Wednesday June 23, 2021
Private Letter Ruling
Exemption Denied for Softball Team
Team submitted Form 1023-EZ, applying for exempt status under Sec. 501(c)(3). Team attested that it had the required organizing document which limits its purposes to one or more exempt purposes, does not empower it to engage in activities that are not in furtherance of an exempt purpose and contains the necessary dissolution provision. Team attests that it is both organized and operated for exempt purposes and will not conduct prohibited activities. Team's stated mission on Form 1023-EZ is "women's softball team." Team plays in softball tournaments once per month and is comprised of adults. Uniform advertising is Team's source of funding. Team's Articles of Incorporation do not state how it will dispose of its assets upon dissolution.
In order to qualify for tax-exempt status under Sec. 501(c)(3), an organization must be organized and operated exclusively for religious, charitable or other specifically-stated purposes. Under Reg. 1.501(c)(3)-1(a)(1), an organization must meet both the organizational and operational tests. Regulation 1.501(c)(3)-1(b)(1)(i) requires an organization's articles of organization to limit its purposes to exempt purposes. Regulation 1.501(c)(3)-1(b)(4) requires an organization to dedicate its assets to an exempt purpose. In Wayne Baseball, Inc. v. Commissioner, the tax court held that an organization's social and recreational activities were substantial compared to its exempt purpose of promoting baseball in the community. The Service determined that Team was neither organized nor operated for an exempt purpose and was similar to the organization in Wayne Baseball. Therefore, the Service denied Team's request for exempt status.
Dear * * *:
We considered your application for recognition of exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a). We determined 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.
Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below.
You submitted Form 1023-EZ, Streamline Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. 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 of IRC Section 501(c)(3), that your organizing document does 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 Section 501(c)(3). You further attest that you are organized and operated exclusively to further charitable purposes and that you have not conducted and will not conduct prohibited activities under Section 501(c)(3).
Your stated mission or most significant activities on Form 1023-EZ were described as “women's softball team.” During review of your Form 1023-EZ, detailed information was requested supplemental to your attestations. You were incorporated on M in the state of N. Your Articles of Incorporation are silent regarding your purpose or how you will dispose of your assets upon dissolution.
You describe yourself as a softball team that plays in tournaments, usually once a month. The age group of your players are adults between P and Q years old.
You do not conduct fundraising. You rely on advertising funds received from businesses. The name(s) of the business(es) will be on your uniforms and seen everywhere you play.
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.
Treasury Regulation Section 1.501(c)(3)-1(a)(1) 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 1.501(c)(3)-1(b)(1)(i) provides that an organization is organized exclusively for one or more exempt purposes only if its articles of organization limit the purposes of such organization to one or more exempt purposes and do not expressly empower the organization engage, otherwise than as an insubstantial part of its activities, in activities that in themselves are not in furtherance of one or more exempt purposes.
Treas. Reg. Section 1.501(c)(3)-1(b)(4) holds that an organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt purpose. An organization's assets will be considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a provision in the organization's articles or operation of law, be distributed for one or more exempt purposes.
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.
Revenue Ruling 64-275, 1964-2 C.B. 142, held an organization formed for the purpose of training suitable candidates in the techniques of racing sailboats in national and international competition, and thereby improving the caliber of candidates representing the United States in Olympic and Pan-American games, qualifies for exemption as an educational organization described in IRC Section 501(c)(3).
Rev. Rul. 65-2, 1965-1 C.B. 227, describes an organization that is organized and operated for the purpose of teaching a particular sport to children under the ages of 18 by holding clinics conducted by qualified instructors. The organization was described in IRC Section 501(c)(3) because it is exclusively charitable and educational.
Rev. Rul. 70-4, 1970-1 C.B. 126, describes an organization engaged in promoting and regulating a sport for amateurs. Their stated purposes were to promote the health of the general public by encouraging all persons to improve their physical condition and fostering public interest in a particular sport. Its activities were directed toward promoting sport tournaments, exhibitions and holding instructive clinics. The organization did not qualify for exemption under IRC Section 501(c)(3).
Rev. Rul. 80-215, 1980-2 C.B. 174, describes an organization that was formed to develop, promote and regulate a sport for youth under the ages of 18 and to promote sportsmanlike competition among the players. It also promulgated rules, organized officials, and presented seminars for players and coaches and referees. The organization combatted juvenile delinquency by providing a recreational outlet for the young people, which is a charitable purpose. Furthermore, the organization was educational because it developed the skills of the youth.
In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court determined the activities of that organization were aimed at promoting the prosperity and standing of the business community and therefore, served a substantial private purpose. It concluded that the presence of a single nonexempt purpose, if substantial in nature, will preclude exemption regardless of the number or importance of statutorily exempt purposes.
In Hutchinson Baseball Enterprises, Inc. v. Commissioner, 696 F.2d. 757 (1982), the court held that an organization that promoted recreational and amateur sports was exempt as a charitable organization under IRC Section 501(c)(3). The organization undertook numerous activities to promote the sport of baseball and the court found that the purpose of promoting sports predominated over subsidiary purposes, such as members' recreational or social benefit.
In Media Sports League, Inc. v. Commissioner, T.C. Memo 1986-568 (1986), the court ruled that an organization that sponsored sports competitions for adults in the community was not exempt under IRC Section 501 (c)(3). The court found that the organization had the substantial nonexempt purpose of promoting the social and recreational interests of its members.
In Wayne Baseball, Inc. v. Commissioner, T.C. Memo. 1999-304 (1999), the court held that the organization's nonexempt social and recreational activities were substantial in comparison to the organization's promotion of baseball in the community. The Court found that the only activity sponsored by the organization was the operation of an adult amateur baseball team and that the primary beneficiaries of the organization were the individual team participants.
Application of law
IRC Section 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-1(a)(1) set forth two main tests to qualify for exempt status. An organization must be both organized and operated exclusively for purposes described in Section 501(c)(3). You have failed to meet both requirements, as explained below.
Your Articles of Incorporation includes no stated purpose. Because your organizing document does not limit your purposes to exclusively IRC Section 501(c)(3) purposes, you do not meet the requirements of Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i). Additionally, your Articles are silent regarding the disposition of your assets upon your dissolution, which also causes you to fail the organizational test per Treas. Reg. Section 1.501(c)(3)-1(b)(4).
You do not meet the operational test under IRC Section 501(c)(3) because you are not operating exclusively for exempt purposes as required under Treas. Reg. Section 1.501(c)(3)-1(c)(1). Your activities consist of organizing and operating an adult softball team, which is neither exclusively educational nor charitable.
You are unlike the organization described in Rev. Rul. 64-275 because you do not provide a training program which prepares participants for national and international competitions. You are also unlike the organizations described in Rev. Rul. 65-2 and Rev. Rul. 80-215 because your recreational activities are for adults only. However, you are similar to the organization described in Rev. Rul. 70-4, which did not qualify for exemption under IRC Section 501(c)(3), because you provide a recreational softball team for adults.
Your activities consist of organizing and operating an adult recreational softball team. Because you are operating for substantial non-exempt purposes, as described in Better Business Bureau of Washington, D.C., Inc., you are precluded from exemption under IRC Section 501(c)(3).
You are unlike the organization described in Hutchinson Baseball Enterprises, Inc. because you operate for substantial recreational and social purposes of your members. You are like the organizations described in Media Sports League, Inc., and Wayne Baseball Inc. because your social and recreational activities are substantial and preclude exemption under IRC Section 501(c)(3).
Based on the information provided, you do not qualify for exemption under IRC Section 501(c)(3) because you are neither organized nor operated exclusively for exempt purposes within the meaning of Section 501(c)(3). Your articles are silent regarding your purposes as well as how your assets will be distributed upon your dissolution, causing you to fail the organizational test. You fail the operational test because your recreational activities for adults further a substantial non-exempt purpose. Accordingly, you do not qualify for exemption under Section 501(c)(3).
If you agree
If you agree with our proposed adverse determination, 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
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 information 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 Decision 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:
Internal Revenue Service
EO Determinations Quality Assurance
Mail Stop 6403
P.O. Box 2508
Cincinnati, OH 45201
Street address for delivery service:
Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Mail Stop 6403
Cincinnati, OH 45202
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 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.
Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements