Jockeying for Non-Profit Status by a Monopoly Business

Non-profit rules and regulations weave circuitously through our rather unwieldy tax code.  But one important non-profit theory is that tax exemption is considered a "tax subsidy" provided by the U.S. taxpayers, therefore the IRS carefully scrutinizes organizations that claim exemption under Section 501c.  

Many equine organizations seek non-profit status, including horse rescue organizations, educational programs, and youth riding groups (see here for the U.S. Pony Club's letter of determination of 501c3 status from the IRS).  

There are many different types of non-profits, 28 in fact!  Some of these include religious, charitable, scientific, literary, or prevention of abuse of children or animals.  There are different tax implications for each non-profit designation, but a shared characteristic is that a non-profit can operate to earn revenue, but that revenue cannot be distributed to or for the inurement of a private shareholder or individual.

In the case Jockey Club v U.S., (137 F.Supp. 419) an organization claimed tax-exempt status in 1956 as a business league that operated "to encourage the development of the thoroughbred horse and to establish racing on a footing commanding public confidence and interest."  And the court found that the Jockey Club indeed performed this purpose because:
 "Its Registration Department maintains and publishes the American Stud Book, in which breeders can learn the blood lines of every thoroughbred registered in the United States. Strict proof of eligibility to be registered in the Stud Book is required. More than 8,000 foals are now registered each year. The book is indispensable to the breeding and racing of thoroughbred horses in the United States."

The Jockey Club earned approximately $60,000 per year and claimed that the revenue was tax-exempt because it was a business league, which by IRS statute: "A business league is an association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit." 
(IRS 1939 Section 101(7)).

It is the second part of the statute that the court found the Jockey Club could not meet.  It said of the Jockey Club's operations, "Each of these services is, by the tradition of the industry or even by law, essential to the individual who requests and pays for the services. They are comparable to a lawyer's certificate of title, or a doctor's certificate of health."  Because the Jockey Club entered into contracts with race tracks and other entities to receive compensation for services, it was operating like a regular business ordinarily carried on for-profit.


Lesson to be learned:
Qualifying for non-profit status can be a wonderful benefit to an organization satisfying a suitable public policy, however, an organization must be careful to adhere to the applicable laws, otherwise non-profit status can be lost. Furthermore, an organization may be required to pay back the tax deductions that had been wrongfully taken.
 If violating the tax laws was deliberate then even greater penalty will follow!

Moral of the story: 
Make sure your tax affairs are neat as a pin; see an equine attorney, tax attorney, or CPA when beginning a new equine business venture, and also as a regular check-up to ensure you have stayed in compliance with the ever ponderous tax code!

{All photos taken by Vassar Photography at my local track, Golden Gate Fields}