IRS denies exempt status to a restaurant-operated social organization

Plain-English summary

The IRS Appeals Office issued a final adverse determination for an organization that claimed exemption under sections 501(c)(7) and 501(c)(4). The organization primarily operated a restaurant and catering facility open to the general public, and its documents did not establish a shared recreational interest among its members. The IRS concluded that the organization was not organized and operated as a tax-exempt social club under section 501(c)(7), and that its business activity also prevented exemption as a social welfare organization under section 501(c)(4). The organization was required to file federal income tax returns for the examined periods and later years.

Ruling snapshot

• Question: Does the organization qualify for exemption under sections 501(c)(7) or 501(c)(4)?
• Outcome: Denied. The IRS found that the restaurant and catering operation served the general public and was not a qualifying social or social-welfare activity.
• Key authorities: IRC §§ 501 and 6110; Treas. Reg. §§ 1.501(c)(4)-1 and 1.501(c)(7)-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury

Appeals Office
Taxpayer Identification

Number:
kkkk

Release Number: 201313035
Release Date: 3/29/2013 -

Date: December 5, 2012 Person to Contact:

KEEK

Tax Period(s) Ended:

dea wees -
keke : .
Certified Mail
Dear ****;

We considered your appeal of the adverse action proposed by the Director Exempt
Organizations. Although not recognized by the internal Revenue Service as an exempt
organization under section 501(a) of the Intemal Revenue Code (the “Code), your

organization filed Form 990 for years ending *, and ***.

This is our final determination that you do not qualify for the claimed tax exempt status
from federal income tax under section 501(a) of the Code as an organization described
In elther section 501(c)7) of the Code or section 501(c)4) of the Code. There is no
time period during which **** was an organization exempt from federal income tax under
section 501(a) of the Code as an organization described in either section 501(c)(7) or

section 501(c)(4).
Our adverse determination was made for the following reason(s):

Because your primary activity is the operation of a restaurant for members of the
general public, you have failed to meet the requirements for exemption of Section
1.507(c)(7)-1(b) of the Federal Tax Regulations which provides that a club which
engages in business, such as making its social and recreation 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). .

Furthermore, you are not exempt under 501(a) of the Code as a social welfare
organization described in section 501(c)(4) of the Code because section 1.501(c)(4)-
1(a)(2)il) of the Federal Tax Regulations provides that an organization is not operated
primarily for the promotion of social welfare if its primary activity is carrying on a
business with the general public in a manner similar to organizations which are
operated for profit.

You are required to file Federal income tax returns on Forms **** for the tax periods
stated in the heading of this letter and for all tax years thereafter. File your return with
the appropriate Internal Revenue Service Center per the instructions of the return. For
further instructions, forms, and information please visit www.irs.gov.

• ‘Please show your employer {dentification number on all returns you file and in all
• correspondence with Internal Revenue Service.

You.also 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 matters that may not
have been resolved through normal channels get prompt and proper handling. If you
want Taxpayer Advocate assistance, please contact the Taxpayer Advocate for the IRS
office that issued this fetter. You may call toll-free, 1-877-777-4778, for the Taxpayer
Advocate or visit www. irs.gov/advocate for more information.

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

Sincerely Yours,

Is}:
Appeals Team Manager

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
575 N. Pennsyivania St.
Stop GE 750
indianapolis, IN 46204-1526

TAX EXEMPT AND
' GOVERNMENT ENTITIES
DIVISION

LEGEND:
ORG -— Organization name
Address — address
-XX — Date ;

ORG
ADDRESS

Date: June 21, 20XX

Taxpayer Identification Number:
Form: ;
Tax Period(s) Ended:
Person to Contact/ID Number:
Contact Numbers:
Telephone:
Fax:

~

CERTIFIED MAIL — Retum Receipt Requested .

Dear

During our examination of the retun(s) indicated above, we determined that your
organization was not described in Intemal Revenue Code section 501(c) for the tax
period(s) listed above and, therefore, it does not qualify for exemption from federal
income tax. This letter is not a determination of your exempt status under section 501

for any period other than the tax period(s) listed above.

The attached Report of Examination, Form 886-A, summarizes the facts, the applicable
law, ‘and the Service's position regarding the examination of the tax period(s) listed
above. You have not agreed with our determination, or signed.a Form 6018-A, Consent
"eto Proposed Action, accepting our determination of nonexempt status for the period(s)
stated above. You have not agreed to file the required Income tax retums. You may
appeal your case. The enclosed Publication 3498, Exempt Organizations Appeal
Procedures for Unagreed Issues, and Publication 892, Exempt Organizations Appeal
Procedures for Unagreed Issues, explain 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 with Appeals, you must submit a written protest within 30
days of the date of this letter. An Appeals officer will review your case. The Appeals
Office is independent of the Director, EO Examinations. Most disputes considered by

Appeals are resolved informally and promptly.

You may also request that we refer this matter to IRS Headquarters for technical advice
as explained in Publication 892. If you do not agree with the conclusions of the technical
advice memorandum, no further administrative appeal is available to you within the IRS —

examination.

If we do not hear from you within 30 days of the date of this letter, we will issue a
Statutory Notice of Deficiency based on the adjustments shown in the enclosed
report of examination. .

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 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:

In the future, if you believe your organization qualifies for tax-exempt status, and would |
like to establish its status, you may request a determination from the IRS by filing Form
1024, Application for Recognition of Exemption Under Section 501 (a), and paying the

required user fee.

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 fo 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

‘Schedule No. or

Form U.S. Treasury Department-internal Revenue Service

886-A EXPLANATION OF ITEMS Exhibit

Name of Taxpayer Year/Period Ended
ORG payer 12/31, 20XX & 20XX

This page intentionally left blank..

Legend:

ORG -— Organization Name

X - Number

PERSON 1, 2, 3 - Individuals

$ - Dollar Amount

LAW - Ordinance

DAY — Day of the Week

ENTITY 1,.2 — Unrelated Entities
COUNTY - County.Name
PARTY -— Political Party

POA — Power of Attorriey
FOR-PROFIT ENTITY — For-Profit-Entity
FORM — Tax Form

Form 886-A

Department of the Treasury ~ internal Revenue Service

Page 1

Form U.S. Treasury Department-Internal Revenue Service | Schedule No. or

886-A EXPLANATION OF ITEMS Exhibit

Name of Taxpayer 7 Year/Period Ended
ORG 12/31, 2OXX & 20XK
ISSUE

Should the ORG be treated as an organization described in 501(c)(7)?

FACTS ,
The calendar years ended (CYE) December 31, 20XX, 20XX and 20XX are under examination.

The Articles, dated July XX,20XX, state the legal name as the "ORG,

The purpose of the ORG is in the Articles of Incorporation (Articles). The purpose Is to

~ establish, maintain and conduct a ORG for the social enjoyment, leisure and recreation of the
members; to encourage and promote interest in understanding the importance of the civil
liberties enjoyed by all Americans; to further the education of its members regarding the .
historical background of the United States; and to promote participation of its members in the
processes of local, state, and federal legislative bodies.

Upon dissolution, the Articles state the remaining assets shall be transferred by the Board of
Directors to the equity members.

The ORG has not received a determination letter recognizing exempt status under 501(a). The
ORG has filed Forms 990, Return of Organization Exempt From Income Tax for the years
under examination to be "treated" as a tax-exempt social ORG described in 501(c)(7). The
ORG also filed Form 990-T, Exempt Organization Business Income Tax Return for CYE 20XX

and 20XX.

Form 990 12/31/20XX 12/31120XX 12/311/20XX
Investment income
Gross Sales
_ Cost of Goods

. Total Expenses
Total Revenue $ . $ $
Form 990-T 12/34/20XX 12/34/20XX
Gross Receipts $ . $
Taxable Income

‘ Advertising Expense $ $ . 3

Form 886-A

Department of the Treasury — Internal Revenue Service
Page 2

Form U.S. Treasury Department-internal Revenue Service Schedule No. or

886-A EXPLANATION OF ITEMS Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31, 20XX & 20XX

The Forms 990 and 990-T for all years report the ORG's primary activity is food services
provided to members. The Forms 990 also list PERSON 1 as the President, PERSON 2 as the
Vice-President and Treasurer and PERSON 3 as the Secretary and Manager.

The Bylaws state the ORG" ...shall be managed by a Board of two (2) directors, which shall
include the four (3) [sic] officers of President, Secretary and Treasurer...".

The Bylaws list two classes of members known as equity and social members. Equity members
are persons having contributed cash or other property to the corporation. Paying capital into the
ORG for day-to-day operating purposes also qualifies one as an equity member. Social
members, by paying-annual dues and periodic assessments, have the right to participate in
general ORG activities but have no voting power. The Articles or Bylaws do not require

• membership requirements of the social membership class.

The ORG conducts regular meetings. The topics listed in the minutes include: 1) the effect of
the municipal government's LAW on the ORG; 2) the catering business; 3) the use of the ORG
by other organizations; 4) the publishing of a newsletter and 5) allowing for the nomination and
election of a social membership representative. The minutes make no reference to an activity
furthering the members’ involvement or interest in a hobby, sport, common interest or pursuit.

The minutes make reference that the ORG's facility is used by other organizations in the
community. The local ENTITY 1 uses the ORG's facility for meetings on the X and X DAY of
each month. The ORG provides a meal to ENTITY 1 charging $ for each meal provided to the X
(or so) ENTITY 1’s members in attendance. ENTITY 2 has sponsored a fund raiser using the
ORG and the COUNTY PARTY held a meeting of the candidates event at the ORG.

PERSON 1 and PERSON 2 and the Power of Attorney, POA were present during the initial
interview. It was stated by the officers the purpose of the ORG is to provide a sense of home for
the elderly and provide a place for the members to discuss events, etc.

The officers stated the ORG operating hours are - X am - X pm
-X am - X pm on DAY
-X am - X pm on DAY and DAY

The restaurant is open for business during these operating hours.

The officers stated the social members pay $ a year in membership dues. The ORG has X
social members and X equity members. Upon entering the ORG a person pays $ and becomes
a member. In fact, upon entering the ORG the IRS Agent writing this report was solicited to pay
$ and become a member. The equity members are PERSON 1 and PERSON 2.

Department of the Treasury - Internal Revenue Service Form 886-A
OO Page 3

Form U.S. Treasury Department-Internal Revenue Service | Schedule No. or

886-A EXPLANATION OF ITEMS Exhibit
Name of Taxpayer . Year/Period Ended
ORG 42/31, 2OXX & 20XX

The officers stated the ORG activities include member discussions, which occur at will during
the normal hours of operation. The ORG will be open past normal operating hours whena
significant event is held in the community. Activities related to the members’ involvement in a
hobby, sport, common interest or pursuit are not conducted.

Inspecting-the ORG revealed it is a restaurant operation and catering facility. The minutes verify
bids were accepted for the catering services.

The building being used by the ORG is owned by FOR-PROFIT ENTITY. A written lease
agreement was executed between-the ORG and FOR-PROFIT ENTITY. The term of the lease
is for one year beginning August _| 20XX. At the end of the term the lease will be month-to-
month. The ORG shall pay $ per month in rent. Occupancy expenses totaling $, $ and $ were
reported on the CYE 20XX, 20XX and 20XX Forms 990 respectively.

The ORG is embrailed in a legal dispute with the local government about a LAW. The local
government claims the LAW applies.to the ORG. The ORG claims the LAW does not apply and
has taken the matter to court to have the issue resolved.

LAW

• Code section 501(a) grants exemption from taxation to organizations described in Code section
  501(c).

Code section 501(c\7) describes social clubs as being organized for pleasure, recreation or
other nonprofitable 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.

Income Tax Regulation section (Regulation) 1.501(c)(7)-1(a) states "The exemption provided by
section 501(a) for organizations described in 501(c)(7) 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 any part of its net earning inures to the benefit of any private
  shareholder. In general, this exemption extends to social and recreational clubs which are
  supported solely by membership feés, 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."

Regulation section 1.507(c)(7)-I(b) states in part "A club which engages in business, such as
making its social and recreation 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 501(a).”

Department of the Treasury — Internal Revenue Service Form 886-4
age

Form U.S. Treasury Department-internal Revenue Service § Schedule No. or

886-A EXPLANATION OF ITEMS Exhibit
Name of Taxpayer Yeat/Period Ended
ORG . 12/31, 20XX & 20XX

Revenue Ruling 58-588, 1958-2 CB 265 states in part that a club "...whose prominent activity is
the selling of services for profit to an unlimited number of so-called “members”, who have no
voice in the management of the club and whose only rights are to the use of the club 's facilities
upon the payment of specified fees, is not a tax-exempt social club within the meaning of
section 501 (c)7)...”.

Revenue Ruling 58-588 continues by stating "On the basis of the information presented, it is
concluded that the club in the instant case is operated in the personal.interest of a few
individuals; that social features are not a material purpose of the club but are subordinate and
merely incidental to the active furtherance of a predominant purpose to engage in the business
of selling services for profit to an unlimited number of individuals termed "associate members;"
that "associate" membership is not a true membership but is merely a guise under which -
virtually unlimited numbers of individuals may utilize the club facllities; and that income from
associate members Is in reality income from transactions with the general public."

Revenue Ruling 58-588 also states that "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."

Revenue Ruling 58-589, 1958-2CB 266 states in part that" ...to qualify for income tax
“exemption, a social club should not advertise its facilities for nonmember patronage since this

would be prima facia evidence it was engaging in business." -

Revenue Ruling 66-179, 1966-1 CB 139, Situation 4 addresses a garden club qualifying under
section 501(c)(7) of the Code. "The organization was incorporated by amateur gardeners to
promote their common interest in gardening. The organization (1) holds flower shows and
exhibits to display members’ achievements in home gardening, (2) schedules weekly meetings
devoted primarily to informal social hours during which matters related to gardening are
discussed, and (3) issues a publication containing news about members’ social activities and
achievements in home gardening. Its funds are derived from membership dues, fees, and
assessments. No part of the net earnings of the organization inures to the benefit of any officer
or member.”

Revenue Ruling 67-139, 1967-1 CB 129, Situation 2.-- club qualifying under section 501(c)(7) of
the Code. "The club was formed by mineralogy and lapidary enthusiasts to disseminate
knowledge of mineralogical and lapidary subjects, to promote their application so that greater
pleasure may be derived from these activities, and to promote good fellowship among its
members. In furtherance of these purposes, the club (1) holds monthly social meetings during
which the members discuss gem and mineral topics and sell, purchase, or exchange rock and
mineral specimens; (2) issues a bulletin containing news of members’ social activities and their
rock and mineral collections; and (3) annually conducts a show for the general public at which
its members display their lapidary techniques and mineral specimens. A nominal admission fee,

Department of the Treasury — Internal Revenue Service Form 806-4
age

Form U.S. Treasury Department-Internal Revenue Service © Schedule No. or

886-A EXPLANATION OF ITEMS Exhibit
Name of Taxpayer Year/Period Ended
ORG ; - 42/31, 20XX & 20XX

designed to cover expenses of the show, is charged for admittance to the show. The club ‘s
funds are otherwise derived solely from membership dues, fees, and assessments. No part of
. the net earnings of the organization inures to the benefit of any individual."

Revenue Ruling 67-139 also states that “The club provides a meeting place for its members
where they may associate with each other and become more proficient in their hobbies. It is
operated primarily to accommodate its members in their recreational pursuits. The gem and
mineral show serves to stimulate the members’ hobby interests and is, thus, consistent with the
society's recreational purposes.”

Revenue Ruling 69-635 1, 1969-2 CB 126 states that “An automobile club whose principal
activity is rendering automobile services to its members but has no significant social activities
does not qualify for exemption under section 501(c)(7) of the Code...”.

Revenue Ruling 74-30, 1974-1 CB 137 A flying club of limited membership that provides flying
privileges solely for its members, assesses dues based on the club's fixed operating costs and
charges fees based on variable operating expenses, and whose members are interested in —
flying as a hobby, constantly comingle in informal meetings, maintain and repair the aircraft
owned by the club, and fly together in small groups qualifies for exemption under section —
501(c)7) of the Code.

GOVERNMENT'S POSITION

The ORG does not conduct activities furthering the members pursuit of a common recreational
interest. Therefore, the ORG should not be treated as a social club described in Code section
501(c)(7) for the years under examination.

To be treated as a social club, the ORG must: 1) be a club; 2) be organized for pleasure and
recreation; 3) have substantially all activities devoted to recreational purposes; 4) ensure no
" inurement is provided to any private shareholder; and 5) not have a written discrimination —
policy.

Code section 501(c)(7) does not define the term “club". However, a club must have certain
characteristics including: 1) the membership of individuals; 2) personal contact; 3) comingling of
the membership; 4) fellowship among members; 5) members sharing some active interest and;
6) the sharing of goals by members justifying the existence of a club.

The exemption of social clubs is based on the members pooling their funds for recreational
purposes rather than a compelling public benefit. A:social club must be organized and operated
for pleasure, recreation and other nonprofitable purposes. The receipts must be generated from
the pursuit of the common interest devoted to pleasure, recreation and other nonprofitable
purposes.

Department of the Treasury — Internal Revenue Service Form 886-4
age

• Form U.S. Treasury Department-Internal Revenue Service Schedule No. or

886-A EXPLANATION OF ITEMS Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31, 20XX & 20XK

Purpose of the ORG

The Articles state the purpose of the ORG is to provide for the social enjoyment of its members
and educating members on the importance of the civil liberties enjoyed by the citizens of the
United States. This purpose does not meet 501(c)(7) requirements. Educating the membership
on the importance of civil liberties is not a 501(c)(7) purpose. —

The stated purpose does not list a common interest providing for the social enjoyment and
comingling of the members. The purpose does not list an active interest or sharing of.goals by
the members justifying the existence of the ORG. The ORG isn't organized for pleasure or
recreation. The ORG's purpose does not provide for recreation and comingling of the
membership around a common interest.

~ The Government's position is that the ORG's purpose does not comply with 501(cX(7).
Membership

The two classes of membership consist of two (2) equity members and an unspecified number
of social members.

Membership qualifications related to the pursuit of a common interest are not found in the
Bylaws or Articles. Stating qualifications for membership in the organizing documents ensures
the persons solicited for membership share the.interest of the members. The organizing
documents state the ORG's social membership includes any individual who has paid their dues
and any assessments. Such persons are accepted into the social membership.

The membership requirements do not meet the standard set by 501(c)(7). The ORG's members
pay annual dues of $ and there are no formal membership requirements. Membership is
available to all entering the ORG's restaurant. Indeed, upon entering the ORG, the IRS Agent
writing this report was solicited to pay $ and become an ORG member. The Government's
position is that the ORG's membership Is, in fact, the general public. The low dues, no
membership requirements and membership being available simply by entering the ORG. and
paying $ provides clear evidence that the ORG's social membership class is the general public..
The social membership designation is not a true membership but is a guise under which
virtually unlimited numbers of individuals may use the ORG's restaurant facility.

Department of the Treasury ~ Internal Revenue Service Form Bee."
age

Form U.S. Treasury Department-Internal Revenue Service Schedule No. or

886-A - EXPLANATION OF ITEMS Exhibit
Name of Taxpayer : Year/Period Ended
ORG 12/31, 20XX & 20XX

Also, the lack of substantive membership requirements is clear evidence that there is no
common interest shared by the membership. Membership is open to all members of the public
thus negating the requirement of the members common interest. -

Activities

A social club as defined by 501(c)(7), shall provide a meeting place for persons interested in a
hobby, sport or some form of active recreational interest common to the members. Then a
viable social club sponsors activities related to the members' pursuit of this common interest.
Then receipts from the members are generated from conducting these activities, thus providing.
the members’ wherewithal to pursue their interests. Such is not the case with the ORG. The
activities of the ORG do not support a 501(c)(7) purpose.

The Government's position is the ORG does not sponsor activities devoted to pleasure,
recreation or nonprofitable purposes related to the pursult of a common interest. Enjoying
conversation while dining does not meet 501(c)(7) requirements. The ORG Is providing a
service to its membership by operating a full-time restaurant which does not provide the social
activities required by 501(c)(7). Therefore, the ORG may not be treated as a 501(c)(7) social
ORG for ali years under examination.

The restaurant is open during the normal operating hours of the ORG making it the exclusive
activity of the ORG. No other activity is conducted during normal operating hours. While dining
may be a part of a viable social! club's activities it may not be the exclusive activity.

Dining in the company of another person is pleasurable. However, dining is not an activity
meeting the requirements of a social club within 501(c)(7). If it were, any restaurant would
qualify as a social club. :

The ORG has regular meetings attended by the equity members and two social members. The
subjects discussed involve the operation of the restaurant and. catering services, publishing a
newsletter, use of the club facility by other organizations and the municipal LAW. The minutes
contain no references to planning or conducting activities devoted to the pleasure of the
membership. This verifies the activities are not devoted to social or recreational pursuits.
Meetings of a viable social club are devoted to planning activities in pursult of the common
interest or hobby shared by the membership. In fact, the meeting should be a social and
recreational activity for the membership, but the ORG has only two social members attending
the meetings. The ORG's meetings are devoted to the operation of the restaurant, catering,
facility and addressing the LAW. The meetings do not provide a forum for the membership to
plan activities involving a common recreational interest. The minutes provide evidence of not
complying with 501(c)(7).

Department of the Treasury — Internal Revenue Service _ Form aoe 8

Form U.S. Treasury Department-Internal Revenue Service § Schedule No. or

886-A EXPLANATION OFITEMS | Exhibit
Name of Taxpayer Year/Period Ended
ORG 42/31, 20XX & 20XX

The ORG may argue that the restaurant activity provides a place where the members may sit,
eat a meal and discuss the civil liberties enjoyed in the United States or other subjects related
to responsible citizenship. The Government's position is that conversations while dining are
pleasurable. However, the ORG's primary purpose is the rendering of a service to the
membership which is not in compliance with 501(c)(7) requirements. Also, conversations while
dining is not a pleasurable activity within the scope of 501(c){7).

The ORG is performing an activity similar to Revenue Ruling 58-588. The ORG's exclusive
activity is the selling of a food service to the members. This service is not related to a hobby,
"sport or active interest which all members have in common.

The ORG is open during community events such as election days. Prior to an elaction the ORG
~ may be used by candidates to communicate with the residents of the community and members.
These events provide a service to the community and an element of pleasure may be
associated with them. However, this does not further the social and recreational requirements
of 501(c)(7). These activities-are more indicative of a 501(c)(4) social welfare organization and,.
in fact, don't involve the pursuit of a common recreational interest of the membership required
by 501(c)(7).

Local organizations use the ORG facllities as a meeting place. At each meeting, the ORG
provides a meal to one of these organizations at.a per plate cost. While this may serve the
interests of the entity using the ORG's facility, it does not further the ORG's requirement of
being substantially devoted to recreational activities required of a 501(c)(7) social club.

Receipts should be generated from activities related to the pursuit of a common recreational
interest shared by the members. By generating receipts from the pursuit of a common interest,
the members are pooling their funds to promote the enjoyment of their common interest. The
ORG is generating revenue from a food service provided to the membership, and this is stated
.on the Forms 990 and 990-T for the years under examination. Therefore, the ORG is nat
operated solely on membership fees, dues and assessments. Revenue is not generated
through the use of the ORG facility in connection with ORG activities. Income from social
members is, in reality, income from the general public.

The Government's position Is that the social features are not material but are subordinate to the
‘active purpose of selling a product to an unlimited number of persons designated as social
members who are, in fact, the general public. Therefore, the ORG should not be treated as a
501(c)(7) social club. The activities don't comply with the requirements of 501(c)(7).

Voting

The Bylaws state the equity members have voting privileges to determine the ORG's
management, operation and contro!. The Bylaws state the social members do not have voting
privileges. The Government's position is that the organizing documents of a viable social club

Department of the Treasury — Internal Revenue Service Form 886-4
age

aa

Form © U.S. Treasury Department-Internal Revenue Service Schedule No. or

886-A , EXPLANATION OF ITEMS Exhibit
Name of Taxpayer | Year/Period Ended
ORG 42/31, 20XX & 20XX

would give its members a voice in the control of the club. This ensures the members are
actively involved in the pursuit of their common pleasurable interest.

Denying social members voting privileges clearly indicates the ORG is not organized for the
pleasure of the membership. The social members have no voice in the affairs of the ORG.
Therefore, the ORG is not entitled to be treated as a 501(c)(7) social club.

dvertisin

The ORG advertises for public patronage of its facilities. This is evidence that the ORG is
engaging in business and is not being operated for pleasure, recreation or social purposes.

TAXPAYER'S POSITION

The taxpayer does not agree with the Government. The taxpayer believes the ORG complies
with the requirements of 501(c)(7). The ORG should be allowed to file Form 990 and be treated
as a 501(c)(7) social club.

CONCLUSION

The ORG's Articles and Bylaws indicate the ORG is not.organized for the members’ pleasure or
recreation. The ORG's activities do not further a.social or recreational purpose. The ORG
operates what would be classified as a for-profit restaurant and catering facility. The ORG's
restaurant operation is providing.a personal service to the general public. Therefore, the ORG
‘is not operated for the members’ pleasure or recreation. Finally, the ORG is not organized or

_ Operated as a social club within the meaning of 501(c)(7).

The Government's position Is that the ORG is operated in a manner consistent with any for-
profit restaurant business. The ORG is doing business with the public which is inconsistent with
the term “club" as used in 501(c){7).

The ORG should not be treated as a social club within the meaning of Code section 501(cX7).
The ORG has Articles making it a corporate entity. Therefore, the ORG must file FORM,
_ for CYE 20XX, 20XX, 20XX and all subsequent years.

Department of the Treasury — Internal Revenue Service For bee’
. age