Goldsboro Art League Inc V Commissioner 75 Tc 337
Capital Gymnastics Booster Club, Inc. v. Commissioner
Administrative Proceeding United States Tax Courtroom, Case No. 12-24C| Text |  | Citations (0) |  | Cited By (0) |  |
T.C. Memo. 2013-193
Uppercase GYMNASTICS BOOSTER Guild, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5819-09X. Filed August 26, 2013.
P is a gymnastics booster order. In June 1988 the IRS granted P's request to exist recognized as exempt from Federal income tax nether I.R.C. sec. 501(c)(3) equally an organization fostering amateur sports competition. In its financial year ending June 30, 2003, P'southward members were parents of immature athletes from approximately 240 families. The athletes were all on teams from i local individual gym, to which each family unit individually paid tuition and other fees. These teams competed in meets, which required substantial additional funds that P collected and administered. Membership in P was mandatory for the parents of athletes who wanted to participate on the teams that were operated out of that private gym, and each family paid to P an almanac assessment to encompass the athlete's entry fees to compete in the meets and to offset the estimated expenditures for the coaches' travel. The cess ranged from $600 to $1,400 per athlete for FY 2003, depending on the athlete's competitive level.[End Page 2]
[*2] A family could satisfy its athlete's assessment either by paying
cash or past participating in P's fundraising program. The amount that
an athlete'due south family raised was credited against his assessment. About
46% of the families engaged in fundraising in FY 2003. This
fundraising generated a cyberspace profit of $35,326. P used 93% of that
profit to reduce the assessment on boilerplate by l to lxx% for the
families that fundraised. P did non credit whatever of this profit against the
assessments of the athletes whose families did not fundraise.
was not operated exclusively for taxation-exempt purposes under I.R.C.
sec. 501(c)(3). P petitioned for a declaratory judgment under I.R.C.
sec. 7428(a).
was not operated exclusively for exempt purposes within the meaning
of I.R.C. sec. 501(c)(3). P'due south net earnings inured to the benefit of its
fundraising parent members, and it conferred substantial individual
do good on children of those fundraising families.
David B. Friedel, for petitioner.
Robin Williams Denick and Joseph Due west. Spires, for respondent.
GUSTAFSON, Judge: On December 1, 2008, the Internal Revenue Service (IRS) issued to Capital Gymnastics Booster Club, Inc. ("Capital Gymnastics"), a terminal adverse determination letter, which determined that, for "Tax Years Ending:[End Page iii] [*three] June 30, 2003 and all subsequent years", Capital Gymnastics was no longer exempt from Federal income revenue enhancement under section 501(a).1 Capital letter Gymnastics challenged the conclusion by timely petitioning this Court for declaratory judgment pursuant to section 7428(a). The issue to exist decided is whether Uppercase Gymnastics satisfied the requirements of section 501(c)(3) and therefore qualified for exemption from taxation under department 501(a).
For the reasons explained below, we find that Upper-case letter Gymnastics' earnings inured to the do good of some of its athletes' parents in violation of department 501(c)(3), and that Capital Gymnastics had the substantial non-exempt purpose of furthering the individual interests of those athletes. Nosotros therefore deny Capital Gymnastics' request for a declaratory judgment and sustain the IRS'south final adverse determination.
Upper-case letter Gymnastics
In March 1987 Majuscule Gymnastics was organized in Virginia every bit a nonstock corporation for the purpose of "fostering national and international sports
ane
Unless otherwise indicated, all section references are to the Internal Acquirement Code ("the Lawmaking", 26 U.S.C.) every bit in outcome for the years in outcome, and all Rule references are to the Revenue enhancement Courtroom Rules of Practice and Procedure.[Terminate Folio four] [*4] competition, inside the pregnant of Section 501(c)(3)". In June 1988 the IRS granted Capital Gymnastics' asking for recognition of tax-exempt status.
By the fiscal yr concluded June thirty, 2003 ("FY 2003"), Capital Gymnastics had approximately 240 member families. However, Capital Gymnastics is a booster club, non a preparation facility, and it owns no facilities or equipment. As of June 2003 its only nugget was a bank account with a $27,192 rest.
Past 2003 the number of local clubs that offered competitive gymnastics teams had dwindled to two or 3, with the largest remaining boys plan being offered at the Capital Gymnastics National Training Center ("the Training Heart")--an entity that has a proper name like to petitioner's only that is distinct from petitioner. The Training Center2
The Grooming Middle is a private, for-profit corporation in Virginia. In FY 2003 the Training Centre trained amateur athletes from ages 6 through 18 in gymnastics and tumbling and placed them on teams according to age, ability, and sexual activity. All of Capital letter Gymnastics' athletes trained at the Training Center; and
2
The Training Center's status is not at result in this case, and the Commissioner does not fence that Upper-case letter Gymnastics operated for the benefit of the for-profit Training Middle in a manner that affects Capital Gymnastics' entitlement to revenue enhancement-exempt status.[Stop Page v] [*5] membership in Capital Gymnastics was mandatory for the parents of athletes who trained for competition at the Training Centre. Tuition, fees, and expenses
Each athlete'southward family paid tuition directly to the Training Center, ranging in FY 2003 from $200 per calendar month for the youngest age groups to $330 per month for the oldest age groups. The families also paid to third parties (non to the Training Centre or Uppercase Gymnastics) other expenses, such as national dues, a registration fee of $100, the cost of specialized equipment such as grips and official gym uniforms, and the expenses of travel to gymnastics meets, including airline tickets, hotels, and restaurants for the athletes (and for their parents if they chose to attend the meets). These amounts, even so, did not cover the cost of competitions themselves, and Uppercase Gymnastics was operated to address those separate costs. Capital Gymnastics dues and assessments
Parents were responsible for ii dissever fees payable straight to Majuscule Gymnastics: (1) an annual dues payment of $xl to first Upper-case letter Gymnastics' nominal operating expenses such every bit almanac corporate fees, insurance premiums, and production costs for the organization's annual handbook, and (2) an cess of $600 to $1,400 per yr per child to pay each athlete'due south competition[Finish Page half-dozen] [*six] costs.3 This cess covered the athlete's estimated meet entry fees and the coaches' travel costs (including transportation, lodging, and meals). Participation in competitions varied by interest, age, and skill, with meets held locally, in nearby States, nationally, and internationally. Capital letter Gymnastics computed the assessment at the beginning of each season by consulting with see sponsors. Capital Gymnastics did not allow athletes to compete unless their cess was paid in full, including any late fees. The record shows no conferring of "scholarships" nor any other relaxation of this requirement. Capital Gymnastics' fundraising
The parties accept stipulated that "Majuscule Gymnastics' primary function was to raise funds". A parent could merely pay his child's assessment in cash; but
3
Capital Gymnastics acknowledges the possibility "that some of the Booster Club's members might attempt to deduct their dues or assessment payments, arguing those are payments to a tax-exempt organisation"; but we run into nothing in the record to propose that Capital Gymnastics facilitated such deductions (due east.g., by issuing donation receipts) or to contradict Majuscule Gymnastics' assertion that "we have consistently maintained that members should not deduct those payments, and that is the clear and consistent position we have stated whenever asked." However, while it is true that a parent-member who pays his assessment in cash patently does so out of after-tax dollars, it is also true that a fundraising parent- member earns "points" on which he pays no taxation and then satisfies his assessment with those before-tax earnings. Information technology could therefore be said that Capital Gymnastics distributes money that escapes tax; but since the Commissioner did non raise this issue, nosotros practice not base our determination on it.[Cease Folio vii] [*vii] Capital Gymnastics also gave member-parents the pick to voluntarily fundraise4 to offset the cess corporeality. Capital Gymnastics' fundraisers included selling wrapping paper, disbelieve cards, cookie dough, candles, ornaments, and "scrip" (explained below).
Scrip, as used by Uppercase Gymnastics, involved a merchant who wanted to support Capital letter Gymnastics and would allow the organisation to purchase, at a discount, certificates that bore the merchant's name and that the merchant would award for purchases. For case, Upper-case letter Gymnastics might buy from a grocery shop a number of $100 certificates for $95 each. (The capital required for this scrip program was thus considerable, apparently amounting to more than $180,000 in FY 2003.) Members would then buy the certificates from Capital Gymnastics at the full face value ($100) and could redeem the document at the store to purchase $100 worth of groceries. A member's buy of scrip therefore generated a fundraising profit equal to the merchant's discount, $5 in this case. A member who purchased scrip of $100 (and who would otherwise have purchased $100 worth of groceries without scrip) thus generated $v for Upper-case letter
four
The parties stipulate that "families" engaged in fundraising and that "[p]arents and athletes are collectively referred to [as] ‘families.'" However, they besides stipulate that the assessment that might be satisfied by fundraising was the responsibility of the parent-member, non the kid-athlete.[End Page 8] [*8] Gymnastics at no real cost to himself. More than i-4th of Majuscule Gymnastics' fundraising profit in FY 2003 arose from sales of scrip, and virtually all of those scrip sales were to Capital Gymnastics members. Merchants were willing to grant these discounts and support Upper-case letter Gymnastics just if it was a revenue enhancement-exempt charitable system.
A portion of Capital letter Gymnastics' other fundraising activities occurred on sidewalks in front of grocery stores and other retail establishments. The fundraisers displayed Capital Gymnastics signs and banners at the fundraising events. The families gained permission to fundraise from the merchants or property managers by presenting documentation of Upper-case letter Gymnastics' tax- exempt status.
For the families that chose to fundraise, Majuscule Gymnastics awarded points in proportion to the fundraising turn a profit that each family unit generated. Each point was worth $10. The chairperson of each fundraiser also received a pocket-sized number of points equally an incentive to manage the fundraisers. Parents could earn additional points past filling sure board positions on Majuscule Gymnastics. Capital Gymnastics' fiscal manager periodically tallied the points for each family unit and reduced the family's unpaid assessment in dollars, co-ordinate to the number of points that the family unit had earned.[End Page ix] [*9] If a balance due remained for whatever family unit who had fundraised, the family paid the balance of their assessment by writing a check payable to Capital Gymnastics. If a fundraising family generated more points than they needed for the yr, and so they carried over the backlog to exist applied to the following year's assessment. If a family discontinued membership, the family forfeited any excess points, and Capital Gymnastics applied the excess dollars to the organization's general fund.
Parents who did not participate in the fundraising--slightly more than than one-half of the families--did not receive a benefit from the fundraising activities of the other parents. Rather, families who did not fundraise wrote checks to Upper-case letter Gymnastics for their full assessment amount.
This allotment of fundraising benefit solely to fundraising families was conscious and deliberate, since Upper-case letter Gymnastics explicitly prevented those it chosen "freeloaders" or "moochers" from benefiting from the fundraising activity of others. FY 2003 fiscal results
For FY 2003, about 110 families (i.east., approximately 46% of the 240 member families) participated in fundraising. The fundraising yielded a internet turn a profit $35,326. Capital Gymnastics awarded $32,920 of the net profit, or approximately[End Page 10] [*10] 93%, to families that participated in the fundraising or who filled board positions, leaving $2,406 or 7% of the fundraising profit for utilize by the entire organization. Families who fundraised were able to outset on average 50% to 70% of their assessment for the year.
Also the fundraising profit of $35,326, Capital letter Gymnastics' only other source of income for FY 2003 was $81,186 from membership ante and assessments that the fundraising did non offset. Accordingly, Uppercase Gymnastics' total net revenue for FY 2003 was $116,512.
Capital Gymnastics incurred full expenses of $130,610 for FY 2003, consisting of $115,394 in competition-related expenses and $fifteen,216 in operating expenses. Consequently, for FY 2003 Capital Gymnastics generated a loss of $14,096, which the organization funded by reducing its bank business relationship balance to $27,192 by financial yearend. IRS activeness
Commencement in 2005 the IRS examined Majuscule Gymnastics' returns for its FY 2003 to determine whether Capital letter Gymnastics operated in the manner stated in its application for recognition of tax exemption. After completing the examination, the IRS sent to Capital Gymnastics a letter dated October half-dozen, 2006, stating the agency'due south determination to revoke its recognition of the organization'south[End Page 11] [*11] tax-exempt status. Upper-case letter Gymnastics appealed that determination within the IRS. The IRS Office of Appeals issued to Capital Gymnastics a final adverse determination letter dated December 1, 2008. The alphabetic character stated that Capital Gymnastics had failed to constitute that its income "did not inure to the do good of individual individuals and shareholders, which is prohibited past I.R.C. § 501(c)(3). You lot are operated for a substantial private purpose, which is prohibited by Internal Revenue Code section 501(c)(3)." As a issue, the IRS revoked its recognition of the arrangement's taxation-exempt status under section 501(a), beginning with FY 2003.
Capital Gymnastics timely petitioned this Court, seeking a declaratory judgment under department 7428 that would reverse the IRS's last adverse determination. At the time it filed its petition, Capital Gymnastics maintained its principal place of business in Virginia.
I. General legal principles
A. Revenue enhancement exemption
Section 501(a) provides in pertinent part that an organization "shall be exempt from taxation" if the system is of a type that department 501(c) describes. Section 501(c) in plough lists types of organizations that are exempt from taxation,[End Page 12] [*12] including those described in section 501(c)(iii). Failure to satisfy any of the requirements of section 501(c)(3) disqualifies an organization from being revenue enhancement exempt nether that department. Columbia Park & Recreation Donkey'n, Inc. v. Commissioner, 88 T.C. i, xiii (1987), aff'd without published stance, 838 F.2d 465 (4th Cir. 1988). [Cease Folio ane. Tax-exempt purposes]
Section 501(c)(3) confers tax exemption on organizations with certain specified charitable "purposes":
Corporations, and any customs breast, fund or foundation,
organized and operated exclusively for religious, charitable,
scientific, testing for public safety, literary, or pedagogy purposes, or
to foster national or international amateur sports competition (but
just if no part of its activities involve the provision of able-bodied
facilities or equipment), or for the prevention of cruelty to children or
animals, no role of the net earnings of which inures to the benefit of
whatsoever private shareholder or private, no substantial office of the
activities of which is carrying on propaganda, or otherwise
attempting, to influence legislation (except as otherwise provided in
subsection (h)), and which does non participate in, or intervene in
(including the publishing or distributing of statements), whatsoever political
campaign on behalf of (or in opposition to) any candidate for public
office. [Emphasis added.] The purposes that qualify for tax-exempt status under section 501(c)(three) thus include, equally quoted above, "foster[ing] national or international amateur sports competition".[Terminate Page 13] [*13] two. Organized and operated
In order to be described in department 501(c)(3), an arrangement must be both "organized and operated exclusively[5] for" certain specified exempt "purposes". The Commissioner does not dispute that Capital letter Gymnastics is organized exclusively for exempt purposes (since its organizing documents do not neglect to so state), see 26 C.F.R. sec. one.501(c)(3)-i(b), Income Tax Regs., but instead maintains that Upper-case letter Gymnastics failed to operate exclusively for exempt purposes (a requirement that calls for an examination of its actual operations). [End Page iii. Individual inurement and individual do good]
Section 501(c)(3) provides that, in club for an organization to qualify as taxation-exempt, "no office of the internet earnings[6] of * * * [the organization may] inure[]
five
26 C.F.R. department 1.501(c)(3)-one(c)(ane), Income Revenue enhancement Regs., provides: "An organization will be regarded as operated exclusively for i or more exempt purposes only if it engages primarily in activities which accomplish 1 or more of such exempt purposes specified in section 501(c)(iii). An organization volition not exist so regarded if more an insubstantial part of its activities is non in furtherance of an exempt purpose." (Emphasis added.) That is, under the statute the exempt purposes must be "sectional", but the regulation provides that an organisation may exist revenue enhancement exempt even if its operations include activities in furtherance of non- exempt purposes, provided that those activities are "insubstantial". Capital Gymnastics' fundraising was its admitted "master function", and its non-exempt purposes furthered past that function are very substantial.
vi
Capital Gymnastics correctly states that prohibited inurement may include "excessive compensation", thereby perhaps suggesting that reasonable
[End Folio 14] [*14] to the do good of any individual shareholder or individual". This prohibition looks to benefits conferred on a "private shareholder or private", by and large understood to mean an insider of the organization (such as a member or an officeholder). Come across Redlands Surgical Servs., Inc. v. Commissioner, 113 T.C. 47, 74-75 (1999), aff'd, 242 F.3d 904 (9th Cir. 2001). However, the question whether an organization is operated for tax-exempt purposes also requires an examination of the benefits conferred on non-insiders, since--
[a]n organization is not organized or operated exclusively for one or
more of the [revenue enhancement-exempt] purposes * * * unless it serves a public
rather than a private interest. Thus, to meet the requirement of this
subdivision, it is necessary for an organization to establish that it is
not organized or operated for the do good of private interests such as
designated individuals, the creator or his family unit, shareholders of the
organization, or persons controlled, straight or indirectly, past such
private interests. [Emphasis added.] 26 C.F.R. sec. 1.501(c)(3)-1(d)(1)(ii). Impermissible benefit to "private interests" thus encompasses non only do good to insiders but also benefits that an organization may confer on unrelated or fifty-fifty disinterested persons, i.due east., outsiders. Am. Campaign Acad. 5. Commissioner, 92 T.C. 1053, 1068-1069 (1989).
6
(...connected) compensation does not constitute inurement. However, Capital Gymnastics has non contended that "points" conferred on its members are reasonable compensation for their fundraising activities (and that contention would appear to be problematic on this record), so nosotros do not address the concept of reasonable bounty.[Cease Page fifteen] [*fifteen] If the arrangement engages in either inurement or private benefit, then the arrangement is furthering a not-exempt purpose. Id.; 26 C.F.R. sec. ane.501(c)(3)-1(c)(2), -one(d)(1)(ii). The prohibition against inurement, like the prohibition of private do good, ensures that the exempt system is serving a public and not a individual interest, Church of Scientology of Cal. v. Commissioner, 83 T.C. 381, 491 (1984), aff'd, 823 F.second 1310 (ninth Cir. 1987), and the two prohibitions thus have a mutual purpose. And because "private benefit" encompasses just is broader in scope than "inurement", Am. Campaign Acad. 5. Commissioner, 92 T.C. at 1068-1069, they overlap. We therefore hash out the problems in tandem below.
B. Declaratory judgment nether department 7428
As an exception to the full general principle that activeness by the tax collector may non be enjoined, see sec. 7421(a), Congress enacted section 7428 to provide an system with an opportunity to challenge "a decision by the Secretary * * * with respect to the * * * continuing qualification of an organization as an organization described in department 501(c)(3)", sec. 7428(a)(1)(A). Before an organisation may receive consideration for a section 7428 declaratory judgment, the organization must outset exhaust all administrative remedies within the IRS,[End Page 16] [*16] sec. 7428(b)(two), and the IRS does not dispute that Capital letter Gymnastics fully wearied those remedies.
C. Burden of proof
By and large, the burden of proof rests on the petitioner to demonstrate that the IRS'southward determination is incorrect. Rule 142(a); Rameses Sch. of San Antonio, Tex. v. Commissioner, T.C. Memo. 2007-85. Uppercase Gymnastics acknowledges in its cursory that it bears that burden. Revenue enhancement exemption is a affair of legislative grace, and the organization seeking exemption must show that it "comes squarely within the terms of the constabulary conferring the do good sought." Fla. Hosp. Trust Fund 5. Commissioner, 103 T.C. 140, 153 (1994), aff'd, 71 F.3d 808 (11th Cir. 1996). Majuscule Gymnastics has the brunt to overcome the IRS's determination that, because of the mode in which Upper-case letter Gymnastics credited fundraising points, (1) function of its net earnings inured to the benefit of private individuals (i.e., parent- members) and (2) information technology operated in that substantial respect not for the benefit of the public just for the benefit of designated private individuals (i.east., the children of fundraising families).vii
7
Our jurisdiction is express to "a case of actual controversy". Sec. 7428(a). Consequently, we examine only the reasons that the IRS offers (either in its final adverse determination or at trial) as its basis for revoking Capital Gymnastics' exempt status. Id.; see too Am. Campaign Acad. 5. Commissioner, 92 T.C. 1053,
[Terminate Folio 17] [*17] 2. The parties' contentions
Upper-case letter Gymnastics stipulated and the tape shows that parent-members were "insiders" for purposes of section 501(c)(iii), pregnant that the parents exerted directly or indirect command over the organization. Capital Gymnastics insists nonetheless that information technology operated exclusively for an exempt purpose. Capital Gymnastics claims that its method of "unequal sharing of fundraising profits" did non give rise to a "constructive distribution" because the organization "never pays money to any of its members" and instead spends its funds "exclusively on contest-related expenses of the athletes". Uppercase Gymnastics therefore contends that the true recipient of its generosity was not the parents merely instead "a well-defined charitable course"8 of "school age children competing on the Training
7
(...continued) 1063 (1989); H.R. Rept. No. 94-658, at 285 (1976), 1976-3 C.B. (Vol. 2) 695, 977 ("The court is to base its decision upon the reasons provided past the Internal Revenue Service in its find to the party making the request for a determination, or based upon whatsoever new statement which the Service may wish to innovate at the time of the trial"). We therefore do not consider such problems equally whether Capital Gymnastics facilitated improper claims of tax deductions by members, see supra note three, or whether Capital Gymnastics was operated for the individual benefit of the Grooming Eye, run across supra annotation two.
viii
Capital Gymnastics lays corking stress on the fact that its kid athletes were all members of a charitable class (a fact that the Commissioner does non deny). Nosotros cannot tell whether Capital Gymnastics means to fence that this fact resolves the arrangement'due south tax-exempt condition; if information technology does then intend, then the
[End Page 18] [*18] Center's amateur gymnastics and power tumbling teams." Its witness testified that a number of the parents chose to fundraise because they "needed the money", but no prove was offered to back upwards this argument, and it appears to have been speculation. Upper-case letter Gymnastics points to situations where exempt groups raise funds without losing their exempt status, including church youth groups, Cub Scouts, or public schoolhouse athletic booster clubs that have "kids jumping up and down at the corner gas station exhorting yous to go your car washed." Capital Gymnastics maintains that "it seems inconceivable that Congress could have intended such an absurd result" every bit to prohibit booster clubs from spending whatever office of their earnings for the benefit of the children who are on an athletic team. In the terminate, Capital Gymnastics seeks the Courtroom'due south endorsement that its "method for allocating fundraising profits is non only permissible and
8
(...continued) contention fails. Even if all the activities of an arrangement redound to the do good of members of a charitable class, nonetheless, in order to be taxation exempt, the organization must all the same comply with all the requirements of section 501(c)(3), including refraining from inurement and from substantially benefiting private interests. Thus, fifty-fifty when we decide that the beneficiaries of an organization "comprise a charitable class", we nonetheless go along to assure that there is "no selectivity with regard to the identities of the individual[due south] * * * to be benefited", Help to Artisans, Inc. v. Commissioner, 71 T.C. 202, 215-216 (1978) (accent added)--i.east., to clinch that at that place is no impermissible individual benefit.[End Page 19] [*19] lawful, but it should be recognized every bit a ‘best practice' for similar organizations to follow."
The Commissioner "does not quarrel" that Capital letter Gymnastics' mission of fostering amateur sports contest is a qualifying purpose within the meaning of section 501(c)(3) or that the amateur athletes associated with Capital Gymnastics are members of a charitable class. The Commissioner besides accepts that fundraising by a booster club is a permissible action under section 501(c)(iii). The Commissioner objects, however, that "near all of petitioner's fundraised proceeds are earmarked to benefit those individuals who fundraised". The Commissioner contends that this dollar-for-dollar arrangement constitutes inurement and private do good in violation of section 501(c)(3) because the methodology furthers private interests rather than the team or the organization as a whole. Iii. Application of the law to Capital Gymnastics
Applying the law to Upper-case letter Gymnastics' facts and circumstances, nosotros observe that, in violation of department 501(c)(3), Capital Gymnastics allowed substantial individual inurement to the parent-member-insiders who fundraised (by providing to those insiders relief from an economic burden in the form of "points" applied to their assessments) and thereby conferred an impermissible substantial private[End Page 20] [*20] benefit on the kid-athletes of those parents only (as opposed to its child- athletes generally). Capital Gymnastics authorized parent-members to heighten funds for their ain do good but under the name of Majuscule Gymnastics and trading on its revenue enhancement-exemption ruling. Majuscule Gymnastics rigorously assured that its fundraising did not mostly do good all the child-athletes in its programs just rather benefited simply the children of parents who did the fundraising.
Moreover, this is non a circumstance (like, say, a school ring's sale of candy or a church youth grouping's carwash for a in one case-a-year event) in which the fundraising is a tiny fraction of the arrangement'due south overall function; hither, the fundraising is, instead, the admitted "primary function" of the organization. This is not a circumstance in which the individual's contribution of his share of the cost is optional or where scholarships are fabricated available for those who cannot afford the toll. Nor is this a circumstance in which every member is required to perform fundraising and no one can buy his mode out; rather, the fundraising was an option chosen by those who wanted to earn their assessments. The assessments at issue were not arguably de minimis charges that might be covered by a child's newspaper road or babysitting, but rather were serious parental obligations of as much as $1,400 per year (on peak of already considerable tuition of up to $330 per month, plus national dues, registration fees, equipment expenses, and travel expenses).[Finish Folio 21] [*21] Capital Gymnastics' fundraising method is in contrast to the operations of organizations that have been held to comply with section 501(c)(three) and to which Upper-case letter Gymnastics attempts to liken itself. For instance, in Goldsboro Art League, Inc. 5. Commissioner, 75 T.C. 337 (1980), an system that promoted the appreciation of art had two art galleries that displayed artwork from more than 100 artists. These galleries were held not to yield inurement or private benefit, even though the works were bachelor for sale, considering a jury independent of the organization decided which works to display (and only two of the art pieces were from members of the organization). Id. at 345-346. That is, the financial benefits resulting from the organization'due south activities were neither deliberately focused on its members nor (as hither) self-selected by its members. Similarly, in Assistance to Artisans, Inc. v. Commissioner, 71 T.C. 202 (1978), an arrangement that sold for a profit handicrafts from developing societies of the globe was held to operate for a public purpose and not for individual individual gain, because the organization benefited a charitable class (disadvantaged communities), the organisation selected the handicrafts later on researching the socioeconomic structure of the localities without regard to the identities of the individual artisans (e.g., fourscore anonymous disadvantaged women living in a small village in Haiti), the organisation retained none of the profit, and the handicrafts were not from members of the organization.[End Page 22] [*22] Conversely, Capital letter Gymnastics' improper methodology is similar to operations that have been held non to comply with section 501(c)(3).9 For example, in Wendy L. Parker Rehab. Found., Inc. v. Commissioner, T.C. Memo. 1986-348, the organization selected the founders' daughter (who had suffered a coma) as a substantial beneficiary of the foundation's funds, so that "[t]hirty pct of petitioner'southward income is expected to be expended for the benefit of Wendy L. Parker." The system thus relieved the family unit of the economical burden of providing medical intendance and thereby caused its net earnings to inure to the private benefit of insiders. In N. Am. Sequential Sweepstakes five. Commissioner, 77 T.C. 1087 (1981), an system promoted apprentice able-bodied competition in the new sport of "sequential relative" skydiving, but when it paid its creators' expenses for competing in skydiving events, it impermissibly promoted their individual benefit.
Even if an organization benefits an individual who is an undisputed member of a charitable class (such equally the comatose patient in Parker or the athletes in this case), the arrangement may, as in Parker, fall afoul of section 501(c)(3) if its internet
9
Capital Gymnastics acknowledges the unfavorable precedent that these and other cases have on its litigating position. In response, Capital letter Gymnastics offers hypothetical changes to the facts in a number of these cases that (information technology says) were closer to Capital Gymnastics' facts and may accept resulted in favorable outcomes. Capital Gymnastics also spent a pregnant part of its arguments discussing two alternating, hypothetical fundraising methods that it never adopted. We pass up to decide hypothetical cases that are not before us.[End Folio 23] [*23] earnings inure to the benefit of the child'due south parents. Majuscule Gymnastics made no showing that the parent-members who received its fundraising "points" (i.e., the parents who did fundraising) were actually poor, disadvantaged, in financial distress, or otherwise members of whatsoever charitable course. When an organisation benefits members without regard to their being in a charitable class, it fails to farther an exempt purpose. See Retired Teachers Legal Def. Fund, Inc. v. Commissioner, 78 T.C. 280 (1982) (two-thirds of the organization's pensioner- members were non poor or in fiscal distress); see likewise Michigan v. United States, 802 F. Supp. 120, 125 (Due west.D. Mich. 1992) (and cases cited thereat), rev'd on other grounds, 40 F.3d 817 (sixth Cir. 1994).
Upper-case letter Gymnastics seems to argue that its method of "unequal sharing of fundraising profits" did not give rise to a "constructive distribution" because the parents did not receive actual cash; rather, Uppercase Gymnastics disbursed the checks directly to the meet sponsors and thereby bypassed the parents. It cannot be denied, even so, that the fundraising parents received a benefit in the form of a reduction in the amount of cash they were required to pay for their children's participation in gymnastics competitions. The "points" were as good every bit dollars; Capital Gymnastics used those points to allocate dollars to the benefit of the fundraising parent-members; and the parent-members were to that extent excused[Stop Page 24] [*24] from mandatory greenbacks assessments they would otherwise accept been required to pay to comprehend their share of competition costs. For purposes of section 501(c)(iii), "‘benefit'" is a broad term and tin include "‘[a]dvantage; profit; fruit; privilege; gain; [or] interest'". Retired Teachers Legal Def. Fund, Inc. five. Commissioner, 78 T.C. at 286 (quoting Black'south Law Dictionary 143 (5th ed. 1979)). In fact, the do good received by the parents in this case is analogous to the disqualifying do good received by the parents in Wendy L. Parker Rehab. Found., Inc., where the Court concluded that inurement occurred where the arrangement did non requite cash to the parents but instead paid a portion of medical expenses that the parents would otherwise have borne.
The benefit that Capital Gymnastics conferred on fundraising families was hardly insubstantial. Unlike the qualifying organizations in Assistance to Artisans, Inc., and Goldsboro Art League, Inc., whose insiders received, respectively, nil and less than ii% (2 artists out of more than 100 artists) of the benefits, Capital letter Gymnastics' members received 93% of the fundraising profits. Capital Gymnastics' figures are substantial both in absolute terms and in relative terms. By comparison, in Wendy Fifty. Parker Rehab. Found., Inc., a smaller corporeality of inurement--i.e., 30% of that foundation's $vii,500 in income--was still large enough to constitute substantial inurement.[End Page 25] [*25] In property that Capital Gymnastics' fundraising constituted a substantial not-exempt purpose, we do not overlook its non-fundraising activity. Every bit the Commissioner admitted:
[I]n addition to its fundraising activities, petitioner disseminates
data to its members, holds a few spirit events, and acts as a
"conduit" or "clearinghouse" to collect and pay over the competition
costs. This administrative activity of assembling funds in a
centralized place (petitioner's bank business relationship), forwarding the encounter
entry fees to the meet sponsors and paying the coaches' expenses so
that they could back-trail the athletes benefited all the athletes
equally. It facilitated the power of the teams and the athletes to
participate in competitions. These administrative-blazon activities
appear to be specifically contemplated by Congress when amending
section 501(c)(3) of the Code to include exempt organizations which
foster amateur able-bodied competition. But this administrative activeness
was non petitioner's primary activeness. The primary activity was
fundraising which benefited private interests more than incidentally. Nosotros agree. The issue here is not whether Capital Gymnastics had any charitable purpose but whether (as the statute requires) information technology was operated exclusively for charitable purposes. Nosotros concur it was not.
In so holding, we practice not criticize (except in the revenue enhancement-exemption context) Capital Gymnastics' "point" organisation. Parents who make a serious financial investment in the evolution of their children's athletic abilities should exist free to accommodate that action in the way they choose. The arrangement that Capital Gymnastics developed may well be a rational, wholesome, just, and efficient[End Page 26] [*26] fundraising method (a proposition as to which we have no jurisdiction to brand a declaratory judgment); but even if so, it does not further a taxation-exempt purpose. Capital Gymnastics' arrangement reflects instead the purpose of promoting the financial interests of its fundraising members. IV. Conclusion
For all of the higher up reasons, Majuscule Gymnastics operated in a manner that allowed substantial individual inurement and promoted private, non-public interests. Therefore, the organization did not operate exclusively for an exempt purpose. Nosotros conclude that Upper-case letter Gymnastics did not satisfy the requirements of section 501(c)(3) and consequently did not qualify for exemption from tax nether section 501(a). We therefore sustain the IRS'due south final adverse determination.
To reverberate the foregoing,
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Source: https://www.plainsite.org/dockets/u5bm369x/united-states-tax-court/capital-gymnastics-booster-club-inc-v-commissioner/
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