IRS revokes a social club's exemption after investment income exceeds 35 percent of receipts

Plain-English summary

The IRS revoked a social club's exemption under IRC § 501(c)(7), effective January 1 of a redacted year. The examination found that the club's investment income consistently exceeded 35 percent of total income, the limit described in the determination. The IRS concluded that the club therefore did not qualify for exemption and required it to file Form 1120 for future periods. The organization had signed Form 6018-A consenting to the proposed revocation.

Ruling snapshot

• Question: Could the organization continue to qualify as a social club under IRC § 501(c)(7) when investment income consistently exceeded 35 percent of total income?
• Outcome: Revocation.
• Key authorities: IRC §§ 501(a) and 501(c)(7); Treas. Reg. § 1.501(c)(7)-1; Rev. Rul. 66-149; Public Law 94-568

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
Attn: Mandatory Review, MC 4920 DAL
1100 Commerce Street
Dallas, TX 75242

501.07-00

TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION

Date: February 17, 2012

Number: 201222049
Release Date: 6/1/2012

LEGEND

ORG - Organization name
XX - Date
Address - address

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

ORG
ADDRESS

CERTIFIED MAIL - RETURN RECEIPT REQUESTED

Dear [illegible]:

In a determination letter dated October 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 appeal rights. On July 21, 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 have filed taxable returns on Form 1120, U.S. Corporation Income Tax Return for
the years ended December 31, 2009 and December 31, 20XX with us. For future
periods, you are required to file Form 1120 with the appropriate service center
indicated in the instructions for the return.

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

Internal Revenue Service
Department of the Treasury
Tax Exempt and Government Entities Division
Exempt Organizations: Examinations
10 Causeway Street Room #581
Boston, MA 02222

Date: June 21, 2011

ORG
ADDRESS

Taxpayer Identification Number:
Person to Contact/ID Number:
ID Number
Contact Numbers:
Telephone:
Fax:

Dear [illegible]:

Based on our review of the 2009 F990 & F990-T tax forms, we are proposing revocation
of the IRC Section 501(c)(7) tax exemption for 210 Building Association, Inc., effective
1/1/20XX. You may choose to agree or disagree with this proposal for revocation. If you
agree, please sign and return Form 6018-A, Consent to Proposed Action, and Form
5701, Notice of Proposed Adjustment. If you disagree, please sign Form 5701 and
indicate in the checkbox if you will formally appeal or submit a request for a decision
under the Fast Track program. Please submit this information by 7/21/20XX.

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. This letter and attachments
are also sent to your representative we have on file.

Thank you for your cooperation.

Sincerely,

Trinh Nguyen
Revenue Agent

Enclosures:
Form 886-A - Explanation of Proposed Revocation
Form 5701 - Notice of Proposed Adjustment
Form 6018 - Consent to Proposed Action
Publication 3605 - Fast Track Mediation
Publication 5 - Your Appeals Right

Schedule number or exhibit
Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN 12/31/20XX

LEGEND
ORG - Organization name XX - Date

ISSUE:

Whether The ORG may continue to qualify for exemption under IRC Section 501(c)(7) when its
investment income consistently exceeds the thirty five percent (35%) limitation of total income?

FACTS:

The ORG (hereafter refers to as “EO”), has reported the following figures on its F990 for the year
20XX, 20XX, and 20XX:

20XX 20XX 20XX

Interest on savings and temporary
cash investments (Investment
Income)

Total Revenue on F990

Percentage of Investment Income
over Total Revenue

See Attachments of the EO's F990 Page 1 for the aforementioned years.

APPLICABLE LAW(S):

Section 501(c)(7) of the Code (IRC) defines an exempt organization under this section as one
that is organized for the pleasure, recreation, and other nonprofit purposes, for its members.

Section 1.501(c)(7)-1 of the Income Tax Regulations provides that, in general, the exemption
extends to social and recreation clubs which are supported by membership fees, dues, and
assessments. However, 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 nonprofitable purposes, and is not exempt under section 501(a).

Public Law 94-568 defines gross receipts as those receipts from normal and usual activities of a
club including charges, admissions, membership fees, dues, assessments, investment income,
and normal recurring capital gains on investments, but excluding initiation fees and capital
contributions. Public Law 94-568 also states that it is intended that social clubs should be
permitted to receive up to 35 percent of their gross receipts, including investment income, from
sources outside of their membership without losing their exempt status. Within this 35 percent
amount, not more than 15 percent of the gross receipts should be derived from the use of the
social club's facilities or services by the public. Thus, a social club may receive investment income

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

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN 12/31/20XX

up to the full 35 percent amount of gross receipts. If a club receives unusual amounts of income,
such as from the sale of its clubhouse or similar facility, that income is not to be included in the 35
percent formula; that is, unusual income is not to be included in the gross receipts of the club.

Revenue Ruling 66-149, 1966-1 C.B. 146 holds that a social club is not exempt from Federal
income tax as an organization described in section 501(c)(7) of the Code where it regularly
derives a substantial part of its income from nonmember sources such as, for example, dividends
and interest on investments, which it owns.

GOVERNMENT POSITION:

Income from investments - a social club is not exempt from Federal income tax under IRC 501(c)
(7) of the Code where it regularly derives a substantial part of its income from nonmember
sources, such as dividends and interest on investments that it owns. ORG does not qualify for
exemption under IRC 501(c)(7) under the year of examination.

TAXPAYER'S POSITION:

To Be Determined

CONCLUSION:

The ORG may not continue to qualify for exemption under IRC Section 501(c)(7) when its
investment income consistently exceeds the thirty five percent (35%) limitation of total income. We
are proposing revocation of the IRC Section 501(c)(7) tax exemption for the EO effective
1/1/20XX.

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