Golf club loses social-club exemption for public business activity

Plain-English summary

A golf club recognized under Section 501(c)(7) operated seasonally and regularly opened its course, carts, food, and bar services to the public. It advertised public weekday access, online tee times, greens fees, discount cards, gift certificates, and other offers. The IRS found that receipts from nonmembers exceeded the 15 percent limit and that total outside income exceeded the 35 percent limit, while the club had also failed to keep the records required for public use of social-club facilities. Because the public activity was regular, profitable, and used to support member facilities, it was not merely incidental. The IRS revoked the exemption because the club operated like a public-facing business rather than substantially for the pleasure and recreation of its members.

Ruling snapshot

• Question: Did the golf club continue to qualify under Section 501(c)(7) despite regular public use and excessive nonmember receipts?
• Outcome: Revocation.
• Key authorities: IRC §§ 501(a), 501(c)(7), 6001; Treas. Reg. § 1.501(c)(7)-1; Rev. Proc. 71-17; Rev. Rul. 58-589; Rev. Rul. 69-219

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TEGE EO Examinations Mail Stop 4920 DAL
1100 Commerce St.
Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: February 28, 2018

Number: 201829021

Release Date: 7/20/2018
Tax Year Ending:

Taxpayer Identification Number:
Person to Contact:
Employee Identification Number:

Employee Telephone Number:

UIL: 501.03-00
CERTIFIED MAIL — RETURN RECEIPT
Dear

This is a final determination that you do not qualify for exemption from Federal income tax under
Internal Revenue Code (the “Code”) section 501(a) as an organization described in Code section
501(c)(7) effective October 1, 20XX. Your determination letter dated April 12, 19XX is revoked.

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

Nonmember income received by you exceeded 15% of your total gross receipts and non-exempt
function income exceeded 35%. Further, you advertise the use of your facilities to the general
public reflecting evidence that that you are engaged in a business and your activities are not
substantially all for pleasure and recreation for your members.

Organizations that are not exempt under section 501 generally are required to file federal income
tax returns and pay tax, where applicable. For further instructions, forms, and information, please

visit www.irs.gov.

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: 1) United States
Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for
the District of Columbia. A petition or complaint in one of these three courts must be filed within
90 days from the date this determination letter was mailed to you. Please contact the clerk of the

appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment
by referring to the enclosed Publication 892. You may write to the courts at the following
addresses:

United States Tax Court
400 Second Street, N.W.
Washington, D.C. 20217

U.S. Court of Federal Claims
717 Madison Place, N.W.
Washington, D.C. 20439

U.S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, D.C. 20001

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

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
www.taxpayeradvocate.irs.gov or call 1-877-777-4778.

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

Sincerely,

Maria Hooke
Director, EO Examinations

Enclosure:
Publication 892

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

Date: May 25, 2017
Taxpayer Identification Number:
Form:
Tax Year(s) Ended:
Person to Contact / ID Number:
Employee ID:
Contact numbers:
Telephone:
Fax:
Manager’s Name / ID Number:
Employee ID:
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

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

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,

Maria Hooke
Director, EO Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

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

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
9/30/20XX
ISSUE:
Whether the will continue to qualify as an exempt social club under IRC

section 501(c)(7)?
FACTS:

(the “Club”) was granted exemption as a social club exempt from federal
income tax under IRC section 501(c)(7) pursuant to a ruling issued on April 12, 19XX.
According to the Club's Articles of Organization, the Club's purpose is exclusively for pleasure,
recreation, and other non-profit purposes within the meaning of IRC Section 501(c)(7), as from
time to time amended, including the fostering, encouraging and engaging in athletic activities.
The Club’s current principal activity is to provide golf facilities and services for the pleasure and
recreation of its members, their guests and the public. The Club operates a golf course and a
clubhouse that includes a pub and locker facilities with a large parking lot on the grounds. The
Club operates seasonally from the first week in April until mid-November. Per the Club's Form
1024, Application for Recognition of Exemption under 501(a), "golf carts both pull and
mechanized are provided. The club also fosters an emphasis on junior golf with several
neighboring schools ( etc.). Several social events (i.e. dances) held during the year
further enhance the social climate of the club. An on-site kitchen provides for light snacks and
meals for all members.”

The Club advertises on its website that it is a hole semi-private club. During the operating
season, the Club is open to the public on weekdays. On weekends and holidays, non-members
must play with a member, as their guest. The Club's signpost, located at the main entrance,
states that the public is welcome to play Monday through Friday. The Club's web site advertises
that the course is open to the public Monday through Friday and lists the greens fees for golf
and carts. Tee times are available by calling the Pro Shop and online booking. The web site
indicates that gift certificates, discount golf cards, monthly drawing and other special offers are
available by phone or on-line. The discount golf cards include five rounds of golf at a 0%
savings. Another option for non-members is a Fairway Freedom Pass available for $0 and used
for greens fees for the cardholder and guest. The Fairway Freedom Pass application states that
purchasers must be non-members for at least one season to be eligible for the pass.

The Club's filing requirements include Form 990-T, Exempt Organization Business Income Tax
Return, which is due by the 0 day of the 0 month after the end of its tax year. For tax year
ending 9/30/20XX, the due date was 2/15/XX The Club requested an automatic six-month
extension of time to file the Form 990-T by 8/15/XX. However, the Club did not file the Form
990-T by the extended due date and did not file it until the examiner requested the delinquent
return which was received on 2/21/20XX.

On Form 990-T for its tax year ending 9/30/20XX, the Club incorrectly reported its entire
Unrelated Trade or Business Income in Part I on Line 6, Rent Income, including income from
the non-member use of the facilities. The Form 990-T Instructions state that a IRC section
501(c)(7) social club reports its restaurant and bar receipts from nonmembers on line 1, gross
receipts or sales. The 990-T instructions for Schedule C, Rent Income, state that IRC section
501(c)(7), (9), and (17) organizations, enter gross rents in Part I, line 6, and applicable

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

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
9/30/20XX

expenses in Part Il, lines 14 through 28 and all rents except those that are exempt function
income must be included. The Club's Form 990, Part VIII, Statement of Revenue, also included
incorrectly its non-member income on Line 6a, Gross Rents. Inspection of the previous and
subsequent fiscal year Forms 990-T revealed that the Club reported nonmember income
incorrectly as Rent Income on those Forms also.

During the examination, it was determined that the Club did not comply with the record- keeping
requirements of Revenue Procedure 71-17, 1971-1 C.B. 683 which sets forth guidelines for
determining the effect of gross receipts derived from use of a social club's facilities by the
general public have on the club's exemption under IRC section 501(c)(7) and recordkeeping
requirements. In order to determine the income received from outside its membership, the
examiner requested a breakdown of the 990-T Unrelated Business Income. Exhibit A attached.

The examiner used the financial system's reports including the profit and loss statements to
reconcile Forms 990 and 990-T and to determine the income received from outside its
membership. The examination revealed that the two additional accounts, Handicap Fees - Non
Members and Tee Signs are Non Member income and increases the Non Member gross
receipts by $0. Exhibit B attached.

Based on examination of the Club’s Form 990 returns for the period ending September 30,
20XX and review of their books and records, the percentage of gross receipts from nonmember
use of facilities exceeded 15% and the percentage of gross receipts from sources outside its
membership, including investment income, exceeded 35% of total gross receipts. The following
chart illustrates the percentage of gross receipts from non-member and investment income:

[illegible]

This analysis indicates that the Club has been consistently using income from nonmembers to
support the activities of its members.

LAW:

IRC Section 501(a) states that an organization described in subsection (c) or (d) shall be
exempt from taxation under this subtitle unless such exemption is denied under IRC Section
502 concerning feeder organizations or IRC Section 503 concerning organization engaged in

prohibited transactions.

Organizations exempt from federal taxes as described in IRC Section 501(c)(7) include 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.

Treas. Reg. 1.501(c)(7)-1, relating to the requirements of exemption of such clubs under IRC
section 501(a), reads in part as follows:

Form 886-A (Rev.4-68)

Department of the Treasury - Internal Revenue Service

Page: -2-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
9/30/20XX

(a) The exemption provided by section 501(a) for organizations described in section
501(c)(7) 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
its net earnings inures to the benefit of any private shareholder. In general, this
exemption extends to social and recreation clubs that 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 using club
facilities or in connection with club activities.

(b) 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). 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.

Prior to its amendment in 1976, IRC Section 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 a section 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 further state:

(a) 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 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. These percentages supersede
those provided in Revenue Ruling 71-17, 1971-1 C.B. 683.

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

(c) In addition, the Committee Reports state 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.

(d) The Senate report also indicates that even though gross receipts from the public exceed
this standard, it does not necessarily establish that there is a nonexempt purpose. A
conclusion that there is a nonexempt purpose will be based on all the facts and
circumstances including, but not limited to, the gross receipts factor. If a club exceeds
the 15/35% test, then it will maintain its exempt status only if it can show through facts
and circumstances that “substantially all” of its activities are for “pleasure, recreation and
other nonprofitable purposes.”

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -3-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
9/30/20XX

IRC Section 6001 states "Every person liable for any tax imposed by this title, or for the
collection thereof, shall keep such records, render such statements, make such returns, and
comply with such rules and regulations as the Secretary may from time to time prescribe.
Whenever in the judgment of the Secretary it is necessary, he may require any person, by
notice served upon such person or by regulations, to make such returns, render such
statements, or keep such records, as the Secretary deems sufficient to show whether or not
such person is liable for tax under this title."

Revenue Ruling 58-589, 1958-2 C.B. 266, sets forth the criteria for exemption under IRC
section 501(c)(7), and provides that a club must have an established membership of
individuals, personal contacts, and fellowship. It also provides that, while the regulations
indicate that a club may lose its exemption if it makes its facilities available to the public, this
does not mean that any dealings with nonmembers will automatically cause a club to lose its
exemption. This is particularly true where the receipts from nonmembers are not more than
enough to pay their share of the expense. Where, however, a club makes its facilities open to
the general public and the purpose is to increase its fund for enlarging its club facilities or for
otherwise benefiting its members, it evident that it is not operating as an exempt social club
within the meaning of IRC section 501(c)(7). It is equally clear that the solicitation by
advertisements or otherwise of public patronage of its facilities may be adverse to its exempt
status.

Revenue Ruling 66-149, 1966-1 C.B. 146, provides that a social club is not exempt from federal
income tax as an organization described in IRC section 501(c)(7) if it regularly derives a
substantial part of its income from non-member sources. If the income from non-member
sources is not incidental, trivial or non-recurrent, then the intent is to produce income and is
reflective of a purpose inconsistent with exempt under IRC section 501(c)(7).

Revenue Ruling 68-119, 1968-1 C.B. 268, provides that a club will not necessarily lose its
exemption if it derives income from transactions with other than bona fide members and their
guests, or if the general public on occasion is permitted to participate in its affairs, provided
such participation is incidental to and in furtherance of its general club purposes and the income
therefrom does not inure to members.

Revenue Ruling 69-219, 1969-1 C.B. 153, concerns a club organized for social and recreational
purposes. Its principal function is to operate a golf course for its members, who pay annual
dues. However, the club regularly holds the golf course open to the public to use upon the
payment of an established green fee. Green fees from the public have constituted a significant
portion of the club's total receipts from all sources for each of the past five years. The Club
used the income from this source to help defray the expense of maintaining and improving the
golf course. Based on the facts presented, this golf club does not qualify for exemption under
IRC section 501(c)(7) because it is engaged in business with the general public by regularly
holding its golf course open to the public for use upon payment of established green fees, and
the income from this source is inuring to the benefit of the members because it is used for
maintenance and the improvement of club facilities.

Revenue Procedure 71-17, 1971-1 C.B. 683, sets forth guidelines for determining the effect of
gross receipts derived from use of a social club's facilities by the general public have on the
club's exemption under IRC section 501(c)(7) and recordkeeping requirements. The term

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

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
9/30/20XX

"general public" as used in this procedure means persons other than members of a club, their
dependents or guests. Failure to maintain such records or make them available to the Service
for examination will preclude use of the minimum gross receipts standard and audit
assumptions set forth in this Revenue Procedure. When a club makes its facilities available to
the public to a substantial degree, then the club's activities are not substantially for pleasure,
recreation and other nonprofitable purposes and operating in this manner jeopardizes the
organization's exempt status.

In Pittsburgh Press Club v. U.S., 536 F.2d 572 (3d.Cir. 1976), other facts and circumstances
noted by the court to consider in addition to the level of nonmember income include the
purposes for which the club's facilities were made available to nonmember groups, the
frequency of use of the club facilities by nonmembers, and the amount of net profits derived
from the nonmember income.

TAXPAYER'S POSITION:

The taxpayer's position is not Known at this time.

GOVERNMENT'S POSITION:

IRC Section 501(c)(7) exempts from taxation clubs organized for pleasure, recreation, and
other nonprofit purposes, substantially all of the activities of which are for such purposes and no
part of the net earning of which inures to the benefit of a private shareholder. The Club allows
regular non-member use of their facilities. The Club uses the income derived from non-
members to operate and maintain the facility. Since the Club is not supported solely by the
membership dues, fees, and assessments, the non-member income inures to the benefit of the
members which is prohibited under IRC section 501(c)(7).

Treas. Reg. 1.501(c)(7)-1(b) states: 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
nonprofit purposes, and is not exempt under IRC section 501(a). The Club regularly allows
non-members unrestricted use of the facilities. Non-members may golf, rent carts, purchase
liquor and/or food from the kitchen and adjacent bar and enjoy full use of the club throughout
the operating season.

Revenue Ruling 58-589, 1958-2 C.B. 266 states that it is equally clear that the solicitation by
advertisements or otherwise of public patronage of its facilities may be adverse to a social
club's exempt status. The Club's web site advertises that the course is open to the public
Monday through Friday and lists the greens fees for golf and carts. The web site indicates that
gift certificates, discount golf cards, monthly drawing and other special offers are available by
phone or on-line which encourages use of the facility by non-members.

An organization exempt from federal income taxes as described in IRC section 501(c)(7) must
meet the gross receipts test in order to maintain its exemption. In order to meet the gross
receipts test, an organization can receive up to thirty-five percent (35%) of its gross receipts,
including investment income, from sources outside its membership without losing its tax-exempt

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -5-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
9/30/20XX

status. Within this 35% amount, the use of a social club’s facilities or services by non-members
cannot be more than fifteen percent (15%) of the social club's gross receipts. Public Law 94-
568, and the related Senate Report No. 94-1318, 2d Session, 1976-2 C.B. 597, states that the
exemption of a social club exempt under IRC section 501(c)(7) is jeopardized if they receive
over 15 percent of their gross income from non-member use of facilities or services. The Club
has exceeded the 15% gross receipts standard for nonmember income. Nonmembers use the
Club's facilities throughout its operating season and the Club advertises frequently to
encourage public use of its facilities. The facts of the case show that the Club is operating in a
manner consistent with a for-profit business. In addition, the Club did not exceed the 15%
threshold because of a single or unusual event.

As noted in Pittsburgh Press Club v. U.S., 536 F.2d 572 (3d.Cir. 1976), relevant facts and
circumstances to consider in determining whether revenues generated from nonmembers are
so high as to preclude exemption under § 501(c)(7) include the frequency of use of the club
facilities by nonmembers and the purposes of such use and the amount and existence of net
profits earned from such use. For the Club, the facts and circumstances indicate that
nonmembers use the golf course and other facilities on a regular basis with few restrictions and
for the same purposes as members. The Club encourages nonmember use through its
advertisements, discounts and special pricing. Inspection of the previous and subsequent fiscal
year Forms 990-T revealed that the Club's nonmember income has produced consistent profits.

Based on the large percentage of nonmember income, (0% as noted in the above table),
which exceeds the 15% limitation, and the large percentage of non-exempt function income,
(0% as noted in the above table) which exceeds the 35% limitation, plus the fact that the
Club's facilities are regularly available to the public, it is the Government's position that the
Club is no longer operated exclusively for the pleasure and recreation of its members and is
not exempt under IRC section 501(c)(7).

CONCLUSION:

tax exempt status under IRC Section 501(c)(7) should be revoked because
nonmember income received by the Club exceeded 15% of the Club’s total gross receipts and
non-exempt function income exceeded 35%. Further, the Club advertises the use of its
facilities to the general public reflecting evidence that the Club is engaged in a business and its
activities are not “substantially all for pleasure, recreation or social purposes.”
no longer meets the requirements to qualify as exempt from federal income tax under IRC
section 501(a) as described in IRC section 501(c)(7). Therefore, its exempt status under IRC
section 501(c)(7) will be revoked effective October 1, 20XX. As a taxable entity, the Club is
required to file Form 1120, U.S. Corporation Income Tax Return for the periods open under
statute, whether or not it has taxable income. Under IRC section 6501(g), these periods include
the years ending September 30, 20XX and subsequent tax years. Additionally, the provisions of
IRC section 277 concerning membership organizations that are not exempt organizations apply
to the Club's tax reporting on Form 1120.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -6-