Revocation of 501(c)(7) social-club exemption for public use of facilities and excess nonmember income

Plain-English summary

The IRS revoked the tax-exempt status of a social club recognized under
section 501(c)(7). A 501(c)(7) club is meant to be supported mainly by its
members and operated substantially for the pleasure and recreation of
members. On audit, the IRS found this club rented out its facility to the
general public on a regular, first-come basis, advertised the rentals with
signage and a booking phone line, and drew most of its income from
nonmembers. The officers explained that members could not afford enough in
dues to maintain the facility, so public rentals had become the club's
main way to stay afloat. Under the law, a 501(c)(7) club may receive only
up to 35 percent of gross receipts from outside its membership, and no
more than 15 percent from public use of its facilities; exceeding those
limits on a recurring basis defeats exemption. Because the club's
nonmember income exceeded the threshold year after year, the IRS proposed
revocation, and the taxpayer agreed. Once revoked, the club must file
regular income tax returns. This document combines the final revocation
letter (Letter 6337), the earlier proposed-revocation letter (Letter
3618), and the Form 886-A audit explanation.

Ruling snapshot

• Question: Does a social club still qualify under IRC § 501(c)(7)
  when it rents its facility to the public and gets most of its income
  from nonmembers?
• Outcome: Revoked (taxpayer agreed with revocation)
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7); Pub. L.
  94-568 (Senate Report No. 94-1318); Rev. Rul. 66-149; Rev. Rul. 60-324;
  Rev. Proc. 71-17

Full text (IRS public release)

Department of the Treasury                    Date: September 9, 2021
Internal Revenue Service
Tax Exempt and Government Entities            Taxpayer ID number:
Number: 202240025                             Tax periods ended:

Release Date: 10/7/2022

Form:

Person to contact:
Name:
ID number:
Telephone:
UIL: 501.07-00                                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        is revoked.

Our adverse determination as to your exempt status was made for the following reasons: You have not
established that you are operated substantially for the pleasure and recreation of its 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. By
leasing your facilities, you are engaging in a regular trade or business and derive a significant profit from the
activity. You receive the majority of your income from nonmember sources on a recurring basis. As a result,
you do not operate substantially for pleasure, recreation, or other non-profitable purposes.

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.

Sincerely,

Sean E. O'Reilly
Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

cc:

Letter 6337 (12-2020)
Catalog Number 74808E


Department of the Treasury                    Date: August 11, 2020
Internal Revenue Service                      Taxpayer ID number:
Tax Exempt and Government Entities
IRS Form:
Tax periods ended:

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

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

CERTIFIED MAIL - Return Receipt Requested
Dear

Why you're receiving this letter
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.

After we issue the final adverse determination letter, we'll announce that your organization is no
longer eligible to receive tax deductible contributions under IRC Section 170.

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.

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

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.

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.

For 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).

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


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

Enclosures:
Form 886-A
Form 6018
Form 4621-A

Sincerely,

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

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


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

ISSUE
Whether        continue to qualify for exemption under IRC (IRC) § 501(c)(7)?

FACTS
        was formed in        to built and support the        community. Their activity includes member luncheon,
fundraising activities to support        , and         their facilities both to members and nonmembers.
        conducted tour of the business. Organizations business is advertised through the signage in front of the
facility, some that refers inquirers to the organization telephone contact number, and the        . There was a sign
post in front of the facility that states, "        " and a phone number "        ", Officer stated in the interview that
people call the telephone number posted on the signage. Inquirers can call contracted site manager to book and
view the facility. The contracted site manager makes the        ready for showing. Inquirer can book the site after
the showing by reserving a date with usual deposit in the amount of $        . Member and nonmember inquirers
can        based on        come serve basis. Reservations can be made to        in advanced.
There are no reservation priority given to the members but members do receive discount on the        . Discount is
considered for member, other nonprofit, and        .

The        can be made with or without the        service.        services is contracted out to a        service
company. The preparation and cleaning service is provided by the contracted worker of the organization who
make sure of the maintenance and facility usage during the events.

        reviewed Organizations record for the facility        . For the audit year, facility was        by the member
        times and by the nonmember        times. The member who        was traced and verified on the membership
roster.

Current officers do not know when the        began for the organization. VP joined the organization in        and
the        was already in place for the organization. The starting date of the        cannot be determined.

The officers stated that due to the socioeconomical background of their members, they are not able to collect
enough membership fee to cover for maintenance of        and business with the general public is the only means
to maintain their facility.

Organizations Future Plans —

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
Name of taxpayer          Tax Identification Number (last 4 digits)          Year/Period ended

        conducted researched during the pre-audit phase and found articles about the organization's covenant
with the city.        discussed with the officers and the Representative about the future organization plan. Officer
stated that the organization is working on the covenant with the city to operate a        on their facility. City will
give grants to the organization to renovate and restore the facility. Organization will        out the facility to the
        that will take over event        . Organization will continue to meet at the facility        .        will operate
for breakfast and lunch. Officers hopes that they can still make the facility available for evening event rental.
The covenant with the city is for        years.

Since renting their facility to the        will relieve them from the financial burden of maintaining the facility repairs
and preservation, the officers believe that they can better focus on the main purpose of the organization.

The organization reported the following sources and amounts of revenue on Forms        for the periods ending
        and        :

Total Member Income            $        $ -        $                A
Total Nonmember & Investment Income-      $        $ -        $        B
Total Income                   $ —       $ -        $                C
Member %                       -        A/C %        #DIV/0! %
Total Nonmember & Investment %  -        B/C %       #DIV/0! %

While reviewing the general ledger, income statement, minutes of meetings, website, as well as other internal
documents provided by the organization, such as contracts, income/expense report, it has been noted that the
organization is open to the general public on a regular basis, as stated previously.

Based on conducting a        -year analysis of gross receipts, it has been noted that the organization received
        % and        % from non-members, during tax years ending        and        , respectively.

LAW
IRC § 501(c)(7) exempts from federal income tax clubs organized for pleasure, recreation, and other
non-profitable purposes, substantially all of the activities of which are for such purposes and not part of the net
earnings of which inures to the benefit of any private shareholder.

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 or exhibit
Explanations of Items
Name of taxpayer          Tax Identification Number (last 4 digits)          Year/Period ended

Section 1.501(c)(7) of the Regulations provides that, in general, the exemption extends to social and recreation
clubs supported solely by membership fees, dues and assessments. However, a club that engages in a
business, such as making its social and recreational facilities open to the general public, is not organized and
operated exclusively for pleasure, recreation and other non-profitable purposes, and is not exempt under
section 501(a).

Prior to its amendment in 1976, IRC § 501(c)(7) required that social clubs be operated exclusively for pleasure,
recreation and other nonprofitable purposes. Public Law 94-568 amended the "exclusive" provision to read
"substantially" in order to allow an IRC § 501(c)(7) organization to receive up to 35 percent of its gross receipts,
including investment income, from sources outside its membership without losing its tax exempt status. The
Committee Reports for Public Law 94-568 (Senate Report No. 94-1318 2d Session, 1976-2 C.B. 597) further
states;

(a) Within the 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 an exempt social club may
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.

(b) Thus, a social club may receive investment income up to the full 35 percent of its gross receipts if no income
is derived from non-members' use of club facilities.

(c) In addition, the Committee Report states that where a club receives unusual amounts of income, such as
from the sale of its clubhouse or similar facilities, that income is not to be included in the 35 percent formula.

Revenue Ruling 66-149 holds a social club as not exempt as an organization described in IRC § 501(c)(7)
where it derives a substantial part of its income from non-member sources.

Revenue Ruling 60-324 states by making its social facilities available to the general public the club cannot be
treated as being operated exclusively for pleasure, recreation or other non-profitable purposes.

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 IRC § 501(c)(7). Where nonmember income
from the usage exceeds the standard as outlined in this Revenue procedure, the conclusion reached is that
there is a non-exempt purpose and operating in this manner jeopardizes the organization's exempt status.

TAXPAYER'S POSITION
Taxpayer's position agrees with revocation.

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 or exhibit
Explanations of Items
Name of taxpayer          Tax Identification Number (last 4 digits)          Year/Period ended

GOVERNMENT'S POSITION
Based on the examination, the organization does not qualify for exemption as a social club described in IRC
§ 501(c)(7) and Treas. Reg. § 1.501(c)(7) which provides that in general, this exemption extends to social and
recreation clubs which are supported solely by membership fees, dues, and assessments.

Rev. Ruls. 66-149 and 60-324 support this position stating that a social club that opens to the public and derives
a substantial part of its income from non-member sources is not exempt as an organization described in
501(c)(7).

The        permits unrestricted use of its facilities by the general public. The organization has exceeded the        %
non-member threshold as outlined in Public Law 94-568, on a recurring basis during tax years ending        and
        . Accordingly, it is proposed that the tax exempt status be revoked effective        .

CONCLUSION
        no longer qualifies for exemption under § 501(c)(7) of the Code as your nonmember income has exceeded
the        % nonmember threshold on a continuing basis. Therefore, it is proposed that your exempt status under
§ 501(c)(7) of the Code be revoked effective        .

Should this revocation be upheld, Form        must be filed starting with tax periods ending        and        .

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