Pickleball club denied tax-exempt status

A recreational community pickleball club that was open to participants of all ages and skill levels was not organized and operated exclusively for exempt purposes under Sec. 501(c)(3), according to the IRS.

Facts: A local community pickleball club was organized and duly incorporated in a state by filing articles of incorporation. The club sought tax-exempt status with the IRS by submitting Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. On the form, the club attested that it had a “necessary organizing document” that limited its purposes to one or more exempt purposes under Sec. 501(c)(3), did not empower the club to engage in substantial activities that did not further one or more exempt purposes, and contained the dissolution provisions required under Sec. 501(c)(3). The club further attested it was “organized and operated exclusively” to further charitable purposes and that it would not engage in any prohibited activities under Sec. 501(c)(3).

Also, within the club’s Form 1023-EZ, it indicated that its mission was to provide a “fun, healthy, recreational, and competitive social activity in a structured setting which fosters friendships and camaraderie, and by doing so helps to grow the sport of pickleball.”

The club’s articles of incorporation stated that its purpose was “to promote the development and growth of the sport of pickleball for the enjoyment, health, and social wellbeing, for all ages.” This was accomplished through “social, recreational, and competitive events” for members of all ages and skill levels. Any individual in the community could become a member of the club, the activities of which were held on public courts. The club raised funds to accomplish these purposes by charging its members a fee.

Discussion: Sec. 501(c)(3) and Regs. Sec. 1.501(c)(3)-1(a)(1) set forth two main requirements to qualify for exempt status. An organization must be 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” (Sec. 501(c)(3)). If the organization fails either the organizational or operational test, it will not be deemed tax-exempt (Regs. Sec. 1.501(c)(3)-1(a)(1)).

An entity is organized exclusively for one or more exempt purposes if the articles of incorporation limit it to one or more exempt purposes and do not expressly empower the organization to engage in substantial activities that do not further these exempt purposes (Regs. Sec. 1.501(c)(3)-1(b)). Moreover, the presence of a single nonexempt purpose, if substantial in nature, precludes exemption “regardless of the number or importance of statutorily exempt purposes,” the IRS stated, citing Better Business Bureau of Washington, D.C., Inc., 326 U.S. 279 (1945).

Since the club’s articles of incorporation did not limit its purpose to those “exclusively exempt” under Sec. 501(c)(3), the club did not meet the requirements of Regs. Sec. 1.501(c)(3)-1(b)(1)(i), the IRS stated. An organization’s articles of incorporation cannot be broader than the purposes specified in Sec. 501(c)(3) (Regs. Sec. 1.501(c)(3)-1(b)(1)(iv)). Therefore, the club did not meet the organizational test. Also, since the club’s main activities consisted of organizing and operating community pickleball for its members, it did not meet the provisions of Sec. 501(c)(3) because it was not operated exclusively for an exempt purpose.

Sec. 501(j) provides that an organization that fosters “national or international amateur sports competition” may qualify as tax-exempt under Sec. 501(c)(3) if it is considered a “qualified amateur sports organization” under Sec. 501(j)(2). A qualified amateur sports organization means any organization organized and operated exclusively to foster national or international amateur sports competition by conducting these sporting events or supporting and developing amateur athletes to compete in them (Sec. 501(j)(2)). These organizations also qualify for tax-exempt status “whether they provide facilities or equipment to their members” and “whether their membership is local or regional in nature,” the IRS stated. Since the club did not foster any national or international pickleball competitions or support and develop any amateur pickleball athletes, it did not meet the definition of a qualified amateur sports organization under Sec. 501(j).

In determining that the club was not tax-exempt, the IRS considered several revenue rulings. Rev. Rul. 64-275 determined that an organization whose purpose was to train suitable candidates in the techniques of racing sailboats in international and national competitions, such as the Olympic and Pan American games, was tax-exempt as an educational organization under Sec. 501(c)(3). Also, an organization organized and operated exclusively to teach children a sport by holding free clinics conducted by “qualified instructors” and providing equipment to children who could not afford it was also deemed to be an educational organization under Sec. 501(c)(3) (Rev. Rul. 65-2; see also Rev. Rul. 80-215). The IRS determined, however, that the pickleball club was not an educational organization since it was not providing training for participants to compete in national or international competitions, and the recreational activities within the club were not limited to a “charitable class.”

The organization here was more like the one denied tax-exempt status in Rev. Rul. 70-4, the IRS stated, in which the organization’s purpose was to promote “the health of the general public by encouraging all persons to improve their physical condition and fostering public interest in a particular sport.” This was done through promoting sports tournaments and exhibitions and holding instructive clinics.

Conclusion: Based on the facts and circumstances, the pickleball club did not qualify for exempt status under Sec. 501(c)(3) since it was not organized or operated as such. The organization’s purpose as stated in its articles of incorporation went beyond the scope of Sec. 501(c)(3), causing it to fail the organizational test. Also, the organization failed the operational test because it furthered a substantial nonexempt purpose by providing recreational pickleball to participants of all ages and skill levels.

■ IRS Letter Ruling 202443020

— John McKinley, CPA, CGMA, J.D., LL.M., is a professor of the practice in accounting and taxation in the SC Johnson College of Business, and Matthew Geiszler, Ph.D., is a lecturer in accounting in the Brooks School of Public Policy, both at Cornell University. To comment on this column, contact Paul Bonner, the JofA‘s tax editor.