IRS revokes a youth-sports charity's 501(c)(3) status after it went inactive

Plain-English summary

The IRS revoked the 501(c)(3) charitable exemption of a nonprofit that had run a youth sports league for underprivileged children, offering free spots, player scholarships, and equipment to families who could not afford to play. The audit report describes how the group later sold its league operation to a for-profit and tried to pivot to a new charitable purpose (raising awareness and helping underserved youth), but pandemic restrictions, which shut down the in-person meetings its new plan depended on, left it unable to carry out that purpose. The examiner found the organization then essentially ceased all activity. To keep a 501(c)(3) exemption, an organization must be both organized and operated exclusively for exempt purposes, and the "operational test" requires it to actually engage primarily in exempt activities. Because the organization had become inactive and was no longer conducting exempt activities, the IRS concluded it failed the operational test and revoked its exemption; the organization indicated it would accept the revocation. The revocation is a final determination, contestable only by filing for declaratory judgment under section 7428 within 90 days, and contributions are no longer deductible. The lesson: a charity that stops operating, even for understandable reasons, can lose its exemption for failing the operational test.

Ruling snapshot

• Question: Does a formerly active youth-sports charity still qualify under IRC § 501(c)(3) after it ceased operations and conducted no substantial exempt activity?
• Outcome: Revoked (final determination; 90 days to seek declaratory judgment under IRC § 7428)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (c)(1); IRC §§ 170, 7428

Full text (IRS public release)

(Scanned document; OCR-proofread. Obvious scan misreads were corrected; wording is preserved verbatim. This release combines the final adverse determination (Letter 6337), the proposed revocation (Letter 3618), and the audit report (Form 886-A). Blanks where identifying details, amounts, and dates were redacted appear as gaps in the original.)

Internal Revenue Service
Tax Exempt and Government Entities

IRS Taxpayer ID number (last 4 digits):

Form:

5a) Department of the Treasury Date: February 27, 2023

Release Number: 202321013
Release Date: 5/26/2023
UIL Code: 501.03-00

Tax periods ended:

Person to contact:

Last day to file petition with United States
Tax Court:

CERTIFIED MAIL - Return Receipt Requested
Dear :

Why we are sending you this letter
This is a final determination that you don’t qualify for exemption from federal income tax under Internal
Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective

. Your determination letter dated , is revoked.

Our adverse determination as to your exempt status was made for the following reasons: You have not
demonstrated that you are both organized and operated exclusively for charitable, educational, or other exempt
purposes within the meaning of IRC Section 501(c)(3). You were inactive and did not engage in any substantial
activity that accomplished one or more exempt purposes under IRC Section 501(c)(3).

Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns
and pay tax, where applicable. For further instructions, forms and information please visit IRS.gov.

Contributions to your organization are no longer deductible under IRC Section 170.

What you must do if you disagree with this determination
If you want to contest our final determination, you have 90 days from the date this determination letter was

mailed to you to file a petition or complaint in one of the three federal courts listed below.

How to file your action for declaratory judgment
If you decide to contest this determination, you can file an action for declaratory judgment under the provisions
of Section 7428 of the Code in either:

* The United States Tax Court,

* The United States Court of Federal Claims, or

* The United States District Court for the District of Columbia

You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this
determination letter to you. You can download a fillable petition or complaint form and get information about
filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one
of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee
with the petition or complaint.

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E

You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available
on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to
do so. You may also file your petition at the address below:

United States Tax Court
400 Second Street, NW
Washington, DC 20217
ustaxcourt.gov

The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain
instructions about how to file your completed complaint electronically. You may also file your complaint at one of
the addresses below:

US Court of Federal Claims
717 Madison Place, NW
Washington, DC 20439
uscfc.uscourts.gov

US District Court for the District of Columbia
333 Constitution Avenue, NW

Washington, DC 20001

dcd.uscourts.gov

Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for
declaratory judgment under IRC Section 7428.

Information about the IRS Taxpayer Advocate Service

The IRS office whose phone number appears at the top of the notice can best address and access your tax
information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate
Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't
working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects
taxpayer rights. Contact your local Taxpayer Advocate Office at:

Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights,
go to taxpayeradvocate.IRS.gov. Do not send your federal court pleading to the TAS address listed above.
Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time
to file an action for declaratory judgment.

Where you can find more information
Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for

more comprehensive information.

Find tax forms or publications by visiting IRS.gov/forms or calling 800-TAX-FORM (800-829-3676). If you
have questions, you can call the person shown at the top of this letter.

If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best
time to call, and a copy of this letter.

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E

You may fax your documents to the fax number shown above, using either a fax machine or online fax service.
Protect yourself when sending digital data by understanding the fax service's privacy and security policies.

Keep the original letter for your records.

Sincerely.

Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

cc:

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E

Department of the Treasury

Internal Revenue Service

Tax Exempt and Government Entities
i Exempt Organizations Examinations

CERTIFIED MAIL — Return Receipt Requested

Dear
Why you’re receiving this letter

If you agree

Date: 8/18/2022
Taxpayer ID number:
Form:

Tax periods ended:

Person to contact:

ID number:
Telephone:
Fax:

Manager's contact information:
ID number:

Telephone:
Response due date:

If you haven’t already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the
contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an

organization described in IRC Section 501(c)(3) for the periods above.

If you disagree

1. Request a meeting or telephone conference with the manager shown at the top of this letter.

2. Send any information you want us to consider.

3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional
information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after

the meeting or after we consider the information.

The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes
informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of
limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case.
For your protest to be valid, it must contain certain specific information, including a statement of the
facts, applicable law, and arguments in support of your position. For specific information needed for a
valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status.

Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn’t

apply now that we’ve issued this letter.

4, Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities)
if you feel the issue hasn’t been addressed in published precedent or has been treated inconsistently by the

IRS.

Letter 3618 (Rev. 8-2019)
Catalog Number 34809F

If you’re considering requesting technical advice, contact the person shown at the top of this letter. If you
disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as
explained above. A decision made in a technical advice memorandum, however, generally is final and
binding on Appeals.

If we don't hear from you
If you don't respond to this proposal within 30 calendar days from the date of this letter, we’ll issue a final
adverse determination letter.

Contacting the Taxpayer Advocate Office is a taxpayer right
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your

taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't
been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS
will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

Additional information
You can get any of the forms and publications mentioned in this letter by visiting our website at
www. irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676).

If you have questions, you can contact the person shown at the top of this letter.

Sincerely,

for Lynn A. Brinkley
Acting Director, Exempt Organizations Examinations

Enclosures:
Form 886-A, Form 6018
Publication 892, Publication 3498

Letter 3618 (Rev. 8-2019)
Catalog Number 34809F

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number
H exnibt
(May 2017) Explanations of items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
ISSUES
Whether (the Organization) qualifies for exemption from
federal income tax under Internal Revenue Code (IRC) Section (Sec.) 501(c)(3).
FACTS
Formation
The Organization was incorporated as a nonprofit corporation on in and listed
and as the initial directors.

Application for Recognition of Exemption
On the Organization submitted a Form 1023, Application for Recognition of Exemption
Under Section 501(c)(3) of the Internal Revenue Code, which was postmarked and
received by the Cincinnati Service Center on

Under Part IV, “Narrative Description of Your Activities,” in the attachment to the Form 1023, the Organization
provided the following:

Our stated purposes are as follows:

1) Provide underprivileged youth the opportunity to participate in sports activities:

2) Provide sports participation for youth in a healthy, fun and positive environment:

3) Support young people in discovering and building their self-confidence and self-esteem through
sports participation; and

4) Develop programs to educate young people, and communities, about the positive effects and
benefits of youth participation in sports activities.

The narrative continued to explain that the main activity used by the Organization to fulfill its purpose was
through establishing and running a ,as
a “ .” It further states that, “[EJach age group is
closely bracketed to allow fun, fair and competitive play. The program provides young players a fun and
exciting opportunity to engage in non-contact continuous action, while learning lessons in teamwork.”

Exemption
On the Organization received recognition of exemption under IRC Sec. 501(c)(3) as a
public charity, effective
Subsequently, the Organization was auto revoked as of , presumably because it failed to file
the required for the tax years ended and
The Organization requested reinstatement on and, apparently, filed the delinquent

The Service reinstated the Organization’s tax-exempt status under IRC Sec. 501(c)(3) as a public
charity on , retroactive to the date of revocation, ;

Catalog Number 20810W Page 1 www .irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schone number
= . or exhibi
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
Activities
The Organization started in after the
and , who had in the for-profit , noticed that

some potential players’ families couldn't afford to pay to play. Initially, the founders approached the for-profit

owners to address this issue, but none of the owners were willing to do anything
to help these underprivileged and underserved families. As such, the founders decided to set up the
Organization to run a that would allow everyone to play. The Organization allowed
each team one free player and, subsequently, provided a lot of additional player scholarships, including
providing equipment for players that couldn't afford it.

Due to , the league was shut down in after completing the winter and spring seasons. During
that time, the Organization was approached by a for-profit organization proposing that the
Organization sell its operation to the for-profit, which it did later in . Since the founders had
already moved to in and the operations were curtailed by , they
decided to switch the focus of the Organization to reach out to to bring
awareness to the . They lost a to in and his

wanted to do something to help bring awareness to this issue. Since the operation was being

sold, and since the Organization was already established to help underprivileged and underserved youth,
this seemed like a good pivot and was something the Organization could get behind wholeheartedly.
However, again due to the restrictions and lockdowns brought about by , the Organization was unable
to fulfill this tax-exempt purpose.

Financials Per

For the Year Ended

Revenue:
All Other Contributions, Gifts, Grants, & Similar Amounts
Program Service Revenue:
Player Registration Fees
Game Admissions
Refunds
Net Income (Loss) from Sale of Inventory (
Total Revenue

PPP
nd ell
|

Expenses:
Grants and Other Assistance to Domestic Individuals
Compensation of Current Officers, Directors, etc.
Other Salaries and Wages
Legal
Other Fees for Service
Advertising and Promotion
Office Expenses
Occupancy
Travel
Depreciation, Depletion, and Amortization

PARAAPAAH HAH

Catalog Number 20810W Page 2 Www. irs.gov Form 886-A (Rev. 5-2017)

Department of the Treasury — Internal Revenue Service Schedule number
Form 886-A P Y

e hibi
(May 2017) Explanations of Items or exhibit

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

Insurance

Stadium Fees

Player Awards

Website

Meals & Entertainment

All Other Expenses
Total Expenses

mM
iS
<<

Assets:
Cash — non-interest-bearing
Inventories for Sale or Use
Land, Buildings, Equip. (less Accumulated Depreciation)
Total Assets

Ipjrone
ow
a:
~<
a aa

For the Year Ended

Revenue:
Program Service Revenue:
Player Registration Fees
Gross Amount from Sale of Assets
Net Income (Loss) from Sale of Inventory
Total Revenue

Meee

Expenses:
Grants and Other Assistance to Domestic Individuals
Compensation of Current Officers, Directors, etc.
Accounting
Travel
Game Expenses
Admin Expenses

Total Expenses

Pro ewwe

m
()
<

Assets:
Cash — non-interest-bearing
Inventories for Sale or Use
Land, Buildings, Equip. (less Accumulated Depreciation)
Other Assets
Total Assets

IPP nen

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a:

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pees

Examination

On , the Revenue Agent (Examiner) sent an initial contact letter and Information Document
Request (IDR) package, which included Publication 1, Notice 609, and Publication 3498-A, to inform the
Organization of the examination.

The Examiner subsequently held the Initial Interview with the Organization's , and
the Organization’s , via a conference call on

Catalog Number 20810W Page 3 Www. irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Scheanle number
bl . or exhibi
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
During the Initial Interview provided the information regarding the Organization's activities as

stated previously herein. He also confirmed that the Organization was unable to continue its operations to
provide awareness and assistance to underprivileged and underserved youths

and subject to due to the . Since the majority of
the programs the Organization intended to implement were targeted toward meeting with and communicating
with the affected youth in face-to-face encounters, the effectively shut

down the Organization’s ability to move forward with its newly focused tax-exempt purpose.

Further examination of the Organization’s books and records also revealed the Organization basically ceased
all operations when the were implemented.

LAW
Internal Revenue Code (IRC)

IRC Sec. 501(c)(3) exempts from income tax entities organized and operated exclusively for religious,
charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or
international amateur sports competition (but only if no part of its activities involve the provision of athletic
facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of
which inures to the benefit of any private shareholder or individual, no substantial part of the activities of
which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise
provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or
distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public
office.

Treasury Regulations (Treas. Reg.)

Treas. Reg. Sec. 1.501(c)(3)-1(a)(1) states that in order to be exempt as an organization described in section
501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes
specified in such section. If an organization fails to meet either the organizational test or the operational test,
it is not exempt.

Treas. Reg. Sec. 1.501(c)(3)-1(c)(1) states that an organization will be regarded as operated exclusively for
one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such
exempt purposes specified in section 501(c)(3). An organization will not be so regarded if more than an
insubstantial part of its activities is not in furtherance of an exempt purpose.

GOVERNMENT’S POSITION

It is the Government's position that the Organization does not qualify for exemption under IRC Sec. 501(c)(3).

Under Treas. Reg. Sec. 1.501(c)(3)-1(a), in order to be exempt as an organization described in section
501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes
specified in such section. If an organization fails to meet either the organizational test or the operational test,
it is not exempt.

Catalog Number 20810W Page 4 Www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Scheae number

* . or exhibi
(May 2017) Explanations of Items

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

Under Treas. Reg. Sec.1.501(c)(3)-1(c), an organization will be regarded as operated exclusively for one or
more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt
purposes specified in IRC Sec. 501(c)(3). An organization will not be so regarded if more than an
insubstantial part of its activities is not in furtherance of an exempt purpose.

Here, the organization and operation of the by the Organization
met the requirements for tax exemption as a charitable organization under IRC Sec. 501(c)(3) and the
Regulations thereunder. By providing player's and their families with scholarships and equipment they
couldn't otherwise afford, the Organization fulfilled its stated charitable purpose of providing “underprivileged
youth the opportunity to participate in sports activities.” Obviously, when the Organization sold

operation it ceased operating for that tax-exempt purpose.

However, changing the Organization’s tax-exempt purpose to one of helping and aiding underprivileged and
underserved youth still met the operational
requirements for tax exemption as a charitable organization under IRC Sec. 501(c)(3) and the Regulations
thereunder. Unfortunately, though, when the Organization was unable to continue its operations due to the

, it no longer met those operational requirements. The Organization is no
longer engaged primarily in activities that accomplished one or more of the exempt purposes specified in IRC
Sec. 501(c)(3) as required under Treas. Reg. Sec.1.501(c)(3)-1(c).

As such, the Organization failed to meet the requirements for tax exemption under IRC Sec. 501(c)(3) and
the Regulations thereunder.

TAXPAYER’S POSITION

Throughout the examination, the Examiner discussed his findings with the Organization’s

, and the Organization’s , explaining that the Government will be recommending
revocation of the Organization’s exemption under IRC Sec. 501(c)(3). indicated that since the
Organization had ceased operations due to the Organization will accept the proposed revocation.

The Organization is being solicited for its position at this time.

CONCLUSION

The Organization does not qualify for exemption from federal income tax as it failed to substantiate that it is
operated exclusively for one or more exempt purposes, resulting in its failure to comply with the requirements
of IRC Sec. 501(c)(3) and Treas. Reg. Sec.1.501(c)(3)-1(c).

It is the Government's position that the Organization failed to operate exclusively to accomplish one or more
of such exempt purposes specified in IRC Sec. 501(c)(3). Because the Organization was not operated
exclusively for the exempt purpose under IRC Sec. 501(c)(3), its federal tax-exempt status under such
section should be revoked effective . The Organization is liable for

, for the year ended and all years thereafter.

Catalog Number 20810W Page 5 Www. irs.gov Form 886-A (Rev. 5-2017)