## Facts

- Education Athletic Association, Inc. (EAA) was a Nebraska nonprofit corporation formed in 1971 and recognized as exempt from federal income tax under I.R.C. § 501(c)(3); its primary exempt purpose was to advance athletic education.
- On its exemption application, EAA indicated it expected to be a publicly supported organization rather than a private foundation.
- In a 1984 IRS determination letter, EAA was treated as a nonprivate foundation during an advance ruling period that ended December 31, 1989.
- For 1993 through 1995, EAA’s only source of financial support was income from selling “pickle cards” (a Nebraska-authorized game of chance) to liquor establishments through a state-licensed chain of manufacturers, distributors, licensed organizations, and licensed operators.
- Nebraska law limited pickle-card licenses to certain categories of exempt organizations, including some described in § 501(c)(3).
- EAA reported its pickle-card income as unrelated business taxable income (UBTI) on its federal returns.
- The Commissioner determined that, effective January 1, 1993, EAA was not a publicly supported organization under I.R.C. § 509(a)(2) and therefore was a private foundation, even though it remained exempt under § 501(c)(3).
- EAA filed a declaratory-judgment action in the U.S. Tax Court under I.R.C. § 7428 challenging the private-foundation determination; the case was submitted on a stipulated administrative record (Tax Ct. R. 122, 217).

## Issues

1. Whether the Commissioner correctly determined that EAA was not a publicly supported organization described in I.R.C. § 509(a)(2) and therefore was a private foundation effective January 1, 1993.
2. Whether EAA’s pickle-card sales activity constituted an “unrelated trade or business” under I.R.C. § 513 for purposes of the § 509(a)(2) public-support computation.
3. Whether Nebraska’s licensing restriction (limiting pickle-card sales to certain exempt organizations) meant the pickle-card activity should not be treated as an unrelated trade or business because EAA allegedly did not compete with for-profit businesses.

## Decision

- The Tax Court entered declaratory judgment for the Commissioner.
- The court held that selling pickle cards was an unrelated trade or business because the activity was not substantially related to EAA’s exempt purpose apart from generating funds.
- The court rejected EAA’s argument that state-law limits on who may be licensed to sell pickle cards prevented the activity from being “unrelated” for federal tax purposes.
- Because EAA’s sole support for 1993–1995 came from receipts tied to that unrelated trade or business, EAA could not satisfy the public-support requirements of § 509(a)(2).
- EAA was properly classified as a private foundation effective January 1, 1993.

## Legal Principles

- Under I.R.C. § 513, a trade or business is “unrelated” if it is not substantially related (aside from the organization’s need for income) to carrying out the organization’s exempt purpose.
- An activity does not become related to exempt purposes merely because its net proceeds are used to fund exempt activities; the activity itself must contribute importantly to accomplishing those purposes.
- State regulation restricting an activity to exempt organizations (and any resulting absence of competition with for-profit entities) does not, by itself, convert a revenue-producing activity into a related exempt-function activity for federal tax analysis.
- For § 509(a)(2), an organization must meet statutory public-support thresholds; where an organization’s support is derived entirely from receipts attributable to an unrelated trade or business, it will fail the § 509(a)(2) support computation and be treated as a private foundation.
- In a § 7428 declaratory-judgment proceeding submitted on the administrative record, the Tax Court evaluates the Commissioner’s classification using the stipulated record and the governing Code and regulations.

## Conclusion

The Tax Court upheld the IRS determination that Education Athletic Association, though exempt under § 501(c)(3), did not qualify as a publicly supported organization under § 509(a)(2) because its only support for 1993–1995 came from pickle-card sales that constituted an unrelated trade or business under § 513; accordingly, it was a private foundation effective January 1, 1993.


Education Athletic Association v. Commissioner, 77 T.C.M. 1525 (1999)