Basketball officials’ association denied Sec. 501(c)(3) status

In Letter Ruling 202521023, the IRS denied tax-exempt status to an association of sports officials.

Facts: The organization requesting tax-exempt status in the letter ruling functions as an association of basketball officials that recruits, trains, certifies, and assigns its members to officiate at elementary, middle, and high school games through contracts with school districts in its local area. The school districts pay the referees directly as independent contractors. Officials with more experience and certifications receive higher pay. The school districts determine what the officials are paid based on the level of play. An assignment secretary, who is an independent contractor of the organization, assigns members to games “based on their availability and qualifications.”

The organization provides testing to assess each official’s understanding, interpretation, and application of the rules and regulations of basketball. The organization also ensures referees meet physical-fitness requirements, demonstrate effective communication skills, and are proficient in pregame and post-game video analysis.

The organization’s activities are funded primarily through annual dues paid by the members. The organization also receives fees from “scrimmage games and camp fees.” Over half of the organization’s expenses were payments to the assignment secretary, with other expenses including an opening season member’s dinner and meeting, an end-of-season banquet, and a stipend for the treasurer.

Discussion: To qualify under Sec. 501(c)(3), an organization must satisfy both the organizational and operational tests (Regs. Sec. 1.501(c)(3)-1(a)(1)).

Regarding the organizational test, Regs. Sec. 1.501(c)(3)-1(b)(1)(iv) states that the test must be met by the creating document or state law. It cannot be met by oral representations or representations made in other documents. The secretary of state listed the organization as having a “forfeited existence.” This, according to the IRS, clearly illustrated that the organization was not legally formed under state law. Therefore, it did not meet the requirements of Regs. Sec. 1.501(c)(3)-1(b)(1)(iv) and failed the organizational test under Sec. 501(c)(3).

The IRS then considered whether the organization met the operational test. Under Regs. Sec. 1.501(c)(3)-1(c)(1), an organization will not be regarded as exempt under Sec. 501(c)(3) if more than an insubstantial part of its activities does not further an exempt purpose. Regs. Sec. 1.501(c)(3)-1(d)(1)(ii) requires that activities serve a public, not a private, interest. Here, it was determined that the organization’s primary activity was arranging for paid officiating opportunities for its members to work school-district games, serving functionally as a placement pipeline, such that private economic interests predominated over any educational programming. In support of this conclusion, the IRS cited Better Business Bureau of Washington, D.C., Inc., 326 U.S. 179 (1945), in which the Supreme Court held that the presence of a “single non-exempt purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly exempt purposes.”

In Rev. Rul. 61-170, a nursing registry’s primary purpose was to give its members greater employment opportunities. The IRS ruled that the registry did not meet the operational test even though the public received some benefit from its activities. The basketball officials’ association kept a pool of qualified officials, scheduled those who met certain requirements, and was supported primarily by membership fees, with negligible public support. As it had in Rev. Rul. 61-170, the IRS found that those features indicated that the principal beneficiaries were the members; although the public received some benefit from the organization’s activities, it was not enough to negate the organization’s substantial nonexempt purpose.

The organization also claimed that it was a “qualified amateur sports organization” under Sec. 501(j)(2). Sec. 501(j)(2) requires an entity to be organized and operated exclusively to foster national or international amateur sports competition and be primarily engaged in supporting and developing amateur athletes for that level of competition. The IRS found that the organization was “primarily operated to provide [its] members with paid officiating assignments,” not to support or develop athletes for elite competition. Thus, the Service ruled that the organization was not a Sec. 501(j)(2) qualified amateur sports organization.

Conclusion: IRS Letter Ruling 202521023 offers a clear reminder that tax-exempt status requires both a valid legal organization and operations directed primarily to public, not private, interests. An organizational defect, such as forfeited existence under state law, is independently fatal. Even when some activities appear educational or supportive of a broader public purpose, an organization will be denied exemption where the primary function substantially benefits members’ private economic interests.

The reliance on Better Business Bureau of Washington D.C., Inc., and Rev. Rul. 61-170 is a strong signal to membership associations that an activity resembling job-placement registries facilitating paid work for members is a substantial nonexempt purpose. Applicants in the sports space should also note the narrow reading of Sec. 501(j)(2) that the activity must primarily support and develop athletes for national or international competitions, not merely provide services for competitions. For organizations contemplating tax-exempt status, some practical takeaways are: (1) verify state-law good standing prior to filing; (2) ensure that any member-facing services are both qualitatively and quantitatively incidental to a demonstrable public benefit; and (3) align sports-related purposes to Sec. 501(j)(2)’s athlete-development focus if pursuing that path.

• IRS Letter Ruling 202521023

— Austin Arnold, CPA, is a lecturer in taxation and financial literacy in the Cornell Law School at Cornell University; John McKinley, CPA, CGMA, J.D., LL.M., is a professor of the practice in accounting and taxation within the SC Johnson College of Business at Cornell University; and Jordan Fishman is a J.D. candidate at the University of Miami School of Law at the University of Miami. To comment on this column, contact Paul Bonner, the JofA‘s tax editor.