IRS denies 501(c)(7) social club status to a football officials' association that mostly collects officiating fees

Plain-English summary

A group of trained football officials organized so that school districts could
hire them to officiate scholastic games; the district pays fees to the group,
which passes them on to the member-official. The group applied to be recognized
as a tax-exempt social club under Code Section 501(c)(7). The IRS denied it. To
qualify as a 501(c)(7) club, an organization must be organized and operated
mainly for the pleasure and recreation of its members, with real social
commingling and fellowship, and it can take in only limited income from outside
its membership (generally no more than 35% of gross receipts, with a tighter 15%
sub-limit for public use of club facilities). This group failed on both counts:
almost all its money came from schools paying officiating fees, not from members,
which blows past the non-member income limits, and it had no genuine social
activities beyond required training. The IRS concluded the group operates as a
clearinghouse to get its members paid officiating work, a business and personal
service purpose, not a social club, so it must file regular corporate income tax
returns.

Ruling snapshot

• Question: Does the football officials' association qualify for tax exemption as a social club under IRC § 501(c)(7)?
• Outcome: Denied (final adverse determination)
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7)-1(a), (b); Pub. L. 94-568 (1976-2 C.B. 596); Rev. Rul. 58-589; Rev. Rul. 69-527; Rev. Rul. 69-635

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Appeals Office
LTRS 2525 Capitol Street, MS 201
Fresno, CA 93721

Date: August 7, 2018

Person to contact:
Name:
Employee ID number:
Telephone:
Fax:

Number: 201845030
Release Date: 11/9/2018
Employer ID number:

Uniform issue list (UIL):
501.07-00
501.07-05
501.07-06

Certified Mail

Dear

This is a final adverse 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 Section 501(c)(7)
of the Code.

We made the adverse determination for the following reasons:

You exceed the allowable levels of non-member income and are not organized and operated exclusively for the
pleasure and recreation of your members.

You're required to file federal income tax returns on Forms 1120, U.S. Corporation Income Tax Return. Mail
your form to the appropriate Internal Revenue Service Center per the form's instructions. You can get forms and
instructions by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676).

We'll make this letter and the proposed adverse determination letter available for public inspection under
Section 6110 of the Code after deleting certain identifying information. We provided to you, in a separate
mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the documents attached
that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in
Notice 437.

If you decide to contest this determination, you can file an action for declaratory judgment under the provisions
of Section 7428 of the Code in either:

• The United States Tax Court,
• The United States Court of Federal Claims, or
• The United States District Court for the District of Columbia

Letter 1371 (Rev. 12-2017)
Catalog Number 40683R

You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this
determination letter to you. Contact the clerk of the appropriate court for rules and the appropriate forms for
filing petitions for declaratory judgment. You can write to the courts at the following addresses:

United States Tax Court US Court of Federal Claims US District Court for the District of Columbia
400 Second Street, NW 717 Madison Place, NW 333 Constitution Avenue, NW
Washington, DC 20217 Washington, DC 20005 Washington, DC 20001

Note: We will not delay processing income tax returns and assessing any taxes due even if you file a petition for
declaratory judgment under Section 7428 of the Code.

Please refer to the enclosed Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status, for
more information about the Appeals process.

You also have the right to contact the Taxpayer Advocate Service (TAS). 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 877-777-4778.

TAS assistance is not a substitute for established IRS procedures, such as the formal appeals process. TAS
cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a
petition in a United States Court.

If you have questions, contact the person at the top of this letter.

Sincerely,

Appeals Team Manager

Enclosures:
Publication 892

Letter 1371 (Rev. 12-2017)
Catalog Number 40683R

Department of the Treasury
Internal Revenue Service
IRS P.O. Box 2508
Cincinnati, OH 45201

Date: November 9, 2017
Employer ID number:
Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:
X = date 501.07-00
Y = state 501.07-05
501.07-06

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 became an unincorporated association on X in the state of Y. Your 1024 application states your purpose is
to serve as a group of trained officials public school districts can contact to receive officiating services for
selected scholastic football contests in southeastern Y. Your members are then assigned to officiate those games
by your volunteer officers. The school district pays fees to you, which you then pay to the member-official.

Your Bylaws state your purpose is to provide a professional, contracted service for officiating football contests
in Y and neighboring states. Members will place an emphasis on the following areas:

• Enhancing the ethical standards of officiating football at all levels of play

• Guiding and enhancing sportsmanship on and off the field of play by all participants

• Conveying a greater understanding of the profession of officiating football among the players, coaches,
  the general public, and our fellow officials

• Promoting personal and organizational growth through on-going training and mentoring of the Z's
  membership

Your Bylaws also spell out membership obligations, indicating membership is open to all dues paying officials
registered in good standing with the Y officials association. Members must attend and participate at least %
of your training meetings and show up for game assignments. Training meetings occur at least times
annually prior to and times during the current football season.

Your financial data indicates most funds you receive are from officiating fees — receipts represent payments for
scholastic football officiating services performed.

Law

Section 501(c)(7) of the Code provides for the exemption from federal income tax of 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 the exemption provided by Section 501(c)(7) of the Code
applies only to clubs which are organized and operated exclusively for pleasure, recreation, and other non-
profitable purposes, but does not apply to any club if any part of its net earnings inures 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.

Treasury Regulation Section 1.501(c)(7)-1(b) states, in part, that a club which engages in business is not
organized and operated exclusively for pleasure, recreation and other nonprofitable purposes, and is not exempt
under section 501(a) of the Code.

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.

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. 69-527, 1969-2 C.B. 125, A social club formed to assist its members in their business endeavors
through study and discussion of problems and other activities at weekly luncheon meetings did not qualify for
exemption under section 501(c)(7) of the Code.

Rev. Rul. 69-635, 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.

Application of law

You are not described in Section 501(c)(7) of the Code nor Treas. Reg. Sections 1.501(c)(7)-1(a) and
1.501(c)(7)-1(b). A club that is not organized and operated exclusively for pleasure, recreation, and other non-
profitable purposes, but rather engages in business, does not qualify under Section 501(c)(7). You do not have
organized social activities but instead act as a clearinghouse for officials to secure work for local schools.

Social clubs exempt under Section 501(c)(7) of the Code have limitations on the amount of non-member
income they may receive. Nearly all your revenue is from schools paying fees for officiating services, rather

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

than from your member-officials. This more than exceeds the 35% limitation from sources outside your
membership and the 15% limitation for nonmember use of a social club's facilities or services indicated in
Public Law 94-568. This also disqualifies you from exemption under Section 501(c)(7).

Per Revenue Ruling 58-589, there must be an established membership of individuals, personal contacts, and
fellowship including a commingling of members within a social club to receive exemption. While you have an
established membership, you have not indicated any form of social commingling or fellowship among
members. The only gathering is required training, and members are not required to attend each training session.
This does not suffice as regular recreational comingling or fellowship among members.

Per Revenue Rulings 69-527 and 69-635 a club formed to assist its members in their business endeavors or
whose principal activity is rendering services to its members but has no significant social activities did not
qualify for exemption under section 501(c)(7) of the Code. Both organizations were essentially providing
services to members rather than engaging in social activities and the comingling of members. Your sole activity
is assisting local officials in gaining employment in coordinating games for them to officiate and receiving fees
for those services. Your activities serve to facilitate the personal interests of each member instead of social and
recreational club activities.

Conclusion

You do not qualify for exemption under Section 501(c)(7) of the Code. You exceed the allowable levels of non-
member income and are not organized and operated exclusively for the pleasure and recreation of your
members. Accordingly, you cannot be granted exemption under Section 501(c)(7).

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

• 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.

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

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.

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.

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

Enclosure:
Publication 892

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

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