IRS revokes a fraternal title-holding group's 501(c)(7) status after it sold its building and kept only investment income

Plain-English summary

This organization started as a company that owned and held title to a building for a fraternal lodge. Over the decades its tax classification shifted: originally exempt as a title-holding corporation (Section 501(c)(2), formerly Section 101(14) of the 1939 Code), then reclassified to a Section 501(c)(7) social club when it ran a bar and bingo for members, and once even back to 501(c)(2). By the time of this audit, the group had sold its building and stopped all social activity. Its only activity now is investing the sale proceeds and passing the investment income to a related fraternal chapter for charitable purposes. A 501(c)(7) social club can take no more than 35 percent of its gross receipts from outside its membership, and investment income counts against that limit. Here essentially 100 percent of the group's income is investment income, so it far exceeds the limit. It also fails a basic requirement of a social club: members must actually gather and socialize (the "commingling" requirement), and there are no social activities left. The taxpayer agreed with the revocation and said it hoped to reapply as a title-holding company under 501(c)(2). The IRS revoked the exemption, and the group must file Form 1120.

Ruling snapshot

• Question: Should a fraternal title-holding group's IRC § 501(c)(7) exemption be revoked when it sold its building, has no social activities, and earns only investment income?
• Outcome: Revocation (final adverse determination; taxpayer agreed)
• Key authorities: IRC §§ 501(c)(7), 512(a)(3)(B); Treas. Reg. § 1.501(c)(7)-1(a); Pub. L. 94-568; Rev. Ruls. 58-589 and 60-324

Full text (IRS public release)

Department of the Treasury Date: 01/14/2022
Internal Revenue Service
Tax Exempt and Government Entities Taxpayer ID number:
Form:
Number: 202244014
Release Date: 11/4/2022 Tax periods ended:
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), effective
. 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 pleasure and recreation of your members or other
nonprofitable purposes and no part of the earnings inures to the benefit of any private shareholder within the
meaning of IRC Section 501(c)(7). Your sole activity is generating investment income. 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 set by Public Law 94-568 for years ending and

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,

[illegible signature]
Sean E. O'Reilly
Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

Letter 6337 (12-2020)
Catalog Number 74808E

Department of the Treasury Date: 6-7-2021
Internal Revenue Service Taxpayer ID number:
Tax Exempt and Government Entities
Form:
Tax periods ended:

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

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.

[DELETE PARAGRAPH BELOW IF NOT APPLICABLE — Only Applicable to Group
Exemption Parent Organizations]

[Revenue Procedure 80-27 requires that, in the event your tax-exempt status is revoked, your
group exemption will also be revoked. If that occurs, none of your subordinates will be able to
rely on the group ruling for tax-exempt status. You should notify each subordinate of this
proposed action.]

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).

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

Sincerely,

Sean E. O'Reilly
Director, Exempt Organizations
Examinations

Enclosures:
Form 886-A
Form 6018

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

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

Issue
Should tax-exempt status under Internal Revenue Code (IRC) section 501(c)(7) be
revoked?

Facts

was incorporated in of in under the name
. Article II of the Articles of Incorporation state
specific purpose is to own and maintain a building for the accommodation of the
and other charitable and social bodies of like character, and for the preservation and
dissemination of the principles of the

Supplemental Articles of Incorporation were signed in of in changing the
organization's name from to
. Article II states the specific purpose is buying, owning, and leasing all such real and
personal property as may be required or desired by
for establishing club rooms, reading room, library and gymnasium for the purpose of carrying out the
activities of the

Amended Articles of Incorporation were signed in of in changing the
organization's name from to
The IRS issued Form 6975 dated , granting
exemption from Federal income tax under the provisions of Section 101(14) of the Internal
Revenue Code.

submitted Form 1026, Exemption Affidavit, to the Internal Revenue Service (IRS)
under IRC Section 101(14), Corporations Holding Title to Property for Exempt Organizations.
described its purpose is to acquire, own, or lease real and personal property as may be required or
desired by . Form 1026 described income as being
derived from the transfer of bonds, or cash from obtained
from dues, assessments, social activities, and interest on bonds held in the building fund.

Amended Articles of Incorporation were signed in of in changing the
organization's name from to

On , the IRS issued Form 1937-A reconsidering the ruling dated , issued in
the name of , in which exemption was granted under
Section 101(14) of the 1939 Internal Revenue Code, which corresponds to Section 501(c)(2) of the 1954
Code. Based on the results of the examination of Form for the fiscal year ended , it was
determined that the activities of operating a bar and bingo game for members were more in the nature of a
social club. The primary activities did not meet the requirements of exemption under Section 501(c)(2) of
the Internal Revenue Code but they do fall within the provisions for Section 501(c)(7) of the Code. The
ruling dated was modified accordingly.

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
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

Form was examined for the tax period ending . During the
examination, the revenue agent noted that the sole activity was the collection of rents from the building
owned by the . no longer operated the bar or bingo activities reported in the prior
examination. The agent determined that the organization would be suited better under Section 501(c)(2). On
, the IRS issued Letter 948 recognizing as a tax-exempt
organization under IRC 501(c)(2).

For the tax years ended , and ; Forms and
were examined. During the examination, delinquent Forms for the years ended and
were secured during the examination due to having unrelated business gross income of $ or
more. A letter from the IRS dated , stated no change to exemption status was necessary, and
advised that all nonmember and investment income receipts are regarded to be unrelated business income in
accordance with Section 512(a)(3). Form 6018, Consent to Proposed Adverse Action, modified exemption
status from Section 501(c)(2) to 501(c)(7), effective .

filed Form , , for the year ending
on . filed Form for the year ending on
. On both Forms, stated its mission is charity, unity, fraternity,
and patriotism. Use of investment income and proceeds from the sale of their building to donate to the
was listed as a significant activity. The following table lists the financial data that
appears on and Forms

Investment Income $ $
Other Revenue
Total Revenue $ $
Grants and similar amounts $ $
Other Expenses $ $
Total Expenses $ $
Assets $ $
Liabilities $ $

In , the IRS began an examination of books and records for period
ending because reported non-member income in excess of 15% of total
gross receipts on the Form .
On , Revenue Agents conducted an initial interview with
Power of Attorney and Treasurer . The following information was
provided by them during the interview.

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
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

They stated that the organization was previously established to hold title to a former building. All members
of , around people, are members of the fraternal
organization. The chapter was not able to hold title to the building due to their parent
organization's rules against owning property. During an examination in the , the organization's
exemption status changed from Section 501(c)(2) to Section 501(c)(7) because at that time they had a lounge and
bingo activities.

sole activity currently is providing money to their related organization,
, for charitable purposes. They sold their previous building and generate investment income from
the proceeds of the sale.

Revenue Agent explained to the representatives that provisions under Section 501(c)(7) state that
nonmember income, including investment income, may not exceed 35%. He also stated that since there are
no other activities, specifically social activities, the organization is not meeting the commingling
requirement under Section 501(c)(7). Revenue Agent explained that these are grounds for revocation,
and due to tax law changes, we are no longer able to modify exemptions during an examination.

representative stated they understand the reasoning for revocation but asked about
remedies to tax exemption. He expressed interest in reapplying under Section 501(c)(2). Revenue Agent
explained that IRS agents are not permitted to suggest applying for a certain tax exemption, but they
may attempt to apply for another Section of the Internal Revenue Code if they wished to remain tax exempt.

Law

IRC Section 501(c)(7) states in part the federal tax exemption of 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.

IRC section 512(a)(3)(B) provides in part that the term "exempt function income" means the gross income
from dues, fees, charges, or similar amounts paid by members of the organization as consideration for
providing members or their dependents or guests goods, facilities, or services in furtherance of the purposes
constituting the basis for the exemption of the organization to which such income is paid.

Federal Tax Regulations (Regulations) Section 1.501(c)(7)-1(a) states in part that the exemption criteria in
IRC section 501(c)(7) 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.

Revenue Ruling 58-589, 1958-2 C.B. 266 describes in part that a club must have an established
membership of individuals, personal contacts, and fellowship to qualify for tax exemption under IRC
501(c)(7). A commingling of the members must play a material part in the life of the section 501(c)(7)
organization.

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
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

Revenue Ruling 60-324, 1960-2 C.B. 173 details in part an organization that was denied tax exemption
under Code section 501(c)(7) due to having between % of income derived from nonmember sources.

Public Law (P.L.) 94-568 amended IRC Section 501(c)(7) to allow those organizations to receive up to 35
percent of their gross receipts, including investment income, from sources outside their membership without
losing their exempt status. Within the 35 percent, no more than 15 percent of gross receipts should come
from the general public's use of the social club's facilities or services. If an organization has outside income
over the 35-percent or 15-percent limit, the facts and circumstances should be considered to determine
whether the organization qualifies for exempt status.

Taxpayer's Position
The organization agrees with the revocation of their exemption under Section 501(c)(7). They wish to
reapply under Section 501(c)(2) after the examination concludes.

Government's Position
does not qualify to be recognized as a tax-exempt organization under IRC 501(c)(7)
because it does not have commingling activities and exceeds the 35% limitation of nonmember income.

IRC 501(c)(7) provides exemption for clubs of pleasure, recreation, or similar purposes. Revenue Ruling 58-
589 emphasizes that an organization described under IRC 501(c)(7) must have an established membership,
and that a commingling of members must play an essential part of the life of the organization.

sole activity is generating investment income to provide to their related
chapter. There are no social activities, therefore they fail the requirement for commingling amongst
members under IRC 501(c)(7).

P.L. 94-568 provides that an IRC 501(c)(7) organization receive no more than 35 percent of its gross
receipts from sources outside its membership, and no more than 15 percent of gross receipts from
nonmember sources. Further, if an organization cannot meet the 35- or 15-percent limitations, a facts and
circumstances test should be applied to determine the eligibility of an organization for exemption under IRC
501(c)(7). only source of revenue is investment income; therefore, all of its income is
from nonmember sources. Since has failed the 35 percent income limitation, the facts
and circumstances should be taken into consideration. However, the facts and circumstances do not indicate
is a social club under IRC 501(c)(7): there are no social activities, just the generation
investment income.

Conclusion

does not qualify for tax-exempt recognition under IRC 501(c)(7) and should be denied
for the years ended and . The organization is liable for filing Form 1120 for the
years and

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