## Facts

- A Minnesota nonprofit corporation organized a chess club and later incorporated, seeking federal income tax exemption under I.R.C. § 501(c)(3) as an educational organization.
- Its original organizational purposes included broadening and developing chess as “art and recreation” and conducting matches and tournaments funded by public donations, including awarding trophies and other prizes.
- After the IRS proposed denying exemption, the organization amended its articles to remove “recreation” and to describe chess as an “educational competitive device” that develops memory and communication.
- In actual operations, the organization conducted frequent chess tournaments; in one year it held 21 tournaments.
- At 12 tournaments, cash prizes funded by entry fees were awarded, and members won almost all prizes.
- Additional activities included donating chess materials to libraries, publishing a quarterly newsletter, and offering a children’s chess class at a community center.
- The newsletter largely reported tournament results and advertised upcoming tournaments rather than providing instructional content.
- In the evaluated year, the organization spent substantial time on tournament activity and related communications, alongside time devoted to instruction.

## Issues

1. Whether the organization was “organized and operated exclusively for educational purposes” under I.R.C. § 501(c)(3) so as to qualify for exemption under § 501(a).
2. Whether conducting frequent, prize-based chess tournaments constituted a substantial nonexempt recreational purpose that defeated § 501(c)(3) status despite some educational activities.

## Decision

- The Tax Court entered declaratory judgment for the Commissioner and sustained the denial of § 501(c)(3) recognition.
- The court held the organization did not qualify because its operations served a substantial nonexempt recreational purpose, shown chiefly by its tournament program featuring cash prizes.

## Legal Principles

- To qualify under I.R.C. § 501(c)(3), an organization must satisfy both the organizational test and the operational test by being organized and operated exclusively for exempt purposes.
- “Exclusively” permits incidental nonexempt activity, but the presence of a substantial nonexempt purpose defeats exemption even if the organization also conducts exempt activities.
- The analysis focuses on actual operations, not merely stated purposes or amended charter language.
- Competitive events with entry-fee-funded cash prizes and member-concentrated benefits can evidence a substantial recreational or private member-benefit purpose inconsistent with § 501(c)(3).
- Educational characteristics of an activity do not control where the organization’s principal program is structured and presented primarily as recreational competition.

## Conclusion

The Tax Court upheld the IRS’s denial of exemption because the organization’s recurring, prize-oriented chess tournaments and tournament-centered communications showed a substantial recreational, nonexempt purpose, preventing it from being operated exclusively for educational purposes under § 501(c)(3).


Minnesota Kingsmen Chess Ass'n, Inc. v. Comm'r, 46 T.C.M. (CCH) 1133 (T.C. 1983)