Expert: Harvey Mechanic - 10/25/2009

Question
I am a member of a flyball club, which is a dog sport.  We compete in tournaments, and, at present, each member of the club pays a portion of the entry fee for any of the tournaments they wish to participate in, and take turns buying equipment, but do not have formal "dues".  We do have members under age 18, but the majority are older.  We wish to host our own tournament and would like to fundraise to be able to pay the fees for the venue, pay the referees, etc.  We would also charge an entry fee to cover the remaining expenses.  Any remaining money would be saved for the following year's tournament.  Since our athletes are dog-handler teams, I'm not sure that we qualify as an amateur sports team (though we do compete in national and international competition under our national governing body).  Is it possible that we could qualify as a 501c3 or possibly as a 501c4 or 7?  Would someone need to pay taxes on the fundraising monies and tournament entry fees?  If so, is there a specific amount that would trigger us needing to pay taxes?  Thank you for any information you can provide!

Answer
Section 501(c)(3) of the Internal Revenue Code allows exemption
to foster national or international amateur sports competition
but "only if no part of its activities involve the provision of
athletic facilities or equipment"
http://snipurl.com/h9px8

Section 501(j)(1) of the Internal Revenue Code
http://snipurl.com/h9pqt gives an exemption "

and (j)(2) has "(2)  Qualified amateur sports organization
defined For purposes of this subsection, the term "qualified
amateur sports organization" means any organization organized and
operated exclusively to foster national or international amateur
sports competition if such organization is also organized and
operated primarily to conduct national or international
competition in sports or to support and develop amateur athletes
for national or international competition in sports."

From your facts it appears that you would not be operated primarily to conduct national of international competition in sports. Your team is not the national organization. Therefore, you would not be qualified as a 501(c)(3) organization.  Normally such organizations would be a 501(c)(7) recreational or social organization about which the IRS writes at www.irs.gov/irm/part7/irm_07-025-007.html

Please note that donations to such organizations are not deductible by the donors. Also you will be denied status under section 501(c)(7) if over 35% of your gross receipts come from sources outside of membership fees.   

IRC 501(c)(4) provides for exemption for two types of organizations:

  1.   social welfare organizations
  2.   local associations of employees
www.irs.gov/irm/part7/irm_07-025-004.html

Therefore, your organization would not qualify as a 501(c)(4) organization.

As for fundraising that involves business activities, IRS Publication 598 "Tax on Unrelated Business Income of Exempt
Organizations" at
www.irs.gov/pub/irs-pdf/p598.pdf
explains that such activities are generally taxable.

Harvey Mechanic, Attorney at Law -
Harvey108@hotmail.com