This article reviews the findings of the United States Tax Court in Coaches 101 a NJ Nonprofit, v. Commissioner, T.C. Memo. 2025-106 (Oct. 15, 2025), a case focused on the denial of tax-exempt status under Internal Revenue Code (I.R.C.) Section 501(c)(3). The Court, in granting the Commissioner’s Motion for Summary Judgment, underscored that organizations must satisfy both the organizational and operational tests, emphasizing that a single substantial nonexempt purpose or evidence of private inurement is fatal to qualification.

Factual Background of the Petitioner

Coaches 101 a NJ Nonprofit (Petitioner) was incorporated in New Jersey in 2007. Omar Dyer was listed as the registered agent, incorporator, and an initial board member. The Certificate of Incorporation vaguely described the business purpose as a publication to help children with education related to sports and continuing their careers.

Despite its incorporation, Petitioner allegedly remained dormant until July 2020, at which point Mr. Dyer filed Form 1023, Application for Recognition of Exemption Under Section 501(c)(3). The application described the organization as "a family owned organization" and reiterated a familial restriction in the bylaws requiring board members to have “direct lineage to Omar Dyer and his immediate family”.

Crucially, the application explained that Petitioner was organized primarily to act as the license holder for Mr. Dyer in his capacity as a literary agency. The organization’s future plans centered around the promotion and funding of the "Mad Comedian" project, a social media based foundation created by Mr. Dyer, with the goal of pursuing entertainment media. The organization also operated a “Profit Sharing Program” (PSP) and a Simplified Employee Pension Plan (SEP IRA) for employees, with the PSP designed to return personal funds used by the organization to executive employees when the organization generated a profit. Mr. Dyer later changed his status from a volunteer to an employee receiving wages. The profit-sharing agreement stipulated that “[a]ny and all profits after expenses” were eligible for profit-sharing.

Taxpayer’s Request for Relief

On April 5, 2023, the Internal Revenue Service (IRS) issued a final adverse determination, finding Petitioner did not qualify for federal income tax exemption under Section 501(a) because it was not described in Section 501(c)(3). The IRS concluded that the organization was neither organized nor operated for an exempt purpose. The denial specifically cited substantial commercial activities (merchandise sales, marketing, media production, stock investing, and insurance services) and engagement in inurement and/or private benefit with the founder, including holding Mr. Dyer’s intellectual property rights (Mad Comedian and Fan DJ endeavors), reported student loan cancellation income, and royalty income intended for the founder.

Petitioner filed a Petition on May 15, 2023, seeking a declaratory judgment, pursuant to Section 7428(a)(1)(A) and Rule 210(c), that the Commissioner erred in the adverse determination regarding its initial qualification for Section 501(c)(3) status.

Legal Framework for Exempt Status

Section 501(a) exempts organizations described in Section 501(c)(3) from federal income tax. Section 501(c)(3) requires an organization to be "organized and operated exclusively" for exempt purposes (such as charitable, literary, or educational) and mandates that "no part of the net earnings" may inure to the benefit of any private shareholder or individual.

An organization must satisfy both the organizational test and the operational test. The Court found that application of the operational test alone was sufficient to sustain the denial of exempt status. Whether an organization satisfies the operational test is a question of fact resolved based on the administrative record (citing Manning Ass’n v. Commissioner, 93 T.C. 596, 603 (1989)).

The operational test is failed if:

The organization does not primarily engage in activities accomplishing exempt purposes (Treas. Reg. § 1.501(c)(3)-1(c)(1)).
The net earnings inure to the benefit of private shareholders or individuals (private inurement).

Crucially, "exclusively" does not mean "solely," but the presence of a single substantial nonexempt purpose will preclude exemption, regardless of the importance of other exempt purposes (citing Better Bus. Bureau of Wash., D.C., Inc. v. United States, 326 U.S. 279, 283 (1945)). The "critical inquiry" is whether the primary purpose is exempt or if it is the nonexempt purpose of operating a commercial business to produce net profits (citing B.S.W. Grp., Inc. v. Commissioner, 70 T.C. 352, 356–57 (1978)).

Application of Law: Primary Activities Test

The Court found that Petitioner failed the primary activities prong of the operational test because its activities were fundamentally commercial in character. Under Treas. Reg. § 1.501(c)(3)-1(c)(1), an organization is not operated exclusively for exempt purposes if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.

The Administrative Record was pervasive with examples of profit-driven activities, including:

Selling tickets to live events and "credits" for autographs.
Selling "subscriptions" to the "My Plan Challenge".
Selling purported option contracts, and books and CDs authored by the organization’s founder.
Advertising Mad Comedian shoes, designed by Mr. Dyer, for $189 per pair plus fees, with no hint of an exempt purpose in the product description.

Petitioner stated that the "main goal" of the My Plan Challenge Foundation was to "raise close to $1 million dollars selling products" and pursue projects involving the "Mad Comedian" character. The desired outcome of Mad Comedian, as documented in an Ownership Statement, was to create a "social media empire" that would "produc[e] and sell[] short films, music videos and feature films" to a "global market audience".

The Court concluded that Petitioner’s primary activities were commercial ventures designed to earn a profit. This finding weighed heavily against exemption (citing B.S.W. Grp., Inc., 70 T.C. at 359). The few activities put forward by Petitioner that could plausibly qualify as exempt—vague assertions of helping host a children’s event and writing recommendation letters—were insufficient to overcome the abundant evidence of substantial nonexempt commercial purpose. The Court sustained the respondent’s finding that Petitioner failed the operational test on the basis of its activities.

Application of Law: Private Inurement

The Court also sustained the IRS determination based on substantial private inurement. The operational test is also failed if net earnings inure, in whole or in part, to the benefit of private shareholders or individuals (citing Treas. Reg. § 1.501(c)(3)-1(c)(2)). Furthermore, the organization must establish that its operation is not "for the benefit of private interests such as . . . the creator or his family" (citing Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii)).

The organization’s structure and intended operation mirrored examples of private benefit explicitly forbidden by regulation. Petitioner admitted it was organized to act as a literary agency for Mr. Dyer. It sells his works, and the proceeds are paid back to him as "wages" on Form 1099. The plan to direct the foundation around "Mad Comedian," a fictional character created and owned by Mr. Dyer, was considered precisely the type of private inurement forbidden by Section 501(c)(3).

Mr. Dyer admitted that the structure of the PSP, which included “cash advances” drawn on preferential terms, was designed to allow him to be hired as an employee and paid, effectively attempting to circumvent the "limitations set forth by the tax code, in which I can’t benefit personally". Additionally, the organization reported $17,831 of "Student Loan Cancellation" as miscellaneous revenue on its 2019 Form 990, which apparently related to Mr. Dyer’s student loans.

The evidence of earnings flowing directly or indirectly to the founder—through wages, royalties transferred to him, or the promotion of his performance career and products—led the Court to sustain the finding of the potential for substantial private inurement, precluding exemption under Section 501(a).

Petitioner’s Procedural Objections

The Court also addressed Petitioner’s objections to the Motion for Summary Judgment. In a declaratory judgment action, the Court’s scope of inquiry is limited to the administrative record (citing Aid to Artisans, Inc. v. Commissioner, 71 T.C. 202, 208 (1978)). Furthermore, Rule 121(d) requires the nonmoving party to set forth specific facts demonstrating a genuine dispute for trial.

Petitioner’s responsive filings failed to appropriately address the merits of respondent’s Motion. Its objections included arguments regarding inadequate notice, alleged procedural errors concerning respondent’s choice of counsel (misunderstanding the role of William M. Paul, Acting Chief Counsel), and confusion regarding reliance on extrarecord evidence. Petitioner also mistakenly cited the Federal Rules of Civil Procedure instead of the Tax Court Rules. The Court dismissed these arguments as misguided and unhelpful.

Conclusion and Final Ruling

The Court noted that it could have entered a decision against Petitioner solely for failing to adequately respond to the Motion for Summary Judgment as required by Rule 121(d). Nevertheless, upon review of the Administrative Record, the Court found that the Commissioner’s Motion was well made on the merits. The determination that Petitioner did not qualify for exempt status under Section 501(c)(3) was not erroneous. The Court granted respondent’s Motion for Summary Judgment and sustained the final adverse determination.

Prepared with assistance from NotebookLM.