IRS revokes a swim club's 501(c)(7) exemption for excess nonmember income from renting its parking lot

Plain-English summary

This is a final adverse determination revoking a social club's tax-exempt
status under Section 501(c)(7). The club was formed to run a swimming pool
for its members, but the pool closed for lack of participation. To stay
solvent while trying to sell the property, the club rented its adjacent
parking lot to a local car dealer year round. A 501(c)(7) club may draw no
more than 35% of gross receipts from outside its membership, and no more than
15% from public use of its facilities (Public Law 94-568). The IRS found the
parking-lot rental was substantial, recurring, nonmember income that blew
past those limits, so the club was no longer operated exclusively for
pleasure and recreation. The club also failed to keep separate records of
member versus nonmember income (Rev. Proc. 71-17) and did not fully respond
to the examiner's requests. The IRS revoked the exemption, treated the rental
income as taxable unrelated business income under Section 511, and directed
the club to file Form 1120 for the affected years.

Ruling snapshot

• Question: Does a 501(c)(7) swim club keep its exemption when its only ongoing activity is renting its parking lot to nonmembers, producing income above the 15%/35% limits?
• Outcome: Revocation of exempt status
• Key authorities: IRC §§ 501(c)(7), 501(a), 511(a), 512(a)(1); Public Law 94-568; Treas. Reg. § 1.501(c)(7)-1(b); Rev. Rul. 58-589; Rev. Rul. 60-324; Rev. Proc. 71-17; Polish American Club, Inc. v. Commissioner, T.C. Memo 1974-207

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service January 13, 2023
IRS Tax Exempt and Government Entities Taxpayer ID number (last 4 digits):
Form:

Tax periods ended:
Release Number: 202317023
Release Date: 4/28/2023
UIL Code: 501.07-00 Person to contact:

Name:

ID number:
Telephone:
Fax:

Last day to file petition with United States
Tax Court:

April 13, 2023
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:

An organization described in IRC Section 501(c)(7) may not receive more than 35% of its gross receipts,
including investment income, from sources outside of its membership in order to maintain its tax-exempt status.
35% is the overall limit and included in the 35%, not more than 15% of the gross receipts can be derived from
the use of a social club's facilities or services by non members. You have made your social and recreational
facilities available to the general public, and your nonmember income has exceeded the 15% and 35% threshold
as outlined in Public Law 94-568 for tax years ending , , and

. You also have not established that you are organized and operated exclusively for an exempt purpose
within the meaning of IRC Section 501(c)(7). As a result, you are not operating 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 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 can file an action for declaratory judgment under the provisions
of Section 7428 of the Code in either:

• The United States Tax Court,
• The United States Court of Federal Claims, or
• The United States District Court for the District of Columbia

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E

You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this
determination letter to you. You can download a fillable petition or complaint form and get information about
filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one
of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee
with the petition or complaint.

You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available
on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to
do so. You may also file your petition at the address below:

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

The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain
instructions about how to file your completed complaint electronically. You may also file your complaint at one of
the addresses below:

US Court of Federal Claims
717 Madison Place, NW
Washington, DC 20439
uscfc.uscourts.gov

US District Court for the District of Columbia
333 Constitution Avenue, NW

Washington, DC 20001

dcd.uscourts.gov

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.

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E

Find tax forms or publications by visiting 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.

You may fax your documents to the fax number shown above, using either a fax machine or online fax service.
Protect yourself when sending digital data by understanding the fax service's privacy and security policies.

Keep the original letter for your records.

Sincerely,

Mane A. Brinkley
Acting Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E

Department of the Treasury Date:
Internal Revenue Service 06/27/2022
IRS Tax Exempt and Government Entities Taxpayer ID number:

Form:

Tax periods ended:

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

Manager's contact information:
Name:

CERTIFIED MAIL - Return Receipt Requested ID number:
Telephone:

Response due date:
July 27, 2022

Dear
Why you're receiving this letter

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.

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.

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

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.

. Brinkley
Acting Director, Exempt Organizations Examinations

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

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

Form 886-A (Rev. January 1994), EXPLANATIONS OF ITEMS
Name of taxpayer | Tax Identification Number | Year/Period ended
ISSUES
e Whether qualifies for exemption under Internal Revenue Code
(IRC) 501(c)(7) for the tax years ending and ?
FACTS
e ( ) was incorporated in and
located in . It is exempt under IRC Code §501(c)(7). It received its
exempt status in . The Organization was established to provide and maintain

swimming facilities for its members.

e The Organization operated a swimming pool for its members. There were no other activities
by this social club.

e The pool has been closed since summer of due to less members and less
participation.

e The Organization reported a total of $ in program service revenue.

e The Organization provided a handwritten schedule showing amounts from members
totaling $ . The Organization had no other source documentation to verify amounts
received from members.

e The Organization provided copies of bank statements from showing that they earned
$ in interest income. Based on the bank statements and lease agreement with

, the Organization had $ in rental income per month, totaling
$ for the year from the adjacent parking lot. The parking lot was rented for the whole
year ended

e % of the revenue comes from renting the property as a parking lot to non-members in
the year ended

e The Organization is trying to sell the property and wants to self-terminate as a 501(c)(7)
organization.

e The pool has been closed but the rentals continue, and it has been rented all year in the
fiscal years ended and . The Organization wants to be
solvent and pays the expenses from income earned by renting the adjacent parking lot to a
local dealer.

e The Organization rented % of its area as a parking lot. Gross revenue from the parking
area was $ in the year ended . The Organization did not file the required
Forms for unrelated business income for the years ended
and

e The income and expenses shown below are verified amounts from the examination of the
Form for the year ended . The income and expenses for the years ended

and were taken directly from the Forms filed for those periods.

Form 886-A (1-1994) Catalog Number 20810W Page 1 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A (Rev. January 1994), EXPLANATIONS OF ITEMS
Name of taxpayer | Tax Identification Number | Year/Period ended
Law

Section 501(c)(7), in part, provides for the exemption from federal income tax of clubs organized
for pleasure, recreation, and other nonprofitable purposes, substantially all 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.

Section 511(a), in part, provides for the imposition of tax on the unrelated business taxable income
(as defined in § 512) of social clubs described in § 501(c)(7).

Section 512(a)(1) of the Code defines the term 'unrelated business taxable income' as the gross
income derived by any organization from an unrelated trade or business regularly carried on by it.

Public Law 94-568 provides that social clubs are permitted to receive up to 35% of their gross
receipts from sources outside of their membership, including investment income, without losing
their tax-exempt status. Within that 35%, not more than 15% of gross receipts should be derived
from the use of a social club's facilities or services by the general public.

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 exempt under Section 501(a) of the Code.

Rev. Rul. 58-589, 1958-2 C.B. 266, states that a business activity will defeat exemption, unless it
is incidental, trivial or nonrecurrent. The Service has interpreted incidental, trivial or nonrecurrent
to mean insubstantial for this purpose.

Rev. Rul. 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.

In Polish American Club, Inc. v. Commissioner, T.C. Memo 1974-207 (1974), the court decided
that the club is not qualified for exemption under §501(c)(7) of the Code because its non-member
income was substantial, recurring and that it was not operated exclusively for pleasure, recreation,
and other non-profit purposes.

Rev. Proc. 71-17, 1971-1 C.B. 683, requires that organizations described under IRC §501(c)(7)
keep adequate documentation to support all income received from members or non-members.
Failure to retain such adequate documentation to differentiate member and non-member income
will cause the Service to use the audit assumption that all income derived from such an activity is
received from non-members and, therefore, is taxable under IRC §511.

Form 886-A (1-1994) Catalog Number 20810W Page 2 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A (Rev. January 1994), EXPLANATIONS OF ITEMS
Name of taxpayer | Tax Identification Number | Year/Period ended

Taxpayer's position

The had only the swimming pool for its members. The
had to discontinue its operations because of less participation of its members and less revenues
from membership dues. The pool closed but expenses continued for the property.
The decided to sell the property and wants to self-terminate as an IRC 501(c)(7)
organization. The Organization wants to be solvent to maintain the expenses by renting adjacent
parking lot until they can sell the property.

Government's position

According to Section 1.501(c)(7) of the Regulations 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). receives nontraditional income from renting the
adjacent parking lot. Renting a parking lot does not further pleasure, recreation, and other
nonprofitable purpose as described in IRC 501(c)(7). The receives a substantial
portion of income from renting the property.

The has failed to respond to the Service's requests for information in contrast to section
1.6033-2(h)(2) of the Regulations, which requires an organization to provide such information as
requested to allow the Service to make a determination of that exempt status.

Revenue Procedure 71-17 requires the maintenance of separate records for member and non-
member usages of the club facility. Failure to do so means all income can be treated as from non-
members and, therefore, is taxable under IRC §511.

The exempt status of should be revoked.
filing requirement should be Form 1120, U.S. Corporation Income Tax Return, for the
future years. All its income is taxable due to the following reasons:

o The rental income is more than % of total gross receipts derived from non-members or the
general public.

o The failed to provide the documentation showing revenues from exempt income
sources (membership dues).
o The failed to keep member records separate from non-member usage of the
facilities.

Form 886-A (1-1994) Catalog Number 20810W Page 3 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A (Rev. January 1994), EXPLANATIONS OF ITEMS
Name of taxpayer | Tax Identification Number | Year/Period ended

Unrelated Business Income Tax for the tax years ending
are calculated as follows:

Tax calculation for the year ended
Revenues

Expense types [$ Amount]
Accounting
Other
Office Expenses
Interest
Depreciation
Insurance
Real Estate Taxes
Utilities
State Corp Taxes
Repairs & Maintenance
All Other

Total Expenses
Net Taxable Income
Total Tax Due

Note: Revenues based on bank statements
Note: Applied tax rate schedule for corporations

Tax calculation for the year ended
Revenues
Expense types [$ Amount]
Accounting
Office Expenses
Interest
Depreciation
Insurance
Real Estate Taxes
Utilities
State Corporate Taxes
All Other Expenses

Total Expenses
Net Taxable Income
Total Tax Due

Note: Applied % corporation rate

Tax calculation for the year ended
Revenues
Expense types [$ Amount]
Legal
Accounting
Depreciation
Insurance
Real Estate Taxes
Utilities
Telephone
Appraisal Services
All Other

Total
Net Taxable Income
Total Tax Due

Note: Applied % corporation rate

and

Form 886-A (1-1994) Catalog Number 20810W Page 4 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A (Rev. January 1994), EXPLANATIONS OF ITEMS
Name of taxpayer | Tax Identification Number | Year/Period ended

Rental Income for the Year Ended
Deposit of rental income
Deposit of rental income
Deposit of rental income
Deposit of rental income
Deposit of rental income
Deposit of rental income
Deposit of rental income
Deposit of rental income
Deposit of rental income
Deposit of rental income
Deposit of rental income
Deposit of rental income
Total Rental Income $

Total revenues for the year ended
Law permits up to % of non-member usage
The club exceeded the allowable amount by

Rental Income for the Year Ended
Rental Income of
Rental Income of
Rental Income of
Rental Income of
Rental Income of
Rental Income of
Rental Income of
Rental Income of
Rental Income of
Rental Income of
Rental Income of
Rental Income of
Total Rental Income $

Total revenues for the year ended $
Law permits up to % of non-member usage $

Rental Income for the Year Ended
Rental Income of
Rental Income of
Rental Income of
Rental Income of
Rental Income of
Rental Income of
Rental Income of
Rental Income of
Rental Income of
Rental Income of
Rental Income of
Rental Income of
Total Rental Income $
*Rent increased to $ from ;
Total revenues for the year ended $
Law permits up to % of non-member usage
The club exceeded the allowable amount by

Form 886-A (1-1994) Catalog Number 20810W Page 5 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A (Rev. January 1994), EXPLANATIONS OF ITEMS
Name of taxpayer | Tax Identification Number | Year/Period ended

[The following page reproduces a three-part table comparing, for each tax year,
Total Revenues, Nonmember usage allowed by law (%), the Amount exceeding the
allowable amount, and the resulting Unrelated Business Income. The individual
dollar figures are redacted, and the underlying scan of this page is largely
illegible. Column headings as printed: "Total Revenues | Nonmember usage allowed
by law % | Amount exceeding the allowable amount | Unrelated Business Income."
Individual line values: [illegible].]

Form 886-A (1-1994) Catalog Number 20810W Page 6 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A (Rev. January 1994), EXPLANATIONS OF ITEMS
Name of taxpayer | Tax Identification Number | Year/Period ended
Conclusion

The rental income of the adjacent parking area is not infrequent.
substantial rental activity exceeds the amounts allowed by law of a qualifying IRC 501(c)(7)
organization. The is inactive and is not engaging in social activities with its members.
The is not operated exclusively for pleasure, recreation and other non-profitable
purposes, and is not exempt under section 501(a). no longer
qualifies for exemption under IRC 501(c)(7), effective . The is
responsible for income tax for the years ended and

should file Form 1120, U.S. Corporation Income Tax Return, for the
affected years.

Form 886-A (1-1994) Catalog Number 20810W Page 7 publish.no.irs.gov Department of the Treasury-Internal Revenue Service