Tax Court Denies Exempt Status To Group Using Trading Card Games To Promote Sobriety

Originally published on Forbes.com.

Every once in a while I think the IRS and the Tax Court are really getting it wrong and that’s where I’m at in the decision confirming the IRS denial of 501(c)(3) status to GameHearts. GameHearts was founded to promote sobriety by providing alternative gaming activities. And by gaming we are not talking blackjack, roulette, and slots. The main type of gaming that GameHearts sponsors is based on collectible cards. There are quite a few different kinds but the best known and most popular is Magic: The Gathering.

Piercing The Veil

I wrote about GameHearts over two years ago in response to the original IRS denial of exempt status. I tracked down executive director, Ron Glick who is the author of fantasies and books on comic book trivia. He has also been involved in serious controversy, which is beyond the competence of a tax blogger to sort out. The interview was the result of a little game that I play called “Pierce The Redaction”.

I find that IRS private letter rulings denying exempt status are often pretty interesting, No one has yet topped the guy whose charity provided free sperm to women who wanted to become pregnant without, you know, – his own sperm exclusively, but there are still some really good ones. The rulings are redacted, but I often find that I can make a pretty good guess as to what organization is the subject and contact them. Often they will confirm as Ron Glick did. (For another example of “Pierce The Redaction” see Does The IRS Hate Cats?“)

The Object Of The Game

I find the Tax Court’s reasoning in disallowing exempt status a little difficult to follow. The Court seemed to concede quite a bit.

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.

In order to understand that last sentence you need to understand a bit about how Magic: The Gathering and similar games such as Pokemon and World of Warcraft Trading Card Game work. Each player sits down at the table with his or her own deck of cards that are drawn from a large universe of potential cards – over 13,000 in the case of Magic. Magic is the creation of Wizards of The Coast, now a subsidiary of Hasbro.

Although you can buy pre-completed decks you need to get more cards if you want your deck to be special. They are sold in booster packs of 15 cards for $3.00 to $4.50 like we used to buy baseball cards back in the day only without the gum. Some of the cards are rare and some are very rare. So there is a secondary market in which individual cards are sold some with prices running into the thousands.

The side effect of the great value of some rare cards is the negligible value of common cards. In That’s Entertainment in Worcester MA where I often take my kids, they have the very rare cards in binders behind the counter, a display case for rare cards priced in the $10 – $50 range and boxes of commons that go for something like a nickel each.

The Drink Coffee At Starbucks Too

Frankly, if you are playing the game for fun, the common cards are quite sufficient. And that is what has been getting donated to GameHearts. It is an important point when you consider the Tax Court’s conclusion.

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 thatfor-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, consistent with our holdings in Schoger Found. and Wayne Baseball, 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.

The logic escapes me. It would be a bit like disallowing the exempt status of Alcoholics Anonymous because people could just as soon go to Starbucks and drink coffee.

I checked back in with Ron Glick. Ron points to exempt organization Phoenix Multisports which works on similar principles as GameHearts in providing more salubrious activities to support sobriety. That the Phoenix activities are more geared to exercising the body rather than the mind should not really be germane. Ron says they intend to appeal, although he might find it an uphill struggle.

Does IRS Need To Get Out More?

This is another example to me of the IRS EO group being out of touch with the modern world. Magic the Gathering has been a thing since 1993. You will also see IRS giving a hard time to not for profits dedicated to open source software. It also turned down a sorority that wanted to operate on-line and a group planning to provide free wi-fi.

Other Coverage

Although I have no doubt I would have picked this up from my regular review of Tax Court decisions, I learned about it from Paul Streckfus’s – EO Tax Journal. Paul thinks that with some professional help suggesting a few tweaks GameHearts might have qualified.

This seems to me a close case. According to footnote 4 the IRS proffered exemption under section 501(c)(4) in lieu of section 501(c)(3). It appears the Petitioner does not have counsel. I think an experienced EO tax practitioner could have made a few changes that would have brought the Petitioner within the scope of section 501(c)(3).