Public-facing club loses social-club exemption

Plain-English summary

An organization claimed exemption as a section 501(c)(7) social club but operated as a one-owner business open to the general public. It issued lifetime membership cards without a formal application, approval process, initiation fees, dues, member meetings, voting rights, or member control. The IRS found that public use of the facilities and services regularly generated fees above the permitted 15 percent limit and that income inured to the president. The organization closely resembled the public dinner club in Club Ramon rather than a genuine private social club. The IRS revoked exemption effective November 15 of the redacted year and required corporate income tax returns for later periods.

Ruling snapshot

• Question: Did a nominal private club open to the public qualify for section 501(c)(7) exemption?
• Outcome: Revocation because the organization conducted substantial business with the public and its income benefited the president.
• Key authorities: IRC § 501(c)(7); Rev. Proc. 71-17; Club Ramon, Inc. v. United States.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE
Attn: Mandatory Review, MC 4920 DAL
TAX EXEMPT AND 1100 Commerce St.
GOVERNMENT ENTITIES Dallas, TX 75242

DIVISION

Date: June 16, 2016

Number: 201640020

Release Date: 9/30/2016
Employer Identification Number:

Person to Contact/ID Number:

Contact Numbers:

UIL: 501.07-00
Dear

This is a final adverse determination regarding your exempt status under section
501(c)(7) of the Internal Revenue Code (the Code). Our favorable determination letter
to you dated October 17, 20XX is hereby revoked and you are no longer exempt
under section 501(a) of the Code effective November 15, 20XX.

The revocation of your exempt status was made for the following reason(s):

Based on your activities and financial records, you do not qualify for exemption from
Federal income tax under section 501(c)(7) of the Code since: 1) You are engaged in
business with the general public by regularly providing your facilities and services to
the public for use upon payment of established fees. These fees are over the 15%
limit as provided in Revenue Procedure 71-17, as amended by Public Law 94-568;
and 2) the income from these sources is inuring to the benefit of your president.

You are required to file Form 1120 U. S. Corporation Income Tax Return for years
ended June 30, 20XX and June 30, 20XX with the Ogden Service Center. In addition,
for future periods, you are required to file Form 1120 with the appropriate service
center indicated in the instructions for the return.

Processing of income tax returns and assessments of any taxes due will not be
delayed should a petition for declaratory judgment be filed under section 7428 of the
Internal Revenue Code.

If you decide to contest this determination under the declaratory judgment provisions
of section 7428 of the Code, a petition to the United States Tax Court, the United

States Claims Court, or the district court of the United States for the District of
Columbia must be filed before the 91st Day after the date this determination was
mailed to you. Please contact the clerk of the appropriate court for rules regarding
filing petitions for declaratory judgments by referring to the enclosed Publication 892.
You may write to these courts at the following addresses:

United States Tax Court United States Court of Federal Claims
400 Second Street, NW 717 Madison Place, NW
Washington, D.C. 20217 Washington, D.C. 20005

United States District Court for the District of Columbia
333 Constitution Avenue, NW
Washington, D.C. 20001

The Taxpayer Advocate Service (TAS) is an independent organization within
the IRS that can help protect your taxpayer rights. TAS can offer you help if
your tax problem is causing a hardship, or you've tried but haven't been able to
resolve your problem with the IRS. If you qualify for TAS assistance, which is
always free, TAS will do everything possible to help you. Visit
taxpayeradvocate.irs.gov or call 1-877-777-4778.

If you have any questions, please contact the person whose name and telephone
number are shown at the beginning of this letter.

Thank you for your cooperation.
Sincerely,
Margaret Von Lienen
Director, EO Examinations

Enclosure:
Publication 892

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
Exempt Organizations Examinations

Date: 03/14/2016

Taxpayer Identification Number:
Form:
Tax Year(s) Ended:

Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Manager’s Name/ID Number:

Manager’s Contact Number:

Response due date:

Certified Mail — Return Receipt Requested
Dear

Why you are receiving this letter

We propose to revoke your status as an organization described in section 501(c)(7) of the
Internal Revenue Code (Code). Enclosed is our report of examination explaining the proposed
action.

What you need to do if you agree

If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed
Action — Section 7428, and return it to the contact person at the address listed above (unless
you have already provided us a signed Form 6018). We'll issue a final revocation letter
determining that you aren’t an organization described in section 501(c)(7).

If we don't hear from you

If you don’t respond to this proposal within 30 calendar days from the date of this letter, we'll
issue a final revocation letter. Failing to respond to this proposal will adversely impact your legal
standing to seek a declaratory judgment because you failed to exhaust your administrative
remedies.

Effect of revocation status
If you receive a final revocation letter, you'll be required to file federal income tax returns for the
tax year(s) shown above as well as for subsequent tax years.

What you need to do if you disagree with the proposed revocation
If you disagree with our proposed revocation, you may request a meeting or telephone
conference with the supervisor of the IRS contact identified in the heading of this letter. You also

Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

may file a protest with the IRS Appeals office by submitting a written request to the contact
person at the address listed above within 30 calendar days from the date of this letter.

The Appeals office is independent of the Exempt Organizations division and resolves most
disputes informally.

For your protest to be valid, it must contain certain specific information including a statement of
the facts, the applicable law, and arguments in support of your position. For specific information
needed for a valid protest, please refer to page one of the enclosed Publication 892, How to
Appeal an IRS Decision on Tax-Exempt Status, and page six of the enclosed Publication 3498,
The Examination Process. Publication 3498 also includes information on your rights as a
taxpayer and the IRS collection process. Please note that Fast Track Mediation referred to in
Publication 3498 generally doesn’t apply after we issue this letter.

You also may request that we refer this matter for technical advice as explained in Publication

892. Please contact the individual identified on the first page of this letter if you are considering
requesting technical advice. If we issue a determination letter to you based on a technical
advice memorandum issued by the Exempt Organizations Rulings and Agreements office, no
further IRS administrative appeal will be available to you.

Contacting the Taxpayer Advocate Office is a taxpayer right

You have the right to contact the office of the Taxpayer Advocate. Their assistance isn’t a
substitute for established IRS procedures, such as the formal appeals process. The Taxpayer
Advocate can't reverse a legally correct tax determination or extend the time you have (fixed by
law) to file a petition in a United States court. They can, however, see that a tax matter that
hasn't been resolved through normal channels gets prompt and proper handling. You may call
toll-free 1-877-777-4778 and ask for Taxpayer Advocate assistance. If you prefer, you may
contact your local Taxpayer Advocate at:

Internal Revenue Service
Office of the Taxpayer Advocate

For additional information

If you have any questions, please call the contact person at the telephone number shown in the
heading of this letter. If you write, please provide a telephone number and the most convenient
time to call if we need to contact you.

Thank you for your cooperation.

Sincerely,

Paul A. Marmolejo
Acting Director, EO Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

2 Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

Department of the Treasury

Internal Revenue Service

Tax Exempt and Government Entities Division
Exempt Organizations Examinations

~ Date: June 16, 2016

Taxpayer ID number:

Form:

Tax periods ended:

Person to contact/ID number:

Contact numbers:
Telephone:
Fax:

Dear

On December 18, 2015, Congress enacted the Protecting Americans from Tax Hikes Act of 2015
(PATH Act of 2015), P.L. 114-113. Section 406 of the PATH Act extends declaratory judgment
rights under section 7428 of the Internal Revenue Code from 501(c)(3) organizations to all
501(c) organizations. These rights apply to adverse determinations of tax-exempt status,
including revocations and disqualifications of tax-exempt status.

This section of the PATH Act of 2015 applies to all revocations and disqualifications issued on
or after September 18, 2015. We issued you a final revocation or disqualification letter during
this time period. We are now reissuing a revocation letter because you are entitled to file a
declaratory judgment action with respect to the loss of your tax-exempt status. Your reissued
letter is attached. The basis for the loss of your exempt status has not changed

If you have any questions, you can call me at the telephone number shown in the heading of this
letter. If you write, please provide a telephone number and the most convenient time to call if we
need to contact you.
Thank you for your cooperation.

Sincerely,

Reviewer

Attachment
90-day Final Adverse Determination Letter

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
JUNE 30, 20XX
ISSUE
A so-called , operated for profit, furnished = and to its patrons. The was
organized as a to comply with state . Membership cards were used but there was no formal

application for membership or a system of approval, no initiation fees or dues, no board of directors or meeting of
the members.

Does this that qualifies as a under state law for the purpose of obtaining a
state , qualify under Internal Revenue Code Section 501(c)(7) as a tax exempt social club?
FACTS

filed Articles of Incorporation with the Secretary of State’s office
on January 28, 20XX. Articles of Incorporation were Amended on April 4, 20XX with
the Secretary of State of changing the name of the Corporation to . In
addition, a Registration of Fictitious Name was filed with the Secretary of State of on April 4,
20XX, registering “ ” for

Form 1024 “Application for Recognition of Exemption Under Section 501(a)” was filed with the Internal Revenue
Service on February 6, 20XX.

was granted exemption from Federal Income Tax under section 501(c)(7) of the Internal
Revenue Code by Letter 948 dated October 17, 20XX, with the effective date of exemption of November 15, 20XX.

The privileges of members consist in the right to have access to the and to partake of its

No meetings of the members of are held
members have no voice in the selection of members and members have no voting rights
members have no control of the operation of the
members have no share in the profits
membership is open to the general public and their families, without specific qualification
allows entrance to its establishment without verification as to membership
does not charge a membership fee, there are no membership dues or assessments and
membership cards are issued for life.
The selection of members is entirely in the hands of the one stockholder, anyone who
walks through the door is granted membership
was organized as a private club to comply with state liquor laws.
is a one-person enterprise owned by the stockholder

LAW, ARGUMENT AND RATIONALE

Internal Revenue Code Section 501(a) Exemption from taxation
An organization described in subsection (c) or (d) or section 401(a) shall be exempt from taxation under this subtitle
unless such exemption is denied under section 502 or 503

Internal Revenue Code Section 501(c)(7) Clubs organized for pleasure, recreation, and other non-profitable
purposes, substantially all of the activities of which are for such purposes and no part of the net earnings of which
inures to the benefit of any private shareholder

Club Ramon, Inc., Appellee v. United States of America, Appellant 1962-2 C.B. 356; 1962 IRB LEXIS 791 A so-
called "dinner club," operated for profit, furnished food and entertainment to its patrons. The club was organized as a

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -1-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
JUNE 30, 20XX

private club to comply with state liquor laws. Membership cards were used but there was no formal application for
membership or a system of approval, no initiation fees or dues, no board of directors or meeting of the members.

The court held that in view of all the circumstances the club was so clearly a public place, within the meaning of
section 1700 (e) of the 1939 Code, that it was subject to the cabaret tax and a directed verdict for the United States
should have been granted in the District Court.

The certificate of incorporation, of Club Ramon, Inc, (a one-man enterprise owned by Raymond O. Mattee)
states that the purpose of the corporation is to operate "a private dinner and supper club for the service of food and
beverages." The by-laws of the corporation provide that the club shall be operated as a private club for the use of its
members and their guests and that the Board of Directors shall prescribe the requirements for membership and issue
appropriate identification to the members. No such regulations, however, have been passed and no attempt has been
made to organize a private club in the ordinary meaning of that term. The selection of members has been entirely in
the hands of Mattee and the evidence of membership is a membership card issued by Mattee bearing the member's
name. The privileges of members consist in the right to have access to the Club and to partake of its entertainment
for a price but no meetings of the members are held and the members have no voice in the selection of members, no
control of the operation of the Club, and no share in the profits

In view of all these circumstances we conclude that the Club Ramon is so clearly a public place within the meaning
of the Federal Statute that a verdict for the United States should have been directed. The pretense set up in the
charter and in the by-laws of the corporation that the organization is a private club has no foundation in fact and is
not now urged in support of the judgment of the District Court. Hence, the question is whether a restaurant which is
operated by its owner for profit and for this purpose is open to such members of the general public and their families,
without specific qualification, as the proprietor may deem it safe and prudent to admit to a place where violations of
the state law are carried on, must properly be described as a public place within the meaning of the statute. We think
that the answer must be in the affirmative when, as in this case, the sale of the privileges of the place was the
lifeblood of the business and a large section of the general public was served. Actually the restrictions involved in
the card-carrying practice were no more severe than those imposed by other public places of entertainment from
which, for one purpose or another, certain classes of the general public are customarily excluded.

What we hold here is that the facts in this case establish beyond reasonable dispute that, the Club Ramon, Inc., in its
organization and operation, is no more private than the ordinary discriminating restaurant and that it is, therefore,
liable for the taxes imposed. The judgment of the District Court is reversed with direction to dismiss the complaint

CONCLUSION
The Club Ramon, Inc., court case stated above, and the facts of the . are also similar, in both instances:
• The privileges of members consist in the right to have access to and to partake of its entertainment
for a price
• no meetings of the members are held
• members have no voice in the selection of members
• members have no control of the operation of
• members have no share in the profits
• membership is open to the general public and their families, without specific qualification
• The selection of members is entirely in the hands of the one stockholder
• The was organized as a private club to comply with state liquor laws.
• The a one-person enterprise owned by the stockholder
• The enterprise is similar to the business organization commonly known as a which is defined in

Webster's New Collegiate Dictionary as

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -2-

Treasury - ov Servi
Form 886A Department of the Treasury - Internal Revenue Service

Schedule No. or

Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
JUNE 30, 20XX

The conclusion reached in the Club Ramon, Inc., court case is that the club is a public establishment and not a
private club for Federal Tax Laws. Therefore, given that carries the same or similar facts as this court
case, it can be concluded that in its organization and operation, is no more private than the
ordinary discriminating and that it, therefore, does not qualify for exemption from Federal
Income Tax and the 501(c)(7) classification should be revoked effective November 15, 20XX, the effective date of
exemption.
In addition, is liable for Filing Federal Income Tax Form 1120 for all taxable periods

ending after November 15, 20XX.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page: -3-