                                T.C. Memo. 2015-218



                          UNITED STATES TAX COURT



 GAMEHEARTS, A MONTANA NONPROFIT CORPORATION, Petitioner v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 20303-13X.                          Filed November 16, 2015.



      Ron Glick (an officer), for petitioner.

      Pamela J. Sewell, for respondent.



                            MEMORANDUM OPINION


      PUGH, Judge: Respondent determined that GameHearts, A Montana

Nonprofit Corporation (GameHearts) is not exempt from Federal income tax under

section 501(a)1 because it is not an organization described in section 501(c)(3).


      1
          Section references are to the Internal Revenue Code of 1986, as amended.
                                                                       (continued...)
                                        -2-

[*2] Having exhausted its administrative remedies, GameHearts challenged that

determination by timely seeking a declaratory judgment pursuant to section

7428(a). The sole issue to be decided is whether GameHearts qualifies for tax

exemption as an organization described in section 501(c)(3).

                                    Background

      The administrative record upon which respondent made the final adverse

determination was submitted to the Court by joint motion pursuant to Rules 122

and 217(b). For purposes of this proceeding, the facts and representations in the

administrative record are accepted as true and are incorporated herein.

      GameHearts is a nonprofit Montana corporation with its principal office in

Kalispell, Montana. Its president and representative in this proceeding is Ron

Glick. Article III of GameHearts’ articles of incorporation and article II of

GameHearts’ bylaws describe its purpose as follows:

      Said corporation is organized exclusively for charitable, educational
      and/or scientific purposes, including, for such purposes, the making
      of distributions to organizations that qualify as exempt organizations
      under 501(c)(3) of the Internal Revenue Code, or the corresponding
      section of any future tax code, the specific purpose of the corporation
      is to provide for the benefit and civil welfare of the community and
      region in which the Corporation exists, with specific interest in


      1
       (...continued)
Rule references are to the Tax Court Rules of Practice and Procedure.
                                        -3-

[*3] promotion of adult sobriety and the general welfare of citizens of the
     State of Montana.

      On July 14, 2010, GameHearts filed a Form 1023, Application for

Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.

In the Form 1023 GameHearts provided the following description of its activities:

      GameHearts is a public benefit nonprofit organization committed to
      providing alternative forms of entertainment to adult members of the
      Kalispell area for the purpose of promoting adult sobriety. The
      program achieves its directive by providing free and low cost tabletop
      gaming activities in a supervised[,] non-alcoholic, sober environment,
      along with access to gaming accessories that are provided without
      cost to the participants. In fact, beginning players can learn and
      obtain free gaming materials solely for playing.

      The primary games that the program uses are tabletop customizable
      games, such as card and miniature games (CCGs and CMGs), though
      there is also a strong interest in promoting role playing games
      (RPGs), as well. GameHearts is working toward the betterment of
      our region through encouraging alternative gaming activities amongst
      participants during evening hours, as opposed to frequenting bars and
      casinos in the area, as well as to inspire decision making and problem
      solving abilities by teaching and promoting educational and strategic
      games and activities, using CCGs, CMGs, and RPGs as alternative
      entertainment.

      GameHearts does more than promote just sobriety though--it opens
      up an entirely new facet of the population to these kinds of
      educational and interactive games. People who would otherwise
      never know what a game like Magic, for instance, was really about
      now get free exposure to the game, complete with lessons and a
      beginning deck. Without an initial investment to begin playing, our
      participants have little obstacles in playing and interacting with other
      players. Since GameHearts is primarily an nonprofit, the bulk of
                                        -4-

[*4] participants eventually find they need to purchase materials we simply do
     not have, since we are not interested in maintaining a full service retail
     business. As such, GameHearts also helps boost the overall market shares
     of the industry by introducing new and motivated players into the
     environment.

      GameHearts’ website states that the organization does not promote absolute

abstinence from alcohol or drug use but “encourages community minded sobriety

during otherwise prolific times of alcohol and drug use, particularly Friday and

Saturday nights.” To encourage adult sobriety GameHearts offers two separate

programs. One program is a tutorial on how to play the games, and the second

program is “organized play.” GameHearts’ only requirements to join either the

tutorial or the “organized play” programs are that the participant be at least 18

years of age and be committed towards sobriety during “gameplay.” Those failing

to meet the requirements are not allowed to participate and do not receive any

materials from the programs. The Form 1023 also explained that GameHearts was

dependent on donations from the gaming community and was largely a “mobile

tutorial program” but hoped to secure long-term support so that it could obtain a

permanent facility.

      A series of letters from GameHearts to respondent, through Mr. Glick, also

characterizes its purpose and activities. In an August 16, 2010, letter Mr. Glick

stated that GameHearts “exists to provide recreational activities in a safe, sober
                                        -5-

[*5] environment that keeps participants engaged in a social medium that

precludes drinking and gambling recidivism.” He also stated that “[t]he entire

reason our program provides free services is to appeal to the poor, distressed

citizens in our community.” Acknowledging that the games GameHearts offers

also are offered by the for-profit gaming industry, Mr. Glick argued that

GameHearts’ offerings are limited by the cards available to it through donations,

and GameHearts “take[s] advantage of the surplus bulk leftover from the for-profit

gaming industry”. GameHearts does keep for sale a very small stock of gaming

materials that were needed but were not donated. Apparently GameHearts does

not offer (or sell) the high-value cards needed for competitive play. Because

GameHearts cannot offer those high-value cards, its games are not attractive to

those who could afford for-profit gaming alternatives. In a September 12, 2010,

letter Mr. Glick summarized GameHearts’ services as “therapeutic options for

individuals wishing to maintain sober lifestyles, either recovery from addiction or

those wishing to avoid the addictive lifestyle.” In a July 6, 2010, letter Mr. Glick

explained that some of GameHearts’ projects are intended to teach participants

how to develop relationships with retailers and game manufacturers and other

gaming participants, create fair market access to trade and sales among members,
                                         -6-

[*6] and encourage and teach “positive activities that teach important life skills

and work ethics”.

      In a June 3, 2013, letter respondent notified GameHearts of the conclusion

that, on the basis of the information provided, GameHearts did not qualify for

exemption under section 501(a) as an organization described in section 501(c)(3)

because GameHearts was not organized or operated exclusively for exempt

purposes. Respondent based this determination on the conclusion that

(1) GameHearts failed to establish that it benefited a charitable class;

(2) GameHearts’ nonexempt activities were more substantial than its exempt

activities; and (3) GameHearts did not meet the requirements of section

1.501(c)(3)-1(d), Income Tax Regs., “because it did not limit activities to addicts

with a low income.”

                                     Discussion

A. Declaratory Judgment

      In a declaratory judgment action brought under section 7428, the

organization bears the burden of proving that it is a section 501(c)(3) organization.

See Rule 142. In order for the organization to meet this burden, the administrative

record, upon which this case is to be decided, must contain enough evidence to

support a finding contrary to the grounds set forth in the notice of determination.
                                          -7-

[*7] Rule 217(a); see Nationalist Movement v. Commissioner, 102 T.C. 558, 572

(1994), aff’d, 37 F.3d 216 (5th Cir. 1994); Church in Boston v. Commissioner, 71

T.C. 102, 105 (1978). In other words, we limit the scope of our inquiry to the

administrative record and “to the propriety of the reasons given by respondent for

denying petitioner’s application for exempt status.” Aid to Artisans, Inc. v.

Commissioner, 71 T.C. 202, 208 (1978) (citing Hous. Lawyer Referral Serv., Inc.

v. Commissioner, 69 T.C. 570, 573 (1978)); see also Am. Campaign Acad. v.

Commissioner, 92 T.C. 1053, 1063 (1989). In doing so we are mindful that a

statute creating an exemption must be strictly construed. See Am. Auto. Ass’n v.

Commissioner, 19 T.C. 1146, 1158 (1953); Associated Indus. of Cleveland v.

Commissioner, 7 T.C. 1449, 1464 (1946).

B. Whether GameHearts Is Entitled to Exempt Status

      A corporation that is organized and operated exclusively for charitable

purposes, as described in section 501(c)(3), is exempt from Federal income tax

unless exemption is denied under section 502 or 503. Sec. 501(a). Section

501(c)(3) includes the following organizations:

             Corporations * * * 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 * * *, or for the prevention of cruelty to children
                                         -8-

[*8] or animals, no part of the net earnings of which inures to the benefit of any
     private shareholder or individual * * *

      To be exempt under section 501(c)(3), an organization must be both

“organized” and “operated” exclusively for tax-exempt purposes. See sec.

1.501(c)(3)-1(a)(1), Income Tax Regs. An organization must satisfy both tests to

be exempt under section 501(c)(3). Id.

      Of the exempt purposes listed in section 501(c)(3), GameHearts maintains

that it is organized and operated for charitable purposes. The term “charitable” is

used in section 501(c)(3) in its generally accepted legal sense and includes, but is

not limited to: “[r]elief of the poor and distressed or of the underprivileged; * * *

lessening of the burdens of Government; and promotion of social welfare by

organizations designed to accomplish any of the above purposes, or (i) to lessen

neighborhood tensions; * * * or (iv) to combat community deterioration and

juvenile delinquency.” Sec. 1.501(c)(3)-1(d)(2), Income Tax Regs. We have held

that 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.” See Hutchinson Baseball Enters., Inc. v. Commissioner, 73

T.C. 144, 152 (1979) (quoting Peters v. Commissioner, 21 T.C. 55, 59 (1953)),

aff’d, 696 F.2d 757 (10th Cir. 1982).
                                         -9-

[*9] We focus our analysis on what we believe to be respondent’s primary

objection--that GameHearts was not operated exclusively for charitable purposes

because of the way it chose to promote adult sobriety and the general welfare of

the citizens of the State of Montana. An organization will be regarded as

“operated exclusively” for one or more exempt purposes only if it engages

primarily in activities which accomplish one or more of the exempt purposes

specified in section 501(c)(3). 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 Bus. Bureau of Wash., D.C. 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. Whether an organization satisfies the

operational test is a question of fact to be resolved on the basis of all the evidence

presented by the record. Church of Scientology of Cal. v. Commissioner, 83 T.C.

381, 474 (1984), aff’d, 823 F.2d 1310 (9th Cir. 1987).

      The Court must decide whether GameHearts is operated exclusively for the

charitable purposes of promoting adult sobriety and general welfare by offering

gaming opportunities in a sober environment. GameHearts contends that it

operates for charitable purposes because it provides relief for the poor, distressed,
                                         - 10 -

[*10] or underprivileged and promotes general welfare by encouraging

community-minded sobriety. Respondent counters that more than an insubstantial

part of the activities of GameHearts furthers nonexempt social and recreational

interests because GameHearts offers gaming to anyone who is over 18 and sober.

That is, respondent’s argument is that (1) gaming is recreational and (2)

GameHearts does not limit its services to a charitable class. GameHearts responds

that (1) the specific type of recreation should not matter and (2) it services a

charitable class because its offerings are not competitive with the for-profit

gaming industry.

      The question before us then is under what circumstances an organization

that offers a recreational activity to achieve a charitable purpose qualifies as a

charitable organization. Our prior cases have acknowledged that an organization

may be engaged in a single activity that has more than one purpose. B.S.W. Grp.,

Inc. v. Commissioner, 70 T.C. 352 (1978). In B.S.W. Grp., Inc., we framed the

“critical inquiry” as “whether petitioner’s primary purpose for engaging in its sole

activity is an exempt purpose, or whether its primary purpose is the nonexempt

one of operating a commercial business producing net profits for petitioner.” Id.

at 357. The purpose of the activity, not the nature of the activity itself, is

determinative. Id. at 356-357; see Golden Rule Church Ass’n v. Commissioner,
                                          - 11 -

[*11] 41 T.C. 719, 728 (1964).2 Therefore, we must determine whether

GameHearts’ primary purpose for engaging in its sole activity (gaming) is an

exempt purpose or whether there is another substantial nonexempt purpose

(recreation).

       In B.S.W. Grp., Inc. v. Commissioner, 70 T.C. 352, the organization at issue

provided consulting services at cost to nonprofit, limited resource organizations

engaged in various rural-related activities. We refused to disqualify the

organization from classification under section 501(c)(3) merely because its

activities might constitute a trade or business, but we ultimately concluded that the

organization’s activities were commercial rather than charitable. We found that

the organization did not establish that it was not in competition with commercial

consulting businesses, which weighed heavily against the organization because its

sole activity was commercial. Id. at 358-359. The organization also charged fees

for its services (at cost), producing a net profit, and failed to limit its clientele to

other organizations exempt under section 501(c)(3). Id. at 359-360.




      2
         In this regard, we agree with GameHearts that the type of recreational
activity offered is not determinative--rather, as we explain below, we consider the
other purposes and the potential benefits rather than the specific activity offered to
achieve those purposes and benefits.
                                        - 12 -

[*12] Consequently, we were unable to conclude that the organization’s primary

purpose was educational, scientific or charitable rather than commercial. Id. at

361.

       In Schoger Found. v. Commissioner, 76 T.C. 380 (1981), we applied B.S.W.

Grp., Inc. to conclude that a “religious retreat facility” was not operated primarily

for an exempt religious purpose. We recognized that wholesome family recreation

or contemplating nature might provide a family or individual with a religious or

uplifting experience, but the organization failed to establish how the religious

retreat experience being offered differed from the experience at any other quiet inn

or lodge in Colorado.

       We also have considered the line between exempt activities and nonexempt

recreational activities in considering whether organizations that promoted amateur

baseball qualified under section 501(c)(3) as organizations fostering national or

international amateur sports. In Hutchinson Baseball Enters., Inc. v.

Commissioner, 73 T.C. at 151, the Court held that the organization’s activities

primarily promoted baseball in the surrounding community by maintaining a

baseball field for the public, providing coaches and instruction for children, and

sponsoring a baseball camp and the organization thus operated for an exempt

purpose. Id. at 155.
                                         - 13 -

[*13] In contrast, in Wayne Baseball, Inc. v. Commissioner, T.C. Memo. 1999-

304, the Court held that the organization’s nonexempt social and recreational

activities were substantial in comparison to the organization’s promotion of

baseball in the community. The Court found that the only activity sponsored by

the organization was the operation of an adult amateur baseball team and that the

primary beneficiaries of the organization were the individual team participants.

Id. The Court further reasoned that allowing spectators to watch the baseball

games free of charge was incidental to the purpose of providing enjoyment,

recreation, and social interaction for the team participants. Id. Likewise, in Media

Sports League, Inc. v. Commissioner, T.C. Memo. 1986-568, we found that a

substantial purpose of the organization’s activities was to further the social and

recreational interests of its members.

      Lastly, we have considered when the offering of recreational facilities alone

would qualify an organization for exempt status. In Peters v. Commissioner, 21

T.C. 55,3 we concluded that a foundation organized to promote social welfare by


      3
         GameHearts did not cite Peters v. Commissioner, 21 T.C. 55 (1953), but
rather a revenue ruling, Rev. Rul. 77-366, 1997-2 C.B. 192, that in turn cites
Peters. In responding to GameHearts, respondent focused on the lack of
counseling or therapy offered in addition to the recreation. Of course, under
Peters, respondent’s argument that anyone over 18 and sober may participate
would favor GameHearts.
                                         - 14 -

[*14] furnishing public swimming facilities to all residents of a school district,

especially those who did not have access to private facilities, was a charitable

organization within the meaning of section 23(o)(2) as in effect in 1948 (the

predecessor of section 170 which permitted deductions for contributions to

charitable organizations, among others). In Columbia Park & Recreation Ass’n v.

Commissioner, 88 T.C. 1 (1987), aff’d, 838 F.2d 465 (4th Cir. 1988), we

considered whether an organization qualified as exempt under section 501(c)(4)

(as a social welfare organization) that offered recreational facilities to residents of

a private planned community also qualified as a section 501(c)(3) charitable

organization.4 We concluded that the organization was not charitable because it

was organized for the benefit of the residents of the planned community with

access limited to those residents and funding provided by those residents rather

than from voluntary contributions from the public. Id. at 18-19. Key to the

distinction we drew between the organization in Peters (and other authorities cited

by the organization) and that in Columbia Park & Recreation was not whether the

activities themselves were charitable but rather whether “the various organizations


      4
         The administrative record indicates that respondent urged GameHearts to
apply for exemption as a social welfare organization under sec. 501(c)(4) instead
of sec. 501(c)(3) but GameHearts declined. The issue of whether GameHearts
might qualify under that provision is not, therefore, before us.
                                        - 15 -

[*15] involved were found to be organized for a charitable purpose and such

activities accomplished that purpose.” Id. at 27.

      We do not conclude that recreational therapy would not be an appropriate

means of achieving a charitable purpose. We likewise do not conclude that the

type of recreation--here gaming--should affect our analysis of GameHearts’

status. We also accept GameHearts’ argument that its offerings are less attractive

to those gaming participants who could afford to pay to play.

      Nonetheless, we are unable to conclude on the administrative record that

GameHearts is “operated exclusively” for one or more exempt purposes. Gaming

in an alcohol-free environment may provide a therapeutic outlet to recovering

addicts, and community-minded sobriety may benefit the community as a whole,

but the question of tax exemption turns on whether there is a single substantial

nonexempt purpose, notwithstanding the importance of the exempt purpose. See

Better Bus. Bureau of Wash., D.C., 326 U.S. at 283. While it may be laudable, in

the light of the administrative record in this case promotion of sober recreation is

insufficient justification here for tax-exempt status under a statute that must be

construed strictly. The decisive factor here is that the form of recreation offered as

therapy also is offered by for-profit entities, and GameHearts even emphasized, in

its application for tax exemption, that it would introduce new participants to that
                                        - 16 -

[*16] for-profit recreational market and “boost the overall market shares of the

industry”. We also note that GameHearts received contributions of surplus

materials from the industry. While GameHearts itself does not profit from the

recreation it offers and could not offer recreational gaming experiences that would

compete in the for-profit recreational gaming markets, we conclude nonetheless,

consistent with our holdings in Schoger Found. and Wayne Baseball, that

recreation is a significant purpose, in addition to the therapy provided, because of

the inherently commercial nature of the recreation and the ties to the for-profit

recreational gaming industry.

      We therefore hold that GameHearts does not operate exclusively for

charitable purposes within the meaning of section 501(c)(3). Because of our

holding, we need not consider whether GameHearts was organized for tax-exempt

purposes. We have considered the remaining arguments, and they are either

irrelevant or otherwise lack merit.

      To reflect the foregoing,


                                                 Decision will be entered

                                       for respondent.
