Social club loses 501(c)(7) exemption for renting its hall to the public past the 15% limit

Plain-English summary

A social club exempt under section 501(c)(7), a heritage/fellowship club that owned an event hall, lost its exemption because too much of its money came from renting that hall to the general public. Section 501(c)(7) covers clubs organized and operated for pleasure, recreation, and similar nonprofit purposes, supported mainly by member dues, and Public Law 94-568 lets such a club take up to 35% of gross receipts from outside its membership, but no more than 15% from public use of the club's facilities or services. The examination found the club advertised its venue for rent seven days a week and, on a recurring basis over several years, drew more than the 15% ceiling of its gross receipts from nonmember rentals. Under the regulations and cases the IRS cited (such as Spokane Motorcycle Club and Aviation Club of Utah), soliciting public patronage of club facilities is evidence the club is running a business rather than operating exclusively for member recreation. Because the club exceeded the nonmember threshold repeatedly, the IRS revoked its exemption effective January 1 of the first year in issue, and the club must file Form 1120 corporate returns going forward. The document bundles the final revocation letter, the proposed-revocation letter (Letter 3618), and the Form 886-A examination report.

Ruling snapshot

• Question: Should a section 501(c)(7) social club's exemption be revoked where it repeatedly received more than 15% of its gross receipts from public rentals of its facility?
• Outcome: revocation (exemption revoked effective January 1 of the year in issue; Form 1120 required going forward)
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7)-1; Public Law 94-568; Spokane Motorcycle Club v. United States, 222 F. Supp. 151; Aviation Club of Utah v. Commissioner, 162 F.2d 984; Rev. Ruls. 65-63, 68-119, 66-149, 60-324

Full text (IRS public release)

Scanned document; transcription proofread from IRS OCR. A few obvious scan misreads were corrected (for example, "arc" restored to "are" and "set-vices" to "services"); wording is otherwise verbatim, including the Form 886-A page furniture, and redacted identifiers and figures appear as the IRS released them.

DEPARTMENT OF THE TREASURY

Internal Revenue Service
TE/GE EO Examinations
1100 Commerce Street, MC 4920 DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: Jan 03 2018

Number: 201911007 .
Release Date: 3/15/2019 Person to Contact:

Identification Number:
Contact Telephone Number:

UIL: 501.03-00
EIN:

CERTIFIED MAIL - Return Receipt Requested

Dear

This is a final revocation letter as to your exempt status under §501(c)(7) of the Internal Revenue
Code. The Internal Revenue Service's recognition of your organization as an organization
described in IRC §501(c) (7) is hereby revoked effective January 1, 20XX.

We have made this determination for the following reason(s):

IRC §501(c)(7) and Treas. Reg. §1.501(c)(7) exempts from income tax, clubs organized for
pleasure, recreation, and other nonprofitable purposes, where substantially all activities are
for such purposes and no part of the net earnings inure to the benefit of any private
shareholder.

Public Law 94-568 provides that social clubs are permitted to receive up to 35% of their gross
receipts from sources outside of their membership without losing their tax-exempt status, and that
within that 35%, not more than 15% of gross receipts should be derived from the use of a social
club's facilities or services by members of the public. Your organization has exceeded the fifteen
percent (15%) non-member threshold as outlined in Public Law 94-568, on a recurring basis.

As such, you failed to meet the requirements of IRC §501(c)(7) and Treas. Reg. §1.501(c)(7)
and you do not qualify for exemption.

You are required to file Federal income tax returns on Form 1120. These returns should be
filed with the appropriate Service Center for the year ending December 31, 20XX, and for all
years thereafter.

Processing of income tax returns and assessment of any taxes due will not be delayed should a
petition for declaratory judgment be filed under section 7428 of the Internal Revenue Code.

-2-

If you decide to contest this determination in court, you must initiate a suit for declaratory
judgment in the United States Tax Court, the United States Claim Court or the District Court
of the United States for the District of Columbia before the 91st day after the date this
determination was mailed to you. Contact the clerk of the appropriate court for the rules for
initiating suits for declaratory judgment. 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

You may call the IRS telephone number listed in your local directory. An IRS employee
there may be able to help you, but the contact person at the address shown on this letter is
most familiar with your case. You may also call the Internal Revenue Service Taxpayer
Advocate. The Taxpayer Advocate Service (TAS) is an independent organization within the
IRS that can help protect your taxpayer rights. We 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 our assistance, which is always free, we 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,

Unjeua Qeokte

Enclosures: Maria Hooke
Publication 892 Director, EO Examinations

Date:
May 15, 2017

I nal Revenue Servi eg
nternal Revenue Service Taxpayer Identification Number:

Tax Exempt and Government Entities
IRS Exempt Organizations Examinations

co) Department of the Treasury

Form:
Tax Year(s) Ended:
Person to Contact / ID Number:

Employee ID:
Contact numbers:
Telephone:
Fax:
Manager’s Name / 1D 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 Exempt Organization
Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

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

Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Years/Period ended
20XX

ISSUE:

Whether continues to qualify for exemption under Internal Revenue

code (IRC) §501(c)(7)?

FACTS:

was granted tax-exemption under IRC §501(c)(7) in October, 19XX. Per the
organization’s Articles of Incorporation, signed with the Secretary of State for the State of
on December 4, 19XX, the organization was formed to foster and promote benevolent,
charitable and educational projects. Form 990-E, Short Form Return of Organization Exempt
From Income Tax, states that the organization’s primary exempt purpose is to promote good
fellowship among members composed of descendants of the Republic of

is mentioned on two (2) websites: www. .net and
www. .com which states that the organization’s purpose is to preserve the
heritage of the people; and, to
. Exh 2.2, 8.1

A brief history is also provided on the websites:

This organization has provided over 0 years of service and contribution to the to
community. The organization was chartered and incorporated under the laws of the

state of on December 4, 19XX as the of ' — also
known as
Our purpose has and always will be to preserve the heritage of the people.
We will

The members of met once a month to discuss business matters. The

minutes showed that they hosted a social hour before meetings and served cocktails and
snacks. (Exh 11.1) The members got together several times throughout the year to socialize
with the following activities: dinners and potlucks, Cards Day, Christmas Party, Memorial Mass,
Casino Party, and an Annual Game Day with a continental breakfast.

The Board discussed the number of club rentals scheduled and how to increase rentals by
attracting businesses. (Exh 11.1, 11.4, 11.5, 11.10 & 11.13)

The property records show that own the property
located at , ; . (Exh 10.1) The facility is advertised (Exh 1.4,
7.1) as an event and party venue on the website .com:

Form 886-A (Rev.01-94) Page 1 Department of the Treasury - Internal Revenue Service

Schedule number or exhibit

Form 886-A

Name of taxpayer Tax Identification Number Years/Period ended

20XX

DESCRIPTION OF LOCATION AND SERVICES PROVIDED FROM VENUE
REMOVED.

The website stated that the club was available for rent seven (7) days a week (Exh 5.1, 9.1)
including holidays:

CLUB RENTAL FEES
HOLIDAYS: $0

Form 886-A (Rev.01-94) Page 2 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 Years/Period ended

20XX

FRIDAY OR SATURDAY: $0 SUNDAY - THURSDAY: $0
LONG TERM RENTALS:

$0 - $0

A SECURITY DEPOSIT IS REQUIRED ON ALL RENTALS.
MAKE YOUR RESERVATION EARLY!

ALL RATES ARE SUBJECT TO CHANGE

In addition to the websites, the organization has pages on Facebook and Business Facebook.
The examiner was unable to view the organization’s Facebook; therefore, she was unable to
determine if it highlighted any social events. The January 20, 20XX minutes mentioned that
the Club was the first entry when searching for venues.

The organization’s 20XX Form 990-EZ, Short Form Return of Organization Exempt From
Income Tax, was received August 1, 20XX. They reported the following sources of
income:

Income 20XX

Contributions 0
Dues 0
Rental Income 0)
Gross Receipts 0

The organization’s 20XX Form 990-T, Exempt Organization Business Income Tax Return,
was received August 19, 20XX. It listed the rental income, $0, as its source of unrelated
business income. The rental income (unrelated business income) showed that zero percent
(0%) of the organization’s gross receipts came from nonmember use of their facility.

LAW:

§501(c)(7) of the Internal Revenue Code exempts from 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.

§1.501(c)(7)-1(a) of the Federal Tax Regulations states that 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 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. 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.

Form 886-A (Rev.01-94) Page 3 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 Years/Period ended

20XX

§1.501(c)(7)-1(b) of the Federal Tax Regulations 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).
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.

Public Law 94-568 provides that social clubs are permitted to receive up to 35% of their gross
receipts from sources outside of their membership without losing their tax-exempt status, and
that within that 35%, not more than 15% of gross receipts should be derived from the use of a
social club’s facilities or services by the general public.

In Spokane Motorcycle Club v. United States, 222 F.Supp. 151, the court ruled that
refreshments, goods, and services furnished to members of a charitable, nonprofit corporation
from business enterprise net profits constituted benefits inuring to individual members, and,
therefore, corporation was not exempt from federal income tax. Judge Powell further stated,
“But it is clear that when a club, otherwise exempt, engages in a business from which it derives
profits from outside sources wholly disproportionate to its nontaxable purposes, and such profits
inure to the benefit of its members in the nature of permanent improvements and facilities, it
loses its exempt status under the definitive provisions of the statute. It should be noted that to
be exempt from taxation, the club must not only be organized exclusively for pleasure,
recreation and other nonprofitable purposes, but it must be operated exclusively for those
purposes as well.”

In Aviation Club of Utah v. Commissioner of Internal Revenue, 162 F.2d 984, the court upheld
the position taken by the tax court in a previous ruling whereby the income received by the club
from non-exempt activities was so disproportionate to the income received from exempt
purposes that the club lost its exempt status. Judge Murrah invoked the same concept as that
in Spokane Motorcycle Club v. United States, whereby if a club engages in a business from
which it derives profits from outside sources wholly disproportionate to nontaxable purposes,
and such profits inure to the benefit of its members in the nature of permanent improvements
and facilities, the club loses its exempt status.

In Revenue Ruling 65-63, 1965-1 CB 240 an organization conducts various sports car events
for the pleasure and recreation of its members and their guests. The events end up attracting
the general public. The general public is admitted on a recurring basis upon payment of an
admission fee. Public patronage is solicited by advertising. The Service ruled that public
patronage or participation in club activities is permissible if incidental to and in furtherance of the
club purposes, and if the net income therefrom does not inure to its members. Here however,
the activities of the club, in permitting public patronage of its facilities, are of such a magnitude
and recurrence as to constitute engaging in business and the club uses the income derived
therefrom to acquire additional assets and to pay club expenses normally borne by its members.
It was thus held that the organization in the instant case does not qualify for exemption under
§501(c)(7) of the Internal Revenue Code.

Form 886-A (Rev.01-94) Page 4 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 Years/Period ended

20XX

In Revenue Ruling 68-119, 1968-1 C.B. 268 an equestrian social club that holds an annual one-
day steeplechase meet which is open to the general public is found to be tax-exempt under IRC
501(c)(7). In this case, the club is said to derive a small amount of income from nonmembers in
excess of expenses attributable to their participation and attendance. If any profit results, it is
turned over to charity. Other club activities are supported by member dues. Therefore, the
ruling holds, the income from non-members does not inure to the club’s members.

In T.C. Memo 1962-18, Clements Buckaroos vs. Commissioner of Internal Revenue, the
organization has managed and promoted an annual one-day public event in the nature of a
rodeo. All of the entry fees of the contestants with other funds of the organization are used for
the payment of prize money for participants in the various events. There is no profit to the
organization from such fees. In ruling that the organization is exempt from income tax, the
judge specified that “traffic with outsiders was purely incidental”. The judge also added that “It
would, of course, be possible for the rodeo activities to become so preponderant that they could
no longer be viewed as merely incidental”.

In Augusta Golf Association, Inc. vs. United States, 338 F.Supp. 272, the court ruled, among
other things, that the Association was exempt from federal income tax as a social club, despite
practically all of the Association’s income having been derived from “Calcutta” pools participated
in by non-members. In the instant case, the social affairs at which the Calcuttas were featured
were open only to members and their invited guests. The Association took a cut of 10% of the
gross amount raised in these pools.

TAXPAYER’S POSITION:
Taxpayer's position has not been provided.
GOVERNMENT’S POSITION:

Based on the examination, , Inc. does not qualify for exemption as a social
club as described in IRC §501(c)(7) and Treas. Reg. §1.501(c)(7) which extends exemptions to
social and recreation clubs which are supported solely by membership fees, dues, and
assessments. The organization has exceeded the fifteen percent (15%) non-member threshold
as outlined in Public Law 94-568, on a recurring basis during tax years ending December 31,
20XX through December 31, 20XX as shown below:

Income 20XX 20XX 20XX 20XX 20XX
Contributions 0 0 0 0 0
Dues 0 0 0 0 0
Rental Income 0 0 0 0 0
Gross Receipts 0 0 0 0 0
% Non-member use 0% 0% 0% 0% 0%

Form 886-A (Rev.01-94) Page 5 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 Years/Period ended

20XX

Rev. Rulings 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 as described in 501(c)(7).

CONCLUSION:

Based on the above facts and circumstances, and in light of the statutory law and rulings cited,
does not qualify for tax-exemption under IRC §501(c)(7) and should be
revoked. The proposed date of the revocation is January 1, 20XX.

Form 1120, U.S. Corporation Income Tax Return should be filed for 20XX and thereafter as
long as the organization continues to be subject to income tax.

Form 886-A (Rev.01-94) Page 6 Department of the Treasury - Internal Revenue Service