Public bingo and rentals defeat social club exemption

Plain-English summary

A self-declared social club operated public bingo games and rented its facility mostly to nonmembers. It had no identified dues structure, little member income, and no other significant activities. The IRS found that more than 35 percent of gross receipts came from nonmember sources and more than 15 percent came from nonmember use of club facilities. Because the club’s primary activities did not serve the pleasure or recreation of its members, the IRS denied recognition under Section 501(c)(7).

Ruling snapshot

• Question: Did a self-declared social club qualify under Section 501(c)(7) when public gaming and facility rentals produced substantially all of its income?
• Outcome: Denied.
• Key authorities: IRC §§ 501(c)(7) and 7428; Treas. Reg. § 1.501(c)(7)-1; Rev. Proc. 71-17; Public Law 94-568

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce Street, MC 4920DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Number: 202110037
Release Date: 3/12/2021
UIL: 501.07-00
Date: September 22, 2020
Taxpayer ID Number: [redacted]
Form: [redacted]
For Tax Period(s) Ending: [redacted]
Person to Contact: [redacted]
Identification Number: [redacted]
Telephone Number: [redacted]
Fax Number: [redacted]

CERTIFIED MAIL — Return Receipt Requested
LAST DAY FOR FILING A PETITION WITH THE TAX COURT: [redacted]

Dear [redacted]:

This is a final determination explaining why your organization doesn’t qualify as an
organization described in Internal Revenue Code (IRC) Section 501(c)(7) for the tax period

listed above.

In the future, if you believe your organization qualifies for tax-exempt status and would like a
determination letter from the Internal Revenue Service, you can request a determination by
filing Form 1024, Application for Recognition of Exemption Under Section 501(a), or Form
1024-A, Application for Recognition of Exemption Under Section 501(c)(4) of the Internal
Revenue Code (as applicable) and paying the required user fee.

Our adverse determination as to your exempt status was made for the following reasons:

You have not established that you are operated substantially for pleasure and
recreation of your 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 recreational and social facilities available to
the general public. You have exceeded the non-member income test for tax year
ending December 31, 20XX.

Organizations that are not exempt under IRC Section 501 generally are required to file federal
income tax returns and pay tax, where applicable. For further instructions, forms, and
information please visit www.irs.gov.

If you decide to contest this determination, you may file an action for declaratory judgment
under the provisions of IRC Section 7428 in one of the following three venues: 1) United
States Tax Court, 2) the United States Court of Federal Claims, or 3) the United States
District Court for the District of Columbia. A petition or complaint in one of these three
courts must be filed within 90 days from the date this determination was mailed to you.
Please contact the clerk of the appropriate court for rules and the appropriate forms for
filing petitions for declaratory judgment by referring to the enclosed Publication 892. You
may write to the courts at the following addresses:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

U.S. Court of Federal Claims
717 Madison Place, NW
Washington, DC 20439

U. S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, DC 20001

Processing of income tax returns and assessments of any taxes due will not be delayed if
you file a petition for declaratory judgment under IRC Section 7428.

You may 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. 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
1-877-777-4778.

Taxpayer Advocate assistance can’t be used as substitute for established IRS procedures,
formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or
technically correct tax determination, nor extend the time fixed by law that you have to file a
petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not
have been resolved through normal channels gets prompt and proper handling.

You can get any of the forms or publications mentioned in this letter by calling 800-TAX-
FORM (800-829-3676) or visiting our website at www.irs.gov/forms-pubs.

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

Enclosures:
Publication 892

Sincerely,

Sean E. O'Reilly
Director, Exempt Organizations Examinations

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities

Date: April 15, 2020
Taxpayer ID number: [redacted]
Form: [redacted]
Tax periods ended: [redacted]

Person to contact:
Name: [redacted]
ID number: [redacted]
Telephone: [redacted]
Fax: [redacted]

Manager's contact information:
Name: [redacted]
ID number: [redacted]
Telephone: [redacted]
Response due date: [redacted]

CERTIFIED MAIL — Return Receipt Requested

Dear [redacted]:

Why you’re receiving this letter
We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that your organization
doesn’t qualify as an organization described in Internal Revenue Code (IRC) Section 501(c)(7).

This letter is not a determination of your tax-exempt status under IRC Section 501 for any period other than the
tax periods above.

If you agree
If you haven’t already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the

contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an
organization described in IRC Section 501(c)(7) for the periods above.

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 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 IRS 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 IRS Appeals Office enough time to consider your case.
For your protest to be valid, it must 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 Determination on Tax-Exempt Status.

Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn’t
apply now that we’ve issued this letter.

Letter 3618 (Rev. 8-2019)
Catalog Number 34809F

4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities)
   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 IRS Appeals Office, as
explained above. A decision made in a technical advice memorandum, 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

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 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.

Additional information
You can get any of 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 shown at the top of this letter.

Sincerely,

For
Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018
Publication 892
Publication 3498

Letter 3618 (Rev. 8-2019)
Catalog Number 34809F

Form 886-A (May 2017)
Department of the Treasury — Internal Revenue Service
Explanations of Items
Schedule number or exhibit: [redacted]
Name of taxpayer: [redacted]
Tax Identification Number: [redacted]
Year/Period ended
December 31, 20XX
ISSUE:

The [redacted] (has failed to meet the eligibility requirements under Internal Revenue Code
(IRC) Section 501(c)(7) as their primary activity is gaming, and they permit excessive use of the club’s
facilities by non-members. Can a favorable determination be made regarding the
tax-exempt status under Internal Revenue Code (IRC) Section 501(c)(7).

FACTS:
• The [redacted] ([redacted]) was created on September 18, 19XX, when they filed
their Articles of Incorporation with the state of [redacted].
• At the time the [redacted] was created, the organization did not file Form 1023 or Form 1024 to request a

determination for tax exempt status with the Internal Revenue Service.
• For the period of January 1, 20XX through December 31, 20XX, the organization has filed Forms
990, indicating/self-declaring, that they were an IRC Section 501(c)(7) Social Club.
• In 20XX, the [redacted] was trying to renew their gaming license with the [redacted],
[redacted], and they were asked to provide their tax-exemption letter; which the [redacted] never
applied for, from the Internal Revenue Service.
• On October 10, 20XX the organization completed Form 1024 and submitted it to the Service
for consideration of tax-exemption.

• The Service sent the organization a letter explaining that the [redacted] did not qualify for tax-exemption
based on the information supplied with the organization’s Form 1024 application package.
• The [redacted] does not have a Membership Dues Structure.

• Per the organization’s By-laws: Stockholder — is defined as one who carries a current dues card
entitling the card holder to one vote. There was no other mention of membership classes.
• Per the organization’s By-laws: there is no mention of any dues structure and there are no

requirements listed for membership in the organization.
• Per Form 1024: [redacted], which is a branch of the
[redacted] Organization — All [redacted] members can have input with the organization for the shared facilities.
• Per Form 1024: Every member of the [redacted] is a member of the [redacted]
by paying dues to the [redacted]; no dues are remitted to the [redacted].
• The [redacted] does not have any social requirements for its members.
• The [redacted] primary activities are Gaming Activities and Rental Activities.
• The [redacted] holds bingo games that are open to the public on the second and fourth Fridays of the
month. The gaming activities are conducted with 0 percent volunteer labor. The organization also
sells food and drinks during the gaming activities.

• The [redacted] has [redacted] members and often rented the space out to both members and non-members. The
organization rents their facility to mostly non-members.

• The [redacted] has not reported any other significant activities undertaken during the period examined.
• The [redacted] has not provided any breakdown between member and non-member gaming income; as
such, the revenue agent has determined that all gaming income is from non-member sources.
• The [redacted] is not following Revenue Procedure 71-17; as the organization’s facilities are routinely

open to the public and primarily used by non-members.

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

Form 886-A (May 2017)
Department of the Treasury — Internal Revenue Service
Explanations of Items
Schedule number or exhibit: [redacted]
Name of taxpayer: [redacted]
Tax Identification Number: [redacted]
Year/Period ended

December 31, 20XX

FACTS (continued):
• The actual percentage of non-member gross receipts for the period examined exceeds 0 percent.

• The [redacted] received donations/contributions from members in the amount of $0 for the period
ending December 31, 20XX. This was the only source of member income identified by the
Service.

• The [redacted] received donations/contributions from members in the amount of $0 for the period
ending December 31, 20XX. This was the only source of member income identified by the
Service.

• During the closing conference at the end of the field examination conducted with
[redacted], the Revenue Agent discussed the issues with the [redacted] and stated that since there is
very little member income, and substantially all of the income is from non-member sources, the
organization will not qualify for tax-exemption under IRC 501(c)(7).

• During the closing conference, [redacted] provided the letter that the [redacted] received
explaining that the organization was not granted tax-exemption based upon the information received
with their filed Form 1024.

LAW:

Internal Revenue Code § 501(c). Exemption from tax on corporations, certain trusts, etc.

(7) 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.

The organization must be organized for:
Pleasure

Recreation

Other non-profitable purposes

Treasury Regulation 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 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. However, an incidental sale of property will not deprive a club of its
exemption.

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

Form 886-A (May 2017)
Department of the Treasury — Internal Revenue Service
Explanations of Items
Schedule number or exhibit: [redacted]
Name of taxpayer: [redacted]
Tax Identification Number: [redacted]
Year/Period ended
December 31, 20XX
LAW (continued):

PL 94-568 (October 1976) Substantially All Test is an income test with the following limits

Clubs may receive up to 35 percent of their gross receipts, including investment income, from sources
outside their membership.

Within the 35 percent limitation, no more than 15 percent of gross receipts may be derived from nonmember
use of club facilities and/or services

Rev. Proc. 71-17, 1971-1 C.B. 683,

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; it describes the record-keeping
requirements for social clubs exempt under IRC Section 501(c)(7) with respect to nonmember use of the
club’s facilities. Where a club makes its facilities available to the general public to a substantial degree, the
club is not operated exclusively for pleasure, recreation, or other nonprofitable purposes. Specifically, social
clubs can receive up to 35 percent of their gross receipts, including investment income, from sources outside
their membership. Within the 35 percent, not more than 15 percent of gross receipts should be derived from
the use of the social club's facilities or services by the general public (nonmembers). If a club exceeds the
35/15 percent test, facts and circumstances are applied to determine if substantially all of its activities are for
pleasure, recreation and other nonprofitable purposes.

If a club’s income from nonmember sources exceeds the 35/15 percent limitations, then evaluate all relevant
facts and circumstances to determine if substantially all of the club’s activities are for pleasure, recreation
and other nonprofitable purposes.

TAXPAYER POSITION:
The organization has not submitted their position.

GOVERNMENT POSITION:

Section 501(c)(7) social clubs endanger their exempt status when receipts from nonmembers — including
those from gaming activities — exceed certain thresholds. A social club may receive no more than 35 percent
of its gross annual receipts (including investment income) from sources outside of its membership. Within
that 35 percent, no more than 15 percent of gross receipts can come from the public’s use of club facilities
or services. If those limits are exceeded, the club’s exempt status may be in jeopardy.

Social clubs do not qualify for any of the exclusions/modifications of income. Even if a social club conducts
a bingo game that would fall within the bingo exclusion or uses only volunteers to conduct all its gaming, if
the public participates, the income will be taxable. In addition, the nonmember income, if a large enough
percentage of the social club’s overall income, may jeopardize its exempt status.

The Service has determined that [redacted] primary activities are gaming and renting their facility. If both
activities were only conducted with members, the organization’s tax-exempt status would not be in
jeopardy. However, the organization’s gaming activities are conducted with nonmembers, and the

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

Form 886-A (May 2017)
Department of the Treasury — Internal Revenue Service
Explanations of Items
Schedule number or exhibit: [redacted]
Name of taxpayer: [redacted]
Tax Identification Number: [redacted]
Year/Period ended

December 31, 20XX

GOVERNMENT POSITION (continued):

organization’s facilities are primarily rented out to nonmembers. Since more than 35 percent of the
organization’s gross receipts is generated from nonmembers, and more than 15 percent of the organization’s
gross receipts are from nonmember use of the facilities, the organization has failed to meet the requirements
of the Code. Substantially all of the income generated by the organization are from non-member sources.
The actual percentage of nonmember gross receipts for the period examined exceeds 0 percent.

The frequency of use of club facilities or services by nonmembers and the net income from such use occurs
with bi-monthly bingo games that are conducted on the second and fourth Fridays of each month, with the
exception of November and December, when there is only one bingo night on the second Friday.

The organization has provided these bingo games for a number of years, as evidenced in the period
examined. The [redacted] is not following Revenue Procedure 71-17; as the organization’s facilities are routinely
open to the public and primarily used by non-members.

The Service did not identify a membership dues structure during the examination of the books and records

of the organization. Per the By-laws, Stockholders (members) are defined as someone who carries a
current dues card entitling the card holder to one vote. There was no other mention of membership classes.
Per the [redacted] Form 1024 application: [redacted], which is
a branch of the [redacted] Organization — All [redacted] members can have input with the organization for the
shared facilities. Every member of the [redacted] is a member of the [redacted]
by paying dues to the [redacted]; no dues are remitted to the [redacted].
According to the information examined by the Service, the [redacted] does not have any social requirements for

its members.

The Service did not identify any other significant activities undertaken by the [redacted] during the period
examined.

The Service identified donations/contributions from members in the amount of $0 for the period ending
December 31, 20XX and $0 for the period ending December 31, 20XX. This was the only source of
member income identified by the Service.

The purpose for which the club's facilities were made available to non-members, was to generate income,
through the bingo games and rentals for private events. The non-member income generated represented a
net profit for the organization.

During the closing conference, with [redacted], which was conducted at the end of the field
examination, the Revenue Agent discussed the issues with the [redacted] and stated that since there is very little
member income, and substantially all of the income is from non-member sources, the organization will not
qualify for tax-exemption under IRC 501(c)(7). [redacted] also provided the letter that the
[redacted] received explaining that the organization was not granted tax-exemption based upon the information
received with their filed Form 1024.

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

Form 886-A (May 2017)
Department of the Treasury — Internal Revenue Service
Explanations of Items
Schedule number or exhibit: [redacted]
Name of taxpayer: [redacted]
Tax Identification Number: [redacted]
Year/Period ended

December 31, 20XX

GOVERNMENT POSITION (continued):

The organization was self-declaring their exemption under IRC Section 501(c)(7) from their inception until

20XX. The organization then submitted Form 1024 to receive tax-exempt status. During the application

process, the Service determined that the organization was not a tax-exempt organization based on the
information submitted with their Form 1024 application package. The Service also conducted a field
examination which has resulted in the same conclusion, that the activities conducted by the organization do
not qualify for tax-exempt status under IRC Section 501(c)(7).

Year ending December 31st

20XX

20XX

20XX

GROSS RECEIPTS

Membership Dues
Other Member Contributions/Donations

Member Identified Income Sources

Gaming Activities
Rental Activities

Food & Beverage Sales
Investment Income

Non-member Identified Income Sources

TOTAL GROSS RECEIPTS

35% LIMIT TEST
Receipts from Non-Member Sources
Total Gross Receipts X 35%

Non-Member Source Income - EXCEEDS 35% Limit

Non-member Income as a percent of Total Gross Receipts

15% NON-MEMBER USE TEST
Receipts from Non-Member Sources
Receipts from Member Sources

EXCEEDS 15% Limit

Non-member use of club facilities

[redacted]

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

Form 886-A (May 2017)
Department of the Treasury — Internal Revenue Service
Explanations of Items
Schedule number or exhibit: [redacted]
Name of taxpayer: [redacted]
Tax Identification Number: [redacted]
Year/Period ended
December 31, 20XX
Conclusion:
The [redacted] primary activities, Gaming and Facility Rentals, are not for the pleasure,

recreation, or other non-profitable purposes of the members of the organization. Substantially all of the
[redacted] gross receipts are received from non-member sources. The primary reasons for the
[redacted] operations are not for the exclusive benefit of the members of the organization.

Substantially all of the Total Gross Receipts are attributable to sources outside the organization’s
membership. The income from non-member sources exceeds the 35 percent limit permitted under IRC
Section 501(c)(7). The non-member use of the club / rental activities exceeds the 15 percent limit under IRC
Section 501(c)(7). Therefore, the organization fails to meet the requirements of IRC 501(c)(7).

The [redacted] fails to qualify as a tax-exempt organization under IRC 501(c)(7).

The organization was self-declaring their exemption under IRC Section 501(c)(7) from their inception until
20XX. The organization then submitted Form 1024 to receive tax-exempt status. During the application
process, the Service determined that the organization was not a tax-exempt organization based on the
information submitted with their Form 1024 application package. The Service also conducted a field
examination which has resulted in the same conclusion, that the substantial nonmember activities conducted
by the organization do not qualify for tax-exempt status under IRC Section 501(c)(7).

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