IRS finds a title-holding "social club" that runs public bingo does not qualify under 501(c)(7)

Plain-English summary

The IRS determined that an organization did not qualify as a tax-exempt social club under section 501(c)(7) for the years examined. The group had never filed an exemption application; it self-declared 501(c)(7) status on its annual Form 990. In substance it existed to hold title to and maintain a building for a related fraternal organization, and its main activity was a weekly bingo game open to the general public, along with renting the hall for private events. The IRS found it failed both the organizational test (its purpose was to hold real property for a related group, not to provide pleasure and recreation for members) and the operational test, for three reasons: too much of its gross receipts came from outside its membership (over the 15%/35% limits in Public Law 94-568), it opened its facilities to the public on a regular, recurring basis, and there was little socializing among members (no bar or restaurant, only occasional member events). Because it does not qualify, it is disqualified for the tax periods examined and must file Form 1120 corporate income tax returns. The taxpayer did not submit a position.

Ruling snapshot

• Question: Does an organization that holds title to a building for a related fraternal group and runs public bingo qualify as a 501(c)(7) social club?
• Outcome: revocation (final adverse determination; self-declared 501(c)(7) status disqualified, Form 1120 required)
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7)-1(a), (b); Public Law 94-568 (15%/35% nonmember-income limits); Rev. Rul. 60-324; Rev. Rul. 66-150; Rev. Rul. 69-220; Rev. Proc. 71-17; IRC § 7428

Full text (IRS public release)

Transcriber's note: this is a scanned adverse-determination package, comprising a Letter 6337 final adverse determination, a Letter 3618 proposed adverse determination, and a Form 886-A audit report ("Explanation of Items"). The repeating Form 886-A page-header furniture and catalog-number footers have been removed and each report page replaced with a bracketed [Page N] marker; the cover letters keep their own Letter footers. The report reproduces two Form 990 financial tables (revenue/expenses and a gross-receipts percentage breakdown) whose dollar figures and percentages were redacted in the original and appear as blank "$" cells. Names, dates, and amounts were redacted throughout and appear as blanks; wording is reproduced as scanned, with obvious OCR misreads corrected.

Department of the Treasury Date: May 12, 2021
Internal Revenue Service
IRS
Tax Exempt and Government Entities

Taxpayer ID number:
Form:
Number: 202230010
Release Date: 7/29/2022
Tax periods ended:
Person to contact:
Name:
ID number:
Telephone:
Fax:

UIL: 501.07-00

CERTIFIED MAIL - RETURN RECEIPT REQUESTED
Dear

Why we are sending you this letter
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 periods 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 organized and operated exclusively for an exempt purpose within the meaning of IRC
Section 501(c)(7). It is the government’s position that you fail to meet the operational test due to the following:

1. Receiving more than an insubstantial part of your gross receipts from outside your membership.
2. Allowing the general public access to your facilities on a regular and recurring basis.
3. Lack of socialization among your members.

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.

What you must do if you disagree with this determination
If you want to contest our final determination, you have 90 days from the date this determination letter was

mailed to you to file a petition or complaint in one of the three federal courts listed below.

How to file your action for declaratory judgment
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.

Letter 6337 (12-2020)

Please contact the clerk of the appropriate court for rules and the appropriate forms for filing an action for
declaratory judgment by referring to the enclosed Publication 892, How to Appeal an IRS Determination on
Tax-Exempt Status. You may write to the courts at the following addresses:

United States Tax Court U.S. Court of Federal Claims U.S. District Court for the District of Columbia
400 Second Street, NW 717 Madison Place, NW 333 Constitution Ave., N.W.
Washington, DC 20217 Washington, DC 20439 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.

Information about the IRS Taxpayer Advocate Service

The IRS office whose phone number appears at the top of the notice can best address and access your tax
information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate
Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't
working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects
taxpayer rights. Contact your local Taxpayer Advocate Office at:

Internal Revenue Service
Taxpayer Advocate Office

Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights,
go to taxpayeradvocate.irs.gov. Do not send your federal court pleading to the TAS address listed above. Use
the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to
file an action for declaratory judgment.

Where you can find more information
Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for

more comprehensive information.
Find tax forms or publications by visiting www.irs.gov/forms or calling 800-TAX-FORM (800-829-3676).
If you have questions, you can call the person shown at the top of this letter.

If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best
time to call, and a copy of this letter.

Keep the original letter for your records.

Ps 0 ;
Sean E. O'Reilly a
Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

Letter 6337 (12-2020)

internal Revenue Service November 10, 2020
I Tax Exempt and Government Entities Taxpayer ID number:

Form:

Tax periods ended:

Person to contact:
Name:
ID number:
Telephone:
Fax:
Address:

CERTIFIED MAIL — Return Receipt Requested Manager's contact information:
Name:
ID number:
Telephone:
Response due date:

Dear

Why you’re receiving this letter
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 | 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.

Letter 3618 (Rev. 8-2019)

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

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.

In the future, if you believe your organization qualifies for tax-exempt status and would like a status determination
letter from the IRS, you can request a determination by filing Form 1024, Application for Recognition of
Exemption Under Section 501 (a), and paying the required user fee.

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,
Peter

for Sean E. O'Reilly
Director, Exempt Organizations Examinations

Enclosures:
Form 4621-A
Form 6018
Publication 892
Publication 3498

Letter 3618 (Rev. 8-2019)

ISSUES:

1. Whether is organized as an organization exempt under

Internal Revenue Code Section 501(c)(7).

2. Whether is operating as an organization exempt under
Internal Revenue Code Section 501(c)(7).

FACTS:
Background
was incorporated with the State of on
as a non-profit corporation. Per article IV of the articles of incorporation, its purpose is:

“...owning, leasing, operating, maintaining and managing a building or buildings,
property and equipment, for the purpose of promoting intellectual, cultural, high moral
standards and virtue conducive to the welfare and best interests of the community,
and particularly the members of the bee

Membership in the is limited to members in good standing of the of
the . The does not assess or collect membership dues and no
membership dues are paid over by the . Additionally, of the director positions of
the board are filled by the trustees.

Article XV of the Bylaws, that were amended , provides that upon the sale or
other disposition of the real property, the shall dissolve if it does not purchase another real
property within years of such sale or other disposition. In the event of dissolution, the

must transfer its remaining assets to the , the exception being for any real property, which
must be sold prior to dissolution and the after-tax cash proceeds transferred to the

The holds title to real property located at

On the property there is a parking lot and a building that contains a main hall, commercial kitchen,
front room, back room with a bar, and storage areas. The name and logo is visible at the
entryway and on a banner advertising weekly bingo games that are open to the general public.
However, there is no “members only” signage, no guest log, or restricted access to the building such
as a member key card requirement.

No Form 1024, Application for Recognition of Exemption Under Section 501(a), was filed by the
with the Internal Revenue Service (“the Service”). Per the Service’s records, the began filing
Form , Return of Organization Exempt from income Tax, starting with the tax period ending

and selected Section 501(c)(7) of the Internal Revenue Code as their tax-
exempt status.

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Forms
The reported the following income and expenses on the Forms , Return of Organization
Exempt from Income Tax, for the tax periods ending and
Form , Part VIII, Statement of Revenue
2 | Program Service Revenue: Use Fees ( ») $ $
2 | Program Service Revenue: Use Fees (Private Events) $ $
3 | Investment Income $ $
10a | Gross sales of inventory $ $
10b | Less: cost of goods sold $ $  ( )
11 | Miscellaneous Revenue: Event related donations $ $ -
11 | Miscellaneous Revenue: Other donations $ $
11 | Miscellaneous Revenue: Other donations $ $ -
11 | Miscellaneous Revenue: Maintenance Fund $ $
11 _| Miscellaneous Revenue: to maintenance fund from savings $ $ -
11 | Miscellaneous Revenue: transfer into EMF $ - $
12 Total revenue | $ $
Form , Part IX, Statement of Functional Expenses
7 | Other salaries and wages $ $
10 | Payroll taxes $ $
13 | Office expenses $ $
16 | Occupancy $ $
24 | Other expenses: other $ $
24 | Other expenses: Late Fee/Bank Fees $ $
24 | Other expenses: out of savings to maintenance fund $ $ -
24 | Other expenses: Insurance $ $
25 Total functional expenses | $ $
Per the Service’s records, the has not a filed a Form ,
, to report any unrelated business income.
Rental Contracts .
In addition to the rental fee received from the , the charges a rental fee for private
events held in the building. Per the provided hall rental rate sheet, the charges different rates
for members and nonmembers. The waives any rental fee for events that are educational,
alcohol-free, , and open to the community. Security and cleaning services are available for
an additional fee.
The contract with the , Signed on , is for an initial term of five years;

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automatically renewing for an additional terms of years each. An annual fee of $ is
to be paid in equal monthly installments of $ . In consideration of the contract and fee, the
are giving priority in using the property. Per section 6.1 of the contract, the will use
the property for their meetings and to conduct their charitable and fraternal programs and functions.
Upon termination or expiration of the contract, the will make annual legacy payments equal to
% of their gross revenue to the for years.

Activities

Due to the overlapping membership between the and the , a single combined calendar

was maintained for their activities. A calendar was requested during the field visit, but the
was unable to provide one and a calendar was substituted in its place. The calendars

show that one day each quarter was scheduled for members to come clean up and to handle

building maintenance. A board meeting is held each month, usually preceding the monthly

board meeting.

The building is primarily used by the to conduct a weekly bingo game that is open to
the general public. Aside from bingo, the building is also used by the to conduct various
fundraisers or other charitable collection events open to the public. When the building is not in use
by the , the makes it available for private events for a fee or to other organizations, such
as the , for free. Use of the building for private events is advertised on the

website [see Exhibit A]. The and the do occasionally have member-only
events, such as a beer-brewing event and holiday parties.

LAW:

Section 501(c)(7) of the Internal Revenue Code (“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 net earnings of which inures to the benefit of any
private shareholder.

Section 1.501(c)(7)-1(a) of the Federal Tax Regulations (“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 non-profitable
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

Section 1.501(c)(7) — 1(b) of the 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 non-profitable purposes, and is not exempt under section 501(a). Solicitation by advertisement

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or otherwise for public patronage of its facilities is prima facie evidence that the is engaging in

business and is not being operated exclusively for pleasure, recreation, or social purposes.

Public Law 94-568, 1976-2 C.B. 596 provides that a social club may receive up to 35 percent of its
gross receipts, including investment income from sources outside its membership, without losing
exemption, 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.

Revenue Ruling 60-324, 1960-2 C.B. 173 states that a social club which has been granted
exemption from Federal income tax under section 501(c)(7) of the Code may lose its exemption if it
makes its club facilities available to the general public on a regular, recurring basis since it may then
no longer be considered to be organized and operated exclusively for its exempt purpose.

Revenue Ruling 66-150, 1966-1 C.B. 147 concluded that an organization which holds title to a
building housing its parent, maintains the building, and operates the social facilities (i.e., bar,
restaurant, and game room) located in the building does not qualify for exemption from federal
income tax under section 501(c)(2) or 501(c)(4) of the Code; but it does qualify under section
501(c)(7) of the Code.

Revenue Ruling 69-220, 1969-1 C.B. 154 rules that a social club that receives substantial rental
income and uses that income to defray operating expenses and to improve and expand its facilities
isn't exempt under section 501(c)(7) of the Code.

Revenue Procedure 71-17 sets forth the guidelines for determining the effect of gross receipts
derived from the general public’s use of a social club's facilities on exemption under Section
501(c)(7) of the Code. Where nonmember income from the usage exceeds the standard as outlined
in this Revenue procedure, the conclusion reached is that there is a nonexempt purpose and
operating in this manner jeopardizes the organization’s exempt status.

TAXPAYER’S POSITION:

Taxpayer's position has not been provided.

GOVERNMENT’S POSITION:

is organized as an organization exempt under Internal
Revenue Code Section 501(c)(7).

It is the government's position that the articles of incorporation and bylaws do not meet the
organizational requirements under Section 501(c)(7) of the Code. Rather than being organized for
the purpose of pleasure or recreation for its members, the primary purpose is to hold title to
and maintain real property on behalf of a related organization. The existence is dependent on

[Page 4]

- . exhibi

it owning real property; per its bylaws any sale or disposition of the real property would cause the
dissolution of the . Additionally, the does not meet the exception criteria stated in Revenue
Ruling 66-150, due to it not operating any social facilities for its members such as a bar or
restaurant.

Whether is operating as an organization exempt under Internal
Revenue Code Section 501(c)(7).

As to whether the meets the operational requirements to be exempt under Section 501(c)(7) of
the Code, it is the government's position that the fails to meet these requirements due to the
following:
e Receiving more than an insubstantial part of its gross receipts from outside its
membership.
e Allowing the general public access to the facilities on a regular and recurring basis.
e Lack of socialization among members.

The only provided records for the tax year that indicated the portion of rental income
received from members and nonmembers. Per Revenue Procedure 71-17, we will treat all rental
income received for private events as nonmember sourced for the tax year. For the years
under examination, the received %and % oftheir gross receipts from nonmember sources
in and , respectively. These amounts exceed the % limit on income from non-member
use of facilities set forth in Public Law 94-568. Additionally, the did not report the income
received from nonmembers, income from members for private events, and interest income on a
Form , as is required by an organization exempt under Section 501(c)(7) of the Code.

Gross Receipts | Percentage

Use Fees (Private Events) $ %

Total Gross Receipts (Corrected for transfer reported as revenue) | $

Gross Receipts | Percentage

Use Fees (Private Events-Nonmember) $ %

Use Fees (Private Events-Member) $ %

Total Gross Receipts | $

Further examination of the other source of income, the rental fee received from the F
and the shared calendar of activities indicate that the income was for the use of the building
for their bingo game. It was determined that the weekly bingo game, along with other fundraising
events also open to the general public, are the primary use for the building. There is a lack of
activities or facilities (such as a bar or restaurant) that support socialization among members. Any
member-only events, such as the board meetings and occasional holiday party were incidental.

[Page 5]

it was determined that the sole purpose is managing rental operations for the building. This is

supported by their organizational documents, sources of income, and activities.

CONCLUSION:

Based on the provided organizational documents and operations, we have determined that the
does not meet the requirements for an organization exempt under Section
501(c)(7) of the Code and is disqualified for the tax periods ending and

Should this disqualification be upheld, Form 1120, U.S. Corporation Income Tax Return, must be
filed starting with tax periods ending

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