Rural golf club loses 501(c)(7) exemption because most of its money came from the public

Plain-English summary

A social club exempt under section 501(c)(7), a small rural nine-hole golf club with a bar, restaurant, and gaming (pull-tab) operation, lost its exemption because it took in too much money from nonmembers. Section 501(c)(7) covers clubs operated for pleasure and recreation and supported mainly by member dues; under Public Law 94-568, such a club may draw up to 35% of gross receipts from outside its membership and, within that, no more than 15% from public use of its facilities. The examination found the club advertised itself to the public, used honor-system self-registration open to anyone, sold pull-tabs at multiple outside locations, and rented its hall to the community, and that for three consecutive years it exceeded both the 15% facilities limit and the 35% overall nonmember limit. The club also failed to keep the records required by Revenue Procedure 71-17 to track member versus nonmember use. The IRS concluded the club could not survive on member income alone and was effectively supported by the public, which meant it was operating a business and its net earnings inured to members through the upkeep of the facilities. Exemption was revoked retroactively to April 1 of the first year examined, and the club must file Form 1120 (with the member/nonmember expense limits of section 277) going forward. The document bundles the final adverse determination letter and the Form 886-A examination report.

Ruling snapshot

• Question: Should a section 501(c)(7) golf/social club's exemption be revoked (and retroactively) where it exceeded the 15% and 35% nonmember-income limits for three straight years and failed to keep Rev. Proc. 71-17 records?
• Outcome: revocation (retroactive to April 1 of the first year examined; Form 1120 required, subject to § 277 member/nonmember expense rules)
• Key authorities: IRC §§ 501(c)(7), 277; Treas. Reg. § 1.501(c)(7)-1; Public Law 94-568 (Senate Report No. 94-1318); Rev. Proc. 71-17

Full text (IRS public release)

Scanned document; transcription proofread from IRS OCR. Obvious scan misreads were corrected (for example, "declaratoly" restored to "declaratory" and "evelything" to "everything"); wording is otherwise verbatim, including the Form 886-A page furniture, and redacted identifiers and figures (0, $0, 0%, 20XX) 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 Date: DEC 07 2017
DIVISION

Person to Contact:

Number: 201911009

Release Date: 3/15/2019 Identification Number:
Contact Telephone Number:

In Reply Refer to:
EIN:

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT:

UIL: 501.03-00

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 (IRC). Your exemption from Federal income
tax under IRC section 501(c)(7) is hereby revoked effective April 1, 20XX.

Our adverse determination was made for the following reasons:

You have not established that you are operated substantially for pleasure
and recreation of its members or other non-profitable purposes and no part
of the earnings inures to the benefit of private shareholder within the
meaning of IRC section 501(c)(7).

You have made your services, use of recreational and social facilities
available to the public. You have exceeded the non-member income test
for tax year ending March 31, 20XX.

You failed to comply with the record keeping requirements of Revenue
Procedure 71-17.

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 March 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 IRC section 7428.

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.

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,

Maria Hooke
Director, Exempt Organizations Examinations
Enclosures:
Publication 892

Department of the Treasury Pai gust 16. 2017

Ai) Internal Revenue Service ‘fication Number:
IRS Tax Exempt and Government Entities Taxpayer Identification Number:

Exempt Organizations Examinations
Form:

Filing Period(s) Ended:
Person to Contact / 1D Number:

Employee ID:
Contact numbers:
Telephone:
Fax:
Manager’s Name / ID Number:

Manager’s Contact Number:

CERTIFIED MAIL — RETURN RECEIPT REQUESTED Response due date:

Dear

Why you are receiving this letter

We've enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we
propose to revoke your tax-exempt status as an organization described in section 501(c)(7) of
the Internal Revenue Code.

If you agree

Please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact
person shown at the top of this letter (unless you've already provided us a signed Form 6018).
We'll issue a final adverse letter determining that you aren't an organization described in section
501(c)(7).

If you disagree

1. Request a meeting or telephone conference with the manager shown at the top of this
letter.

2. Send any information you want us to consider.

3. File a protest with the IRS Appeals office. If you request a meeting with the manager
and/or send additional information as stated in 1 and 2, above, you'll still be able to file a
protest with IRS Appeals office after the meeting or after we consider the information.

The Appeals office is independent of the Exempt Organizations division and resolves
most disputes informally. If you file a protest, the auditing agent may ask you to sign a
consent to extend the period of limitations for assessing tax. This is to allow the
Appeals office enough time to consider your case. For your protest to be valid, it must

In lieu of Letter 3618

contain certain specific information, including a statement of the facts, applicable law,
and arguments in support of your position. For specific information needed for a valid
protest, refer to Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status.

Fast Track Medication (FTM) referred to in Publication 3498 generally doesn’t apply now
that we’ve issued this letter.

4. Request technical advice from Office of Associate Chief Counsel (TEGE) if you feel the
issue hasn't been addressed in published precedent or has been treated inconsistently
by the IRS.

If you’re considering requesting technical advice, contact the person shown at the top of
this letter. If you disagree with the technical advice decision, you will be able to appeal
to the Appeals office, as explained above. A decision rendered in a technical advice
memorandum as to your exempt status, however, generally is final and binding on
Appeals.

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 adverse determination letter.

Contacting the Taxpayer Advocate Office is a taxpayer right

You may also be eligible for help from the Taxpayer Advocate Service (TAS). 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 TAS assistance, which is always free, we'll
do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

You can find all forms and publications mentioned in this letter at our website at
www.irs.gov/formspubs.

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

Sincerely,

Acting Group Manager 7938
for

Maria Hooke

Director, Exempt Organizations
Examinations

Enclosures:

Form 886-A, Audit Report
Form 6018

Exhibits

Publications 3498 and 892

2 In lieu of Letter 3618

Schedule number

Form 886-A Department of the Treasury — Internal Revenue Service or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
20XX

ISSUE 1: Whether the is still qualified to be exempt under Section
501(c)(7) of the Internal Revenue Code(IRC)?
ISSUE 2: Whether the revocation of the tax-exempt status should be
applied retroactively to tax year beginning April 1, 20XX?
FACTS: (the “Club”) obtained its exempt in September 19XX. The Club

was created for the common purpose for pleasure and recreation to operate a golf course
described in IRC § 501(c)(7). The course is 9-holes with several pine trees.

The Club did not provide records per Rev. Proc 71-17 to indicate nonmember income from the
gaming, restaurant, Club rental and tournaments at the facility. The calendar for Club rental was
not available due to computer malfunction.

Forms 990 for the years ending March 31, 20XX, 20XX, and 20XX showed the following for green
fees and membership fees.

Gross
Receipts

Year of Audit

20XX

Green Fees 0

Membership 0
Fees

Total 0

20XX

Green Fees

oOl|oO

Membership
Fees

Total 0

20XX

Green Fees

oO1oO

Membership
Fees

Total 0

Catalog Number 20810W Page 1 www. irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service glace number
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
20XX
BYLAWS:

The Bylaws were revised November 14, 19XX. To be a member the person must be a legally
competent person of good reputation who pays the required membership. Green fees paid before
paying for membership will not be credited toward the membership. Each member shall be entitled
to one vote upon each matter at a meeting of members. Family memberships are limited to two (2)
votes. It states there is no fee for Social members.

FACILITIES

The Club has a building with a bar and restaurant along with the 9-hole golf course.

Entry

Observed the registration process and the video camera. Upon entering the , there
are plaques of contributions labeled “ ” at $0 to $0 all the way up to “ ” up to $0, lost

and found, toys for children, calendar, snacks, restrooms and one office. There are no signs or
notifications of “members only” or “visit three times notifications” to encourage membership. No
key card system.

Bar, eating and kitchen areas

The has a 0 chair U-shaped bar. Bar area serves pizza and other snacks. Two
toaster ovens for pizza. Storage area near bar is for bottled water and pop. There is another
storage fully stocked with a variety of beers. The bar stores liquors that take up four shelves from
ceiling to wall. The has 0-person capacity. There are several menus shown in on the
website which describes a full kitchen. In the eating area, there is an ATM machine, Juke Box and
Pull Tab machine. The kitchen contains 1-Fridge full of beer. Full professional kitchen more
refrigerators, ovens, grill, freezers.

Patios

The Club has two patios one screened in one is not. They each have approximately 0 heated
lamps and several tables in each. One has a grill for the “Grill your own steak or burger” days.
These are the days when there is no staff. These are the Men’s and Ladies nights on Wednesday
and Thursdays. (Exhibits A, B, & E)

CLUB OPERATIONS:
The Club charges a membership fee of $0 for Social members in contradiction to its Bylaws.
People within and 0-mile radius use the golf course and Club
called the “The ”. The website shows the golf course and the hours. It
states the golfers may register and rent carts at any time. In the winter, the is open
, , and in the winter to close; the kitchen is open to
to

The Club uses the honor system for self-registration. The website instructs golfers to use the
registration process located at the door. The instructions ask for the name, date, fee
and amount be put on the registration form and dropped in the registration box. There is a video

Catalog Number 20810W Page 2 Www. irs.gov Form 886-A (Rev. 5-2017)

Schedule number

Form 886-A Department of the Treasury — Internal Revenue Service or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
20XX

camera located at entrance to monitor the registration area. The carts are located to the West of
the Club with gas and keys. Instructions to check the carts for flat tires before use. Anyone can
use carts on the course.

The website advertises to golfers, members and the public to have all their special events at the
. The website is very informative with pages labeled Home, Golf Course,
, Tournaments & Events, Membership and Gallery. You can take a virtual tour of

the course and the . You can sign up for a tournament or rent out the _
You can call the Club Manager or email your request. The Club’s website never states it is a
private club on their website: .com. (Exhibits A-F.) There is no indication on the

website that this is a private club.

In addition to the golf and bar the Club sells pull-tabs. It sells at 0 different sites in the area
including its own bar. The total gross income from the gaming sales is $0.

MEMBERSHIPS:
The Club has six classes of membership:

Family Golfing Membership: This includes all children through the summer following high school
graduation. $0

Adult Single Golfing Membership $0

Social Membership: For non-golfing supporters of the Club $0

Student Membership: For any high school or college students/parents are not members $0
Long Drive Family Membership: For those living outside of a 0-mile radius from the Club $0
Long Drive Single Membership: For those living outside of a 0-mile radius from the Club $0

The Membership list for the 20XX tax period totaled 0 members for all types of members. The
highest membership cost is for family of $0 The lowest cost for a social member is $0.

DEMOGRAPHICS:

This is a highly rural area. has a population of 0 per the 20XX census. The chart
below shows the population of and distance to the surrounding towns. The closest public golf
course is in , population of 0. It is 0O-holes located within 0 miles of

The total population for the 0-mile radius below is 0.

Catalog Number 20810W Page 3 www. irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury ~ Internal Revenue Service Sched number
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
20XX

FORM 990 TAX PERIOD ENDING MARCH 31, 20XX.
The correct gross income of $0 was computed. The program expenses of $0 was reported.

The Form 990, Part Ill, line 4a states: “ /CLUB HOUSE PROVIDED TO THE PUBLIC
TO PROVIDE A PLACE TO SOCIALIZE AND INTERACT WHILE AT THE GOLF COURSE.
REVENUE AND EXPENSES RELATED TO THIS PROGRAM HELP TO MAINTAIN THE
CONDITION OF THE GOLF CLUB AND GOLF COURSE.”

Part lil, Line 4b, states: “9 HOLE GOLF COURSE THAT ALLOWS THE PUBLIC TO PLAY AND
LEARN THE GAME OF GOLF. THE REVENUE AND EXPENSES ASSOCIATED WITH THIS
PROGRAM HELP TO MAINTAIN THE CONDITION OF THE GOLF COURSE.”

Part Ill, Line 4c, states: “THE GAMING PROGRAM IS AVAILABLE TO THE PUBLIC IN THE
NAME OF THE TAX EXEMPT ORGANIZATION TO HELP WITH THE UPKEEP OF THE CLUB
HOUSE AND COURSE EXPENSES ARE TO HELP WITH THE GAMING COST INCURRED.”

EVENTS:

does not have a community center in the city. Anyone can rent the
for an event. When the space is rented, it is for the bar and the restaurant area; there are no
partitions. The Form 990 states the Club is providing social interaction for the community. The
website lists all the golfing events held at the Club and the opportunity for the public to rent the
Club. The website .com lists several social clubs or events. The City has
several non-profit organizations: ;
' ; to name a few. Some of the clubs are
available for rental from the public. There is a community garden and a . Also,
there is the ( ). provides live plays and
performances for the community. The city has a diverse amount of activities for the public. (Exhibit
E, .)

MINUTES

Per the minutes of the board meetings, the Club has been struggling to keep the cash flow above
its expenses. It has increased the members’ dues in the past years. Because surrounding areas
have golf courses, it is in competition for the rural members in the area. There was a three-page
analysis regarding the pricing of the food in the restaurant to lower the to achieve a higher
profit. There was also discussion of the kitchen manager receiving a percentage tied to the gross
net profit of the restaurant.

Catalog Number 20810W Page 4 WWW.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service igen number
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
20XX
LAW:

IRC § 501(c)(7) - Clubs organized for pleasure, recreation, and other nonprofitable purposes,
substantially all 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.

REGS, §1.501(c)(7)-1. Social clubs (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 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.

(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 § 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. [Reg. §1.501(c)(7)-1.]

REVENUE PROCEDURE 71-17, 1971-1 C.B. 683, describes the record-keeping requirements for
social clubs exempt under IRC 501(c)(7) with respect to nonmember use of their facilities; it sets
forth guidelines for determining the effect of gross receipts derived from public use of the club’s
facilities on exemption and liability for unrelated business income tax.

GROSS RECEIPTS TEST / PUBLIC LAW 94-568

§ 501(c)(7) was amended in 1976 by Public Law 94-568 to provide that § 501(c)(7) organizations
could receive some outside income without losing their exempt status. Senate Report No. 94-1318
(1976), 2d Session, 1976-2 C.B. 597, explains that a social club is permitted to receive up to 35
percent of its gross receipts, including investment income, from sources outside of its membership
without losing its tax-exempt status. It is also intended that 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 (nonmembers). In effect, the latter modification increases from 5
percent (Rev. Proc. 71-17, 1971-1 C.B. 683) to 15 percent the proportion of gross receipts a club
may receive from making its club facilities available to the general public without losing its tax-
exempt status.

The Senate Report also states that it is not intended that these organizations should be permitted
to receive, within the 15 percent or 35 percent allowances, income from the active conduct of

Catalog Number 20810W Page 5 Www. irs.goVv Form 886-A (Rev. 5-2017)

i Schedule number

- IR S
Form 886-A Department of the Treasury Internal Revenue Service or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
20XX

businesses not traditionally carried on by these organizations. In cases where an organization's
nontraditional income would cause the organization to exceed the 15 or 35 percent allowances,
consideration should be given as to whether the organization continues to be substantially
operated for IRC § 501(c)(7) purposes.

According to the Committee Reports, where a club receives income from other sources (non-
traditional or unusual), including income from the sale of its clubhouse or similar facility, that
income is not to be included in the formula; that is, such income is not to be included in either the
numerator or the denominator for purposes of computing the 35 or 15 percent allowances.

The Committee Reports provide that gross receipts include, charges, admissions, membership
fees, dues, assessments, investment income (such as dividends, rents, and similar receipts), and
normal recurring capital gains on investments, but excluding initiation fees and capital
contributions.

Where college fraternities or sororities charge membership initiation fees but not normal dues,
such fees will be included in their gross receipts, notwithstanding that initiation fees are ordinarily
excluded (Senate Report 94-1318, 2d Session, 1976-2 C.B. 599.).

TAXPAYER’S POSITION: The organization had a conference with the group manager. __
Correspondence was received from POA after that conference. The organization indicated it
wants more time to show that it receives most its income from members.

GOVERNMENT’S POSITION:

The organization is no longer qualified to be exempt under IRC section 501(c)(7) because more
than 35% of its gross income is from non-members and it receives more than 15% of its income
for use of the facilities from non-members.

As provided in Public Law 94-568 an organization exempt from tax under IRC section 501(c)(7)
can’t receive more than 15% of the income for use of the facilities from non-members and not
more than 35% of its income can come from non-member sources.

15% GROSS RECIEPTS TEST

The 15% test pertains to the use of the golf course and the building. The chart below shows the
income reported on the Forms 990 from tax periods ending 3-31-20XX to 20XX for use of the golf
course. The green fees are the amounts charged non-members to use the course. All years are
greater than the 15% set by Public Law 94-568. The trend is 0%, 0% and 0% from 20XX to 20XX,
respectively.

Catalog Number 20810W Page 6 www.irs.gov Form 886-A (Rev. 5-2017)

Schedule number

Ti - Internal Revenue Service ane
Form 886-A Department of the Treasury — In or exhibit

(May 2017) Explanations of Items

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

20XX

Gross Green fees%
Receipts

Year of Audit

20XX

Green Fees

O}oO

Membership
Fees

Total 0 0%

20XX

Green Fees

fo} To)

Membership
Fees

Total 0 0%

20XX

Green Fees

o1oO

Membership
Fees

Total 0 0%

The Forms 990 for the tax periods ending March 31, 20XX to 20XX were used to determine the
percentage of green fees paid by nonmembers and the membership dues. The total of these is
divided by the green fees to determine what percentage of the income is from non-members. The
Income Statement for the tax period ending March 31, 20XX was provided and used to verify the
Form 990 figures.

The organization has income from membership dues, green fees for golfing, cart shed rent, cart
rent, gaming, rental of the , and tournament. Below is the 15% test done with the
Treasurer’s income records with the calculated percentage for 20XX. The records confirm an
exceeded amount of the 15% test to be 0%.

Catalog Number 20810W Page 7 Www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service peglennien number
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
20XX

Power of Attorney (POA) sent correspondence of check payments made by the members in the
facility. The calculation of 0% computed by the POA exceeds the 30% calculation made by the
Examiner. (Exhibit H)

**CALCULATION OF NONMEMBER GAMING INCOME

CHART DELETED

The following chart shows the total gross income from all sources. Public Law 94-568 provides
that no more than 35% of the gross income should come from non-member sources. As shown
on this 0% is from non-members. Because this is more than the 35% allowed by the law the
organization does not qualify to be exempt under IRC section 501(c)(7).

CHART DELETED

The Club does not meet the 35% test.

Based on the facts of the examination, the Club does not qualify for exemption because the
operations were more than substantial for nonmembers. From April 1, 20XX to March 31, 20XX,
the Club has received more than 35% of its income from non-members and of that more than 15%
was for use of the facilities. The Public Law 94-568 and Senate Report No. 1318 amended IRC §
501(c)(7) as of October 20, 19XX provide that to be exempt under IRC § 501(c)(7) a club is limited
to receiving 15% of its income for use of club facilities from nonmembers. This organization
substantially exceeded the 15% limitation from nonmember income for three consecutive years.

For 20XX, the organization had total expenses of $0 to operate the Club. If only the members
were paying for expenses, each member would pay about $0 in a year. If it wanted to keep the
dues at $0, it would need 0 members. The population in in a 0-mile radius is 0. There is a public
course within 0 miles. The chances of the Club being able to increase membership dues or the
number of members is very limited. Its minutes already indicate it was struggling to operating with
the non-member income it already has. These factors show that the Club would not be able to
survive without the large amount of non-member income that it receives.

Catalog Number 20810W Page 8 Www. irs.gov Form 886-A (Rev. 5-2017)

Schedule number

Form 886-A Department of the Treasury — Internal Revenue Service or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
20XX

The idea of exempt status by social and recreational clubs is that the members will pool their
money to operate the club. Rev. Proc. 71-17 requires for social clubs exempt under IRC §
501(c)(7) to keep track of amounts paid by members for their guests’ use of the club. The
organization did not have any of the required records so it is assumed that the non-members paid
their own fees and were not guests of the members. This requirement is for use of the club
facilities.

The Club did not comply with Treas. Reg. § 1.501(c)(7)—1(b) because it made the Club available
to the general public by solicitation of advertisement for public patronage of its facilities. Before the
proposal of revocation, facts and circumstances was performed. Facts and circumstances was
conducted by using a three-year trend to consider an inadequate record notice.

The additional nonmember income from outside the facility exceeded § 501(c)(7) requirements.
The Club has outside gaming income at several vendor locations. The gaming license is for social
recreation at the Club for its members and guests. The Club received more than 35% of its income
from non-member sources. It does not meet the 35% gross receipts test for the tax period ending
March 31, 20XX.

The total income was $0 of that $0 is from gaming income. The gaming income is 0% of the Club’s
income. Of the Club’s income, gaming income is 0% from non-members. The Club is under the
misconception they are a social club for the public versus a private club. Even if the organization
could establish that its members paid for 0% of the use of the facilities it still would not qualify to
be exempt because over 35% of its income is from non-members. The sale of pull-tabs to the
public would always have them over 35% non-member income. But the organization cannot
maintain its facilities without the pull-tab income so it will always be over the 35% from non-
members. This confirmed the inadequate records notice was not the appropriate
recommendation. Normally, there should never be an inadequate records notice for an
organization exempt under IRC § 501(c)(7) because Rev. Proc. 71-17 is required.

The analyzed 15% Gross Receipts computation concluded: The public is supporting the Club
because the income from use of facilities is over the 15% allowance is maintaining the golf course
and the upkeep of the Club as stated by the Form 990. This is inurement to the 0 members. Some
of the 0 memberships are for family at $0. All O members regardless of the type of membership
should be paying approximately $0 to support the facility income of $0 or 0 members for 20XX.
Logical and financial analysis would not see this price for a membership or spending per member
in the facility to be realistic.

ISSUE 1: Whether the is still qualified to be exempt under §
501(c)(7) of the Internal Revenue Code(IRC)?

Catalog Number 20810W Page 9 www. irs.gov Form 886-A (Rev. 5-2017)

Schedule number

Form 886-A Department of the Treasury — Internal Revenue Service or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

20XX

The Club does not qualify to be exempt under IRC § 501(c)(7) because it receives more than 35%
of its total income from nonmembers and it receives more than 15% of the income for use of the
facility is from nonmembers. The Club does not meet the requirements to be exempt under §
501(c)(7) of the Code, Public Law 94-568, Treas. Reg. § 1.501(c)(7)-1(b) and Rev. Proc 71-17.

ISSUE 2: Whether the revocation of the tax-exempt status should
be applied retroactively to tax year beginning April 1, 20XX?

The Form 990 statements filed for 20XX to 20XX show the Club has consistently exceeded the
15%/35% limitations for income from nonmembers. Since the first year under examination is the
year ending March 31, 20XX, it is the Government’s position that the exempt status should be
revoked back to April 1, 20XX.

CONCLUSION:

The Club as an organization described under § 501(c)(7) should be revoked, effective, April 1,
20XX because it did not operate within the provisions for exempt purposes. The Club exceeded
the amount of allowable nonmember income for three consecutive years therefore, no longer
qualifies to be exempt.

Per § 277 of the Internal Revenue Code (Code), a non-exempt organization that is a membership
organization is allowed a deduction for expenses that relate to the operation of the organization for
its members. § 277(a) states that “In the case of a social club or other membership organization
which is operated primarily to furnish services or goods to members, and which is not exempt from
taxation, deductions for the taxable year attributable to furnishing services, insurance, goods, or
other items of value to members shall be allowed only to the extent of income derived during such
year from members or transactions with members (including income derived during such year
from institutes and trade shows which are primarily for the education of members)”.

When completing the Form 1120, the organization must divide the income and expenses between
the member and nonmember activities. If there is a loss from the membership activity it cannot be
used to offset the income from the nonmember activities. A loss on the member activity can be
carried forward to a later year to be taken against member income.

Form 1120, U.S. Corporation Income Tax returns are due no later than the 15th day of the 4th
month following the close of their tax year.

The Club will file the annual Form 1120 beginning in the tax year April 30, 20XX through March
31, 20XX, and in all future tax years. The exempt organization will submit Forms 1120 for tax
years ending March 31, 20XX, March 31, 20XX to the Revenue Agent.

Catalog Number 20810W Page 10 www. irs.gov Form 886-A (Rev. 5-2017)