Basketball-officials association denied section 501(c)(3) status

Plain-English summary

A membership association of basketball officials sought section 501(c)(3) exemption as an organization fostering amateur sports. Its main activity was contracting with school districts and assigning paid officiating work to members based on their experience and qualifications. The IRS found that this primarily created employment opportunities for members, even though the association also offered rules education and promoted safe, consistent games. The association also was listed by its state as having forfeited its existence, so it failed the organizational test. The IRS denied exemption because the association served substantial private interests and did not develop amateur athletes or national or international competition under section 501(j).

Ruling snapshot

• Question: Does the basketball-officials association qualify under section 501(c)(3) or as a qualified amateur sports organization under section 501(j)?
• Outcome: Denied
• Key authorities: IRC §§ 501(c)(3) and 501(j); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 61-170

Full text (IRS public release)

~ Internal Revenue Service
Department of the Treasury Date:
fm 02/27/2025
Tax Exempt and Government Entities Employer ID number:
IRS P.O. Box 2508
Cincinnati, OH 45201 Form you must file:
1120
Release Date: 202521023 Tax years:

Release Date: 5/23/2025 All
Person to contact:
UIL Code: 501.03-00,
501.03-19, 501.33-00

Dear
This letter is our final determination that you don't qualify for exemption from federal income tax under Internal
Revenue Code (IRC) Section 50l(a) as an organization described in IRC Section 501(c)(3 ). Recently, we sent
you a proposed adverse determination in response to your application. The proposed adverse determination
explained the facts, law, and basis for our conclusion, and it gave you 30 days to file a protest. Because we
didn't receive a protest within the required 30 days, the proposed determination is now final.
Because you don't qualify as a tax-exempt organization under IRC Section 501(c)(3), donors generally can't
deduct contributions to you under IRC Section 170.
We may notify the appropriate state officials of our determination, as required by IRC Section 6104( c), by
sending them a copy of this final letter along with the proposed determination letter.
You must file the federal income tax forms for the tax years shown above within 30 days from the date of this
letter unless you request an extension of time to file. For further instructions, forms, and information, visit
www.irs.gov.
We'll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection after deleting certain identifying information, as required by IRC Section 6110. Read the
enclosed Letter 437, Notice oflntention to Disclose - Rulings, and review the two attached letters that show our
proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how
to notify us. If you agree with our deletions, you don't need to take any further action.
If you have questions about this letter, you can call the contact person shown above. If you have questions
about your federal income tax status and responsibilities, call our customer service number at 800-829-1040
(TTY 800-829-4933 for deaf or hard of hearing) or customer service for businesses at 800-829-4933.

                                                                                       Letter 4036 (Rev. 11-2021)
                                                                                       Catalog Number 47632S

                    Sincerely,


                    Stephen A. Martin
                    Director, Exempt Organizations
                    Rulings and Agreements

Enclosures:
Letter 437
Redacted Letter 4034
Redacted Letter 403 8

                                                Letter 4038 (Rev. 11-2021)
                                                Catalog Number 47632S

fl) Department of the Treasury
Internal Revenue Service
PO Box 2508
IRS Cincinnati, OH 45201
Date:
01/08/2025
Employer ID number:

                                                                           Person to contact:
                                                                           Name:
                                                                           ID number:
                                                                           Telephone:
                                                                           Fax:

Legend: UIL:
X = Date of Formation 501.03-00
Y = State ofFom1ation 501.03-19
Z = Cities 501.33-00

Dear

W c considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 50l(a). We detcnnined that you don't qualify for exemption under IRC Section 501(c)(3).
This letter explains the reasons for our conclusion. Please keep it for your records.

Issues
Do you qualify for exemption under IRC Section 50l(c)(3)? No, for the reasons stated below.

Facts
You submitted Form 1023-EZ, Streamlined Application for Recognition of ExempNon Under Section 501 (c)( 3)
of the Internal Revenue Code.

You attest that you were incorporated on X, in the state of Y. You attest that you have the necessary organizing
document, that your organizing document limits your purposes to one or more exempt purposes within the
meaning ofIRC Section 50l(c)(3), that your organizing document docs not expressly empower you to engage
in activities, other than an insubstantial part, that are not in furtherance of one or more exempt purposes, and
that your organizing document contains the dissolution provision required under IRC Section 50l(c)(3).

You attest that you are organized and operated to foster national and international competition. You attest that
you have not conducted and will not conduct prohibited activities under IRC Section 50l(c)(3). Specifically,
you attest you will:

• Refrain from supporting or opposing candidates in political campaigns in any way
• Ensure that your net earnings do not inure in whole or in part to the benefit of private shareholders or
individuals

                                                                                    Letter 4034 (Rev. 01-2021)
                                                                                   Catalog Number 47628K

                                                       2

•   Not further non-exempt purposes (such as purposes that benefit private interests) more than
    insubstantially
•   Not be organized or operated for the primary purpose of conducting a trade or business that is not related
    to your exempt purpose(s)
•   Not devote more than an insubstantial part of your activities attempting to influence legislation or, if you
    made a Section 501 (h) election, not normally make expenditures in excess of expenditure limitations
    outlined in Section 501 (h)
•   Not provide commercial-type insurance as a substantial part of your activities

Your Form 1023EZ states you are utilized for the sole purpose ofrecruiting, training, and assigning officials to
officiate basketball games in elementary, middle, and high schools in the Z area.

During review of your Form 1023-EZ, detailed information was requested supplemental to the above
attestations.

You explained you arc a membership organized comprised of basketball officials who pay annual dues. Your
primary activity is assigning your member officials based on their experience and qualifications to officiate
youth basketball games for local school districts. You contract with these school districts who will pay your
member officials directly as independent contractors.

You pay an assignment secretary as an independent contractor to assign members to games based on their
availability and qualifications. More experienced officials and those with multiple certifications receive higher
pay. School districts detennine the pay based on the level of play.

You explained that you conduct educational activities to ensure member officials have a comprehensive
understanding of the rules and regulations of the game. These activities include study and rules interpretation
sessions, as well as testing to assess understanding, interpretation, and application. The goal of this process is
fairness and consistency. You also ensure that each member meets physical fitness requirements as well as
demonstrates effective communication skills, is proficient in pre-game preparation, and is proficient in post-
game video analysis. Your activities encourage prompt, decisive decisions in games, maintain the integrity of
the game, and ensure the games flow smoothly. This results in a safe and enjoyable environment for all
participants.

Your primary source of income is from membership dues. You also receive fees from scrimmage games and
camp fees. Over half of your expenses is payment to the assignment secretary. Other expenses include an
opening season member's dinner and meeting, an end of season banquet, and a stipend for your treasurer.

Your Secretary of State's website listed you as "forfeited existence". We sent you a copy of this and you have
yet to address it.

Law
IRC Section 501 (c)(3) provides for the recognition of exemption of organizations that are organized and
operated exclusively for religious, charitable, or other purposes as specified in the statute. No part of the net
earnings may inure to the benefit of any private shareholder or individual. This also includes organizations
which are organized and operated exclusively to foster national or international amateur sports competition.

                                                                                     Letter 4034 (Rev. 01-2021)
                                                                                     Catalog Number 47628K

                                                       3

IRC Section 50 l (j)(2) defines a "qualified amateur sports organization" as an organization organized and
operated exclusively to foster national or international amateur sports competition if it is also organized and
operated primarily to conduct or to support and develop amateur athletes for national or international
competition in sports.

Treasury Regulation Section l.50l(c)(3)-l(a)(l) states that, in order to be exempt as an organization described
in IRC 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. Section 1.50 l (c)(3 )-1 (b )(1 )(iv) states that the organizational test must be met by the creating
document or state law. It cannot be met by oral representations or representations made in other documents.

Treas. Reg. Section 1.501 (c )(3 )-1 (c )( 1) provides 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 IRC 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.

Treas. Reg. Section 1.501 (c)(3)-l( d)(l )(ii) provides that an organization is not operated exclusively for exempt
purposes unless it serves a public rather than private interest.

Revenue Ruling 61-170, 1961-1 C.B. 112, holds that an association composed of professional private duty
nurses and practical nurses which supported and operated a nurses' registry primarily to afford greater
employment opportunities for its members was not entitled to exemption under Section 50l(c)(3) of the Code.
Although the public received some benefit from the organization's activities, the primary benefit of these
activities was to the organization's members.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 179 (1945), the Supreme Court
held that the presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption
regardless of the number or importance of truly exempt purposes. Furthermore, the Court also held that once a
substantial non-exempt purpose is established, it is unnecessary to determine an exempt purpose because
exemption is precluded.

Application of law
IRC Section 50l(c)(3) sets forth two main tests for qualification for exempt status. As stated in Treas. Reg.
1.501 (c )(3 )-1 (a)( 1), an organization must be both organized and operated exclusively for purposes described in
Section 501(c)(3). You fail both tests.

You do not meet the or1:anizational test under IRC Section 50Hc)(3).
Your state, Y, lists you as "forfeited existence." This illustrates you are not legally formed in your state.
Subsequently, you do not meet Treas. Reg. Section 1.501 (c)(3)-l (b )(1 )(iv) and therefore fail the organizational
test under IRC Section 50l(c)(3).

You do not meet the operational test under IRC Section 50Hc)(3).

                                                                                     Letter4034 (Rev. 01-2021)
                                                                                    Catalog Number 47628K

                                                     4

Treas. Reg. Section 1.50l(c)(3)-l(c)(l) provides that an organization will not be regarded as exempt under IRC
Section 50l(c)(3) or operated exclusively for one or more exempt purposes if more than an insubstantial part of
its activities is not in furtherance of an exempt purpose. Your primary activity is providing member officials
with paid opportunities to officiate games for school districts you have contracted with. Although your activities
may serve some exempt purposes, as in Better Business Bureau, the presence of a substantial non-exempt
purpose will preclude exemption, even if also serving exempt purposes.

You are like the organization described in Rev. Rul. 61-170, because:
• You arrange and schedule paid officiating opportunities for members who meet particular requirements;
• You maintain a pool of qualified officials;
• You are primarily supported by membership fees and public support is negligible.

These facts show you are operated for the private purposes of your members which is contrary to
Treas. Reg. Section 1.501(c)(3)-l(d)(l)(ii).

You do not meet IRC Section 50 l(j).
You are not a qualified amateur sports organization, as defined in IRC Section 501(j)(2) because you do not
foster national or international amateur sports competition or support and develop amateur athletes for national
or international competition in sports. Rather, you are organized and operated to provide your members with
paid officiating assignments.

Conclusion
Based on the inforn1ation submitted, you fail to qualify under IRC Section 50l(c)(3). You do not meet the
organizational test because you are not legally formed in your state. You also do not meet the operational test
because you are serving the private interests of your member officials which is a substantial nonexempt
purpose.

Further, you fail to qualify under IRC Section 501(j) because you are not organized and operated exclusively to
foster national or international amateur sports. You are primarily operated to provide your members with paid
officiating assignments.

Accordingly, you must file federal income tax returns. Contributions to you are not deductible under IRC
Section 170.

If you agree
If you agree with our proposed adverse detennination, you don't need to do anything. If we don't hear from
you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on
your income tax filing requirements.

If you don't agree
You have a right to protest if you don't agree with our proposed adverse determination. To do so, send us a
protest within 30 days of the date of this letter. You must include:
• Your name, address, employer identification number (EIN), and a daytime phone number
• A statement of the facts, law, and arguments supporting your position
• A statement indicating whether you are requesting an Appeals Office conference

                                                                                  Letter 4034 (Rev. 01-2021)
                                                                                  Catalog Number 47628K

                                                       5

• The signature of an officer, director, trustee, or other official who is authorized to sign for the
  organization or your authorized representative
• The following declaration:
  For an officer, director, trustee, or other official who is authorized to sign for the organization:
  Under penalties of perjury, I declare that I have examined this request, or this modification to the
  request, including accompanying documents, and to the best of my knowledge and belief, the request
  or the modification contains all relevant facts relating to the request, and such facts are true, correct,
  and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven't
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We'll review your protest statement and decide if you gave us a basis to reconsider our determination. If so,
we'll continue to process your case considering the infornrntion you provided. If you haven't given us a basis
for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information
in Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status.

If you don't file a protest within 30 days, you can't seek a declaratory judgment in court later because the
law requires that you use the IRC administrative process first (IRC Section 7428(b)(2)).

Where to send your protest
Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address:

   U.S. mail:                                        Street address for delivery service:

   Internal Revenue Service                           Internal Revenue Service
   EO Determinations Quality Assurance                EO Determinations Quality Assurance
   Mail Stop 6403                                     550 Main Street, Mail Stop 6403
   PO Box 2508                                        Cincinnati, OH 45202
   Cincinnati, OH 45201

You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you
fax your statement, please contact the person listed at the top of this letter to confirm that they received it.

You can get 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 listed at
the top of this letter.

Contacting the Taxpayer Advocate Service
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 if you've tried but haven't
been able to resolve your problem with the IRS. If you quality for T AS assistance, which is always free, T AS
will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

                                                                                     Letter 4034 (Rev. 01-2021)
                                                                                     Catalog Number 47628K

6

Sincerely,


Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements


                        Letter 4034 {Rev. 01-2021)
                        Catalog Number 47628K