Death-benefit association denied social club exemption

Plain-English summary

An association of people from the same foreign city sought exemption as a social club under section 501(c)(7). Members paid dues and additional required contributions so the association could help families with funeral expenses and transport remains to their native country. The IRS found that providing death benefits was the organization's only substantive activity and that member commingling was limited to board, reporting, and emergency contribution meetings. Because the organization was not operated for pleasure, recreation, or similar social purposes, it did not qualify as a tax-exempt social club. The final adverse determination became effective after the organization did not protest within 30 days.

Ruling snapshot

• Question: Did an association focused on funeral and repatriation assistance qualify as a section 501(c)(7) social club?
• Outcome: Denied.
• Key authorities: IRC § 501(c)(7); Rev. Rul. 63-190; Chattanooga Automobile Club, 182 F.2d 551; Allied Trades Club, 23 T.C. 1017.

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201
Date: July 21, 2016

Employer ID number:

Number: 201642036 Contact person/ID number:
Release Date: 10/14/2016

Contact telephone number:

Form you must file:

UIL: 501.07-00, 501.07-06

Tax years:

Dear

This letter is our final determination that you don’t qualify for tax-exempt status under Section 501(c)(7) of the
Internal Revenue Code (the Code). Recently, we sent you a proposed adverse determination in response to your
application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it
gave you 30 days to file a protest. Because we didn’t receive a protest within the required 30 days, the proposed
determination is now final.

You must file federal income tax returns for the tax years listed at the top of this letter using the required form
(also listed at the top of this letter) within 30 days of this letter unless you request an extension of time to file.

We’ll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection (as required under Section 6110 of the Code) after deleting certain identifying information.
Please read the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Notice
437 on how to notify us. If you agree with our deletions, you don’t need to take any further action.

If you have questions about this letter, you can contact the person listed at the top of this letter. If you have
questions about your federal income tax status and responsibilities, call our customer service number at
1-800-829-1040 (TTY 1-800-829-4933 for deaf or hard of hearing) or customer service for businesses at
1-800-829-4933.

Letter 4040 (Rev. 7-2014)
Catalog Number 47635Z

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Notice 437
Redacted Letter 4034, Proposed Adverse Determination under IRC Section 501(a) Other Than 501(c)(3)
Redacted Letter 4040, Final Adverse Determination under IRC Section 501(a) Other Than 501(c)(3) - No

Protest

Letter 4040 (Rev. 7-2014)
Catalog Number 47635Z

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201
Date: June 2, 2016

Employer ID number:

Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

B = State 501.07-00
C = Date of incorporation 501.07-06
D = Country

x dollars = Amount
y dollars = Amount

Dear

We considered your application for recognition of exemption from federal income tax under Section 501(a) of
the Internal Revenue Code (the Code). Based on the information provided, we determined that you don’t qualify
for exemption under Section 501(c)(7) of the Code. This letter explains the basis for our conclusion. Please
keep it for your records.

Issues
Do you qualify for exemption under Section 501(c)(7) of the Code? No, for the reasons stated below.

Facts
You were incorporated under the laws of the State of B on C. Your Articles of Incorporation state that you are
formed as a nonprofit organization. You are seeking exemption under Section 501(c)(7) of the Code.

Your members are individuals originally from a specific city located in the foreign country of D, who are
working in the United States. You raise funds and offer monetary assistance to your members who have lost a
family member due to unforeseen circumstances and do not have money to send the remains back to D. You do
not profit from any sales or fundraising. You will not request donations from other organizations.

You have more than 200 members that have each paid a one-time membership fee of x dollars. Membership
dues are your only source of income. The accumulated funds are reserved as financial assistance for a member
to pay for funeral costs or send the deceased family member’s remains to rest in your native land of D.

You conduct a board meeting every two months to discuss any changes or incidents. Once a year you hold a
meeting with all members to give a yearly report of accumulated funds and expenses. If an immediate family
member of a member passes away, you notify all of your members and schedule a meeting to request a required
contribution of y dollars. You distribute a check to the family who lost the loved one to cover funeral expenses
and the transportation of their remains so that they may be sent back to D.

Law

Section 501(c)(7) of the Code provides for the exemption from federal income tax for 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.

Rev. Rul. 55-716, 1955-2 CB 263, holds that an organization formed for the purpose of furnishing television
antenna service to its members upon payment of a stipulated membership fee and a monthly charge for
maintenance of the antenna was not tax exempt under Section 501(c)(7) of the Code. The term "club," as used
with Section 501(c)(7), contemplates a commingling of members, one with the other, in fellowship. Personal
contacts and fellowship must play a material part in the life of an organization for it to come within the meaning
of the term "club."

Rev. Rul. 58-589, 1958-2 CB 266, discussed the various criteria for recognition of exemption under Section
501(c)(7) of the Code. In order to establish that a club is organized and operated for pleasure, recreation, and
other non-profitable purposes, “there must be an established membership of individuals, personal contacts, and
fellowship. A commingling of the members must play a material part in the life of the organization.”

Rev. Rul. 63-190, 1963-2 C.B. 212, holds that a nonprofit organization (not operated under a system of lodges)
which maintained a social club for members and which also provided sick and death benefits for members and
their beneficiaries, did not qualify for exemption from federal income tax either as a social club under Section
501(c)(7) of the Code, a civic league under Section 501(c)(4), or a fraternal beneficiary society under Section
501(c)(8) of the Code.

Rev. Rul. 69-635 1, 1969-2 CB 126, holds that an automobile club whose principal activity is rendering
automobile services to its members but has no significant social activities, does not qualify for exemption under
Section 501(c)(7). The rendition of automobile services was not in the nature of pleasure and recreation within
the meaning of Section 501(c)(7) and commingling of members did not play a material part in the activities of
the organization.

In Chattanooga Automobile Club v. Commissioner, Warren Automobile Club, Inc. v. Commissioner, 182 F. 2d
551 (6th Cir. 1950), the United States Court of Appeals 6th Circuit held that to be exempt under the Act of
Congress, a club must have been organized and operated for pleasure, recreation, and other non-profitable
purposes. The court further specified that the words "other non-profitable purposes” must be construed as
coming within the same classification as pleasure and recreation. In addition, there must be at least some sort of
commingling of members to constitute a club. The court held that the two automobile clubs petitioning the court
were not exempt under section 101(9) of the Internal Revenue Code of 1939 as a social club because the
members of these clubs did not commingle.

In Keystone Automobile Club v. Commissioner, 181 F. 2d 402 (3rd Cir. 1950), the United States Court of
Appeals 3rd Circuit defined the word "club" to include some type of mingling of people together as well as a
common object. In this case, the court held that the club was not exempt under section 101(9) of the Code for a
number of reasons one of which was because they saw no evidence of the commingling of members.

Allied Trades Club, Inc. v. Commissioner, 23 T.C. 1017 (1955) states that the payment of sick and death
benefits is not a function of a social club exempt under 501(c)(7). It could not be classified as an operation for

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K

3

pleasure, recreation, or social purposes and, therefore, the petitioner was not operating exclusively for such
purposes.

Application of law

Your only activity is providing financial assistance to your members upon the death of their family members for
funeral expenses and transportation of their remains back to D. You are not operating for pleasure, recreation,
and other non-profitable purposes, precluding you from exemption under Section 501(c)(7) of the Code

To be operated for the purposes described in Section 501(c)(7) of the Code, an organization must have an
established membership of individuals who meet to make personal contact and promote fellowship. The
commingling of the members must play a material part in the life of a tax exempt social club, as described in
Rev. Rul. 55-716, 58-589 and 69-635. With the exception of a few board meetings and emergency member
meetings to collect fees, you have no member events. With no commingling of your members, you are
excluded from exemption under Section 501(c)(7).

You are also similar to the organization described in Rev. Rul. 63-190, which was denied exemption under
Sections (c)(7), (c)(5) and (c)(8) for providing sick and death benefits for members and their beneficiaries.

Chattanooga Automobile Club v. Warren Automobile Club, and Keystone Automobile Club both show that
organizations failing to meet the commingling requirement will be denied exemption. You have not
demonstrated that members have any interaction other than board meetings or member meetings to discuss
financial reports. Your social activities are only incidental to your activity of providing death benefits to your
members. Because you have demonstrated very little, if any, personal contact among members and there is no
expectation of personal contact among members, commingling is not a material part of your activities. By
operating in such a way, you do not qualify for exemption under Section 501(c)(7) of the Code.

Much like the organization described in Allied Trades Club, your sole activity is the provision of death benefits,
which is not a function of a social club exempt under 501(c)(7) of the Code. You are not operating for pleasure,
recreation, or social purposes and, therefore, not exempt under Section 501(c)(7).

Conclusion

Based on the information provided, we conclude that you are not organized for pleasure, recreation or other.
non-profitable purposes and there is no commingling of your members. Accordingly, you do not qualify for
recognition of exemption under Section 501(c)(7) of the Code.

If you don’t agree
You have a right to file a protest if you don’t agree with our proposed adverse determination. To do so, you

must send a statement to us within 30 days of the date of this letter. The statement must include:

• Your name, address, employer identification number (EIN), and a daytime phone
number

• A copy of this letter highlighting the findings you disagree with

• An explanation of why you disagree, including any supporting documents

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K

• The law or authority, if any, you are relying on

• The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization, or your authorized representative

• One of the following declarations:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I examined this protest statement, including

accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

For authorized representatives:

Under penalties of perjury, I declare that I prepared this protest statement, including
accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if he or she hasn’t
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We'll review your protest statement and decide if you provided a basis for us to reconsider our determination. If
so, we'll continue to process your case considering the information you provided. If you haven’t provided a
basis for reconsideration, we’ll forward your case to the Office of Appeals and notify you. You can find more
information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-
Exempt Status.

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court at a later date because
the law requires that you use the IRS administrative process first (Section 7428(b)(2) of the Code).

Where to send your protest
Please send your protest statement, Form 2848, if needed, and any supporting documents to the applicable
address:

U.S. mail: Street address for delivery service:
Internal Revenue Service Internal Revenue Service

EO Determinations Quality Assurance EO Determinations Quality Assurance
Room 7-008 550 Main Street, Room 7-008

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your statement and supporting documents to the fax number listed at the top of this letter. If
you fax your statement, please contact the person listed at the top of this letter to confirm that he or she received
it.

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K

If you agree

If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from you
within 30 days, we’ll issue a final adverse determination letter. That letter will provide information on your
income tax filing requirements.

You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If
you have questions, you can contact the person listed at the top of this letter.

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K