Dog-event club denied exemption for public business activity

Plain-English summary

An unincorporated purebred-dog club applied for section 501(c)(7) social-club exemption. It held recurring lure-coursing and conformation events open to members and the public, and event receipts supplied most of its financial support. The IRS found that the redacted percentage of nonmember revenue greatly exceeded the 15 percent public-use limit and that the recurring public events were business operations rather than incidental activity. The club also failed to provide a signed, dated constitution showing formal adoption. Because it did not protest the proposed denial within 30 days, the IRS made the adverse determination final.

Ruling snapshot

• Question: Does the dog-event club qualify as a tax-exempt social club under section 501(c)(7)?
• Outcome: Denied because of substantial nonmember business activity and an inadequate organizing document.
• Key authorities: IRC §§ 501(a), 501(c)(7), and 7428; Treas. Reg. § 1.501(c)(7)-1; Public Law 94-568; Rev. Rul. 66-149; Rev. Rul. 69-219

Full text (IRS public release)

[Redaction note: the IRS release blanks the organization's identity, employer identification number, contact information, filing form, tax years, dog breed, governing organization, dates, amounts, and nonmember-revenue percentage.]

Department of the Treasury
Internal Revenue Service

P.O. Box 2508
Cincinnati, OH 45201

Date: November 17, 2017

Release Number: 201806011
Release Date: 2/9/2018
UIL Code: 501.07-00
501.07-05

Employer ID number:
Contact person/ID number:
Contact telephone number:

Form you must file:

Tax years:

Dear [illegible]:

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 476352

Sincerely,

Stephen A. Martin
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

IRS P.O. Box 2508
Cincinnati, OH 45201

Date: August 4, 2017

Employer ID number:

Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:

B = Name . 501.07-00
C = Organization 501.07-05
D = Year

E= Month/Year

x dollars = Amount
y dollars = Amount
z dollars = Amount

Dear [illegible]:

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
According to your Form 1024, you formed in your state as an unincorporated association in E . You provided
your constitution but it is not signed and dated showing it was adopted.

Article 1 Section 2 of your constitution states that the objects of your club are:

• To encourage and promote quality in breeding of purebred B.
• To urge members and breeders to accept the standard of breed as approved by C.
• To protect and advance the interest of the breed by encouraging sportsmanlike
competition at dog shows, obedience trials, and field trials.
• To conduct dog shows, obedience trials, field trials, and any other event events eligible
under C.

You are a membership organization open to all, Your primary purpose listed in your bylaws is to be
representative of the breeders, exhibitors, and B enthusiasts in your geographic area but there is no requirement
to join your club to participate in your events. Membership fees are x dollars per year. You host two types of

2

ongoing events open to your members and nonmembers. Anyone can participate in these events. Your
members serve as the event committee to ensure safety and continuity under the auspices of C. The first type of
event consists of lure coursing tests and trials. These are designed to mimic open field rabbit hunts. This event
uses a pulley system with string and plastic bags to represent the rabbit and its path. The second type of event
consists of conformation shows and matches. This event focuses on the unique characteristics of B including its
structure and movement and provides the events’ attendees the opportunity to learn about B.

Your financial information shows the receipts from these events constitute the majority of your financial
support. In D, your total revenue for these events was y dollars. Of that amount, z dollars came from non-club
members, making your non-club member income % of your total revenue.

Law

Section 501(c)(7) of the Internal Revenue Code provides for the exemption from federal income tax clubs
organized for pleasure, recreation, and other nonprofitable 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.

Treasury Regulation Section 1.501(c)(7)-1(a) states that the exemption provided by Section 501(a) of the Code
for an organization described in Section 501(c)(7) of the Code applies only to clubs which are organized and
operated exclusively for pleasure, recreation, and other nonprofitable purposes, but does not apply to any club if
any part of its net earnings inure to the benefit of any private shareholder. In general, this exemption extends to
social and recreation clubs which are supported solely by membership fees, dues and assessments. However, a
club otherwise entitled to exemption will not be disqualified because it raises revenue from members through
the use of club facilities or in connection with club activities.

Treas. Reg. Section 1.501(c)(7)-1(b) states that a club which engages in business, such as making its social and
recreational facilities available to the general public or by selling real estate, timber, or other products, is not
organized and operated exclusively for pleasure, recreation and other nonprofitable purposes, and is not exempt
under Section 501(a) of the Code. Solicitation by advertisement or otherwise for public patronage of its
facilities is prima facie evidence that the club is engaging in business and is not being operated exclusively for
pleasure, recreation, or social purposes. However, an incidental sale of property will not deprive a club of its
exemption.

Public Law 94-568, 1976-2 C.B. 596, provides that a social club may receive up to 35 percent of its gross
receipts, including investment income, from sources outside its membership without losing exemption. Within
this 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 nonmembers so long as
the latter do not represent more than 15 percent of the total receipts.

Revenue Ruling 66-149, 1966-1 C.B. 146 states a social club is not exempt under section 501(c)(7) of the Code if
it regularly derives a substantial part of its income from nonmember sources, such as dividends and interest on
investments which it owns.

Revenue ruling 69-219, 1969-1 CB 153 states that a social club that regularly holds its golf course open to the
general public and charges established green fees that are used for maintenance and improvement of club facilities
is not exempt under Section 501(c)(7) of the Code.

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

In Polish American Club Inc. v. Commissioner 33 T.C.M 925 the Court held that making club facilities
available to the general public, for a fee, represented a substantial activity disqualifying the Club from
exemption under Section 501(c)(7) of the Code.

Application of law

You are not described under Section 501(c)(7) of the Code because you are not organized and operated for
pleasure, recreation, or other nonprofitable purposes. The purpose listed in your bylaws is to be representative
of the breeders, exhibitors, and B enthusiasts in your geographic area. but there is no requirement to join your
club to participate in your events. Your primary activity is hosting ongoing events consisting of which are lure
coursing tests and trials and conformation Shows and matches which are open to both your members and
nonmembers. Your revenue primarily comes from these events and in D nonmember revenue consisted of %
of your total revenue which greatly exceeds 15% limitation for nonmembers set forth in Public Law 94-568.
The fees you collect from club members and non-club members are used to pay the expenses of putting on your
events. In addition, you are not organized in accordance with Section 501(c)(7) of the Code. You did not
submit a conformed signed copy of your constitution showing the date it was formally adopted.

You are not described in Treas. Reg. Section 1.501(c)(7)-1(b) because you are not primarily supported by
membership income. Your events are open to the general public for a fee and these events take place throughout
the year. The public patronage of your events is not incidental and you depend on nonmember income to fund
your events. In addition, recurring activities, available to the general public for a fee, are considered to be
business operations, similar to Revenue Ruling 69-219.

You are similar to the organizations described in Revenue Ruling 66-149 and Polish American Club Inc. v.
Commissioner because you regularly derive non-club member income from your events which are open to the
general public.

Conclusion

You are not organized and operated in accordance with Section 501(c)(7) of the Code. Your events are open to
the general public for a fee with your nonmember income exceeding the allowable 15% for non-club member
income as part of the larger 35% revenue allowance. You also have not provided a conformed organizing
document showing that it has been properly adopted. Accordingly, we conclude that you are not exempt 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

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

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

• 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,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

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