A student fishing club does not qualify under section 501(c)(7) because nearly all income comes from nonmembers

Plain-English summary

A university fishing club sought exemption as a section 501(c)(7) social club. Its members competed in fishing tournaments, organized a public tournament, volunteered at community events, promoted fishing, and sold branded apparel. The club charged little or no member dues and instead relied on corporate sponsorships, donations, public fundraising, apparel sales, tournament proceeds, and prize money. The IRS found that recurring nonmember income funded member travel and other club costs, causing economic benefit to inure to members. Because nearly all revenue came from outside the membership and exceeded the limits for nonmember receipts, the IRS denied exemption. The final denial issued after the club did not protest the proposed determination.

Ruling snapshot

• Question: Does a student fishing club qualify under section 501(c)(7) when nearly all of its income comes from sponsors, sales, donations, tournaments, and other nonmember sources?
• Outcome: denied (recurring nonmember income exceeded the permitted limits and subsidized members)
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7)-1; Rev. Rul. 58-589; Rev. Rul. 66-149; Public Law 94-568

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201
Number: 202022008

Release Date: 5/29/2020                                    Date:
                                                              March 5, 2020

Employer ID number:

UIL Number: 501.07-00 Contact person/ID number:

Contact telephone number:
Form you must file:

Tax years:

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.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Notice 437

Redacted Letter 4034, Proposed Adverse Determination under IRC Section 501 (a)

Redacted Letter 4040, Final Adverse Determination under IRC Section 501(a) Other Than 501(c)(3) - No
Protest

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201
Date:

January 13, 2020
Employer ID number:

Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

B = date 501.07-00
C = association

D = university

e dollars = amount

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 IRC Section 501(c)(7)? No, for the reasons stated below.

Facts
You are an association formed on B. Your Constitution states your purpose is:

• To unite men and women through the common bond of fishing.

• To educate anglers and develop angling skills (emphasis on bass fishing).

• To strengthen student camaraderie.

• Promote sportsmanship through athletic competition and fellowship.

• Encourage good stewardship of our natural resources.

• To develop and train student athletes for participation in tournament angling.

• To participate in activities that enhance the future of the sport of angling.

You bring students together to enjoy the sport of bass fishing. The club is affiliated with C and competes in
affiliated C sanctioned tournaments. Any club member may participate but must earn a spot through a tryout
process. You will also teach fishing tactics to all levels of fishermen and will participate in community activities
that enhance the future of bass fishing.

Annually, the club participates competes in _ regional tournaments that involve travel, lodging, and operating
expenses that are all provided out of pocket by club members, who compete in boat fields to qualify for
that year’s national championship event. Any purse money won goes back to the club for funding and support,
not the angler’s pockets.

You organize and run a tournament each spring where a percentage of funds is retained for club use. The
remainder is paid out to top finishers. This tournament is an open invite, open to the public.

The club volunteers at youth and community fishing related events, including running and helping at local river
clean-ups and youth fishing derbies to promote the sport of fishing and make such events possible due to limited
manpower that the organizations who organize such events have. Personal travel expenses fall on the
volunteers, and no form of income or payment to the club or to the volunteers is received. One event like this is
expected each spring and fall. You also attend and operate a booth at a local fishing expo. Members attend the
booth to distribute information, promote the annual tournament, help run games and a kid zone, and to sell
branded apparel raising funds for the club.

Additionally, you hold regular meetings and work to promote the club through social media and other forms
including advertising at D. The membership requirement for the club is that one must be a currently enrolled
student at D.

While your Constitution indicates members pay a fee of e dollars, you have stated you have no non-member
income because there are no club dues, and all income comes from companies and corporate sponsors that
donate money to the club or fundraisers held by the club. The money received by the club is then used to pay
for expenses at fundraiser events or given to club members to cover travel expenses. Your sources of income
are listed as the annual tournament, apparel sales, crowd-sourced fundraising, sponsorships, purse money from
competitions and outside donations.

Law

IRC Section 501(c)(7) 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.

Treasury Regulation Section 1.501(c)(7)-1(a) states that the exemption provided by Section 501(a) of the Code
for an organization described in IRC Section 501(c)(7) 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 inure 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.

Treas. Reg. Section 1.501(c)(7)-1(b) states that a club which engages in business, such as 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) of the Code. An incidental sale of property will
not deprive a club of its exemption.

Rev. Rul 58-589, 1958-2 C.B. 266, stipulates expanded criteria for determining whether an organization
qualifies for exemption under Section 501(c)(7) of the Code. The ruling considers the significance of the

assertion of Treas. Reg. Section 1.501(c)(7)-1(b) that an organization that sells real estate, timber, or other
products, is not organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes.

A club will not be denied exemption merely because it receives income from the general public provided such
participation is incidental to and in furtherance of its general club purposes. To retain exemption a club must not
enter into outside activities with the purpose of deriving profit. If such income producing activities are other
than incidental, trivial or nonrecurrent, it will be considered that they are designed to produce income and will
defeat exemption.

Rev. Rul. 66-149 states a social club is not exempt from federal income tax as an organization described in
Section 501(c)(7) where it regularly derives a substantial part of its income from non-member sources. To the
extent that income is derived from non-member sources, it inures to the benefit of the members. If such
activities are other than incidental, trivial, or non-recurrent, it is considered that they are intended to produce
income and are reflective of a purpose inconsistent with exemption under Section 501(c)(7) of the Code.

Public Law 94-568, 1976-2 C.B. 596, provides that a social club may receive up to 35% of its gross receipts,
including investment income from sources outside its membership, without losing exemption. Within this 35%
amount, not more than 15% of the gross receipts should be derived from the use of a social club’s facilities or
services by the general public. This means that an exempt social club may receive up to 35% of its gross
receipts from a combination of investment income and receipts from nonmembers so long as the latter do not
represent more than 15% of the total receipts.

Application of law

Per Treas. Reg. Section 1.501(c)(7)-1(a), substantially all of your activities are not for pleasure, recreation, or
other nonprofit purposes. However, all of your income is derived from non-member sources, and as a result,
income from non-member sources is used to defray membership costs resulting in inurement to members. These
reasons disqualify you from exemption under IRC Section 501(c)(7).

Your apparel sales, and the receipt of sponsorships and sponsor discounts in exchange for advertising and
promotion of products, is not incidental, and are therefore described as prohibited sales activities in Treas. Reg.
Section 1.501(c)(7)-1(b) that do not promote a social or recreational purpose. While an organization exempt
under IRC Section 501(c)(7) may conduct traditional, permissible business activities these may not constitute
more than 15% of organizational revenue (see Public Law 94-568). Further, generally 35% of your gross
receipts cannot come from sources outside your membership. Your income generating activities are regular and
not incidental, totaling well over the allowed 35% and 15% thresholds and above consideration for facts and
circumstances.

Rev. Rul. 58-589 further describes how these aforementioned income producing activities removes you from
consideration as operating exclusively for purposes under IRC Section 501(c)(7). Participation with these
sources of revenue must be incidental to and in furtherance of general club purposes and a club must not enter
into outside activities with the purpose of deriving profit. As little or no member dues are charged, you are
reliant on sponsorships, sales, donations and tournament proceeds for your operations. This income is not
trivial, incidental, or non-recurring but are your primary sources of income, paid to you regularly.

You are similar to the organization denied exemption in Rev. Rul. 66-149 because your income producing
activities are recurring, rather than sporadic, and produce income over the allowable limits from non-member

sources. Further, your non-member income accounts for nearly all of your income, with little to no member-
related income with which to offset.

Conclusion

Based on the facts provided above, we hold that you do meet the requirements for tax exemption under IRC
Section 501(c)(7). While you are conducting social and recreational activities you receive a majority of your
income from non-member sources on a recurring basis hereby disqualifying you from exemption.

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.

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:

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