PLR 201706019 Rodeo Organization Denied Exempt Status
2/10/2017 (11/18/2016)
Dear * * *:
* * *
We considered your application for recognition of exemption from federal
income tax under Section 501(a) of the Internal Revenue Code (the Code).
Based on the information provided, we determined that you don't qualify
for exemption under Section 501(c)(3) of the Code. This letter explains
the basis for our conclusion. Please keep it for your records.
ISSUES
1. Do you meet the requirements under Section 501(j) of the Code as a
qualified amateur sports organization? No, for the reasons described below.
2. Do you meet the organizational test under Treasury Regulation §
1.501(c)(3)-1(b)? No, for the reasons described below.
3. Do you meet the operational test under Treas. Reg. § 1.501(c)(3)-1(c)?
No, for the reasons described below.
FACTS
You submitted Form 1023-EZ, Streamline Application for Recognition of
Exemption Under Section 501(c)(3) of the Internal Revenue Code, on date Y
You attest that you were incorporated on date Y, in the state of Z. 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 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
foster national or international amateur sports competitions. You attest
that you have not conducted and will not conduct prohibited activities
under Section 501(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
- 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
During the review of your Form 1023-EZ, detailed information was requested
to supplement the above attestations. This information confirms you were
incorporated in the State of Z on date Y. Article III of your bylaws state:
(t)he purposes which the corporation is authorized to pursue are:
- To encourage, promote and advance information and knowledge concerning
rodeos, including the dates of rodeos, names of contestants, prize money
and other particulars in which the members are interested
-
To promote the
professional sport of rodeo through the organization of rodeo participants for their mutual benefit
[emphasis added.]
- To ensure a just amount of prize money
- To require that all entrance fees be added to prize money
- To secure competent, honest judges and officials in all rodeo events
- To encourage cooperation between rodeo contestants and management of all
rodeos at which members participate
-
To protect against unfairness in the
sport of professional rodeo[emphasis added.]
-
To preserve the historical integrity of the
sport of professional rodeo[emphasis added.]
- To raise the standards of cowboy contests so they shall rank among the
foremost of American sports
- To bring about honest advertising by the rodeo committees, so that the
public may rely upon the truth of advertised events in which it is claimed
that members of the Association participate
- To work for the betterment of conditions and of rules governing rodeo events
in which members of the Association participate
- To establish a central place of registration for the convenience of members
-
To undertake any activity which, in the opinion of the Board of Directors
of the corporation, will facilitate the participation of its members in the
professional sport of rodeo [emphasis added.]
Article XIV, section 4 of your bylaws indicate you are a membership organization
and states your board of directors will be elected by the popular vote
of the membership body.
You provide a rodeo venue for participants to participate and the community
to attend. You conduct approximately fourteen rodeos per year from April
through September. Entry fees are charged for each participant that is
competing in the various rodeo events. Spectators pay a fee to attend
the rodeo events.
You did not provide proposed revenues or expenses for your organization.
Based on the provided schedule of events and general information in your
brochure, your revenues appear to include event entry fees and gate receipts.
Rodeo participants pay entry fees to compete for championship buckles
and cash prizes. Membership in the organization is open to anyone who
participates in an event, with no membership fee.
Cash prizes for first place finishers can range from a few hundred dollars
to up to several thousand based on a set percentage of the entry fee collected
for that event.
LAW
Section 501(c)(3) of the Internal Revenue Code (Code) exempts from federal
income tax: corporations, and any community chest, fund, or foundation,
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), and which does not participate in, or
intervene in (including the publishing or distributing of statements),
any political campaign on behalf of any candidate for public office.
Section 501(j)(2) of the Code defines the term "qualified amateur
sports organization" to mean any organization organized and operated
exclusively to foster national or international amateur sports competition
if such organization is also organized and operated primarily to conduct
national or international competition in sports or to support and develop
amateur athletes for national or international competition in sports.
Treas. Reg. § 1.501(c)(3)-1(a)(1) provides that in order to be exempt
as an organization described in section 501(c)(3) of the Code, an organization
must be both organized and operated exclusively for one or more 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. § 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 its purposes to one or more exempt purposes and
do not expressly empower it to engage, otherwise than as an insubstantial
part, in activities which in themselves are not in furtherance of one
or more exempt purposes.
Treas. Reg. § 1.501(c)(3)-1(b)(1)(iii) provides that an organization
is not organized exclusively for one or more exempt purposes if its articles
expressly empower it to carry on, otherwise than as an insubstantial part
of its activities, activities that are not in furtherance of one or more
exempt purposes.
Treas. Reg. § 1.501(c)(3)-1(c)(1) provides that an organization operates
exclusively for exempt purposes if it engages primarily in activities
that accomplish exempt purposes specified in section 501(c)(3) of the
Code. An organization must not engage in substantial activities that fail
to further an exempt purpose.
Treas. Reg. § 1.501(c)(3)-1(d)(3)(i) states that the term "educational"
as used in section 501(c)(3) relates to: (a) The instruction or training
of the individual for the purpose of improving or developing his capabilities;
or (b) The instruction of the public on subjects useful to the individual
and beneficial to the community.
Rev. Rul. 70-4, 1970-1 C.B. 126, provides that an organization whose activities
consisted primarily of the promotion and regulation of a sport for amateurs
is not exempt as a section 501(c)(3) educational organization because
the promotion and regulation of a sport for amateurs as described neither
improve nor develop the capabilities of the individual nor instruct the
public on subjects useful to the individual and beneficial to the community.
In Better Business Bureau v. United States, 326 U.S. 279 (1945), the court
held that an organization is not operated exclusively for exempt purposes,
and thus will not qualify for exemption under section 501(c)(3), if it
has a single non-charitable purpose that is substantial in nature. This
is true regardless of the number or importance of the organization's
exempt purposes.
B.S. W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), describes an
organization whose sole activity was to provide consulting services for
a fee to nonprofit organizations. It provided qualified persons to perform
research projects for its clients. The fees charged by the organization
were set at or close to cost but were not less than the organization's
full cost of providing its service. The organization was denied exemption
because it operated in a commercial, nonexempt manner. The provision of
managerial and consulting services on a regular basis for a fee is a trade
or business ordinarily carried on for profit. The court held that the
organization was not operated exclusively for charitable, educational
or scientific purposes within the meaning of section 501(c)(3) of the Code.
In Hutchinson Baseball Enterprises v. Commissioner, 73 T.C. 144 (1979),
nonacq., 1980-2 C.B. 2, affd. 696 F.2d 757 (10th Cir. 1982), the organization
funded and operated an amateur baseball team, leased and maintained baseball
fields for the use of Little League, American Legion teams and a baseball
camp, and provided coaches for Little League teams. The court held, and
the Tenth Circuit affirmed, that the promotion, sponsorship and advancement
of amateur sports is a charitable purpose within the meaning of section
501(c)(3).
In Wayne Baseball, Inc. v. Commissioner, T.C. Memo. 1999-304, it was determined
that a highly competitive amateur baseball league did not qualify for
exemption under 501(c)(3). Team members were recruited from a series of
spring tryouts were comprised of players who each possessed a high degree
of baseball skills. The team did not have a formal instructional program.
Players relied on informal interaction to seek advice, self-teaching,
and hands-on experience during games. No admission was charged to spectators
who watched the games. Although spectators were allowed to watch the baseball
games for free, the organization's activities did not promote the
game of baseball in the surrounding community. Instead, the court found
that organization's purpose was to provide a team for the enjoyment,
recreation and social interaction of its players.
APPLICATION OF LAW
Based on the facts presented in your application, we have concluded that
you are not a qualified amateur sports organization . Neither are you
organized and operated for exempt purposes as required in section 1.501(c)(3)-1(a)(1)
of the Tax Regulations. Accordingly, you do not qualify for exemption
as an organization described in section 501(c)(3) of the Code.
You do not meet section 501(j)(2) of the Code because you are a professional
rodeo organization as opposed to a qualified amateur sports organization.
You are not organized and operated primarily to conduct or to support
and develop amateur athletes for national or international competition
in sports. Rodeo competition is not a national or international competition
such as the Olympics or Pan-American Games, nor does it appear your competitors
are in the age group from which Olympic-quality athletes are normally
chosen. Finally, it does not appear that you are a member of a national
or international committee such as the United States Olympic Committee.
You do not meet the organizational test under Treas. Reg. § 1.501(c)(3)-1(b)(1)(i)
because your governing documents do not limit your purposes to one or
more exempt purposes and do not expressly empower it to engage, other
than as an insubstantial part, in activities which in themselves are not
in furtherance of one or more exempt purposes.
You also do not meet the requirements of Treas. Reg. § 1.501(c)(3)-1(b)(1)(iii)
because your governing documents expressly permit activities to be carried
on that are not in furtherance of one or more exempt purposes.
You do not meet the operational test under Treas. Reg. § 1.501(c)(3)-1(c)(1)
because your activities further a substantial non-exempt purpose, namely
the promotion of a professional sport. The operational test states that
an organization will not be regarded as 'operated exclusively'
if more than an insubstantial part of its activities is not in furtherance
of an exempt purpose.
You do not meet the definition of "educational" as defined in
Treas. Reg. § 1.501(c)(3)-1(d)(3)(i) because your activities do not
provide instruction or training to the individual nor do you instruct
the public on subjects useful to the individual and beneficial to the
community.
You are similar to the organization described in Rev. Rul. 70-4 in that
your promotion of the sport of rodeo neither improves nor develops the
capabilities of the individual nor instruct the public on subjects useful
to the individual and beneficial to the community.
Similar to the organization in Better Business Bureau, you are operated
for a non-exempt purpose that is substantial in nature, i.e., the promotion
of a professional sports league.
As in B.S. W. Group, Inc., your sole activity is operating a professional
sports league in a manner similar to a commercial enterprise. You charge
entry fees for participants competing in your events and also charge patrons
to attend your events.
You are not similar to the organization in Hutchinson Baseball Enterprises
because Hutchinson operated an amateur baseball league. In contrast, as
you stated in subsequent correspondence, you operate a professional rodeo
association.
You are similar to the organization described in Wayne Baseball, Inc.
in that you do not have a formal instructional program. Your activities
also do not promote the sport of rodeo in the community.
CONCLUSION
Based on the facts and information submitted, you are not organized and
operated exclusively for exempt purposes. You are not a qualified amateur
sports organization as described in section 501(j)(2). Further, you do
not meet the organizational test because your organizing document does
not properly limit your purposes to those described in section 501(c)(3).
Additionally, you do not meet the operational test because your activities
do not further an exempt purpose, such as a charitable or educational
purpose. Accordingly, you do not qualify for exemption under section 501(c)(3)
of the Code and you must file federal income tax returns. Contributions
to you are not deductible under section 170 of the Code.
IF YOU DON'T AGREE
You have a right to file a protest if you don't agree with our proposed
adverse determination. To do so, you must send a statement to us within
30 days of the date of this letter. The statement must include:
- Your name, address, employer identification number (EIN), and a daytime
phone number
- A copy of this letter highlighting the findings you disagree with
- An explanation of why you disagree, including any supporting documents
- The law or authority, if any, you are relying on
- The signature of an officer, director, trustee, or other official who is
authorized to sign for the organization, or your authorized representative
-
One of the following declarations:
For an officer, director, trustee, or other official who is authorized
to sign for the organization:
Under penalties of perjury, I declare that I examined this protest statement,
including accompanying documents, and to the best of my knowledge and
belief, the statement contains all relevant facts and such facts are true,
correct, and complete.
For authorized representatives:
Under penalties of perjury, I declare that I prepared this protest statement,
including accompanying documents, and to the best of my knowledge and
belief, the statement contains all relevant facts 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 he or she hasn'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 provided a basis
for us to reconsider our determination. If so, we'll continue to process
your case considering the information you provided. If you haven't
provided a basis for reconsideration, we'll forward your case to the
Office of Appeals and notify you. You can find more information about
the role of the Appeals Office 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 at a later date because the law requires that you use
the IRS administrative process first (Section 7428(b)(2) of the Code).
WHERE TO SEND YOUR PROTEST
Please send your protest statement, Form 2848, if needed, and any supporting
documents to the applicable address:
U.S. mail:
Internal Revenue Service
EO Determinations Quality Assurance
Room 7-008
P.O. Box 2508
Cincinnati, OH 45201
Street address for delivery service:
Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Room 7-008
Cincinnati, OH 45202
You can also fax your statement 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 he or she
received it.
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.
You can find all forms and publications mentioned in this letter on our
website at www.irs.gov/formspubs. If you have questions, you can contact
the person listed at the top of this letter.
Sincerely,
Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements
Enclosure:
Publication 892