T.C. Memo. 1999-304
UNITED STATES TAX COURT
WAYNE BASEBALL, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15966-98X. Filed September 15, 1999.
John K. Graham and David J. Nagle, for petitioner.
Mark A. Ericson, for respondent.
MEMORANDUM OPINION
COHEN, Chief Judge: Respondent determined that Wayne
Baseball, Inc. (petitioner), does not qualify as a section
501(c)(3) charitable organization and, therefore, is not exempt
from Federal taxation under section 501(a). Pursuant to section
7428 and title XXI of the Tax Court Rules of Practice and
Procedure, petitioner seeks a declaratory judgment that it is a
qualified organization under section 501(c)(3). The
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administrative record, which includes all the facts upon which
respondent made the final adverse determination, was submitted to
the Court under Rule 217(b)(1). Unless otherwise indicated, all
section references are to the Internal Revenue Code in effect at
the time the petition was filed, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
Background
Petitioner is a nonprofit Delaware corporation whose
principal activity is the sponsorship of a highly competitive
amateur baseball team. The team plays almost exclusively in
Delaware County, Pennsylvania. Home games are played on a local
high school field, and petitioner does not charge admission to
spectators who come to watch the games.
Each year, the team holds a series of spring tryouts from
which approximately 25 players are selected to make up the roster
for a 40-game season. The typical player is over the age of 21
and either has competed or currently competes at the collegiate
baseball level. The roster also includes several younger players
between the ages of 17 and 21. Each player possesses a high
degree of skill in the game of baseball. At the time the
administrative record was compiled, one younger player was in the
process of trying out for the U.S. national baseball team, which
competes in the Olympic and Pan-American Games. Also included on
the team are several perennial veteran players who are in their
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later 20's. In addition to being players, these older team
members serve as mentors who instruct and assist in the
development of their younger teammates. Two of the veteran
players also serve on petitioner's board of directors. Of the 25
team members, 3 have experience playing in the professional minor
leagues.
The team does not have a formal instructional program. To
improve player performance, the team relies instead on informal
interaction between the players in giving each other advice and
on self-taught, hands-on training that occurs in game situations.
On their own time and initiative, two players have assisted local
high school athletes in the game of baseball, but this
extracurricular coaching is not sponsored by petitioner.
Petitioner sponsors the team by supplying uniforms,
equipment, umpire fees, insurance, league fees, and miscellaneous
expenses. The expenses of the team run typically between $5,000
and $9,000 per year. A substantial amount of petitioner's
proceeds come from contributions made by Charles T. Freeman
(Freeman). Freeman is president of petitioner, a director on
petitioner's board, and also volunteers as the general manager of
the team.
On December 6, 1995, petitioner submitted a Form 1023,
Application for Recognition of Exemption, under section
501(c)(3). Respondent issued an initial adverse determination on
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June 6, 1996. Petitioner appealed to the Internal Revenue
Service Office of Appeals, which gave a final adverse
determination on July 1, 1998, denying tax-exempt status to
petitioner under section 501(c)(3). Respondent's reasons for
denial stemmed from his conclusion that petitioner is not
operated exclusively for exempt purposes, in that a substantial
portion of the purposes and activities of petitioner is social
and recreational and inconsistent with the section 501(c)(3)
exemption. Petitioner challenges that finding in this action for
declaratory judgment.
Discussion
Petitioner bears the burden of proving that it is a section
501(c)(3) organization. Rule 217(c)(2)(A). A statute creating
an exemption must be strictly construed. See American Auto.
Association v. Commissioner, 19 T.C. 1146, 1158 (1953);
Associated Indus. of Cleveland v. Commissioner, 7 T.C. 1449, 1464
(1946).
Section 501(a) provides tax-exempt status for organizations
described in section 501(c). Section 501(c)(3) includes the
following organizations:
(c)(3) 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
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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 * * *, and which does not
participate in, or intervene in * * *, any
political campaign on behalf of any candidate for
public office.
The theory behind the exemption is that the Government is
compensated for the loss of revenue by its relief from the
financial burden that would otherwise have to be met from public
funds and that the Government realizes benefits resulting from
private promotion of the general welfare. See H. Rept. 1860,
75th Cong., 3d Sess. (1938), 1939-1 C.B. (Part 2) 728, 742.
Section 501(c)(3) sets forth three requirements for an
organization to be exempt: (1) The corporation must be organized
and operated exclusively for exempt purposes, (2) no part of the
net earnings of the corporation may inure to the benefit of any
shareholder or individual, and (3) the corporation must not
engage in political campaigns or, to a substantial extent, in
lobbying activities. See Hutchinson Baseball Enters., Inc. v.
Commissioner, 73 T.C. 144, 151 (1979), affd. 696 F.2d 757 (10th
Cir. 1982). Only the first requirement is at issue in this case.
Respondent concedes that petitioner is organized exclusively
for exempt purposes within the meaning of section 501(c)(3).
Therefore, the only remaining question is whether petitioner is
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operated as a section 501(c)(3) organization. The operational
test requires the activities of an organization to be primarily
those that accomplish an exempt purpose as described in section
501(c)(3). See sec. 1.501(c)(3)-1(c)(1), Income Tax Regs. A
single substantial nonexempt purpose will disqualify an
organization despite the importance of its exempt purpose. See
Better Business Bureau v. United States, 326 U.S. 279, 283
(1945). If an organization serves private rather than public
interests, it also will not meet the operational test. See sec.
1.501(c)(3)-1(d)(1)(ii), Income Tax Regs.
Petitioner contends that it operates exclusively for one or
more exempt purposes within the meaning of section 501(c)(3) and
does not further private interests. In support of this
assertion, petitioner relies on Hutchinson Baseball Enters., Inc.
v. Commissioner, supra at 155-156, which held that the promotion
of amateur baseball is an exempt purpose. Respondent argues that
petitioner does not qualify under section 501(c)(3) because more
than an insubstantial part of the activities of petitioner
furthers nonexempt social and recreational interests of its
members. Respondent relies on the similarities of this case to
Media Sports League, Inc. v. Commissioner, T.C. Memo. 1986-568,
which denied exempt status to an amateur sports league.
Section 501(c)(3) exempt purposes are those of a charitable
character and are not limited to the classifications enumerated
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by the statute. See Hutchinson Baseball Enters., Inc. v.
Commissioner, supra at 152. The term "charitable" embraces "'any
benevolent or philanthropic objective not prohibited by law or
public policy which tends to advance the well-doing and well-
being of man.'" Id. at 153.
In Hutchinson Baseball Enters., Inc., we held that
promotion, advancement, and sponsorship of amateur baseball are
exempt purposes under section 501(c)(3). See id. The
organization in Hutchinson Baseball Enters., Inc. sponsored a
highly skilled adult amateur baseball team. It also leased and
maintained baseball fields for the use of Little League teams, a
local community college team, American Legion teams, and a
baseball camp. In addition, the organization provided coaches
for the Little League teams and baseball camp. See id. at 147.
The Court held that these activities as a whole advanced amateur
baseball in the Hutchinson community. See id. at 155.
In Media Sports League, Inc., the Court addressed a similar
issue but concluded that a corporation is not a section 501(c)(3)
organization when its activities solely sponsor sports games for
novice adult amateur athletes. We distinguished the organization
in Media Sports League, Inc. from the organization in Hutchinson
Baseball Enters., Inc. as follows:
In Hutchinson we found the organization's
predominant motivation for engaging in its activities
was the furtherance of amateur athletics. The
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organization provided coaching and instruction for
children and recruited only top amateur baseball
players to play on the team it sponsored. The
organization also hired a coach, general manager and
trainer to work with the team. Petitioner, in
contrast, provides no formal or ongoing instruction to
its members, has no skill requirements for eligibility
to play in its leagues and does not require members to
participate in any of its activities. Petitioner also
provides facilities and equipment for its members. An
organization may engage in a particular activity for
exempt and nonexempt purposes, but the operational test
will be satisfied only if the taxpayer is operated
exclusively for one or more of the exempt purposes
specified in the statute. * * * Although we believe
that the furtherance of amateur athletics is one of
petitioner's goals, we find that a substantial purpose
was to further the social and recreational interests of
its members. We have repeatedly held that
organizations whose activities are directed
substantially toward social and recreational purposes
are not eligible for section 501(c)(3) status.
[Media Sports League, Inc. v. Commissioner, supra;
citations omitted.]
We conclude that petitioner is unlike the organization in
Hutchinson Baseball Enters., Inc. and indistinguishable from the
organization in Media Sports League, Inc. In Hutchinson
Baseball Enters., Inc., the activities of the organization
primarily promoted baseball in the surrounding community by
maintaining a baseball field for the public and providing
coaches for Little League teams and baseball camp. Hutchinson
Baseball Enters., Inc. v. Commissioner, supra at 155. In
contrast, the only activity sponsored by petitioner is the
operation of the adult amateur baseball team. As in Media
Sports League, Inc., the primary beneficiaries of petitioner are
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the individual team participants, including the player/directors
and Freeman, who serves as the team manager. The team furthers
their social and recreational interests, and, on balance, this
nonexempt purpose was substantial in comparison to petitioner's
promotion of the game of baseball to the surrounding community.
Allowing spectators to watch the games free of charge is
incidental to the purpose of providing a team for the enjoyment,
recreation, and social interaction of the players, and, although
two players on their own have taken the initiative to teach
baseball to several local youths, petitioner does not sponsor
those activities. Therefore, petitioner does not benefit its
community in a way comparable to the charitable activities
described in Hutchinson Baseball Enters., Inc. v. Commissioner,
supra at 153-156.
For the reasons stated, we conclude that petitioner is not
operated as a section 501(c)(3) organization. We have
considered the other arguments of petitioner, and they are
addressed by the consideration of nonexempt purposes or
otherwise lack merit.
Decision will be
entered upholding
respondent’s determination.