IRS revokes a social club's tax exemption for excessive non-member income

Plain-English summary

A tax-exempt social club (IRC § 501(c)(7)) owned a building with two halls it
rented to both member and non-member groups. On audit, the IRS found the club's
income from non-members exceeded the limits Congress set in Public Law 94-568
(explained in Senate Report 94-1318): a club may take up to 35% of gross receipts
from outside its membership, and no more than 15% from use of its facilities by
the general public. Because the non-member rental income was substantial and
recurring, and because the club rented to other clubs (a § 501(c)(7) club must
have individual members and fellowship, and cannot count clubs as members), the
IRS concluded it was no longer operated exclusively for pleasure and recreation.
This document bundles the final revocation (Letter 6337), the earlier proposed
revocation (Letter 3618), and the Form 886-A audit report laying out the facts,
law, and analysis. The revocation applies to the tax years examined, and the
organization said it would protest to IRS Appeals. Exact dollar figures,
percentages, and identifying details were redacted by the IRS.

Ruling snapshot

• Question: Should a social club's § 501(c)(7) exemption be revoked because its non-member income exceeded the 35%/15% limits?
• Outcome: Revocation (final adverse determination)
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7)-1; Public Law 94-568 (S. Rep. 94-1318); Rev. Proc. 71-17; Rev. Ruls. 58-589, 60-324, 66-149, 67-428, 69-219; Pittsburgh Press Club v. United States, 536 F.2d 572 (1976); Polish American Club, Inc. v. Commissioner, 33 T.C.M. 925 (1974)

Full text (IRS public release)

Department of the Treasury                          Date: May 10, 2021
Internal Revenue Service
Tax Exempt and Government Entities

IRS Taxpayer ID number.

Form:

Tax periods ended:

Release Number: 202233015

Release Date: 8/19/2022                             Person to contact:
UIL Code: 501.07-00                                 Name:
                                                    ID number:
                                                    Telephone:
                                                    Fax:

CERTIFIED MAIL - RETURN RECEIPT REQUESTED:
Dear

Why we are sending you this letter
This is a final determination that you don't qualify for exemption from federal income tax under Internal
Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(7), for the tax
periods above. Your determination letter dated November 19, is revoked.

Our adverse determination as to your exempt status was made for the following reasons: You no longer qualify
for exemption under IRC Section 501(c)(7), as your non-member income has exceeded the 35% non-member
income limit and the 15% income from non-member use of facilities limit set by Public Law 94-568.

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.

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.

Letter 6337 (12-2020)
Catalog Number 74808E

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.

[illegible signature]

Sean E. O'Reilly
Director, Exempt Organizations Examinations

Sincerely,

Enclosures:
Publication 1
Publication 594
Publication 892

Letter 6337 (12-2020)
Catalog Number 74808E

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

IRS

CERTIFIED MAIL, Return Receipt Requested

Dear

Why you're receiving this letter

Date:
September 1, 2020

Taxpayer ID number:
Form:

Tax periods ended:

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

Manager's contact information:
Name:
ID number:
Telephone:

Response due date:

October 1, 2020

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

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,
[illegible] for
Sean O'Reilly
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018

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

Department of the Treasury — Internal Revenue Service                          Schedule number
Form 886-A                                                                     or exhibit
Explanations of Items                                                          Exhibit 1
Name of taxpayer          Tax Identification Number (last 4 digits)  |  Year/Period ended

THIS IS AN INITIAL REPORT

ISSUE:

Whether the tax-exempt status of                , an IRC Section 501(c)(7) social club,
should be revoked due to excessive non-member income.

FACTS:

A review of the Secretary of State website on          , shows that
("      ") incorporated in          on          , Its principal office is in
          ,      and it's active and in good standing with the state. The Form for the fiscal
year ending          , Form "       ") states that the purpose is to promote recreational

The IRS issued a ruling for tax exempt status in          , recognizing the exemption under
IRC 501(c)(7) of the Internal Revenue Code ("the Code"). For fiscal years up to the present, the
timely filed Form and . The Form __, Part VIII, line 2a, lists hall rental income ($    ) as
income from leasing to member . Member clubs include such clubs as          ,
(     ),      , etc. Per contract for "Regular Member User",
provided by the      , the "User" (      club) will maintain a minimum of    % membership and a
special assessment of $    per person will be charged all not members of the
      . Membership cards are to be checked to verify membership, unless the person is known to be a
member. In Part VII, line 6a, gross rents $    represented the unrelated trade or business income.
In addition, the reported    % of its gross rents $    on Form and took the $    specific
deduction. On the Form unrelated business taxable income was a net loss of ($ __) that resulted in an
overpayment of $ . The organization chose to apply the overpayment of $    to estimated tax payments
for the fiscal year ending

The      owns the building in which it conducts its activities. The      runs and rents them out to
member and non-member groups. The sources of the income are: membership dues, rental
income from leasing the two halls to member and non-member groups, donations and interest income.

On          , Internal Revenue Agent ("the Agent") interviewed          ("the
Treasurer") and          , POA, CPA ("the Accountant"). The Treasurer discussed that the
      has membership requirements; the club rents the      to member and non-member groups.

In addition, the Accountant and the Treasurer discussed that they were not aware of Revenue Procedure 71-
17 or Senate Report 94-1318. They provided contracts for member and non-member groups.

On          , the Agent conducted an examination of the books and records. The scope of the
examination is to schedule and analyze the records to determine if the records comply with the
record keeping requirements of Revenue Procedure 71-17; and, to determine if the      is organized and

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

Form 886-A          Department of the Treasury — Internal Revenue Service          Schedule number
                                                                                   or exhibit
Explanations of Items                                                              Exhibit 1
Name of taxpayer          Tax Identification Number (last 4 digits)  |  Year/Period ended

operated exclusively for pleasure, recreation, and other nonprofitable purposes within the meaning of Public
Law 94-568 (Senate Report 94-1318).

The Agent located records substantiating gross receipts derived from non-members. The Treasurer provided
a folder with rental contracts for fiscal year ending          . Some of the contracts were signed with
member groups and some of the contracts were signed with outside non-member groups. Member
groups usually pay $    for a Large per event and $    for a Small per event. The non-member
fee usually varies between $    -      per event.

The books and records reported income from following sources for the year ending

Table 1 Sources of income for the year ending

Sources of income          Member/Non-Member          Amount
Membership dues            Member                     $
Program Income             Member                     $
Donations                  Member                     $
Guest fees                 Member                     $
Rental —                   Member                     $
Rental Other               Non-member                 $
Income per P&L Statement for the fiscal year          $

On       Agent mailed Information Document Request (IDR) # 0002 for the
year ending          , thereby extending the audit to the next year. IDR # 0002 requested
file, contracts with clubs, bank statements, membership list, etc.
On       Agent received the response from the      . The provided the requested documents in
IDR # 0002.
The books and records reported income from following sources for the year ending

Table 2 Sources of income for the year ending

Sources of income          Member/Non-Member          Amount
Membership dues            Member                     $
Donations                  Member                     $

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

Form 886-A          Department of the Treasury — Internal Revenue Service          Schedule number
Explanations of Items                                                              Exhibit 1
Name of taxpayer          Tax Identification Number (last 4 digits)  |  Year/Period ended
Guest fees                 Member                     $
Rental —                   Member                     $
Rental Other               Non-member                 $
Income per P&L Statement for the fiscal year          $
The Form reported income from the following sources for the year ending          and
Table 3 Comparison of the income on Form for the years ending          and
                                                          Amount for  |  Amount for
Description Sources of income                             year ending  |  year ending
Membership dues - Part VIII, line 1b          Member          $          $
Program Income Part VIII, line 2b             Member          $          0
Donations - Part VIII, line 1f               Member          $          $
Guest fees Part VIII, line 2c                 Member          $          $
Rental, Part VIII, line 7a                    Member          $          $
Gross rents - Part VIII, line 6a             Non-member       $          $
Total revenue                                                 $          $
The also filed Form for both          and          years. The non-member income — rent from the
      - was reflected on Forms
Table 4 Comparison of the income on Form for the years ending          and
Description                    Amount for year ending          Amount for year ending

Rent income — Part II, line 6          $          $

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

Form 886-A          Department of the Treasury — Internal Revenue Service          Schedule number
Explanations of Items                                                              Exhibit 1
Name of taxpayer          Tax Identification Number (last 4 digits)  |  Year/Period ended

Repairs and maintenance Part II,          ($    )          ($    )
line 16

Interest (Rental of hall) — Part II,          ($    )          ($    )
line 18

Taxes and licenses — Part II, line          ($    )          ($    )
19

Depreciation — Part II, line 21          ($    )          ($    )

Other deductions (Insurance,          ($    )          ($    )
utilities) — Part II, line 28

Total deduction          ($    )          ($    )

UBI before specific deduction          ($    )          ($    )

Unrelated business taxable          ($    )          ($    )
income - Part II, line 34
On Form for the year ending          the claimed net income (Revenue less expenses, Part
I, line 19) in amount of $    . The included net loss of ($    ) from Form as Other revenue on
Part I, line 11 on Form . This net loss of ($    ) is rental income received from non-members of the club
minus expenses that were reflected on for the same fiscal year.
On Form for the year ending          the claimed net income (Revenue less expenses, Part
I, line 19) in the amount of $    . The included net loss of ($    ) from Form as Other revenue
on Part I, line 11 on Form . This net loss of ($    ) is rental income received from non-members of the
club minus expenses that were reflected on for the same fiscal year.

The table below lists an analysis of the receipts identified during the examination or reported on Form

Table 5 Non-member income percentage for -      years
Reporting Year          Total Income          Total nonmember          Nonmember income % of total
                                              income                    income
                        $                     $                        %
                        $                     $                        %

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

Form 886-A          Department of the Treasury — Internal Revenue Service          Schedule number
Explanations of Items                                                              Exhibit 1
Name of taxpayer          Tax Identification Number (last 4 digits)  |  Year/Period ended

Table footnotes:

1: Per Form , Part V, line 1h+2g+6a
2: Per examination or Form , Part V, line 6a Gross Rents
3: Per Form , Part I, line 19

LAW:

Section 501(c)(7) of the Internal Revenue Code (the Code) provides for the exemption from federal income
tax for 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 exemption provided by Section 501(a) of the Code
for organizations described in Section 501(c)(7) of the Code 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 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.
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.

Treasury Regulation Section 1.501(c)(7)-1(b) 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 nonprofitable purposes,
and is not an exemption under Section 501(a) of the Code. 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 purpose. However, an incidental sale of property will
not deprive a club of its exemption.

The Senate Report 94-1318 to Public Law 94-568, 1976-2 C.B. 896, 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. This means that
a club exempt from taxation described in Section 501(c)(7) is to be permitted to receive up to 35 percent of
its gross receipts from a combination of investment income and receipts from non-members so long as the
latter do not represent more than 15 percent of total receipts.

Revenue rulings:

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

Form 886-A          Department of the Treasury — Internal Revenue Service          Schedule number
Explanations of Items                                                              Exhibit 1
Name of taxpayer          Tax Identification Number (last 4 digits)  |  Year/Period ended

Revenue Ruling 66-149, 1966-1 C.B. 146, held that a social club is not exempt from Federal income tax as
an organization described in Section 501(c)(7) of the Internal Revenue Code of 1954 where it regularly
derives a substantial part of its income from nonmember sources such as, for example, dividends and
interest on investments which it owns. However, a club's right to exemption under section 501(c)(7) of the
Code is not affected by the fact that for a relatively short period a substantial part of its income is derived
from investment of the proceeds of the sale of its former clubhouse pending the acquisition of a new home
for the club.

Revenue Ruling 69-219, 1969-1 C.B. 153, held that a social club that regularly holds its golf course open to
the general public and charges established green fees that are used for maintenance and improvement of club
facilities is not an exemption under Section 501(c)(7) of the Code.

Revenue Ruling 60-324, 1960-2 C.B. 173, held that a social club which has been granted exemption from
Federal income tax under Section 501(c)(7) of the Code of 1954 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 67-428, 1967-2 C.B. 204, held that a federation of clubs does not qualify for exemption
from Federal income tax under section 501(c)(7) of the Internal Revenue Code of 1954.

Revenue Ruling 58-589, 1958-2 C.B. 266, held that a social club must establish (1) that it is a club both
organized and operated exclusively for pleasure, recreation and other nonprofitable purposes. To meet the first
requirement, there must be an established membership of individuals, personal contacts and fellowship. A
commingling of the members must play a material part in the life of the organization.

Court cases:

In Pittsburgh Press Club v. USA, 536 F.2d 572, (1976), the Court held that while the reports mandate the
application of a "facts and circumstances test" if gross receipts from nonmember and/or investment income
reach the prohibited levels, they do not specify any of the relevant facts and circumstances to consider.
However, the Court of Appeals in this case indicated some factors to consider in determining exempt status.

Factors to consider in applying this test include:
• The actual percentage of nonmember receipts and/or investment income.

• The frequency of nonmember's use of club facilities. (An unusual or single event (that is, non-
recurrent on a year to year basis) that generates all the nonmember income should be viewed more
favorably than nonmember income arising from frequent use by nonmembers).

• The number of years the percentage has been exceeded. (The record over a period of years is also
relevant. The high percentage in one year, with the other years being within the permitted levels,
should be viewed more favorably to the organization than a consistent pattern of exceeding the limits,
even by relatively small amounts).

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

Form 886-A          Department of the Treasury — Internal Revenue Service          Schedule number
Explanations of Items                                                              Exhibit 1
Name of taxpayer          Tax Identification Number (last 4 digits)  |  Year/Period ended

• The purposes for which the club's facilities were made available to nonmembers.

• Whether the nonmember income generates net profits for the organization. Profits derived from
nonmembers, unless set aside, subsidize the club's activities for members and result in inurement
within the meaning of IRC 501(c)(7).

In Polish American Club Inc v. Commissioner 33 T.C.M 925 (1974) the Court held that making club facilities
available to the general public, for a fee, represented a substantial activity disqualifying the club from
exemption under Section 501(c)(7) of the Code.

Revenue procedures:

Revenue Procedure 71-17, 1971 WL 26186, 1971-1 C.B. 683 sets forth guidelines for determining the effect
gross receipts derived from use of a social club's facilities by the general public have on the club's exemption
from federal income tax under section 501(c)(7) of the Code.

The club must maintain books and records of each such use and the amount derived therefrom. This
requirement applies even though the member pays initially for such use. In each instance the record must
contain the following information:

1. The date;

2. The total number in the party;

3. The number of nonmembers in the party;

4. The total charges;

5. The charges attributable to nonmembers;

6. The charges paid by nonmembers;

7. Where a member pays all or part of the charges attributable to nonmembers, a statement signed by the
member indicating whether he has been or will be reimbursed for such nonmember use and, if so, the
amount of the reimbursement;

8. Where the member's employer reimburses the member or makes direct payment to the club for the
charges attributable to nonmembers, a statement signed by the member indicating the name of his
employer; the amount of the payment attributable to the nonmember use; the nonmember's name and
business or other relationship to the member; and the business, personal, or social purpose of the member
served by the nonmember use; and,

9. Where a nonmember, other than the employer of the member, makes payment to the club or reimburses
a member and a claim is made that the amount was paid gratuitously for the benefit of a member, a

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

Form 886-A          Department of the Treasury — Internal Revenue Service          Schedule number
Explanations of Items                                                              Exhibit 1
Name of taxpayer          Tax Identification Number (last 4 digits)  |  Year/Period ended

statement signed by the member indicating the donor's name and relationship to the member, and
containing information to substantiate the gratuitous nature of the payments or reimbursement.

Exceptions to these record keeping requirements are:

1. Where a group of eight or fewer individuals, at least one of whom is a member, uses club facilities, it
will be assumed for audit purposes that the nonmembers are the guests of the member, provided
payment for such use is received by the club directly from the member or the member's employer.

2. Where 75 percent or more of a group using club facilities are members, it will likewise be assumed
for audit purposes that the nonmembers in the group are guests of members, provided payment for
such use is received by the club directly from one or more of the members or the member's employer.

3. Solely for purposes of 1 and 2, above, payment by a member's employer will be assumed to be for a
use that serves a direct business objective of the employee-member.

GOVERNMENT'S POSITION/ANALYSIS:

Under the guidance of the Pittsburgh Press Club v. USA, when nonmember income reaches a prohibited level,
the following facts and circumstances come into consideration:

• The frequency of nonmember usage of club facilities. (An unusual or single event (that is, non-
recurrent on a year to year basis) that generates all the nonmember income should be viewed more
favorably than nonmember income arising from frequent use by nonmembers)

• The number of years the percentage has been exceeded. (The record over a period of years is also
relevant. The high percentage in one year, with the other years being within the permitted levels,
should be viewed more favorably to the organization than a consistent pattern of exceeding the limits,
even by relatively small amounts).

• The purposes for which the club's facilities were made available to nonmembers.

• Whether the nonmember income generates net profits for the organization. Profits derived from
nonmembers, unless set aside, subsidize the club's activities for members and result in inurement
within the meaning of IRC 501(c)(7).

Based upon the facts, the gross receipts from nonmembers are both substantial and recurring. The
      does not qualify for exemption as a social club described in Section 501(c)(7) of the Code. (Treasury
Regulation Section 1.501(c)(7)-1(a))

Revenue Rulings 67-428 and 58-589 hold: that a club must have a membership of individuals, personal
contacts, and fellowship. A commingling of members must play a material part in the activities of the

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

Form 886-A          Department of the Treasury — Internal Revenue Service          Schedule number
Explanations of Items                                                              Exhibit 1
Name of taxpayer          Tax Identification Number (last 4 digits)  |  Year/Period ended

organization. Although fellowship need not be present between each member and every other member of the
club, it must constitute a material part of the organization's activities. A club can't have other clubs as members
of the club. These revenue rulings support the position that an organization must have membership with
individuals to qualify under Section 501(c)(7).

Revenue Rulings 66-149, 69-219, and, 60-324 support the position that a social club described in Section
501(c)(7) of the Code which regularly derives a substantial part of its income from nonmember sources is not
exempt from Federal income tax.

Revenue Procedure 71-17 (Rev. Proc. 71-17) requires, Section 501(c)(7) organizations, to maintain adequate
records to substantiate the gross receipts derived from nonmembers. Section 4 of Rev. Proc 71-17 provides
the recordkeeping requirements that Section 501(c)(7) organizations are required to prepare and maintain

The Senate Report 94-1318 to Public Law 94-568, 1976-2 C.B. 896, quantitatively defines substantial
amounts of income from nonmembers. The report supports the position that a social club, which is open to
the general public, is permitted to receive up to 35 percent of their gross receipts, including investment income,
from sources outside of their membership without losing their 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. It appears from fiscal years          and
      that the activities exceeded these limitations.

In Polish American Club Inc v. Commissioner, the courts' decision supports the position that a social club
described in Section 501(c)(7) of the Code which regularly derives a substantial part of its income from
nonmember sources, on a recurring basis, is not exempt from Federal income tax.

TAXPAYER'S POSITION

On          Agent discussed with the power of attorney (POA) a potential
revocation of tax exemption and extending an audit for subsequent year via telephone call. The POA said
that they are going to protest to the IRS Office of Appeals.

CONCLUSION

      no longer qualifies for exemption under Section 501(c)(7) of the Code as its
non-member income has exceeded the    % non-member income limit, and the    % income from non-member
use of facilities limit set by Congress and the courts. Therefore, the IRS proposes to revoke its exempt status
under Section 501(c)(7) of the Code for the years ended          and

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