IRS revokes a social club's section 501(c)(7) exemption

Plain-English summary

The IRS revoked a social club's exemption under IRC section 501(c)(7). The club operated shooting ranges, a fishing pond, a clubhouse, and related recreational facilities, and opened many of those facilities to nonmembers. The examination materials state that nonmember receipts repeatedly exceeded the 15% safe-harbor limit described in Public Law 94-568. The IRS concluded that the organization no longer qualified for exemption and required it to file Form 1120 for the affected periods and future taxable years.

Ruling snapshot

• Question: Whether the social club continued to qualify for exemption under IRC section 501(c)(7) after receiving recurring income from the general public.
• Outcome: Revocation of exemption, effective January 1 of the redacted year.
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7); Public Law 94-568; Rev. Rul. 66-149; Rev. Proc. 71-17.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE
Attn: Mandatory Review, MC 4920 DAL 501-07.00
1100 Commerce St.

TAX EXEMPT AND Dallas, TX 75242

GOVERNMENT ENTITIES
DIVISION

Release Number: 201317016
Release Date: 4/26/2013
LEGEND Employer Identification Number:
ORG - Organization name Person to Contact/ID Number:
XX - Date Address - address Contact Numbers:
Voice
Fax

Date: January 14, 2013

CERTIFIED MAIL - RETURN RECEIPT REQUESTED

Dear

In a determination letter dated July, 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 March 19, 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. You have
filed Form 1120 U. S. Corporation Income Tax Return for the years ended December
31, 20XX, December 31, 20XX, December 31, 20XX and December 31, 20XX with us.
In addition, 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.

Thank you for your cooperation.

Sincerely,

Nanette M. Downing
Director, EO Examinations

Internal Revenue Service . Department of the Treasury
Director, EO Examinations

Tax Exempt & Government Entities Division
1100 Commerce
Dallas, TX 75242

Taxpayer Identification Number:

Date: February 17, 2012
Form:

ORG

Tax Year(s) Ended:
ADDRESS

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 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.

Letter 3610 (Rev. 11-2003)
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 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.

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 Examination

Enclosures:
Publication 892
Publication 3498
Form 6018
Report of Examination
Envelope

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

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

Name of Taxpayer ORG Year/Period Ended 20XX12
LEGEND
ORG - Organization name XX - Date

ISSUE

Does the taxpayer, ORG (“TP”), continue to qualify for exemption under Internal Revenue Code (“IRC”)
Section 501(c)(7) given that it receives more than % of its income from the general public on a recurring
basis?

FACTS

TP is organized and operates as a social club exempt from Federal income taxation under IRC Section
501(c)(7) pursuant to a ruling issued by the Service in July, 19XX. The purpose of the organization per its
Articles of Incorporation is to gather together those interested in sports such as fishing, hunting, etc. for
discussions on these topics and to hold social and recreational activities as a group.

TP's primary activities include providing facilities, events and other activities for the pleasure and recreation
of its members and their guests. The benefits provided to TP's members and qualified guests include, but are
not limited to, access to the organization's:

• Trap, sporting clays and skeet shooting ranges
• Rifle and pistol ranges
• Stocked fishing pond
• Clubhouse
• Hiking and dog training areas

TP also offers its members and qualified guests NRA certified firearms training and safety courses and hosts
a number of member only shooting competitions at various times during the year.

An interview with TP's representative as well as information obtained from TP's website website disclosed
that the organization's facilities are open to members and to the general public four days per week
(Wednesday thru Sunday). During these days, nonmembers may enter the grounds of TP's facilities through
an unlocked entry gate and participate in a number of activities and events that are generally available to
members, including, but not limited to, the organization's trap, skeet, and sporting clays shooting ranges. In
order to use these facilities, nonmembers must sign a club rules and indemnity agreement that is maintained
by the cashier working the counter in the Clubhouse. The cashier then charges the individual the applicable
nonmember fee associated with each activity the nonmember will participate in. Nonmembers do not have
access to TP's rifle/pistol ranges and stocked fishing pond. Otherwise, nonmembers have access to the
remaining 80 acres of property owned by TP.

TP records cash receipts, including income derived from nonmember sources, on a daily basis via a MS
Excel based daily cash workbook that is maintained by the organization's club manager and treasurer. The
results of a three year analysis of these reports, in addition to a review of TP's Form 990, Form 990-T,
general ledger, income statement, trial balance and bank statements for the tax periods under review are
summarized below:

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

Form 886A. Department of the Treasury - Internal Revenue Service Explanation of
Items

Name of Taxpayer ORG Year/Period Ended 20XX12

12/31/XX 12/31/XX 12/31/XX TOTAL
Total Nonmember Income A
Total Member, Investment & Other Income B
Total Income C

Nonmember Income % - (A/C)

Total Member, Investment & Other Income% -
(B/C)

TP's primary sources of nonmember income during the tax periods reviewed were derived primarily from
nonmember usage of the organization's trap, skeet, and sporting clays shooting ranges. As summarized
above, during the tax periods ending 12/31/XX, 12/31/XX and 12/31/XX, TP received nonmember income as
a percentage of gross receipts of %, % and % respectively. These nonmember income levels consistently
exceeded the % of gross receipts safe harbor limitation set fourth in Public Law 94-568.

LAW

IRC Section 501(c)(7) exempts from Federal income tax clubs organized for pleasure, recreation, and other
non-profitable purposes, substantially all of the activities of which are for such purposes and not part of the
net earnings of which inures to the benefit of any private shareholder.

Section 1.501(c)(7) of the Treasury Regulations ("Regulations") provides that, in general, the exemption
extends to social and recreation clubs supported solely by membership fees, dues and assessments.
However, a club that engages in a business, such as making its social and recreational facilities open to the
general public, is not organized and operated exclusively for pleasure, recreation and other non-profitable
purposes, and is not exempt under IRC section 501(c)(7).

Public Law 94-568 amended IRC Section 501(c)(7) by substituting the "operated exclusively" provision
of law with "operated substantially". This amendment effectively allows an IRC Section 501(c)(7)
organization allows social clubs to receive up to 35% of their gross receipts, investment income, from
sources outside their membership without losing their exempt status. The amendment further provides that
within this 35%, no more than 15% of gross receipts may be derived from nonmember use of club facilities
and/or services.

Revenue Ruling 66-149 provides, in part, that a social club as not exempt as an organization described in

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

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

Name of Taxpayer ORG Year/Period Ended 20XX12

IRC Section 501(c)(7) where it derives a substantial part of its income from nonmember sources.

Revenue Procedure 71-17 sets forth guidelines for determining the effect of gross receipts derived from
nonmember use of a social club's facilities on the club's exemption under Section 501(c)(7) of the Code.
Additionally, this Procedure sets forth record keeping requirements that can be used by a club to document
member vs. nonmember usage.

TAXPAYER'S POSITION

Taxpayer's position was not available as of the drafting of this addendum.

GOVERNMENT'S POSITION

TP's income derived from nonmember sources has exceeded the 15% safe harbor limitation set fourth in
Public Law 94-568 on a recurring basis throughout the tax periods ending December 31, 20XX, December
31, 20XX and December 31, 20XX. Therefore revocation of TP's exempt status is warranted.

CONCLUSION

TP no longer qualifies for exemption under IRC Section 501(c)(7) as its nonmember income has exceeded
the 15% nonmember threshold as set fourth in Public Law 94-568. Therefore, TP's exempt status under
IRC Section 501(c)(7) should be revoked effective January 1, 20XX. Should this revocation be upheld, Form
1120 must be filed starting with tax periods ending December 31, 20XX, December 31, 20XX and December
31, 20XX.

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

Form 886A. Department of the Treasury - Internal Revenue Service Explanation of
Items

Name of Taxpayer ORG Year/Period Ended 20XX12
LEGEND
ORG - Organization name XX - Date

ISSUE

Does the taxpayer, ORG (“TP”), continue to qualify for exemption under Internal Revenue Code (“IRC”)
Section 501(c)(7) given that it receives more than % of its income from the general public on a recurring
basis?

FACTS

TP is organized and operates as a social club exempt from Federal income taxation under IRC Section
501(c)(7) pursuant to a ruling issued by the Service in July, 19XX. The purpose of the organization per its
Articles of Incorporation is to gather together those interested in sports such as fishing, hunting, etc. for
discussions on these topics and to hold social and recreational activities as a group.

TP's primary activities include providing facilities, events and other activities for the pleasure and recreation
of its members and their guests. The benefits provided to TP's members and qualified guests include, but are
not limited to, access to the organization's:

Trap, sporting clays and skeet shooting ranges
Rifle and pistol ranges
Stocked fishing pond
Clubhouse
*Hiking and dog training areas

TP also offers its members and qualified guests NRA certified firearms training and safety courses and hosts
a number of member only shooting competitions at various times during the year.

An interview with TP's representative as well as information obtained from TP's website website disclosed
that the organization's facilities are open to members and to the general public four days per week
(Wednesday thru Sunday). During these days, nonmembers may enter the grounds of TP's facilities through
an unlocked entry gate and participate in a number of activities and events that are generally available to
members, including, but not limited to, the organization's trap, skeet, and sporting clays shooting ranges. In
order to use these facilities, nonmembers must sign a club rules and indemnity agreement that is maintained
by the cashier working the counter in the Clubhouse. The cashier then charges the individual the applicable
nonmember fee associated with each activity the nonmember will participate in. Nonmembers do not have
access to TP's rifle/pistol ranges and stocked fishing pond. Otherwise, nonmembers have access to the
remaining 80 acres of property owned by TP.

TP records cash receipts, including income derived from nonmember sources, on a daily basis via a MS
Excel based daily cash workbook that is maintained by the organization's club manager and treasurer. The
results of a three year analysis of these reports, in addition to a review of TP's Form 990, Form 990-T,
general ledger, income statement, trial balance and bank statements for the tax periods under review are
summarized below:

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

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

Name of Taxpayer ORG Year/Period Ended 20XX12

12/31/XX 12/31/XX 12/31/XX TOTAL
Total Nonmember Income A
Total Member, Investment & Other Income B
Total Income C

Nonmember Income % - (A/C)

Total Member, Investment & Other Income% -
(B/C)

TP's primary sources of nonmember income during the tax periods reviewed were derived primarily from
nonmember usage of the organization's trap, skeet, and sporting clays shooting ranges. As summarized
above, during the tax periods ending 12/31/XX, 12/31/XX and 12/31/XX, TP received nonmember income as
a percentage of gross receipts of %, % and % respectively. These nonmember income levels consistently
exceeded the % of gross receipts safe harbor limitation set fourth in Public Law 94-568.

LAW

IRC Section 501(c)(7) exempts from Federal income tax clubs organized for pleasure, recreation, and other
non-profitable purposes, substantially all of the activities of which are for such purposes and not part of the
net earnings of which inures to the benefit of any private shareholder.

Section 1.501(c)(7) of the Treasury Regulations ("Regulations") provides that, in general, the exemption
extends to social and recreation clubs supported solely by membership fees, dues and assessments.
However, a club that engages in a business, such as making its social and recreational facilities open to the
general public, is not organized and operated exclusively for pleasure, recreation and other non-profitable
purposes, and is not exempt under IRC section 501(c)(7).

Public Law 94-568 amended IRC Section 501(c)(7) by substituting the "operated exclusively" provision
of law with "operated substantially". This amendment effectively allows an IRC Section 501(c)(7)
organization allows social clubs to receive up to 35% of their gross receipts, investment income, from
sources outside their membership without losing their exempt status. The amendment further provides that
within this 35%, no more than 15% of gross receipts may be derived from nonmember use of club facilities
and/or services.

Revenue Ruling 66-149 provides, in part, that a social club as not exempt as an organization described in

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

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

Name of Taxpayer ORG Year/Period Ended 20XX12

IRC Section 501(c)(7) where it derives a substantial part of its income from nonmember sources.

Revenue Procedure 71-17 sets forth guidelines for determining the effect of gross receipts derived from
nonmember use of a social club's facilities on the club's exemption under Section 501(c)(7) of the Code.
Additionally, this Procedure sets forth record keeping requirements that can be used by a club to document
member vs. nonmember usage.

TAXPAYER'S POSITION

Taxpayer's position was not available as of the drafting of this addendum.

GOVERNMENT'S POSITION

TP's income derived from nonmember sources has exceeded the 15% safe harbor limitation set fourth in
Public Law 94-568 on a recurring basis throughout the tax periods ending December 31, 20XX, December
31, 20XX and December 31, 20XX. Therefore revocation of TP's exempt status is warranted.

CONCLUSION

TP no longer qualifies for exemption under IRC Section 501(c)(7) as its nonmember income has exceeded
the 15% nonmember threshold as set fourth in Public Law 94-568. Therefore, TP's exempt status under
IRC Section 501(c)(7) should be revoked effective January 1, 20XX. Should this revocation be upheld, Form
1120 must be filed starting with tax periods ending December 31, 20XX, December 31, 20XX and December
31, 20XX.

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