Can an amateur sports league qualify as 501(c)(3) organizations? Yes, but only if the organization is organized and operated for purposes that are not merely recreational and not for the sole benefit of its members.

Case in point: an adult men’s baseball league applied for tax-exempt status under I.R.C. § 501(c)(3). It claimed to be exclusively charitable. The stated purposes of the organization were to:

  • Provide strong league play
  • Operate a quality run organization that gives back to players and provides the best experience possible (to including tracking stats, providing prizes for season leaders, playoff series, championship series and All- star game)
  • Promote a healthy lifestyle
  • Provide revenue support to area public high schools in the form of field rental fees

Initially, the IRS granted the organization’s exemption request.

Section 501(c)(3) authorizes tax-exempt status for organizations that are:

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… (emphasis added)

The IRS apparently had second thoughts about the organization and conducted an audited. As a result of the audit, the IRS revoked the organization’s 501(c)(3) status. The IRS reasoned:

  • The organization’s only activity is the operation of a men’s adult baseball league;
  • Such activity is not educational because no program of instruction or training is provided, nor is information provided to the public;
  • The organization simply promoted the recreational and social interests of its members;
  • The organization did not foster national or international amateur sports competition because it provided facilities or equipment to participants/members;
  • The organization’s activities promote private interest not public interests; and
  • The organization’s Articles of Incorporation state the specific purpose is to operate a men’s adult baseball league, which is not a purpose listed under Section 501(c)(3).

The IRS distinguished this case from Rev. Rul. 77-365. In that ruling, an organization instructed persons of all ages and skill levels in a particular sport, conducting clinics, workshops, lessons, and seminars. Its program was open to anyone in the community. Under these circumstances, the IRS held the organization was organized and operated for charitable purposes under IRC section 501(c)(3).

It also found the situation to be distinguishable from In Hutchinson Baseball Enterprises, 73 T.C. 144 (1979). There the Tax 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. The court found that the purpose of promoting sports predominated over subsidiary purposes, such as members’ recreational or social benefit.

This case provides a roadmap of what not to do. An organization that engages in sporting activities must generally have sports has a secondary purpose if it wants to qualify under Section 501(c)(3). The organization’s primary purpose should be charitable or educational, and its activities should be consistent with these purposes. In addition, the organization must provide benefits to the public, not just to its members.

Source: PLR 201717044

Posted by Joel D. Roettger, JD, LLM, EPLS