IRS determination 1107029: Social club tax exemption revoked

Plain-English summary

The IRS revoked a social club's exemption under section 501(c)(7), effective on the stated January 1 date. The examination report found that the organization did not maintain adequate records to distinguish member from nonmember income and that its public banquets generated nonmember income. The organization agreed to the revocation and was required to file a Form 1120 for the stated tax year. The report explains the applicable limits on nonmember receipts and the records needed to support social-club treatment.

Ruling snapshot

• Question: Did the organization continue to qualify for exemption as a section 501(c)(7) social club?
• Outcome: Revocation
• Key authorities: IRC § 501(c)(7); IRC § 277; Treas. Reg. § 1.501(c)(7)-1; Rev. Proc. 71-17

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
Attn: Mandatory Review, MC 4920 DAL
1100 Commerce St. 501.07-00

TAX EXEMPT AND Dallas, TX 75242

GOVERNMENT ENTITIES
DIVISION

Date: November 23, 2010
Release Number: 201107029

Release Date: 2/18/11

LEGEND

ORG = Organization name XX = Date Address = address

Employer Identification Number:
Person to Contact/ID Number:
Contact Numbers:

Voice

Fax

CERTIFIED MAIL — RETURN RECEIPT REQUESTED
Dear

In a determination letter dated January 9, 19XX, you were held to be exempt
from Federal income tax under section 501(c)(7) of the Internal Revenue Code
(the Code).

Based on recent information received, we have determined you have not
operated in accordance with the provisions of section 501(c)(7) of the Code.
Accordingly, your exemption from Federal income tax is revoked effective
January 1, 20XX. This is a final adverse determination letter with regard to
your status under section 501(c)(7) of the Code.

We previously provided you a report of examination explaining why we believe
revocation of your exempt status is necessary. At that time, we informed you
of your right to contact the Taxpayer Advocate, as well as your appeal rights.
On February 23, 20XX you signed Form 6018-A, Consent to Proposed Action,
agreeing to the revocation of your exempt status under section 501(c)(7) of the
Code.

You are required to file Form 1120 U. S. Corporation Income Tax Return for year
ended December 31, 20XX with the Ogden Service Center.

You have the right to contact the Office of the Taxpayer Advocate. Taxpayer
Advocate assistance is not a substitute for established IRS procedures, such as
the formal Appeals process. The Taxpayer Advocate cannot reverse a legally
correct tax determination, or extend the time fixed by law that you have to file a

petition in a United States court. The Taxpayer Advocate can, however, see
that a tax matter that may not have been resolved through normal channels
gets prompt and proper handling. You may call toll-free, 1-877-777-4778, and
ask for Taxpayer Advocate Assistance. If you prefer, you may contact your
local Taxpayer Advocate at:

If you have any questions, please contact the person whose name and telephone
number are shown at the beginning of this letter.

Sincerely,

Nanette M. Downing
Director, EO Examinations

DEPARTMENT OF THE TREASURY
Internal Revenue Service
Exempt Organizations
2525 Capitol Street #217
Fresno, CA 93721-2227

GOVERNMENT ENTITIES
DIVISION

February 12, 2010

Taxpayer Identification Number:

ORG
ADDRESS Form:

Tax Year(s) Ended:
Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

CERTIFIED MAIL - RETURN RECEIPT REQUESTED

Dear

We have enclosed a copy of our report of examination explaining why we believe an
adjustment of your organization's exempt status is necessary.

If you do not agree with our position you may appeal your case. The enclosed
Publication 3498, The Examination Process, explains how to appeal an Internal
Revenue Service (IRS) decision. Publication 3498 also includes information on your
rights as a taxpayer and the IRS collection process.

If you request a conference, we will forward your written statement of protest to the
Appeals Office and they will contact you. For your convenience, an envelope is
enclosed.

If you and Appeals do not agree on some or all of the issues after your Appeals
conference, or if you do not request an Appeals conference, you may file suit in United
States Tax Court, the United States Court of Federal Claims, or United States District
Court, after satisfying procedural and jurisdictional requirements as described in
Publication 3498.

Letter 3610 (04-2002)
Catalog Number 34801V

You may also request that we refer this matter for technical advice as explained in
Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues. If a
determination letter is issued to you based on technical advice, no further administrative
appeal is available to you within the IRS on the issue that was the subject of the

technical advice.

If you accept our findings, please sign and return the enclosed Form 6018, Consent to
Proposed Adverse Action. We will then send you a final letter modifying or revoking
exempt status. If we do not hear from you within 30 days from the date of this letter, we
will process your case on the basis of the recommendations shown in the report of
examination and this letter will become final. In that event, you will be required to file
Federal income tax returns for the tax period(s) shown above. File these returns with
the Ogden Service Center within 60 days from the date of this letter, unless a request
for an extension of time is granted. File returns for later tax years with the appropriate
service center indicated in the instructions for those returns.

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate
assistance is not a substitute for established IRS procedures, such as the formal
appeals process. The Taxpayer Advocate cannot reverse a legally correct tax
determination, or extend the time fixed by law that you have to file a petition in a United
States court. The Taxpayer Advocate can, however, see that a tax matter that may not
have been resolved through normal channels gets prompt and proper handling. You
may call toll-free and ask for Taxpayer Advocate Assistance. If you

prefer, you may contact your local Taxpayer Advocate at:

If you have any questions, please call the contact person at the telephone number
shown in the heading of this letter. If you write, please provide a telephone number and
the most convenient time to call if we need to contact you.

Letter 3610 (04-2002)
Catalog Number 34801 V

Thank you for your cooperation.

Sincerely,

Francisco N. Favila
Revenue Agent

Enclosures:
Publication 892
Publication 3498
Form 6018

Report of Examination
Envelope

Letter 3610 (04-2002)
Catalog Number 34801V

Form 886A - Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Name of Taxpayer: Year/Period Ended
ORG EIN EIN
December 31, 20XX
LEGEND
ORG - Organization name XX = Date State = state
ISSUE:

Is ORG properly operating as described in Internal Revenue Code 501 (c) (7)?
FACTS:

ORG, ORG, received tax exempt status as an organization described in Internal Revenue Code, IRC, 501 (c)
(7) on January 9, 19XX

ORG provided a copy of its Articles of Incorporation stamp dated July 11, 19XX by the State of State
Department of Commerce and Commercial Code. Article III, part “a”, states that the purpose of the
organization is to operate a social club, as defined in IRC 501 (c) (7).

ORG is dedicated to conservation of habitat for wild game in the State of State. The main source of income is
numerous banquets hosted by ORG and its chapters. Typically the banquets consist of a meal, an auction,
and drawings or raffles. The banquets are open to the public and ORG attempts to solicit memberships, but
a membership purchase is not necessary to participate in the banquet or any activities.

ORG did not keep adequate records required by Revenue Procedure 71-17. The ORG did not keep any
records to separate member from non member income. ORG did not keep a record of the individuals that
patronized ORG to able to distinguish from members, guests, and or the general public.

ORG did not report any membership dues or assessments on their filed 20XX Form 990. An examination of
the tax period ending December 31, 20XX revealed that the financial statement, for the same period, showed
$ in membership dues. The amount was determined to be misclassified and was not membership dues, but
was banquet revenue

LAW:

Internal Revenue Code section 501(a) provides for exemption from taxation for certain organizations
described in subsection (c).

Internal Revenue Code section 501(c) (7) describes social clubs as clubs organized for pleasure,
recreation, and other 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

Regulation 1.501(c)(7)-1(a) states in part that in general, the exemption extends to social and recreation
clubs which are supported solely by membership fees, dues, and assessments

Regulation 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 is not organized and operated exclusively for pleasure,
recreation, and other purposes, and is not exempt under section 501(a). 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

Form 886-A Department of the Treasury - Internal Revenue Service

Page: 1 of 2

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

“Name of Taxpayer: Year/Period Ended
ORG EIN EIN
December 31, 20XX

Public Law 94-568 amended IRC section 501(c) (7) to allow these organizations to receive a greater
amount of nonmember income without jeopardizing their exempt status. The committee reports provide
that a section 501(c)(7) organization can receive up to 35% of it's gross receipts from nonmember
sources and investment income, as long as the nonmember gross income does not exceed 15% of the
total gross receipts.

Revenue Procedure 71-17 sets forth guidelines for determining the effect gross receipts derived by the
general public have on a club's exemption from Federal Income Tax under section 501(c)(7) of the
Internal Revenue Code. Revenue Procedure 71-17 also describes the records a club must maintain when
nonmembers use a Club's facilities and the circumstances under which a host guest relationship will be
assumed, which are relevant both for purposes of determining adherence to the exemption requirements
and for computing exempt function income under section 512(a)(3) of the Code.

Section 3 of Revenue Procedure 71-17 provides a set of assumptions as to the status of nonmembers
using club facilities. If nonmember use can be classified into one of the assumptions listed in Revenue
Procedure 71-17, then the income derived from these individuals will be income from guests and treated
as if from members and therefore be classified as exempt function income. Clubs are required to provide
detailed records of nonmember use to substantiate the assumptions

Section 4 of Revenue Procedure 71-17 describes the records that a social club must maintain with respect
to the assumption listed in section 3. Section 4.03 of Revenue Procedure 71-17 describes the books and
records that must be maintained when the assumptions contained in Section 3.03 do not apply.

Section 4.04 of Revenue Procedure 71-17 states that failure to maintain such records or make them

available to the Service for inspection will preclude use of the minimum gross receipts standard and audit
assumptions set forth in this Revenue Procedure.

GOVERNMENT’S POSITION:

Based on the fact that appropriate records were not maintained by the Club to determine the total amount
of nonmember income did not exceed the % limitation and the circumstances under which the Club
operates, it is the Government's position that the Club is no longer operating in the manner described in
IRC 501 (c) (7) and as such tax exemption status should be revoked

TAXPAYER'S POSITION:

The taxpayer agrees with the revocation and signed Form 6018-A.

Form 886-A Department of the Treasury - Internal Revenue Service

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