## Facts

- Capital Gymnastics Booster Club, Inc. was recognized as a § 501(c)(3) organization to support amateur gymnastics competition.
- The Club’s members were parents of youth gymnasts training at a private, for-profit gymnastics facility; membership was mandatory for parents whose children wished to compete on teams associated with the facility.
- Parents paid annual dues and, separately, annual assessments (about $600–$1,400 per athlete) intended to cover competition costs such as meet entry fees and coaches’ travel.
- Athletes could not compete unless assessments were paid; the Club had no documented, need-based scholarship or systematic assessment waiver program.
- Fundraising was a major Club activity. The Club used a “points/credits” system under which fundraising profits were credited to the particular family that generated them and applied to reduce that family’s assessment.
- During the fiscal year ending June 30, 2003, approximately 240 families were members; about 46% participated in fundraising. Net fundraising profits were about $35,326, and about 93% of that profit reduced the assessments of fundraising families; non-fundraising families received no credits.
- The IRS issued a final adverse determination revoking exemption, finding the Club was not operated exclusively for exempt purposes and that net earnings inured to private individuals and conferred substantial private benefit.
- The Club sought declaratory judgment under I.R.C. § 7428(a). The Club stipulated its parent-members were “insiders” for § 501(c)(3) inurement analysis.

## Issues

1. Whether the Club was operated “exclusively” for exempt purposes within the meaning of I.R.C. § 501(c)(3) during the period examined.
2. Whether the Club’s fundraising credit system caused prohibited private inurement to insiders.
3. Whether the Club’s operations conferred a substantial private benefit that was more than incidental to any exempt amateur sports purpose.

## Decision

- The Tax Court sustained the IRS’s revocation of the Club’s § 501(c)(3) recognition.
- The court held the Club was not operated exclusively for exempt purposes.
- The court found the fundraising credit system resulted in prohibited private inurement to insider parents.
- The court also found the arrangement conferred a substantial private benefit on the children and families who participated in fundraising.

## Legal Principles

- A § 501(c)(3) organization must be organized and operated exclusively for exempt purposes, and no part of its net earnings may inure to the benefit of any private shareholder or individual.
- Private inurement focuses on benefits to insiders; directing organizational earnings to relieve insiders’ personal financial obligations violates the inurement prohibition even if the organization generally operates near break-even.
- Private benefit is broader than inurement and disqualifies an organization when nonincidental benefits serve private interests; any private benefit must be incidental in both qualitative and quantitative terms.
- Earmarking fundraising proceeds through de facto individual accounts—crediting profits to specific families in proportion to their efforts and applying them only to those families’ fees—resembles a rebate system and indicates operation for private, not public, benefit.
- An exempt purpose such as fostering amateur sports competition does not override the prohibitions on private inurement and substantial private benefit.

## Conclusion

The Tax Court upheld revocation of the booster club’s exempt status because its “pay-or-play” assessments and individualized fundraising credits effectively returned fundraising proceeds to insider families to offset their own competition costs, producing prohibited private inurement and substantial, nonincidental private benefit rather than public charitable operation.


Capital Gymnastics Booster Club, Inc. v. Commissioner, 106 T.C.M. (CCH) 154 (T.C. 2013)