                        T.C. Memo. 2013-193



                  UNITED STATES TAX COURT



  CAPITAL GYMNASTICS BOOSTER CLUB, INC., Petitioner v.
   COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 5819-09X.                        Filed August 26, 2013.



       P is a gymnastics booster club. In June 1988 the IRS granted
P’s request to be recognized as exempt from Federal income tax
under I.R.C. sec. 501(c)(3) as an organization fostering amateur
sports competition. In its fiscal year ending June 30, 2003, P’s
members were parents of young athletes from approximately 240
families. The athletes were all on teams from one local private gym,
to which each family 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
annual assessment to cover the athlete’s entry fees to compete in the
meets and to offset the estimated expenditures for the coaches’ travel.
The assessment ranged from $600 to $1,400 per athlete for FY 2003,
depending on the athlete’s competitive level.
                                          -2-

      [*2] A family could satisfy its athlete’s assessment either by paying
      cash or by participating in P’s fundraising program. The amount that
      an athlete’s family raised was credited against his assessment. About
      46% of the families engaged in fundraising in FY 2003. This
      fundraising generated a net profit of $35,326. P used 93% of that
      profit to reduce the assessment on average by 50 to 70% for the
      families that fundraised. P did not credit any of this profit against the
      assessments of the athletes whose families did not fundraise.

             R examined P’s operations for FY 2003 and determined that it
      was not operated exclusively for tax-exempt purposes under I.R.C.
      sec. 501(c)(3). P petitioned for a declaratory judgment under I.R.C.
      sec. 7428(a).

             Held: R’s final adverse determination is sustained because P
      was not operated exclusively for exempt purposes within the meaning
      of I.R.C. sec. 501(c)(3). P’s net earnings inured to the benefit of its
      fundraising parent members, and it conferred substantial private
      benefit on children of those fundraising families.



      David B. Friedel, for petitioner.

      Robin Williams Denick and Joseph W. Spires, for respondent.



           MEMORANDUM FINDINGS OF FACT AND OPINION


      GUSTAFSON, Judge: On December 1, 2008, the Internal Revenue Service

(IRS) issued to Capital Gymnastics Booster Club, Inc. (“Capital Gymnastics”), a

final adverse determination letter, which determined that, for “Tax Years Ending:
                                         -3-

[*3] June 30, 2003 and all subsequent years”, Capital Gymnastics was no longer

exempt from Federal income tax under section 501(a).1 Capital Gymnastics

challenged the determination by timely petitioning this Court for declaratory

judgment pursuant to section 7428(a). The issue to be decided is whether Capital

Gymnastics satisfied the requirements of section 501(c)(3) and therefore qualified

for exemption from tax under section 501(a).

      For the reasons explained below, we find that Capital Gymnastics’ earnings

inured to the benefit of some of its athletes’ parents in violation of section

501(c)(3), and that Capital Gymnastics had the substantial non-exempt purpose of

furthering the private interests of those athletes. We therefore deny Capital

Gymnastics’ request for a declaratory judgment and sustain the IRS’s final adverse

determination.

                                FINDINGS OF FACT

Capital Gymnastics

      In March 1987 Capital Gymnastics was organized in Virginia as a nonstock

corporation for the purpose of “fostering national and international sports




      1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code (“the Code”, 26 U.S.C.) as in effect for the years in issue, and all
Rule references are to the Tax Court Rules of Practice and Procedure.
                                         -4-

[*4] competition, within the meaning of Section 501(c)(3)”. In June 1988 the IRS

granted Capital Gymnastics’ request for recognition of tax-exempt status.

      By the fiscal year ended June 30, 2003 (“FY 2003”), Capital Gymnastics

had approximately 240 member families. However, Capital Gymnastics is a

booster club, not a training facility, and it owns no facilities or equipment. As of

June 2003 its only asset was a bank account with a $27,192 balance.

      By 2003 the number of local clubs that offered competitive gymnastics

teams had dwindled to two or three, with the largest remaining boys program

being offered at the Capital Gymnastics National Training Center (“the Training

Center”)--an entity that has a name similar to petitioner’s but that is distinct from

petitioner.

The Training Center2

      The Training Center is a private, for-profit corporation in Virginia. In

FY 2003 the Training Center trained amateur athletes from ages 6 through 18 in

gymnastics and tumbling and placed them on teams according to age, ability, and

sex. All of Capital Gymnastics’ athletes trained at the Training Center; and


      2
        The Training Center’s status is not at issue in this case, and the
Commissioner does not contend that Capital Gymnastics operated for the benefit
of the for-profit Training Center in a manner that affects Capital Gymnastics’
entitlement to tax-exempt status.
                                         -5-

[*5] membership in Capital Gymnastics was mandatory for the parents of athletes

who trained for competition at the Training Center.

Tuition, fees, and expenses

      Each athlete’s family paid tuition directly to the Training Center, ranging in

FY 2003 from $200 per month for the youngest age groups to $330 per month for

the oldest age groups. The families also paid to third parties (not to the Training

Center or Capital 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, however, did not cover the cost of competitions

themselves, and Capital Gymnastics was operated to address those separate costs.

Capital Gymnastics dues and assessments

      Parents were responsible for two separate fees payable directly to Capital

Gymnastics: (1) an annual dues payment of $40 to offset Capital Gymnastics’

nominal operating expenses such as annual corporate fees, insurance premiums,

and production costs for the organization’s annual handbook, and (2) an

assessment of $600 to $1,400 per year per child to pay each athlete’s competition
                                         -6-

[*6] costs.3 This assessment 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 Gymnastics

computed the assessment at the beginning of each season by consulting with meet

sponsors. Capital Gymnastics did not allow athletes to compete unless their

assessment 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 have stipulated that “Capital Gymnastics’ primary function was

to raise funds”. A parent could simply 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 organization”; but we see nothing in
the record to suggest that Capital Gymnastics facilitated such deductions (e.g., by
issuing donation receipts) or to contradict Capital 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
apparently does so out of after-tax dollars, it is also true that a fundraising parent-
member earns “points” on which he pays no tax and then satisfies his assessment
with those before-tax earnings. It could therefore be said that Capital Gymnastics
distributes money that escapes taxation; but since the Commissioner did not raise
this issue, we do not base our decision on it.
                                        -7-

[*7] Capital Gymnastics also gave member-parents the option to voluntarily

fundraise4 to offset the assessment amount. Capital Gymnastics’ fundraisers

included selling wrapping paper, discount cards, cookie dough, candles,

ornaments, and “scrip” (explained below).

      Scrip, as used by Capital Gymnastics, involved a merchant who wanted to

support Capital Gymnastics and would allow the organization to purchase, at a

discount, certificates that bore the merchant’s name and that the merchant would

honor for purchases. For example, Capital Gymnastics might purchase from a

grocery store 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 certificate at the

store to purchase $100 worth of groceries. A member’s purchase of scrip

therefore generated a fundraising profit equal to the merchant’s discount, $5 in this

example. A member who purchased scrip of $100 (and who would otherwise have

purchased $100 worth of groceries without scrip) thus generated $5 for Capital


      4
        The parties stipulate that “families” engaged in fundraising and that
“[p]arents and athletes are collectively referred to [as] ‘families.’” However, they
also stipulate that the assessment that might be satisfied by fundraising was the
responsibility of the parent-member, not the child-athlete.
                                       -8-

[*8] Gymnastics at no real cost to himself. More than one-fourth of Capital

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 Capital Gymnastics only if it was a

tax-exempt charitable organization.

      A portion of Capital 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 Capital Gymnastics’ tax-

exempt status.

      For the families that chose to fundraise, Capital Gymnastics awarded points

in proportion to the fundraising profit that each family generated. Each point was

worth $10. The chairperson of each fundraiser also received a small number of

points as an incentive to manage the fundraisers. Parents could earn additional

points by filling certain board positions on Capital Gymnastics. Capital

Gymnastics’ financial manager periodically tallied the points for each family and

reduced the family’s unpaid assessment in dollars, according to the number of

points that the family had earned.
                                         -9-

[*9] If a balance due remained for any family 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 year, then they carried over the excess to be 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 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 Capital

Gymnastics for their full assessment amount.

      This allocation of fundraising benefit solely to fundraising families was

conscious and deliberate, since Capital Gymnastics explicitly prevented those it

called “freeloaders” or “moochers” from benefiting from the fundraising activity

of others.

FY 2003 financial results

      For FY 2003, about 110 families (i.e., approximately 46% of the 240

member families) participated in fundraising. The fundraising yielded a net profit

$35,326. Capital Gymnastics awarded $32,920 of the net profit, or approximately
                                       - 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 use by the entire

organization. Families who fundraised were able to offset on average 50% to 70%

of their assessment for the year.

      Besides the fundraising profit of $35,326, Capital Gymnastics’ only other

source of income for FY 2003 was $81,186 from membership dues and

assessments that the fundraising did not offset. Accordingly, Capital Gymnastics’

total net revenue for FY 2003 was $116,512.

      Capital Gymnastics incurred total expenses of $130,610 for FY 2003,

consisting of $115,394 in competition-related expenses and $15,216 in operating

expenses. Consequently, for FY 2003 Capital Gymnastics generated a loss of

$14,096, which the organization funded by reducing its bank account balance to

$27,192 by fiscal yearend.

IRS action

      Beginning in 2005 the IRS examined Capital Gymnastics’ returns for its

FY 2003 to determine whether Capital 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 6, 2006,

stating the agency’s determination to revoke its recognition of the organization’s
                                           - 11 -

[*11] tax-exempt status. Capital 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 letter stated that Capital

Gymnastics had failed to establish that its income “did not inure to the benefit of

private individuals and shareholders, which is prohibited by I.R.C. § 501(c)(3).

You are operated for a substantial private purpose, which is prohibited by Internal

Revenue Code section 501(c)(3).” As a result, the IRS revoked its recognition of

the organization’s tax-exempt status under section 501(a), beginning with

FY 2003.

      Capital Gymnastics timely petitioned this Court, seeking a declaratory

judgment under section 7428 that would reverse the IRS’s final adverse

determination. At the time it filed its petition, Capital Gymnastics maintained its

principal place of business in Virginia.

                                     OPINION

I. General legal principles

      A.     Tax exemption

      Section 501(a) provides in pertinent part that an organization “shall be

exempt from taxation” if the organization is of a type that section 501(c) describes.

Section 501(c) in turn lists types of organizations that are exempt from tax,
                                        - 12 -

[*12] including those described in section 501(c)(3). Failure to satisfy any of the

requirements of section 501(c)(3) disqualifies an organization from being tax

exempt under that section. Columbia Park & Recreation Ass’n, Inc. v.

Commissioner, 88 T.C. 1, 13 (1987), aff’d without published opinion, 838 F.2d

465 (4th Cir. 1988).

             1.    Tax-exempt purposes

      Section 501(c)(3) confers tax exemption on organizations with certain

specified charitable “purposes”:

      Corporations, and any community chest, fund or foundation,
      organized and operated exclusively for religious, charitable,
      scientific, testing for public safety, literary, or education 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, 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 (except as otherwise provided in
      subsection (h)), and which does not participate in, or intervene in
      (including the publishing or distributing of statements), any 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)(3) thus

include, as quoted above, “foster[ing] national or international amateur sports

competition”.
                                         - 13 -

[*13]         2.     Organized and operated

        In order to be described in section 501(c)(3), an organization must be both

“organized and operated exclusively[5] for” certain specified exempt “purposes”.

The Commissioner does not dispute that Capital Gymnastics is organized

exclusively for exempt purposes (since its organizing documents do not fail to so

state), see 26 C.F.R. sec. 1.501(c)(3)-1(b), Income Tax Regs., but instead

maintains that Capital Gymnastics failed to operate exclusively for exempt

purposes (a requirement that calls for an examination of its actual operations).

              3.     Private inurement and private benefit

        Section 501(c)(3) provides that, in order for an organization to qualify as

tax-exempt, “no part of the net earnings[6] of * * * [the organization may] inure[]


        5
       26 C.F.R. section 1.501(c)(3)-1(c)(1), Income Tax Regs., provides: “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
such exempt purposes specified in section 501(c)(3). An organization will not be
so regarded if more than an insubstantial part of its activities is not in furtherance
of an exempt purpose.” (Emphasis added.) That is, under the statute the exempt
purposes must be “exclusive”, but the regulation provides that an organization
may be tax 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 “primary function”, and its non-exempt
purposes furthered by that function are very substantial.
        6
       Capital Gymnastics correctly states that prohibited inurement may include
“excessive compensation”, thereby perhaps suggesting that reasonable
                                                                     (continued...)
                                        - 14 -

[*14] to the benefit of any private shareholder or individual”. This prohibition

looks to benefits conferred on a “private shareholder or individual”, generally

understood to mean an insider of the organization (such as a member or an

officer). See 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 [tax-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 benefit of private interests such as
      designated individuals, the creator or his family, shareholders of the
      organization, or persons controlled, directly or indirectly, by 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 not only benefit to insiders but also benefits that an organization

may confer on unrelated or even disinterested persons, i.e., outsiders. Am.

Campaign Acad. v. Commissioner, 92 T.C. 1053, 1068-1069 (1989).


      6
        (...continued)
compensation does not constitute inurement. However, Capital Gymnastics has
not 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 we do not address the concept of reasonable compensation.
                                       - 15 -

[*15] If the organization engages in either inurement or private benefit, then the

organization is furthering a non-exempt purpose. Id.; 26 C.F.R. sec.

1.501(c)(3)-1(c)(2), -1(d)(1)(ii). The prohibition against inurement, like the

prohibition of private benefit, ensures that the exempt organization is serving a

public and not a private interest, Church of Scientology of Cal. v. Commissioner,

83 T.C. 381, 491 (1984), aff’d, 823 F.2d 1310 (9th Cir. 1987), and the two

prohibitions thus have a common purpose. And because “private benefit”

encompasses but is broader in scope than “inurement”, Am. Campaign Acad. v.

Commissioner, 92 T.C. at 1068-1069, they overlap. We therefore discuss the

issues in tandem below.

      B.     Declaratory judgment under section 7428

      As an exception to the general principle that action by the tax collector may

not be enjoined, see sec. 7421(a), Congress enacted section 7428 to provide an

organization with an opportunity to challenge “a determination by the Secretary

* * * with respect to the * * * continuing qualification of an organization as an

organization described in section 501(c)(3)”, sec. 7428(a)(1)(A). Before an

organization may receive consideration for a section 7428 declaratory judgment,

the organization must first exhaust all administrative remedies within the IRS,
                                         - 16 -

[*16] sec. 7428(b)(2), and the IRS does not dispute that Capital Gymnastics fully

exhausted those remedies.

      C. Burden of proof

      Generally, the burden of proof rests on the petitioner to demonstrate that the

IRS’s determination is incorrect. Rule 142(a); Rameses Sch. of San Antonio, Tex.

v. Commissioner, T.C. Memo. 2007-85. Capital Gymnastics acknowledges in its

brief that it bears that burden. Tax exemption is a matter of legislative grace, and

the organization seeking exemption must show that it “comes squarely within the

terms of the law conferring the benefit sought.” Fla. Hosp. Trust Fund v.

Commissioner, 103 T.C. 140, 153 (1994), aff’d, 71 F.3d 808 (11th Cir. 1996).

Capital Gymnastics has the burden to overcome the IRS’s determination that,

because of the manner in which Capital Gymnastics credited fundraising points,

(1) part of its net earnings inured to the benefit of private individuals (i.e., parent-

members) and (2) it operated in that substantial respect not for the benefit of the

public but for the benefit of designated private individuals (i.e., the children of

fundraising families).7

      7
       Our jurisdiction is limited 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 also Am. Campaign Acad. v. Commissioner, 92 T.C. 1053,
                                                                        (continued...)
                                        - 17 -

[*17] II. The parties’ contentions

      Capital Gymnastics stipulated and the record shows that parent-members

were “insiders” for purposes of section 501(c)(3), meaning that the parents exerted

direct or indirect control over the organization. Capital Gymnastics insists

nonetheless that it operated exclusively for an exempt purpose. Capital

Gymnastics claims that its method of “unequal sharing of fundraising profits” did

not give rise to a “constructive distribution” because the organization “never pays

money to any of its members” and instead spends its funds “exclusively on

competition-related expenses of the athletes”. Capital Gymnastics therefore

contends that the true recipient of its generosity was not the parents but instead “a

well-defined charitable class”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 determination upon the reasons provided by the Internal
Revenue Service in its notice to the party making the request for a determination,
or based upon any new argument which the Service may wish to introduce at the
time of the trial”). We therefore do not consider such issues as whether Capital
Gymnastics facilitated improper claims of tax deductions by members, see supra
note 3, or whether Capital Gymnastics was operated for the private benefit of the
Training Center, see supra note 2.
      8
       Capital Gymnastics lays great stress on the fact that its child athletes were
all members of a charitable class (a fact that the Commissioner does not deny).
We cannot tell whether Capital Gymnastics means to contend that this fact
resolves the organization’s tax-exempt status; if it does so intend, then the
                                                                         (continued...)
                                        - 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 evidence was offered to back up this statement, and it appears to

have been speculation. Capital Gymnastics points to situations where exempt

groups raise funds without losing their exempt status, including church youth

groups, Cub Scouts, or public school athletic booster clubs that have “kids

jumping up and down at the corner gas station exhorting you to get your car

washed.” Capital Gymnastics maintains that “it seems inconceivable that

Congress could have intended such an absurd result” as to prohibit booster clubs

from spending any part of their earnings for the benefit of the children who are on

an athletic team. In the end, Capital Gymnastics seeks the Court’s endorsement

that its “method for allocating fundraising profits is not only permissible and




      8
        (...continued)
contention fails. Even if all the activities of an organization redound to the benefit
of members of a charitable class, nonetheless, in order to be tax exempt, the
organization must still comply with all the requirements of section 501(c)(3),
including refraining from inurement and from substantially benefiting private
interests. Thus, even when we determine that the beneficiaries of an organization
“comprise a charitable class”, we nonetheless proceed to assure that there is “no
selectivity with regard to the identities of the individual[s] * * * to be benefited”,
Aid to Artisans, Inc. v. Commissioner, 71 T.C. 202, 215-216 (1978) (emphasis
added)--i.e., to assure that there is no impermissible private benefit.
                                        - 19 -

[*19] lawful, but it should be recognized as a ‘best practice’ for similar

organizations to follow.”

      The Commissioner “does not quarrel” that Capital Gymnastics’ mission of

fostering amateur sports competition 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 also accepts that

fundraising by a booster club is a permissible activity under section 501(c)(3).

The Commissioner objects, however, that “almost 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 benefit 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 Capital Gymnastics’ facts and circumstances, we find

that, in violation of section 501(c)(3), Capital Gymnastics allowed substantial

private 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
                                        - 20 -

[*20] benefit on the child-athletes of those parents only (as opposed to its child-

athletes generally). Capital Gymnastics authorized parent-members to raise funds

for their own benefit but under the name of Capital Gymnastics and trading on its

tax-exemption ruling. Capital Gymnastics rigorously assured that its fundraising

did not generally benefit all the child-athletes in its programs but rather benefited

only the children of parents who did the fundraising.

      Moreover, this is not a circumstance (like, say, a school band’s sale of

candy or a church youth group’s carwash for a once-a-year event) in which the

fundraising is a tiny fraction of the organization’s overall function; here, 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 made available for those who cannot afford

the cost. Nor is this a circumstance in which every member is required to perform

fundraising and no one can buy his way 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 paper

route or babysitting, but rather were serious parental obligations of as much as

$1,400 per year (on top of already considerable tuition of up to $330 per month,

plus national dues, registration fees, equipment expenses, and travel expenses).
                                        - 21 -

[*21] Capital Gymnastics’ fundraising method is in contrast to the operations of

organizations that have been held to comply with section 501(c)(3) and to which

Capital Gymnastics attempts to liken itself. For example, in Goldsboro Art

League, Inc. v. Commissioner, 75 T.C. 337 (1980), an organization 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 available for sale, because 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’s activities were neither deliberately focused on its

members nor (as here) self-selected by its members. Similarly, in Aid to Artisans,

Inc. v. Commissioner, 71 T.C. 202 (1978), an organization that sold for a profit

handicrafts from developing societies of the world was held to operate for a public

purpose and not for individual private gain, because the organization benefited a

charitable class (disadvantaged communities), the organization selected the

handicrafts after researching the socioeconomic structure of the localities without

regard to the identities of the individual artisans (e.g., 80 anonymous

disadvantaged women living in a small village in Haiti), the organization retained

none of the profit, and the handicrafts were not from members of the organization.
                                         - 22 -

[*22] Conversely, Capital Gymnastics’ improper methodology is similar to

operations that have been held not 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

percent of petitioner’s income is expected to be expended for the benefit of Wendy

L. Parker.” The organization thus relieved the family of the economic burden of

providing medical care and thereby caused its net earnings to inure to the private

benefit of insiders. In N. Am. Sequential Sweepstakes v. Commissioner, 77 T.C.

1087 (1981), an organization promoted amateur athletic 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 private benefit.

      Even if an organization benefits an individual who is an undisputed member

of a charitable class (such as the comatose patient in Parker or the athletes in this

case), the organization may, as in Parker, fall afoul of section 501(c)(3) if its net

      9
        Capital Gymnastics acknowledges the unfavorable precedent that these and
other cases have on its litigating position. In response, Capital Gymnastics offers
hypothetical changes to the facts in a number of these cases that (it says) were
closer to Capital Gymnastics’ facts and may have resulted in favorable outcomes.
Capital Gymnastics also spent a significant part of its arguments discussing two
alternate, hypothetical fundraising methods that it never adopted. We decline to
decide hypothetical cases that are not before us.
                                        - 23 -

[*23] earnings inure to the benefit of the child’s parents. Capital 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 any charitable class. When an

organization benefits members without regard to their being in a charitable class, it

fails to further 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 not poor or in financial distress); see also Michigan v. United

States, 802 F. Supp. 120, 125 (W.D. Mich. 1992) (and cases cited thereat), rev’d

on other grounds, 40 F.3d 817 (6th Cir. 1994).

      Capital Gymnastics seems to contend 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, Capital Gymnastics disbursed the

checks directly to the meet sponsors and thereby bypassed the parents. It cannot

be denied, however, 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 as 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
                                        - 24 -

[*24] from mandatory cash assessments they would otherwise have been required

to pay to cover their share of competition costs. For purposes of section 501(c)(3),

“‘benefit’” is a broad term and can include “‘[a]dvantage; profit; fruit; privilege;

gain; [or] interest’”. Retired Teachers Legal Def. Fund, Inc. v. Commissioner, 78

T.C. at 286 (quoting Black’s Law Dictionary 143 (5th ed. 1979)). In fact, the

benefit received by the parents in this case is analogous to the disqualifying

benefit received by the parents in Wendy L. Parker Rehab. Found., Inc., where the

Court concluded that inurement occurred where the organization did not give 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 Aid to Artisans, Inc.,

and Goldsboro Art League, Inc., whose insiders received, respectively, zero and

less than 2% (2 artists out of more than 100 artists) of the benefits, Capital

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 L. Parker Rehab. Found., Inc., a smaller amount of

inurement--i.e., 30% of that foundation’s $7,500 in income--was still large enough

to constitute substantial inurement.
                                       - 25 -

[*25] In holding that Capital Gymnastics’ fundraising constituted a substantial

non-exempt purpose, we do not overlook its non-fundraising activity. As the

Commissioner admitted:

      [I]n addition to its fundraising activities, petitioner disseminates
      information 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 account), forwarding the meet
      entry fees to the meet sponsors and paying the coaches’ expenses so
      that they could accompany the athletes benefited all the athletes
      equally. It facilitated the ability of the teams and the athletes to
      participate in competitions. These administrative-type activities
      appear to be specifically contemplated by Congress when amending
      section 501(c)(3) of the Code to include exempt organizations which
      foster amateur athletic competition. But this administrative activity
      was not petitioner’s primary activity. The primary activity was
      fundraising which benefited private interests more than incidentally.

We agree. The issue here is not whether Capital Gymnastics had any charitable

purpose but whether (as the statute requires) it was operated exclusively for

charitable purposes. We hold it was not.

      In so holding, we do not criticize (except in the tax-exemption context)

Capital Gymnastics’ “point” system. Parents who make a serious financial

investment in the development of their children’s athletic abilities should be free

to arrange that activity in the manner they choose. The arrangement that Capital

Gymnastics developed may well be a rational, wholesome, just, and efficient
                                       - 26 -

[*26] fundraising method (a proposition as to which we have no jurisdiction to

make a declaratory judgment); but even if so, it does not further a tax-exempt

purpose. Capital Gymnastics’ arrangement reflects instead the purpose of

promoting the financial interests of its fundraising members.

IV. Conclusion

      For all of the above reasons, Capital Gymnastics operated in a manner that

allowed substantial private inurement and promoted private, non-public interests.

Therefore, the organization did not operate exclusively for an exempt purpose.

We conclude that Capital Gymnastics did not satisfy the requirements of section

501(c)(3) and consequently did not qualify for exemption from tax under section

501(a). We therefore sustain the IRS’s final adverse determination.

      To reflect the foregoing,


                                                Decision will be entered for

                                      respondent.
