Death-benefit club denied section 501(c)(7) social-club exemption

Plain-English summary

A club’s only activity was providing death benefits to members to help with funeral costs. All income came from member dues, and all disbursements paid death benefits. The club had no social or recreational program, personal contacts, fellowship, or commingling among members. The IRS concluded that providing mutual assistance through death benefits was not a pleasure, recreation, or other nonprofitable social-club purpose and denied exemption under section 501(c)(7).

Ruling snapshot

• Question: Does a club whose sole activity is paying death benefits qualify for exemption under section 501(c)(7)?
• Outcome: denied, because it lacked social and recreational activities and instead provided financial benefits to members’ survivors
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7)-1(a); Rev. Rul. 63-190; Rev. Rul. 70-32; Allied Trades Club, Inc. v. Commissioner

Full text (IRS public release)

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

Date:
July 16, 2019

Number: 201941026 Employer ID number:

Release Date: 10/11/2019

Contact person/ID number:
Contact telephone number:
Form you must file:

Tax years:

UIL: 501.07-00, 501.07-06

Dear

This letter is our final determination that you don’t qualify for tax-exempt status under Section 501(c)(7) of the
Internal Revenue Code (the Code). Recently, we sent you a proposed adverse determination in response to your
application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it
gave you 30 days to file a protest. Because we didn’t receive a protest within the required 30 days, the proposed
determination is now final.

You must file federal income tax returns for the tax years listed at the top of this letter using the required form
(also listed at the top of this letter) within 30 days of this letter unless you request an extension of time to file.

We’ll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection (as required under Section 6110 of the Code) after deleting certain identifying information.
Please read the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Notice
437 on how to notify us. If you agree with our deletions, you don’t need to take any further action.

If you have questions about this letter, you can contact the person listed at the top of this letter. If you have
questions about your federal income tax status and responsibilities, call our customer service number at
1-800-829-1040 (TTY 1-800-829-4933 for deaf or hard of hearing) or customer service for businesses at
1-800-829-4933.

Letter 4040 (Rev. 7-2014)
Catalog Number 47635Z


Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Notice 437
Redacted Letter 4034, Proposed Adverse Determination under IRC Section 501(a) Other Than 501(c)(3)
Redacted Letter 4040, Final Adverse Determination under IRC Section 501(a) Other Than 501(c)(3) - No
Protest

Letter 4040 (Rev. 7-2014)
Catalog Number 47635Z


Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201
Date:
April 18, 2019

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

Contact fax number:

Legend: UIL:

B = Formation date 501.07-00
C = State 501.07-06
D = Country 1

F = Country 2

G = Place of origin

h dollars = Initial fee

k dollars = Annual dues
z dollars = Benefit 1

x dollars = Benefit 2

Dear

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 501(a). We determined that you don’t qualify for exemption under IRC Section 501(c)(7).
This letter explains the reasons 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 were incorporated on B under the law of the State of C for a social purpose. The only activity in which
you engage is providing death benefits to your members to help with funeral costs. The membership is open to
anyone who is from G in F. There is no age limit or medical condition requirement. All new members must pay
a one-time initiation fee of h dollars and annual membership dues of k dollars. Any member can cancel
participation in the club at any time with no refund. The member’s survivors receive z dollars if he or she dies
in D and x dollars if in F. No benefits will be paid for infants who die aged four months or younger.

All of your income is from member dues and all of your disbursements are for death benefits.

Law
Section 501(c)(7) of the Internal Revenue Code exempts from federal income tax, clubs organized for pleasure,
recreation, and other nonprofitable purposes, substantially all of the activities of which are for such purposes
and no part of the net earnings of which inures to the benefit of any private shareholder.

2

Treasury Regulation Section 1.501(c)(7)-1(a) provides that the exemption 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.

In Rev. Rul. 63-190, 1963-2 C.B. 212, a nonprofit organization not operated under the lodge system, which
maintains a social club for members and also provides sick and death benefits for members and their
beneficiaries, does not qualify for exemption from Federal income tax as a social club under section 501(c)(7).
A social club is not organized exclusively for exempt purposes if it provides assistance in the form of services
to its members such as the payment of sick and death benefits.

In Rev. Rul. 70-32, 1970-1 C.B. 132, a flying club providing economical flying facilities for its members but
having no organized social and recreation program does not qualify for exemption under section 501(c)(7) of
the Code. The sole activity of the club involves the ownership, operation, and maintenance of the aircraft for
use by the members. There is little commingling among members for social or recreational purposes. In order
for a club to meet the requirements for exemption under Section 501(c)(7) of the Code, there must be an
established membership of individuals, personal contacts, and fellowship. Furthermore, a commingling of
members must play a material part in the activities of the organization.

In Allied Trades Club, Inc. v. Commissioner, 23 T.C. 1017 (1955), affirmed 228 F.2d 906 (1956) the court held
that a social club that expanded its activities to provide mutual assistance by paying death benefits to the
survivors of its members was not operated exclusively for pleasure, recreation or other nonprofitable purposes,
because provision of assistance in the form of services to its members, rather than social activities, is not a
nonprofitable purpose. Entities not so organized do not qualify for exemption under section 501(c)(7).

Application of law
You do not qualify for exemption under Section 501(c)(7) of the Code, because you are not organized
exclusively for pleasure, recreation or other nonprofitable activities as required in Treas. Reg. 1.501(c)(7)-1(a).

Social and recreational purposes are conspicuously absent in your organization. The only activity in which you
engage is providing death benefits to your members to help with funeral costs.

There are no personal contacts, fellowship and commingling of the members. For this reason, you, like the
flying club of Rev. Rul. 70-32, do not qualify for exemption under section 501(c)(7).

As in Rev. Rul. 63-190 and Allied Trades Club, Inc. v. Commissioner, your provision of death benefits for your
members precludes exemption under Section 501(c)(7).

Conclusion
Since you are not organized exclusively for social, recreational, and other nonprofit purposes, as required by
Treas. Reg. Sec. 1.501(c)(7)-1(a), you do not qualify for exemption under section 501(c)(7).

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

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

your income tax filing requirements.

If you don't agree
You have a right to protest if you don’t agree with our proposed adverse determination. To do so, send us a
protest within 30 days of the date of this letter. You must include:

• Your name, address, employer identification number (EIN), and a daytime phone number

• A statement of the facts, law, and arguments supporting your position

• A statement indicating whether you are requesting an Appeals Office conference

• The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization or your authorized representative

• The following declaration:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I have examined this request, or this modification to the
request, including accompanying documents, and to the best of my knowledge and belief, the request
or the modification contains all relevant facts relating to the request, 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 they haven’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 gave us a basis to reconsider our determination. If so,
we’ll continue to process your case considering the information you provided. If you haven’t given us a basis
for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information
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 later because the
law requires that you use the IRC administrative process first (IRC Section 7428(b)(2)).

Where to send your protest
Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address:

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


4

U.S. mail: Street address for delivery service:
Internal Revenue Service Internal Revenue Service

EO Determinations Quality Assurance EO Determinations Quality Assurance
Mail Stop 6403 550 Main Street, Mail Stop 6403

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your protest 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 they received it.

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-
pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at
the top of this letter.

Contacting the Taxpayer Advocate Service

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 if 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.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K