Social club exemption revoked for excessive nonmember income

Plain-English summary

A motorcycle club held competition events and provided campgrounds, grilling, showers, and other amenities for riders and their families. The events were open to nonmembers, advertised on the club's website and through flyers at motorcycle shops, and available for online registration. The IRS found that nonmember event entry fees represented a substantial portion of the club's income and exceeded the 15 percent limit for public use of a social club's facilities or services. Because the club repeatedly derived excessive income from nonmember sources, it was not supported primarily through member fees, dues, and assessments as required for section 501(c)(7) status. The IRS revoked the exemption effective January 1 of the redacted year.

Ruling snapshot

• Question: Could the club retain section 501(c)(7) status when public events generated nonmember income above the permitted threshold?
• Outcome: revocation
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7)-1; Rev. Ruls. 66-149 and 60-324; Rev. Proc. 71-17; Pub. L. 94-568

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
Internal Revenue Service TE/GE EO

EXAMINATIONS
TAX EXEMPT AND
GOVERNMENT ENTITIES Date: April 18, 2017
DIVISION

Taxpayer Identification Number:
Number: 201749011
Release Date: 12/8/2017

Person to Contact:

Employee Identification Number:

Employee Telephone Number:
UIL: 501.07-00

CERTIFIED MAIL — Return Receipt Requested

Dear

This is a Final Adverse Determination Letter as to your exempt status under section
501(c)(7) of the Internal Revenue Code. Your exemption from Federal income tax under
section 501(c)(7) of the Code is hereby revoked effective January 1, 20xx

Our adverse determination was made for the following reasons:

You have not demonstrated that you are operated exclusively for exempt
purposes within the meaning of section 501(c)(7) of the Internal Revenue
Code and Treasury Regulations 1.501(c)(7)-1. Exempt clubs are organized
for pleasure, recreation, and other non-profitable purposes. The exemption
extends to social and recreation clubs that are supported solely by membership
fees, dues, and assessments. Our examination of your activities and finances
revealed that your operations are supported primarily with funds other than
from your members. Therefore, you are not operating in furtherance of or
exclusively for pleasure, recreation or other similar nonprofit purposes as
defined under section 501(c)(7) of the Code.

You are required to file Federal income tax returns on Form 1120. If you have not
already filed these returns and the agent has not provided you instructions for converting
your previously filed Form 990 to Form 1120, you should file these income tax returns
with the appropriate Service Center for the tax year ending December 31, 20xx and for all
tax years thereafter in accordance with the instructions of 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, you may file an action for declaratory
judgment under the provisions of section 7428 of the Code in one of the following three
venues: United States Tax Court, the United States Court of Federal Claims, or the United
States District Court for the District of Columbia. A petition or complaint in one of these
three courts must be filed before the 91st day after the date this determination was mailed
to you if you wish to seek review of our determination. Please contact the clerk of the
respective court for rules and the appropriate forms regarding filing petitions for
declaratory judgment by referring to the enclosed Publication 892. Please note that the
United States Tax Court is the only one of these courts where a declaratory judgment
action can be pursued without the services of a lawyer. You may write to the courts at the
following addresses:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

US Court of Federal Claims
717 Madison Place, NW
Washington, DC 20005

U. S. District Court for the District of Columbia 333
Constitution Ave., N.W.
Washington, DC 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 in the heading of this letter.

Sincerely yours,

for Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Publication 892


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

Date: November 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).

After we issue the final revocation letter, we’ll announce that your organization is no longer
eligible for contributions deductible under section 170 of the Code.

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

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


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
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.

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


Thank you for your cooperation.

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

Sincerely,

Margaret Von Lienen
Director, EO Examinations

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

Schedule number or exhibit

Form 886-A EXPLANATIONS OF ITEMS
(Rev. January 1994)

Name of taxpayer Tax Identification Number Year/Period ended
December 31, 20xx
December 31, 20xx

ISSUES:

1. Whether continues to qualify for exemption under Internal Revenue Code (IRC)
§ 501(c)(7)?
2. Should tax exemption under section 501(c)(7) of the Internal Revenue Code be

revoked because of substantial amounts of non-member income?

3. If revocation is upheld what is the effective date of revocation?

FACTS:
The hereinafter, “ ” was granted tax-exemption under IRC §501(c)(7) in November,
19xx. Per ’s articles of incorporation, the purpose of the club is to promote the safe

operation of motorcycles on public streets and highways, strive for general public acceptance of
motorcycles on public streets and to promote and sponsor competition events. The articles of
incorporation were filed with Secretary of State on August 11, 19xx.

is a membership club for bikers. sponsors competition events as annual
. Further, provides camp grounds, grilling, showers and other amenities for bikers and
their families during weekend stays. These activities are held on
The events are “open to the public”. The riders bring their bikes and all-terrain vehicles.
Annual dues for club membership are $. The club has approximately members. has a
clubhouse where meetings and other social activities are held for members and their guest.

During the initial interview with — treasurer, s activities are attended by bike and
all-terrain vehicle riders throughout . The events are advertised on the club’s website. And
events are widely advertised by posting flyers in bike shops throughout the county. Riders can
registrar online at .com. Events are open to nonmembers. Nonmembers are exclusively
drawn to the named events. Members are required to work and help out during events and most
do not participate in activities.

sources of revenue reported on the Forms 990-EZ:

Revenue Sources Tax Year 20xx Tax Year 20xx
Program service revenue $ $
Investment income $ $

Totals $ $

Form 886-A (1-1994) Catalog Number 20810W Page 1 publish.no.irs.gov Department of the Treasury-Internal Revenue Service


Schedule number or exhibit

Form 886-A EXPLANATIONS OF ITEMS
(Rev. January 1994)
Name of taxpayer Tax Identification Number Year/Period ended

December 31, 20xx
December 31, 20xx

The program service revenues from events in 20xx:

EVENTS (20xx) INCOME
$
$
$
TOTAL INCOME $

The program service revenue includes other social events held at the clubhouse. Form 990-EZ
for 20xx, program service revenues is $ The sources are unknown.

The club does not file a Form 990-T, Exempt Organization Business Income Tax Return to
report gross receipts from nonmember income. The financial statements reveal membership |

dues and initiation fees are $ . Other income from member's clubhouse socials is $.
Non-member income is approximately $ or %.
Club website: .com advertisement state “event open only to past

participants or family or friends of past participants”. Indications are that any ATV (all-terrain
vehicle), 4-wheelers an off-road motorcycle racing enthusiasts can participate in club sponsored
events without being a member.

While reviewing the club’s website, flyers and other internal documents provided by the
organization, club events are open to the general public on a regular basis. Nonmember event
entry fees represent approximately % of the club’s total income.

LAW:

A club is not exempt under IRC 501(c)(7) where it regularly derives a substantial part of its income
from nonmember sources.

Form 886-A (1-1994) Catalog Number 20810W Page 2 publish.no.irs.gov Department of the Treasury-Internal Revenue Service


Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
December 31, 20xx
December 31, 20xx

IRC § 501(c)(7) exempts from federal income tax clubs organized for pleasure, recreation, and
other non-profitable purposes, substantially all of the activities of which are for such purposes and
not part of the net earnings of which inures to the benefit of any private shareholder.

Section 1.501(c)(7) of the Regulations provides that, in general, the exemption extends to social
and recreation clubs supported solely by membership fees, dues and assessments. However, a
club that engages in a business, such as making its social and recreational facilities open to the
general public, is not organized and operated exclusively for pleasure, recreation and other
nonprofitable purposes, and is not exempt under section 501(a).

Prior to its amendment in 1976, IRC § 501(c)(7) required that social clubs be operated exclusively
for pleasure, recreation and other non profitable purposes. Public Law 94-568 amended the
“exclusive” provision to read “substantially’ in order to allow an IRC § 501(c)(7) organization to
receive up to 35 percent of its gross receipts, including investment income, from sources outside its
membership without losing its tax exempt status. The Committee Reports for Public Law 94-568
(Senate Report No. 94-1318 2d Session, 1976-2 C.B. 597) further states;

(a) Within the 35 percent amount, not more than 15 percent of the gross receipts should be
derived from the use of a social club’s facilities or services by the general public. This means that
an exempt social club may receive up to 35 percent of its gross receipts from a combination of
investment income and receipts from non-members, so long as the latter do not represent more
than 15 percent of total receipts.

(b) Thus, a social club may receive investment income up to the full 35 percent of its gross
receipts if no income is derived from non-members’ use of club facilities.

(c) In addition, the Committee Report states that where a club receives unusual amounts of
income, such as from the sale of its clubhouse or similar facilities, that income is not to be included
in the 35 percent formula.

Revenue Ruling 66-149 holds a social club as not exempt as an organization described in IRC §
501(c)(7) where it derives a substantial part of its income from non-member sources.

Revenue Ruling 60-324 states by making its social facilities available to the general public the club
cannot be treated as being operated exclusively for pleasure, recreation or other non-profitable
purposes.

Form 886-A (1-1994) Catalog Number 20810W Page 3 publish.no.irs.gov Department of the Treasury-Internal Revenue Service


Schedule number or exhibit

Form 886-A

Name of taxpayer Tax Identification Number Year/Period ended
December 31, 20xx
December 31, 20xx

Revenue Procedure 71-17 sets forth the guidelines for determining the effect of gross receipts
derived from the general public’s use of a social club's facilities on exemption under IRC §
501(c)(7). Where nonmember income from the usage exceeds the standard as outlined in this
Revenue procedure, the conclusion reached is that there is a non-exempt purpose and operating in
this manner jeopardizes the organization’s exempt status.

TAXPAYER’S POSITION:

Taxpayer's position has not been provided.

GOVERNMENT'S POSITION:

The Club is not supported exclusively by membership income and therefore does not
qualify for exemption as a social club described in IRC §501(c)(7) and Treas. Reg. §1.501(c)(7)
which provides that in general, this exemption extends to social and recreation clubs which are
supported solely by membership fees, dues, and assessments. The events are not exclusively for
the pleasure of its members. Nonmember income is $ of the total income $ per the
Club’s 20xx Form 990-EZ return. Club has exceeded the 15% non-member threshold.
Nonmember income far exceeds the permissible limit for organization exempt under section
501(c)(7) status.

Rev. Ruls. 66-149 and 60-324 support this position stating that a social club that opens to the
public and derives a substantial part of its income from non-member sources is not exempt as an
organization described in 501(c)(7).

permits nonmembers to participate unrestricted in club sponsored events. The organization
has exceeded the 15% non-member threshold as outlined in Public Law 94-568, on a recurring
basis during tax years ended December 31, 20xx and December 31, 20xx.

CONCLUSION

Based on the facts and circumstances of the examination, Club is not operated
exclusively for members. During the examination it was determined that the club receives
approximately % of their income from nonmembers. Club is not operated exclusively

for members under section 501(c)(7) exempt purposes and no longer qualifies for exemption
because the nonmember income has exceeded the 15% nonmember threshold on a continuing

Form 886-A (1-1994) Catalog Number 20810W Page 4 publish.no.irs.gov Department of the Treasury-Internal Revenue Service


Schedule number or exhibit
Form 886-A EXPLANATIONS OF ITEMS
(Rev. January 1994)
Name of taxpayer Tax Identification Number Year/Period ended
December 31, 20xx
December 31, 20xx
basis. It is recommended that Club exempt status under Section 501(c)(7) of the

Code be revoked effective January 01, 20xx.

Should this revocation be upheld, Form 1120 must be filed.

Form 886-A (1-1994) Catalog Number 20810W Page 5 publish.no.irs.gov Department of the Treasury-Internal Revenue Service