IRS revokes a social club's exemption after public golf-course use and inadequate records

Plain-English summary

The IRS revoked a social club's tax exemption under IRC section 501(c)(7), effective January 1 of a redacted year. The club operated a golf course that was open to the public, charged nonmembers green fees, and received income from nonmember use of its pro shop, food sales, and golf carts. It did not maintain records separating member and nonmember income, so the IRS could not apply the percentage guidelines for social clubs. The club agreed to the proposed revocation by signing Form 6018-A.

Ruling snapshot

• Question: Does a social club with a public golf course and inadequate member-income records continue to qualify for exemption under IRC section 501(c)(7)?
• Outcome: Revocation
• Key authorities: IRC §§ 501(c)(7) and 512(a)(3)(A); Treas. Reg. § 1.501(c)(7)-1; Rev. Rul. 69-219; 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.
Dallas, TX 75242 501.07-00

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: June 13, 2012

Number: 201240030
Release Date: 10/5/2012

LEGEND Employer Identification Number:
ORG - Organization name Person to Contact/ID Number:
XX - Date Address - address Contact Numbers:

Voice:

Fax:
ORG
ADDRESS

CERTIFIED MAIL — RETURN RECEIPT REQUESTED #
Dear

In a determination letter dated May 6, 19XX, you were held to be exempt from Federal
income tax under section 501(c)(7) of the Internal Revenue Code (the Code).

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 January 27,
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 Federal income tax returns for the tax period(s) shown above. If
you have not yet filed these returns, please file them with the Ogden Service Center
within 60 days from the date of this letter, unless a request for an extension of time is
granted, or unless an examiner’s report for income tax liability was issued to you with
other instructions. 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, 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

12301 Research Blvd

STE 4-270, MS: 4949 AUNW

Austin, TX 78759

Date: January 23, 2012 Taxpayer Identification Number:
Form:
Tax Year(s) Ended:
Person to Contact/ID Number:

ORG Contact Numbers:
ADDRESS Telephone:
Fax:

Certified Mail — Return Receipt Requested
Dear

We have enclosed a copy of our report of examination explaining why we believe revocation 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.

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 revoking your 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.

Letter 3610 (Rev 11-2003)
Catalog Number 34801V

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 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.

Thank you for your cooperation.

Sincerely,

Nanette M Downing
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Form 6018-A

Report of Examination
Envelope

2 Letter 3610 (Rev 11-2003)
Catalog Number 34801V

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

Name of Taxpayer Year/Period Ended
ORG December 31, 20XX and
December 31, 20XX
LEGEND
ORG - ORGANIZATION NAME XX - DATE STATE - STATE WEBSITE — WEBSITE POA - POA

ISSUE

1. Does the organization, ORG, continue to qualify for exemption under IRC section 501(c)(7)?
   FACTS

The ORG (herein after referred to as the ORG) was incorporated in the State of State on February
8th, 19XX. The ORG was determined to be exempt from Federal income tax under section
501(c)(7) of the Internal Revenue Code on May 6th, 19XX. According to the articles of
incorporation, the purpose of the corporation is to support and maintain a golf club and other
innocent sports, athletic in nature; and to promote and encourage golfing activities and other
innocent athletic sporting activities in order to encourage better physical fitness among members
and the public in general.

The ORG has members who pay quarterly dues. Members are not required to pay greens fees for
use of the golf course. Nonmembers who use the golf course are charged a greens fee. The Pro
Shop sales, food sales, and golf cart rentals have income from members and nonmembers. The
ORG does not maintain records to separate member and nonmember income from Pro Shop
sales, food sales, or golf cart rentals. See Attachment 1 for the gross receipts from members and
nonmembers.

According to the ORG’s website and as stated during the interview on January 10th, 20XX, the
golf course is open to the public.

LAW

Internal Revenue Code (IRC) section 501(c)(7) provides that clubs organized for pleasure,
recreation, and other nonprofitable purpose, which substantially all of the activities are for such
purposes and no part of the net earnings of which inures to the benefit of any private shareholder
are exempt from tax.

Treasury Regulation section 1.501(c)(7)-1 states that the conduct of business activities, including
public use of a club’s social and recreational facilities, is incompatible with exemption. It has not
yet been changed to reflect the amendment to P.L. 94-568.

Revenue Ruling 69-219, 1969-1 C.B. 153 (Golf course; open to the public) provides that a
social club that regularly holds its golf course open to the general public, charging established

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -1-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of Items
Name of Taxpayer Year/Period Ended

ORG December 31, 20XX and
December 31, 20XX

green fees that are used for maintenance and improvement of club facilities, is not exempt under
IRC 501(c)(7).

Revenue Procedure 71-17 sets forth guidelines for determining the effect gross receipts derived
from use of a social club’s facilities by the general public have on the club’s exemption from
Federal income tax under section 501(c)(7) of the Internal Revenue Code of 1954. These
guidelines will be used in connection with the examination of annual returns on Forms 990 and
990-T filed by social clubs. This Revenue Procedure also describes the records required 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.

This Revenue Procedure allows social clubs to receive up to 35% of their gross receipts,
including investment income, from sources outside their membership without losing their exempt
status. Within this 35%, no more than 15% of gross receipts may be derived from nonmember
use of club facilities and/or services. Gross receipts are defined for this purpose as those receipts
from normal and usual activities that have been traditionally conducted by the club or by other
social and recreational clubs of the same general type. For example, in the case of country clubs,
gross receipts include receipts from activities traditionally conducted by country clubs. Unusual
amounts of income, such as from the sale of a clubhouse or similar facility are not to be included
in either the gross receipts of the club or in the permitted 35 or 15 percent allowances. It should
be emphasized that gross receipts from the conduct of a nontraditional business or other activity
previously forbidden may not be included within the percentage guidelines. The conduct of a
business not traditionally carried on by social clubs unless it is insubstantial, trivial, and
nonrecurrent, should preclude exemption.

Section 4.04 of Revenue Procedure 71-17 provides that if a club fails to maintain or make
available the records required by Revenue Procedure 71-17, the percentage guidelines may not be
used in the determination of whether the club has a non-exempt purpose. If the records are
unavailable, then the club’s income may be considered to be from nonmembers, and its exempt
status could be in jeopardy. Even if the amount of nonmember income does not exceed either of
the limitations, the club’s nonmember income is still included in the computation of unrelated
business taxable income.

IRC section 512(a)(3)(A) provides that in the case of organizations described in paragraph (7) of
section 501(c), the term “unrelated business income” means the gross income (excluding any
exempt function income, i.e. income from dues, fees, charges, or similar amounts paid by
members of the organization), less the deductions allowed by this chapter which are directly
connected with the production of the gross income.

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -2-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of Items
Name of Taxpayer Year/Period Ended

ORG December 31, 20XX and
December 31, 20XX

TAXPAYER’S POSITION

According to the organizations Power of Attorney, POA, the ORG believes that exemption from
tax under IRC section 501(c)(7) is not beneficial to the ORG since the ORG often runs at a net
loss. The exemption from tax may also not be beneficial because the ORG will be subject to tax
on nonmember income, and the time and effort to maintain the records as required in Revenue
Procedure 71-17 will possibly result in higher expenses to the ORG. According to the Power of
Attorney, POA, the ORG agrees to the revocation of the exempt status, under IRC section
501(c)(7).

GOVERNMENT’S POSITION

According to Revenue Ruling 69-219, the ORG does not qualify for exemption under IRC
section 501(c)(7) because the ORG’s golf course is open to the general public year round and the
ORG charges nonmembers green fees that are used for maintenance and improvement of the
ORG’s faculties.

As shown in Attachment 1, the ORG had significant income from nonmembers, for the years
ending December 31, 20XX and 20XX.

Revenue Procedure 71-17 allows social clubs to receive up to 35% of their gross receipts,
including investment income, from sources outside their membership without losing their exempt
status. Within this 35%, no more than 15% of gross receipts may be derived from nonmember
use of club facilities and/or services. Gross receipts are defined for this purpose as those receipts
from normal and usual activities that have been traditionally conducted by the ORG or by other
social and recreational clubs of the same general type. The conduct of a business not traditionally
carried on by social clubs unless it is insubstantial, trivial, and nonrecurrent, should preclude
exemption.

Section 4.04 of Revenue Procedure 71-17 provides that if a club fails to maintain or make
available the records required by Revenue Procedure 71-17, the percentage guidelines may not be
used in the determination of whether the club has a non-exempt purpose. Since the club did not
maintain the required records, per Revenue Procedure 71-17, we are unable to determine the
gross income from nonmembers.

Since the ORG is open to the public and the ORG failed to maintain records to determine the
gross income from nonmembers, it is the Government’s position that the ORG does not meet the
requirements to be exempt from tax under IRC section 501(c)(7), see Treasury Regulation
section 1.501(c)(7)-1.

CONCLUSION

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -3-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of Items
Name of Taxpayer Year/Period Ended

ORG December 31, 20XX and
December 31, 20XX

Based on the foregoing reasons, the ORG does not qualify for exemption under section 501(c)(7)
and it is the Government’s position that its tax exempt status should be revoked.

ORG has agreed with the proposed revocation for exemption under IRC section 501(c)(7) by
signing Form 6018-A.

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -4-