Amateur Sports League’s Tax Exemption Revoked

It’s common this time of year to see amateur baseball teams facing each other in a game full of rivalry and friendly competition. Amateur sports teams are often organized as nonprofits and may qualify for tax exemption. In a recent case the IRS revoked the 501(c)(3) tax exempt status of an organization that operated an amateur baseball league for adults (“League”) (PLR 201717044, April 28, 2017).  The IRS concluded that the League was not organized or operated for exempt purposes.To qualify for exemption under Section 501(c)(3) an organization must be organized and operated for exempt purposes.  Exempt purposes include educational and charitable activities.

The League’s purposes included providing strong league play, promoting a healthy lifestyle, and providing revenue to support area high schools through field rental fees.  To advance this purpose the League organized, managed, and administered weekly baseball games for adults.  Team membership fees were its sole source of revenue.  Most of their expenses consisted of field rental fees, umpire fees, and promotional materials.

Unfortunately, the IRS did not deem the League tax exempt because it was not organized or operated for educational purposes and because it offered no instructional or educational component.  Fostering national or international amateur sports competition can be an exempt purpose in some circumstances.  However, the IRS found that the League’s activities were not “primarily” or “exclusively” to promote national or international competition.  Instead, this League’s activities furthered the private recreational interests of its members.  This is not an exempt purpose under 501(c)(3).  Since the League furthered no exempt purpose, it failed to qualify for exemption under Section 501(c)(3) and its exempt status was revoked.

This case illustrates how better planning could have helped the League avoid this difficult situation with the IRS.  It appears that 501(c)(3) tax exempt status was of limited use to that League since it did not receive tax-deductible contributions.  Section 501(c)(7) provides an exemption for social clubs.  Social clubs are allowed to provide recreational activities for their members.  This may have been a more appropriate structure for the League under the circumstances in this case. It pays to get good legal advice when starting any sort of amateur sports league.

This article is provided for general information and is not intended to be legal advice for any specific situation.  If you are in need of specific advice or legal representation, please do not hesitate to contact us.

©2017 Bea & VandenBerk