1032045: IRS approved a social club's liquidating sale of real estate without revoking its exemption

Plain-English summary

The IRS ruled that a social club could sell its real estate, liquidate its assets, and dissolve without losing its section 501(c)(7) tax exemption. The club had operated recreational facilities for its members, but rising expenses led the members to approve a sale and dissolution plan. The IRS treated the sale as incidental to the club's exempt purposes because it was intended to facilitate dissolution rather than generate a profit. The ruling was conditioned on there being no material change in the facts and did not address unrelated business tax or the members' individual tax liabilities.

Ruling snapshot

• Question: Would a social club's liquidating sale of its real estate and distribution of its assets cause it to lose its section 501(c)(7) exemption?
• Outcome: Approved
• Key authorities: IRC §§ 501(c)(7) and 6110(k)(3); Treas. Reg. § 1.501(c)(7)-1; Rev. Rul. 58-501.

Full text (IRS public release)

This document is an OCR transcription of a scanned IRS release. Wording is preserved verbatim; obvious scanning misreads have been corrected. Unreadable spots are marked [illegible].

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 201032045 Contact Person:

Release Date: 8/13/2010

Date: May 18, 2010 Identification Number:
Telephone Number:

Employer Identification No.

Section 501 -- Exemption From Tax on Corporations, Certain Trusts, etc. (Exempt v. Not
Exempt)

501.00-00 Exemption From Tax on Corporations, Certain Trusts, etc. (Exempt v. Not
Exempt)

501.07-00 Social Clubs
501.07-02 Distribution of Assets
LEGEND:

Taxpayer =
X =

Dear

This is reply to your letter dated September 25, 2009, and your further letter of
December 16, 2009, requesting a ruling that the dissolution process of your social club
will not result in revocation of your tax exemption under Section 501(c)(7) of the Internal
Revenue Code (the “Code.”)

FACTS:

Taxpayer is a membership non-profit corporation that has been recognized as tax exempt
under Section 501(c)(7) of the Code. For many years, it has operated a club for the
promotion of social intercourse among members, and the maintenance of facilities for
playing golf, tennis, and other outdoor games and sports. Taxpayer has owned real
property which it has used in furtherance of its exempt purposes for approximately x
years.

Taxpayer charges annual dues, and also collects separately accounted-for assessments to
members to cover maintenance, improvements, payment of debt, and operating expenses.
Membership is evidenced by a non-negotiable, non-interest bearing certificate. A
certificate entitles a member to nominate and vote for the members of a board of trustees,
receive and review corporate records, enjoy club privileges, and, in the event of the
dissolution of Taxpayer, receive a pro rata share of the property and assets remaining
after the payment of all debts and liabilities, upon a member’s surrender of the member’s
membership certificate.

Because of rising expenses, in early 20XX the members voted to sell the club property,
and thereafter liquidate club assets and dissolve the corporate entity. A Plan of
Dissolution and Disposition of Assets was developed. An executed Agreement for Sale
of Real Estate was negotiated, but has yet to be consummated and is subject to a number
of customary purchaser-developer contingencies. The purpose of the sale is primarily to
facilitate the dissolution of the corporation.

REQUESTED RULING:

The liquidating sale of its real estate will not cause Taxpayer to lose its tax-exempt status
under Section 501(c)(7) of the Code.

LAW:

Section 501(c)(7) of the Code provides for the exemption of clubs organized and
operated for pleasure, recreation, and other nonprofit 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 1.501(c)(7)-1(a) of the Income Tax Regulations (the “regulations”) states that the
exemption provided to 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 its net earnings inures to
the benefit of any private shareholder. The regulation also states that, in general, this
exemption extends to social and recreation clubs, which are supported solely by
membership fees, dues, and assessments. However, a club otherwise entitled to
exemption will not be disqualified because it raises revenue from members through the
use of club facilities or in connection with club activities.

Section 1.501(c)(7)-1(b) of the regulations provides 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 tax
exempt. 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 purposes. However, an incidental sale of
property will not deprive a club of its exemption.

Rev. Rul. 58-501, 1958-2 C.B. 262, holds that where a social club described in section
501(c)(7) of the Code finds it impracticable to continue to conduct its exempt activities
and, sells its property and liquidates, such sale is incidental to its exempt purposes. The
Rev. Rul. states that the club will continue to be considered as operated exclusively for
pleasure, recreation, and similar purposes up through the date of the sale and distribution
of the liquidated assets to its active members.

ANALYSIS:

The facts surrounding the proposed sale of Taxpayer’s assets show that such property
has been used to carry out Taxpayer’s exempt activities, but circumstances have changed,
specifically the increased costs of operation. Thus, Taxpayer now wishes to sell its assets
in conjunction with the dissolution of the club. As in the case of the sale of club property
by the organization described in Rev. Rul. 58-501, supra, the purpose of the sale of
Taxpayer’s assets is to facilitate the club's dissolution rather than to make a profit. As
noted in section 1.501(c)(7)-1(b) of the regulations, an incidental sale of property will not
adversely affect a social club's tax exempt status. Furthermore, the distribution of
liquidated assets to Taxpayer’s members will not result in the revocation of the club's tax
exempt status. See Rev. Rul. 58-501.

RULING:

The liquidating sale of its real estate will not cause Taxpayer to lose its tax-exempt status
under Section 501(c)(7) of the Code.

This ruling is conditioned on the understanding that there will be no material changes in
the facts upon which it is based.

This ruling is limited to the issue discussed above. It does not cover any other issue or
statute, whether or not discussed in the instant ruling request. For example, we express no
opinion on whether Taxpayer will be subject to unrelated business tax on any gain which
it realizes on the liquidation sale of its assets. We also express no opinion on each
member’s tax liability arising from receipt of liquidation proceeds.

This ruling will be made available for public inspection under section 6110 of the Code
after certain deletions of identifying information are made. For details, see enclosed
Notice 437, Notice of Intention to Disclose. A copy of this ruling with deletions that we
intend to make available for public inspection is attached to Notice 437. If you disagree

with our proposed deletions, you should follow the instructions in Notice 437.

This ruling is directed only to the organization that requested it. Section 6110(k)(3) of
the Code provides that it may not be used or cited by others as precedent.

Because this letter could help resolve any future questions about tax consequences of
your activities, you should keep a copy of this ruling in your permanent records.

If you have any questions about this ruling, please contact the person whose name and
telephone number are shown in the heading of this letter. In accordance with the Power
of Attorney and Declaration of Representative currently on file with the Service, we are
sending a copy of this letter to your authorized representative.

Sincerely,

/s/

Ronald J. Shoemaker
Manager Technical Group 2

Enclosure:

Notice 437