Nonprofit Organizational Assessment

The U.S. Tax Court recently issued an opinion focusing on the requirements for an
organization to qualify for a tax exemption under Sec. 501(c)(3), emphasizing that an
organization must strictly comply with those requirements.
In GameHearts, T.C. Memo. 2015-218, the Tax Court held in a declaratory judgment
proceeding that the IRS was justified in denying the nonprofit organization GameHearts
a tax exemption. The organization claimed in its bylaws that it would promote “adult
sobriety and the general welfare of the citizens of the State of Montana.”
In its Form 1023, Application for Recognition of Exemption Under Section 501(c)(3),
GameHearts said it was committed to “providing alternative forms of entertainment”
including “free and low cost tabletop gaming activities in a supervised non-alcoholic,
sober environment …” GameHearts also stated that it was working toward the
betterment of the region by attracting participants to its activities “during evening hours,
as opposed to frequenting bars and casinos in the area, as well as to inspire decision
making and problem solving abilities by teaching and promoting educational and
strategic games and activities ...” On its Form 1023, GameHearts also said it depended
on donations from the gaming community and was largely a “mobile tutorial program.”
To encourage adult sobriety, GameHearts offered tutorials on how to play card games
and miniature games and offered “organized play.” Many of the games were similar to
those offered in nearby for-profit casinos. GameHearts claimed that another purpose for
its programs was to teach participants how to develop relationships with retailers and
game manufacturers and teach important life skills and work ethics.
Its stated purpose for providing free services was to appeal to the poor, distressed
citizens in the community. However, GameHearts also claimed that it would help “boost
the overall market shares of the industry by introducing new and motivated players into
the environment.”
The IRS concluded that GameHearts was not organized or operated exclusively for
exempt purposes because (1) GameHearts failed to establish that it benefited a
charitable class; (2) GameHearts’ nonexempt activities were more substantial than its
exempt activities; and (3) GameHearts did not meet the exempt purpose requirements
of Regs. Sec. 1.501(c)(3)-1(d) since it did not limit its activities to addicts with low
incomes.
The requirements for Exempt Status
In its opinion, the court included two important reminders. First, the organization bears
the burden of proving that it meets the requirements under Sec. 501(c)(3). Second, a
statute creating an exemption “must be strictly construed.”
The exemption under Sec. 501(c)(3) is available to the following organizations:
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