That if gambling is what you do, you’re not tax-exempt. This is the lesson that Judge Pugh has for GameHearts, A Montana Nonprofit Corporation, 2015 T. C. Memo. 218, filed 11/16/15.

GH’s application for Section 501(c)(3) exemption gets tossed by IRS, and petitions.

GH’s story: “GameHearts is a public benefit nonprofit organization committed to providing alternative forms of entertainment to adult members of the Kalispell area for the purpose of promoting adult sobriety. The program achieves its directive by providing free and low cost tabletop gaming activities in a supervised[,] non-alcoholic, sober environment, along with access to gaming accessories that are provided without cost to the participants. In fact, beginning players can learn and obtain free gaming materials solely for playing.” 2015 T. C. Memo. 218, at p. 3.

Keeps them out of the bars, says GH.

But “Without an initial investment to begin playing, our participants have little obstacles in playing and interacting with other players. Since GameHearts is primarily an [sic] nonprofit, the bulk of participants eventually find they need to purchase materials we simply do not have, since we are not interested in maintaining a full service retail business. As such, GameHearts also helps boost the overall market shares of the industry by introducing new and motivated players into the environment.” 2015 T. CV. Memo. 218, at pp. 3-4.

Of course, record rule governs, so GH must show that record contains enough evidence to counter IRS’s determination. The test, of course, is “primary purpose.” Purpose and not the nature of the activity is what governs. And the purpose must fall into one of the hoppers of Section 501(a).

Here’s where GH fails to meet the test.

“We do not conclude that recreational therapy would not be an appropriate means of achieving a charitable purpose. We likewise do not conclude that the type of recreation–here gaming–should affect our analysis of GameHearts’ status. We also accept GameHearts’ argument that its offerings are less attractive to those gaming participants who could afford to pay to play.

“Nonetheless, we are unable to conclude on the administrative record that GameHearts is “operated exclusively” for one or more exempt purposes. Gaming in an alcohol-free environment may provide a therapeutic outlet to recovering addicts, and community-minded sobriety may benefit the community as a whole, but the question of tax exemption turns on whether there is a single substantial nonexempt purpose, notwithstanding the importance of the exempt purpose. While it may be laudable, in the light of the administrative record in this case promotion of sober recreation is insufficient justification here for tax-exempt status under a statute that must be construed strictly. The decisive factor here is that the form of recreation offered as therapy also is offered by for-profit entities, and GameHearts even emphasized, in its application for tax exemption, that it would introduce new participants to that for-profit recreational market and ‘boost the overall market shares of the industry’. We also note that GameHearts received contributions of surplus materials from the industry. While GameHearts itself does not profit from the recreation it offers and could not offer recreational gaming experiences that would compete in the for-profit recreational gaming markets, we conclude nonetheless… that recreation is a significant purpose, in addition to the therapy provided, because of the inherently commercial nature of the recreation and the ties to the for-profit recreational gaming industry recreation is a significant purpose, in addition to the therapy provided, because of the inherently commercial nature of the recreation and the ties to the for-profit recreational gaming industry.” 2015 T. C. Memo. 218, at pp. 15-16. (Citations omitted).

No exemption, GH. Game over.

On 11/20/15, I received the following e-mail: “You got your position grossly wrong – gambling is neither what GameHearts does, nor is this the decision of the tax court. It was decided that GH was not tax exempt because the games we use are also used by for profits, and that somehow this equates to a support of a non-exempt purpose. It would help if you did not libel our organization in this way, especially as we move for reconsideration.”

The entire opinion of the Tax Court is available by using the link in my blogpost, or separately by using Tax Court’s website.