Other 1318013: IRS revokes a private golf and country club’s exemption

View official IRS release (PDF)

Plain-English summary

The IRS revoked a private golf and country club’s exemption under section 501(c)(4), retroactive to January 1, 20XX. The organization operated a public golf course alongside member facilities, but its governing documents limited membership and gave equity members voting rights and an interest in the organization’s net assets on dissolution. The IRS concluded that public patronage and golf-course revenues benefited private members, and that the organization was organized and operated for profit rather than exclusively for social welfare. The IRS considered possible relief under section 7805(b).

Ruling snapshot

• Question: Whether the organization’s section 501(c)(4) exemption should be revoked.
• Outcome: Revocation.
• Key authorities: IRC §§ 501(c)(4), 7805(b); Treas. Reg. § 1.501(c)(4)-1; Rev. Rul. 64-313; Rev. Rul. 65-195; Rev. Rul. 66-273; Rev. Rul. 67-109; Rev. Rul. 69-385; Rev. Rul. 74-298; Rev. Rul. 80-205; West Side Tennis Club v. Commissioner, 111 F.2d 6 (2d Cir. 1940); American Women Buyers Club, Inc. v. Commissioner, 238 F.2d 526 (2d Cir. 1964); People’s Educational Camp Society, Inc. v. Commissioner, 331 F.2d 923 (2d Cir. 1964); Club Gaona, Inc. v. United States, 167 F. Supp. 741 (S.D. Cal. 1958).

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE EO Examinations
1100 Commerce Street
Dallas, TX 75242

501.04-00

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: December 4, 2008

Number: 201318013
Release Date: 5/3/2013

LEGEND
ORG = ORGANIZATION NAME XX = DATE ADDRESS = ADDRESS
Taxpayer Identification Number:
ORG Form:
ADDRESS Tax Year(s) Ended:

Exemption under Section 501(c)(4)
of the Internal Revenue Code
Person to Contact/ID Number:
Contact Numbers:
Phone:
Fax:
CERTIFIED MAIL — RETURN RECEIPT REQUESTED

Dear

In a determination letter dated 03/12/20XX, you were held to be exempt from Federal
income tax under section 501(c)(4) 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)(4) of the Code. Accordingly, your
exemption from Federal income tax is revoked effective 01/01/20XX. This is a final
adverse determination letter with regard to your status under section 501(c)(4) 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 05/15/20XX,
you signed Form 6018-A, Consent to Proposed Action, agreeing to the revocation of
your exempt status under section 501(c)(4) 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 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 the
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:

Taxpayer Advocate Service

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

Sincerely,

Sunita Lough
Director, EO Examinations

DEPARTMENT OF THE TREASURY
Internal Revenue Service
1100 Commerce Street
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

April 8, 2008

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 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.

Letter 3610 (04-2002)
Catalog Number 34801V

Thank you for your cooperation.

Sincerely,

Marsha A. Ramirez
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Form 6018

Report of Examination
Envelope

Letter 3610 (04-2002)
Catalog Number 34801V

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX12, 20XX12
LEGEND
ORG = Organization name XX = Date State = state River = river
CO-1, & CO-2 = 15%* Company, gna Company ATT-1, ATT-2, ATT-3, ATT-4, ATT-5,

ATT-6, ATT-7 & ATT-8 = 1°? ATTRACTION, 2™2 ATTRACTION, 3®° ATTRACTION, 47"

ATTRACTION, 5™ ATTRACTION, 67 ATTRACTION, 77 ATTRACTION & 87" ATTRACTION

ISSUE:

Whether ORG’s (ORG) section 501(c)(4) exempt status should be revoked effective January 1,
20XX, because the ORG is organized for profit. and is not operated exclusively for social welfare

purposes.
FACTS-ORGANIZATIONAL:

The ORG (ORG) was incorporated or formed on 11/12/19XX. The ORG applied for exempt
status under Section 501(c)(7) as a social ORG on 11/19/ . The ORG received a determination
letter granting them exempt status under Section 501(c)(4) on 3/12/20XX. The ORG’s Form
1024, Application for Exempt Status states, “The organization formerly owned and operated a
private nine hole golf course and ORG house/restaurant for its members only. A couple of years
ago, however, the organization went through a change. Rather than focusing on its members, it
became a community organization. It opened its golf course up to the public. As a part of this
change, it entered into an agreement with ORG, State, to combine with the organization’s nine
holes of golf the nine holes of golf owned by ORG, State. Thus, the organization currently
operates an 18 hole course that is open to the public. ORG requested the organization to operate
the entire course. This is the only golf course near City, State. ORG requires that all green fees
be used towards the maintenance of the 18 holes of golf. ORG regularly meets with the
organization to provide suggestions as to how to make this course better for the general
community...”

The ORG’s most recent ARTICLE’s OF INCORPORATION dated 3/31/20XX [and prior
Articles] state the following:

Article I] PURPOSES AND POWERS

The ORG was organized and continues as a non-profit country ORG for the purpose of
owning and operating a golf course, a ORG house and other related recreational, dining
and social facilities for the recreation and enjoyment of the ORG’s duly qualified
members. The ORG shall have the power to carry on all activities reasonably related or
incidental to the operation of a golf and country ORG. No part of the net earnings of the
ORG shall inure to the benefit of any member or individual. The ORG’s powers shall
include but shall not be limited to the following:

(1) To construct, own, operate, and carry on a golf ORG for the use and enjoyment of
its members and their guests, and to build, own, operate and maintain a golf course, a pro
shop, a ORG storage facility and other related facilities, on its own or in conjunction with

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
Explanation of Items Exhibit

Year/Period Ended
ORG 20XX12, 20XX12

Name of Taxpayer

other public or private entities as may be determined by the ORG’s Board of Directors,
for the use, pleasure and enjoyment of the ORG’s member, their guests and the public.

(2) To construct, own, operate, and maintain a ORG house and other facilities as may
be determined by the Board of Directors, including a restaurant, dining areas, dance floors
or areas, refreshment stands, locker rooms, and other rooms, places or facilities, and to
provide or conduct social, entertainment or amusement activities, for the convenience,
health, comfort, and entertainment of the ORG’s members and their guests;

Article VI (f) POWERS OF THE BOARD OF DIRECTORS

(1) To make, alter or amend the Bylaws and ORG rules and provide penalties for
infractions thereof by members; all bylaws made and enacted by the Board shall have full
and final effect unless inconsistent with the laws of the State of State or the Constitution
and Articles of Incorporation;

(2) Prescribe the terms upon which persons may be accepted to membership in the
ORG;

(3) Accept or reject any application for membership;

(4) Fix and prescribe classifications of members;

(5) Determine and fix admission fees and dues;

(6) Levy assessments against the members and provide for the collection of the same;
(7) Approve the hiring of the ORG manager, the golf pro, the greens superintendent,
and all other employees of the ORG, and approve all salaries of ORG employees;

(8) Fine, reprimand, suspend or expel any member;

(9) Remove for cause any director or officer....

Article IX MEMBERSHIP

(a) Eligibility. Any person of good moral character, twenty-one years of age or over,
shall be eligible for membership in the ORG, subject to the provisions of the Bylaws and
tules of the ORG.

(b) Application for Membership and Action Thereon. Matters relating to applications
for membership and action thereon shall be as fixed in the Bylaws.

The ORG’s BYLAWS dated 3/31/20XX [and prior bylaws] state the following:

Article I Section 1.1 Purposes. The ORG was formed and continues as a nonprofit
country ORG for the purpose of owning and operating a golf course, ORG house and
other related recreational, dining and social facilities in City, State for the enjoyment and
recreation of its members.

Article IT MEMBERS:

Section 2.1.1. Members....In the case of a membership owned by a corporation or other
entity, such entity shall designate one individual who will be deemed the owner for
purposes of use of ORG facilities and voting.

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
Explanation of Items Exhibit

Year/Period Ended
ORG 20XX12, 20XX12

Name of Taxpayer

Section 2.1.2. Equity Members. Equity Members are those members who have
purchased an equity membership, have received a certificate of equity membership issued
by the ORG, and whose equity membership has not been sold by the member or
terminated by the ORG. Equity Members are entitled to vote, hold office, share in any
liquidation proceeds, and sell, transfer or bequeath their membership in the ORG as
permitted by these Bylaws.

Section 2.1.3. Non-Equity Members. Non-Equity Members are those members
who have purchased a non-equity membership and whose non-equity membership has not
been terminated by the ORG. Non-equity Members are not entitled to vote, hold office,
share in any liquidation proceeds, or sell, transfer or bequeath their membership in the
ORG.

Section 2.4 Admission Procedures. Membership in the ORG will be solely by
invitation of the Board. A request that an invitation to membership be extended must be
made in writing by at least one (1) voting Equity Member in good standing. All requests
for invitations will be submitted to the Membership Committee of the Board for
consideration and review. The Membership Committee will carefully examine all
information and communications in reference to each candidate. Before each monthly
Board meeting, the Membership Committee will submit to the Board members a list of
individuals for whom an invitation for membership has been requested, together with its
recommendation for action. All information regarding the candidates, as well as all
action taken by the Membership Committee and the Board regarding such candidates will
be kept confidential. The affirmative vote of four Board members will be required to
admit a candidate. Should the nomination be unfavorably acted upon, it may not be
submitted again for a period of one (1) year. It will be the duty of each Member of the
ORG possessed of any negative information regarding the character of a candidate, or
knowing of any good reason why membership should not be granted to such individual,
to communicate the same to the Membership Committee. All such communications will
be held by the Membership Committee in strictest confidence.

Section 2.6. Upgrade from Non-Equity Membership to Equity Membership. At
the discretion of the Board, a Non-Equity Member may become an Equity Member by
requesting such status and by paying as an initiation fee the difference between the fee
paid by the Member at the time he or she became a Non-Equity Member and the then
current initiation fee for an equity membership. [For 20XX, both the purchase of an
Equity membership and the initiation fee for a Non-Equity membership were $100. ]

Section 2.8. Voting Rights. ...Each Equity Member in good standing shall have
one vote. Non-Equity Members shall not have voting rights. [In 20XX, the ORG had
127 equity members and 105 associate/non-equity members; both classes pay annual dues
of $ per person.]

Article XV DISSOLUTION

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
Explanation of Items Exhibit

Year/Period Ended
ORG 20XX12, 20XX12

Name of Taxpayer

Section 15.1. Dissolution of the ORG. In the event that the ORG shall be
dissolved, the Equity Members in good standing shall participate on a pro-rata basis in the
distribution of the net assets of the ORG.

FACTS — OPERATIONAL:
Golf Course Open to Public

The ORG operates an 18 hole championship golf course under an arrangement with ORG, State.
The County owns 9 holes and leases this to the ORG in exchange for the ORG managing and
maintaining it along with their 9 holes, and keeping the entire 18 holes open to the public. The
County requires the ORG to roll green fees from the golf course back into the course for
operating expenses, maintenance and improvements. For 20XX, the County also appropriated $
for capital improvements and equipment for the golf course.

Numerous golf tournaments are held on the golf course including fundraisers, state sponsored or
sanctioned events, and company outings. All of the golf tournaments are open to the public as
well as the ORG members. There are many people from out of the area that participate in the
tournaments.

Members of the ORG and members of the general public all pay the same to play golf— whether
it is a season pass or green fees.

Private ORG house — Members pay dues to patronize but also open to the public.

Facilities owned by the ORG include a restaurant and bar which is a private ORG house with a
Class A liquor license as contemplated in Section 32A-5 of the State Code. The building also
contains several large conference rooms not subject to the state private ORG rules.

Although the ORG house is a “private ORG” for purposes of the state liquor law, the ORG
maintains that it is open to the public for practical purposes. The ORG actively seeks to book
business meeting luncheons and corporate golf outing dinners with local and visiting companies
and groups as well as company holiday parties, weddings, reunions, birthday gatherings, etc. The
ORG meets and works with the Convention and Visitors Bureau and local hotels, rents
billboards, and buys radio time to find bookings for the ORG house. The ORG explained that
private ORG rules are followed by having a member of the ORG sponsor an event. Thus, the
attendees are guests of that member. When an event is initiated by a non-member, they will ask
one of their relatives or friends that is a member to sponsor the event. If it happens that there is
non-member business, the person who is hosting the party must buy a temporary membership.
[See section below on membership. |

Snack bar and pro-shop — Open to the public

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

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

Year/Period Ended
ORG 20XX12, 20XX12

Name of Taxpayer

ORG property also includes a building housing a snack bar and pro-shop, open to the public.
Beer, but not liquor, is served in the snack bar so it is not subject to the State private ORG rules.
The snack bar business is owned and operated by the ORG. The pro-shop business is owned and
operated by the general manager (GM) of the ORG who is also their golf professional.

Membership: Voting, Non-Voting and Temporary

There are three classes of membership: (1) equity members, who have purchased an equity
membership, are entitled to vote, hold office, share in any liquidation proceeds, and sell, transfer,
or bequeath their shares in the ORG, (2) non-equity members, who are not entitled to vote, hold
office, share in any liquidation proceeds, or sell, transfer or bequeath their shares in the ORG and
(3) temporary members, whose only benefit is the use of the ORG house. Equity and non-equity
membership is only by invitation of the ORG.

For 20XX, the purchase of both an equity membership and the initiation fee for a non-equity
membership was $. Both classes pay annual dues of $ _ per person. In 20XX, there were 127
equity (voting) members and 105 non-equity (non-voting) members. Upgrade from non-equity to
equity membership is at the discretion of the Board. Since the equity and non-equity members
pay the same dues and fees, it is not immediately apparent why the non-equity members are not
allowed to vote. One possible explanation may be that the State State liquor law requires at least
50% of the membership of a Class A liquor licensee have full voting rights [and an equal share in
the equity of the ORG if it is a stock corporation]. The ORG has % members with full
voting rights. This arrangement will generate dues revenue from all “members” willing to pay
dues while granting full voting membership only to the extent required by State law. This would
allow for maximum revenue and minimum sacrifice of voting control and equity.

Regarding the temporary memberships, in actuality, very few are sold. Non-member/temporary
dues in 20XX totaled $. Regular membership dues totaled $. Initially, the examining agent was
told that a temporary membership costing $ entitled the purchaser and guest(s) the use of the
ORG house for two weeks. This amount was charged at the request of regular members because
it approximates member’s annual dues on a prorated basis. The members didn’t think it was fair
if they had to pay $ per person; $ per married couple to patronize the ORG house if a non-
member could get in on a $ vistor card. [Under state law, the $4 visitor card can be good for 3
weeks.] Per correspondence from the ORG’s representative dated 3/13/20XX, “for the last
several months they have three different types of non-member use of the restaurant. First, non-

• members are able to purchase a one month membership for the $. Second, they can purchase a
  one day membership for $. Third, and apparently the largest use, is that non-members are
  allowed to use the restaurant based upon being a guest of a member.”

Membership dues, whether annual or temporary, do not entitle a member to use the golf course,
only the restaurant and bar.

Form 886-A (rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -5-

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX12, 20XX12
Control of ORG

According to the Articles of Incorporation, control of the ORG rests with a board of seven
directors who are elected by the members. The board determines who will be accepted as a
member to the ORG and who will not. A prospective equity/voting member must be
recommended to the board by a current equity member. An affirmative vote of four board
members is required to admit a candidate.

The board meets with the County regularly regarding the management of the golf course, but
manages the ORG house and membership in the ORG independently.

The area where the ORG is situated

The ORG is of golf courses in all of Southeastern State. Northern State covers a comparable
geographic area and has _ golf courses. The golf course winds along the River and is banked by
sandstone and shale cliffs. It is located between the towns of City and City in ORG. The
approximate population of City is and City, the largest town in the county, . There
are at least two hotels in City which have event facilities. The CO-1 advertises that it has
meeting and banquet facilities for groups of 10 to 500. The CO-2 has two meeting rooms. The
larger has a capacity of 200 and the smaller, 50. Per an internet source, ORG per capita income
is approximately $ with % of the population below the poverty line. Largest industries are
mining, government, and wholesale/ retail trade.

ORG terrain consists of mountain and desert. The area appears to be somewhat economically
depressed, however many tourist attractions draw in additional commerce. City was once the
hub of State’s transportation and mining industries, and now nearly every building on Main
Street is on the NATT-2. Other attractions in this area called “ATT-1” ( )
include ATT-3, ATT-4, ATT-5, ATT-6 ATT-7, and ATT-8. There are hundreds of miles of
mountain bike trails, trout fishing, hiking tours and camping.

FACTS — FINANCIAL:
The following two pages contain the ORG’s financial statements. The ORGs allocates income
and expenses to either the ORG house or the golf course.
Form ORG Golf
990 Revenue house Course Combined
Green Fees-ORG Members & General Public
Golf Season Passes - General Public
Driving Range Income
Riding Cart Rentals
Advertising Income — Bench Ads
Visitor cards - Temporary Membership ORG
house

Form 886-A (rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -6-

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

Year/Period Ended
ORG 20XX12, 20XX12

Name of Taxpayer

Mineral lease

income

Miscellaneous income

Collection charge returned cks
Line 2 Program Service Revenue

ORG house Member Golf Passes
ORG house Member Dues
Line 3 Membership Dues

Line 4 =‘ Interest Income
Sale of Fixed
Line 8 Assets

ORG house - Food

ORG house - Minimum Charges

ORG house - Bev

ORG house -

Liquor

ORG house - Beer

ORG house - Catering Deposits
Subtotal

Snack Bar - Food

Snack Bar — Beverages

Snack Bar - Beer

Subtotal
Line
10a Gross Sale of Inventory
Total Gross
Receipts
Line

10b Cost of Goods Sold
Line 12 Total Revenue
Line 44 Total Expense
Line 18 Excess or (deficit)

Form ORG Golf
990 Expense house Course Combined

Groundskeeper Salary

Assistant Groundskeeper Salary
Assistant Golf Pro Salary

Grounds Labor

Salary - Driving Range

Starter's Salary

Marshalling

General Manager and Golf Pro Salary
Office Clerk and Office Manager Salary
Crew Labor

Form 886-A (rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -7-

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

Year/Period Ended
ORG 20XX12, 20XX12

Name of Taxpayer

Labor Snack Bar
Janitor
Line 26 Other Salaries and Wages
Line 29 Payroll Taxes
Line 31. Accounting Fees
Line 32 Legal Fees
Office Supplies
Paper Supplies, Linens
Janitor Supplies, Misc Supplies, Freight
Kitchen Supplies, Uniforms, China/Silver,
Gasoline & Lubricants
Bar Supplies, Mistakes/Spills Liquor
Line 33. Supplies
Line 35 Postage and Shipping
Line 37 Repairs & Maintenance - Bldgs & Equip
Line 42 Depreciation
Outside Labor
Electric
Phone
Water
Tax & license
Property Taxes
Insurance
Employee ed,insure,bene,wrkmns comp
Legal services
Advertising
BDay, dues/sub, entertain, cable, misc, bad cks
Bank charges
Line 43. Other Expenses
Line 44 Total Expenses

LAW:

IRC, 2007-CODE-VOL, SEC. 501. EXEMPTION FROM TAX ON CORPORATIONS,

CERTAIN TRUSTS, ETC.
501(c)(4)(A) Civic leagues or organizations not organized for profit but operated
exclusively for the promotion of social welfare, or local associations of employees, the
membership of which is limited to the employees of a designated person or persons in a
particular municipality, and the net earnings of which are devoted exclusively to
charitable, educational, or recreational purposes.

501(c)(4)(B) Subparagraph (A) shall not apply to an entity unless no part of the net earnings of

such entity inures to the benefit of any private shareholder or individual.

The term “shareholder” includes a member of an organization. See West Side Tennis Club v.
Comm., 111 F. 2d 6 (2d Cir. 1940).

Form 886-A (rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -8-

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

Year/Period Ended
ORG 20XX12, 20XX12

Name of Taxpayer

FINAL-REG, TAX-REGS, §1.501(c)(4)-1. Civic organizations and local associations of
employees
Reg. §1.501(c)(4)-1 does not reflect P.L. 99-514, P.L. 100-203, P.L. 100-647, P.L. 101-73 or P.L.
104-168.
(a) Civic organizations
(1) In general. —A civic league or organization may be exempt as an organization
described in section 501(c)(4) if:
(i) It is not organized or operated for profit; and
(ii) It is operated exclusively for the promotion of social welfare.
(2) Promotion of social welfare
(i) In general. —An organization is operated exclusively for the promotion of
social welfare if it is primarily engaged in promoting in some way the common good and
general welfare of the people of the community. An organization embraced within this
section is one which is operated primarily for the purpose of bringing about civic
betterments and social improvements.

(ii) Political or social activities. —The promotion of social welfare does not
include direct or indirect participation or intervention in political campaigns on behalf of
or in opposition to any candidate for public office. Nor is an organization operated
primarily for the promotion of social welfare if its primary activity is operating a social
club for the benefit, pleasure, or recreation of its members, or is carrying on a business
with the general public in a manner similar to organizations which are operated for profit.

Revenue Ruling 64-313

The organization in question was incorporated under state law, without capital stock, as a
nonprofit corporation. Its purpose is to maintain a registry for the wishes of members in regard
to arrangements following death; to study and develop methods of achieving simplicity and
dignity in funeral and memorial services; and to educate and inform its members and the public
as to the results of such study.

Membership is available to any person who is in sympathy with the purposes of the organization
on payment of a nominal membership fee. The income of the organization is derived from
membership fees and donations. Its funds are expended for office rental, printing and supplies,
secretarial help, and other miscellaneous expenses.

It is clear that the educational functions of the organization benefit the community as a whole by
informing it of the problems involved in funeral arrangements. Furthermore, the maintenance of
the registry is not similar to a business ordinarily carried on for profit, and in view of the nominal
cost of membership and the non-exclusiveness of membership, this activity also serves a public
purpose by facilitating the completion of decedents’ funeral arrangements and the disposition of
their remains in accordance with their wishes. Supplying information to members or their

Form 886-A (rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -9-

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

Year/ Period Ended
ORG 20XX12, 20XX12

Name of Taxpayer

representatives as to local funeral directors furnishing low cost funerals is incidental to and in
furtherance of the organization’s primary social welfare functions.

Revenue Ruling 67-109

A nonprofit corporation which operates a roller skating rink is exempt under section 501(c)(4).
The roller skating rink is located in a county-owned building which is made available by the
county government to the organization on a rent free basis. The income of the organization,
which is derived from admissions, membership fees, and concessions operated in conjunction
with the skating facilities, is used to defray operating expenses. Although the charges made are
aimed at a break-even operation, any profit which the rink might realize is donated to the county
for necessary improvements to the rink building. Membership in the organization, which
qualifies one to vote for officers and directors at the annual meeting, and admission to the rink
are open to all residents of the county upon payment of a nominal amount.

Revenue Ruling 66-273

An organization was formed to provide supervised facilities in a community for the development
of good pistol, rifle, and shotgun marksmanship and for instruction in the safe handling and
proper care of firearms. Membership is open to any citizen of the community of good moral
character over 18 years old. Its receipts are derived from membership dues, range fees, and
proceeds from the sale of ammunition and targets. Disbursements are made for the purchase of
ammunition and targets, improvements to the range ground and buildings, expenses of special
events, and miscellaneous operating expenses. The organization does not maintain a clubhouse.
Social affairs are limited to an annual dinner for members, occasional picnics, and special events.
None of the organization’s income inures to the benefit of private individuals.

American Women Buyers Club, Inc. v. Commissioner, 238 F.2d 526 (2nd Cir. 1964)

The court affirmed denial of exemption to a membership corporation of female ready-to-wear
buyers organized to promote the general good and welfare of members in the trade, encourage
friendly relations, and give aid to members in distress. Membership, even within the trade, was
restrictive as approximately 15% of the applicants were turned down. The services provided by
the club (such as employment facilities, information about sources of supply, lectures, dinners,
installations, publications, and sick and death benefits) were all primarily, if not exclusively, for
the club membership.

Revenue Ruling 80-205

The Service ruled that it will not follow the decision in Eden Hall Farm v. United States, 389 F.
Supp. 858 (W.D. PA 1975). This case held that an organization providing recreational facilities
to the employees of selected corporations qualifies for exemption as a social welfare organization
described in IRC 501(c)(4).

Revenue Ruling 69-385

Form 886-A (rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -10-

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

Year/Period Ended
ORG 20XX12, 20XX12

Name of Taxpayer

A corporation was formed for the stated purpose of promoting the general welfare of the
residents of a particular community. Membership in the corporation was available to those who
owned property in a designated area. They paid an assessment based on the amount of property
owned. Membership was transferable to successive purchasers of property owned by the original
members. The corporate bylaws provide that any profits of the corporation shall be apportioned
pro rata among the members according to the assessment originally paid. The corporation used
the original assessments to purchase unimproved lots and some undeveloped land in the area.
Over the years, the corporation sold on a sporadic basis some of the property and received
substantial income from such sales. It derived additional income from the investment of the
proceeds from the sales. The corporation improved and maintained nonresidential property and
engaged in other activities for the benefit of all the residents of the area. On several occasions
the corporation distributed profits to the members in accordance with its bylaws provisions. The
corporation is authorized to make, and in fact made, distributions of profits to its members.
These distributions are equivalent to dividends based upon equity ownership and result in profit
to the members. It was held that the corporation does not qualify for exemption from Federal
income tax under section 501(c)(4) of the Code since the authority for making the distributions
and the distributions themselves are incompatible with the requirements of the regulations that an
organization must not be organized or operated for profit.

In P.L.L. Scholarship Fund v. Commissioner, 82 T.C. 196 (1984) [CCH Dec. Link 40,960]

An organization operated bingo at a bar (a for-profit enterprise) for purposes of raising money for
scholarships. The board of directors included the bar's owners and accountant, and two other
persons. The court reasoned that, because the bar owners controlled the organization and
appointed its directors, the organization's fundraising activities could be used to the advantage of
the bar owners, and thus, provide them with a maximum private benefit. The organization
claimed that it was independent because there was a separate accounting and that no payments
were going to the bar. The court maintained that the organization's and the bar's activities were so
interrelated as to be “functionally inseparable.” A separate accounting did not change that fact.
Thus, the organization did not operate exclusively for exempt purposes, but rather benefited
private interests - the bar owners. Exemption was properly denied.

Revenue Ruling 74-298

A nonprofit organization was formed by local businessmen to provide recreation and
entertainment for the citizens and visitors of the community. All residents of the community are
eligible to become members of the organization upon payment of a nominal initiation fee and
approval of a majority of the Board of Directors. The organization’s sole activity is the
sponsorship of an annual professional golf tournament that would otherwise not be available to
the community. The tournament features nationally known competitors and receives nation-wide
news coverage. The organization charges a standard admission fee to the public to attend the
tournament. The organization’s income is from gate receipts, membership fees, and assessments.
Its disbursements are for prize money for the golfers, rental of a golf course, and miscellaneous
administrative expenses. The ruling held that a professional golf tournament is an activity that

Form 886-A (rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -11-

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

Year/Period Ended

Name of Taxpayer
ORG 20XX12, 20XX12

can be operated for profit, and the sponsorship of such a golf tournament can itself be a business
for profit. The golf tournament sponsored by the organization is carried on with the general
public and is operated in a manner similar to tournaments operated for profit. Accordingly, the
organization is not operated primarily for the promotion of social welfare and, therefore, does not
qualify for exemption from Federal income tax under section 501(c)(4) of the Code.

In People’s Educational Camp Society, Inc. v. Commissioner, 331 F.2d 923 (2nd Cir. 1964), a
nonprofit corporation’s social welfare activities were supported by its operation of a commercial
resort. The court rejected the argument that the resort activities were social welfare and
characterized them as business activities. It noted that a large portion of the revenue was being
reinvested in the commercial operation. As the business activities were of such magnitude in
comparison with the social welfare activities that the organization could not be said to be
exclusively (that is, “primarily”) engaged in the promotion of social welfare, the court held the
organization nonexempt.

In Club Gaona, Inc. v. United States, 167 F. Supp. 741 (S.D. CA 1958), the organization’s
principal activity was the promotion of regular public dances, which were its main source of
income. The club used these profits for speculative real estate dealings. The court held that the
organization was not primarily promoting social welfare as its profits were devoted to the
accumulation of funds which were not used for ascertainable civic projects.

GOVERNMENT'S POSITION:

The ORG operates in several capacities:

1.) Asa private ORG bar and restaurant in order to comply with the state liquor laws, to control
membership and ownership, and for the benefit, pleasure and recreation of the members.

2.) Carrying on a business with the general public by actively seeking bookings for golf
tournaments, banquets, other events and daily business.

3.) Managing and operating a County owned 9 hole golf course in conjunction with their own 9
hole course to provide recreation for the community and for ORG members.

During the course of this examination, there has been a good deal of discussion and fact finding
in an attempt to determine whether the ORG is organized and operated as required under IRC
501(c)(4). i.e. Are the Articles and Bylaws consistent with IRC 501(c)(4)? What is the primary
activity and is it in furtherance of social welfare purposes? Relevant facts and circumstances are
as follows.

Social and recreational activities for members and activities similar to those carried on by a
business operated for profit are present to a substantial degree. Functions for members in the
ORG house and member golf leagues are not IRC 501(c)(4) activities. They are social and
recreational activities for members. Also, operating a bar, restaurant, banquet facilities, renting
out meeting rooms, and even hosting golf tournaments [R.R. 74-298] are activities similar to

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

Page: -12-

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

Name of Taxpayer Year/Period Ended
ORG 20XX12, 20XX12

those carried on by a business operated for profit and are not IRC 501(c)(4) activities. However,
these activities do not preclude exemption provided they do not comprise the primary activity of
the organization.

Factors such as the remote location of the golf course, the economically depressed area, the
community’s need for recreation, and the golf course being available at the same cost to the
general public and ORG members, are indicative that the golf course may be operated for the
benefit of the community. The ORG has suggested that the arrangement they have with the
County and the support they receive from them shows that they qualify under IRC 501(c)(4).

The examining agent suggests that the “arrangement” is a management contract and the
“support” is compensation under that contract; i.e. capital acquisition funds [9 holes are ORG
property], additional revenues generated by the draw of having an 18 hole course suitable for
tournaments, and additional revenues from being open to the public. The County’s purpose was
to provide a golf course open to the community. To achieve this, they contracted with a privately
owned golf course [the ORG] to manage and operate it. The ORG did not apply for exempt status
until a couple of years later. Nevertheless, without regard to the private ownership of the ORG,
operation of a public golf course can qualify as a 501(c)(4) activity provided other facts and
circumstances are consistent with IRC 501(c)(4). The examining agent will continue with the
government’s position allowing the presumption that the 18 hole golf course activity is
considered to be an activity of the ORG and an activity described in IRC 501(c)(4).

Returning to the determination of the-primary activity of the ORG; one method of determining
the primary activity is a gross receipts test. Initially, the examining agent used the ORG’s
allocation of receipts on their financial statements for the gross receipts test which resulted in the
ORG house having % of gross receipts. However, the ORG pointed out that this allocation
was

flawed because receipts from riding cart rentals and the snack bar are related to the golf course.
Thus, these receipts were moved to the golf course column as reflected in the schedule below.
Gross receipts from the golf course activities, i.e. green fees, season passes, golf cart rentals,
driving range income and snack bar income make up 69% of total gross receipts.

ORG Golf
house Course Total

ORG Financial Statements
Gross Receipts

Cost of Goods Sold

Total Revenue

Total Expense

Excess or (Deficit)

Riding cart rentals
Snack Bar receipts

Form 886-A (rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -13-

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX12, 20XX12
Reallocation

Gross Receipts
Cost of goods sold
Total Revenue

Labor snack bar
Total Expense

Excess or (Deficit)

The gross receipts test shows the golf course activity to be the primary activity and there are
factors supporting that the golf course is operated for the benefit of the community. Additional
facts and circumstances relevant in determining qualification for exempt status are as follows.

The examining agent feels it is important to point out that the riding cart rentals and snack bar
income are not required by the County to be rolled back into the golf course. [Not that this
would necessarily prevent funds from benefiting equity members as they own half of the 18 hole
course.] These receipts may be disbursed as deemed necessary by the ORG board. In fact, the
ORG financial statements allocate all of these receipts to the ORG house. Regardless, the excess
from general public patronage benefits ORG members in such forms as an increase in services
offered by the ORG without a corresponding increase in dues or other fees and as an increase in
the ORG’s assets which are distributable to equity members upon the dissolution of the ORG.

Equity membership in the ORG is exclusive; limited by the Board. Equity members are given
access to the ORG house, the right to vote, hold office, and share in the net assets of the ORG
upon dissolution. Non-equity members pay the same dues and fees and only receive access to the
ORG house. They are not allowed to vote, hold office, or share in the net assets of the ORG
upon dissolution. An organization that is operated for the benefit of the community should be
open to all persons in the community with full voting rights and equal dues for equal rights. The
exclusivity of membership is inconsistent with IRC 501(c)(4) purposes.

The ORG has stated that the ORG house itself provides social welfare activities because it has
meeting rooms which provide a place for “various charities and other public gatherings” and that
the bar and restaurant is not just for members but, open to the public, for all practical purposes.
The examining agent contends that the activities are not social welfare activities. There are other
bars, restaurants, event centers, banquet facilities, and a convention center, in the area. These are
business activities carried on with the general public and operated for profit. However, it is not
the operation of the ORG house as a business activity [or social activity for members] that
precludes exemption. The ORG house does not appear to be the primary activity. The problem
is the private ownership of the ORG house along with the limited membership. Revenues treated
as tax exempt are inuring to private individuals.

Form 886-A (rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -14-

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

Year/Period Ended
ORG 20XX12, 20XX12

Name of Taxpayer

The Articles and Bylaws are not consistent with and in furtherance of IRC 501(c)(4) purposes.
They state “In the event that the ORG shall be dissolved; the Equity Members in good standing
shall participate on a pro-rata basis in the distribution of the net assets of the ORG.” The net
earnings of a 501(c)(4) organization must be devoted exclusively to charitable, recreational, or
educational activities. The ORG’s dissolution clause which provides for the distribution of nets
assets to its members is not consistent with exemption under IRC 501(c)(4). [R.R. 69-385]

The organizing documents do state that the ORG was organized as a non-profit country ORG and
that no part of the net earnings shall inure to the benefit of any member or individual. However,
this declaration is contradicted when these same documents also authorize the issuance of
certificates of equity, which are certificates of stock representing ownership in the corporation,
and dedicate the assets to the owners/members of the corporation.

The ORG states that it is the net assets of the ORG that will be shared by the members and that
IRC 501(c)(4) only requires that no net earnings inure to the benefit of any private shareholder or
individual. The examining agent argues that for purposes of the prohibition against inurement,
these terms are indistinguishable and interchangeable. Both the net assets and the net earnings of
an IRC 501(c)(4) organization are protected by this prohibition. The ORG is organized so that
equity members will participate on a pro-rata basis in the distribution of the net assets upon
dissolution. This is a fatal flaw in the ORG’s organizing documents.

TAXPAYER’S POSITION:

[Letter dated 12/28/20XX] The report basically ignores the fact that substantially all of the
activities and funds of the Golf Course are devoted to maintenance and operation of the public
golf course which provides needed recreational activities to the general public and is of the type
that ORG clearly recognizes and supports. In addition to the larger capital acquisition payments,
ORG contributes indirectly to the operations of the golf course. This results from the County
making the additional nine holes of golf available for use with no charge. Thus, the golf course
is able to use the green fees generated by this free use of the County’s property for the operation
of the golf course as a whole. All such green fees, as well as all golf passes sold to members and
non-members must be used for the care, maintenance, and operation of the golf course. The vast
majority of such green fees are paid from the general public users or from public tournaments. In
addition to the use of the County’s portion of the golf course, the County contributed last year
about $ for golf course capital acquisitions. Given these two forms of contributions, there is no
doubt but that the operation of the golf course is furthering one of the purposes of the County.

A “de minimis” part of the Golf Course activities is the operation of the restaurant. The
restaurant is owned and operated in the manner imposed upon it by the State of State as a result
of its liquor license. These rules make it appear as if it is similar to other private ORGs.
However, like most places in State that permit the sale of alcohol, the actual operation of the

Form 886-A (rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -15-

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

Year/Period Ended
ORG 20XX12, 20XX12

Name of Taxpayer

ORG is radically different from a true private ORG. The public is able to and does use the
restaurant. This is facilitated by the payment of a small three-day fee, now being the minimum $
fee set by the State of State. The requirement of a member sponsoring an event to be held at the
restaurant by the public on paper also looks like a private ORG. Here again, the State of State
requires a member to sponsor such an event. However, this is form over substance, since such
member sponsorship has been and is available upon request. In addition, in the same building as
the restaurant, there are several large conference rooms. These are fully available, without the
minimum liquor license fee, for all types of community and other charitable uses and are
frequently used for such purposes.

Proceeds from the golf cart rentals are used for golf cart repair, maintenance, and purchase of
new replacement carts. This is not the profit center alleged in the report, especially since this
“profit” only goes to improve the facilities used by the public.

Although Code Section 501(c)(4) may use stricter language, the regulations make it clear that all
that is required for an entity to qualify under this section is that it be “primarily” engaged in
promoting the common good and general welfare of the people of the community. Regs.
1.501(c)(4)-1(a)(2)(i). Given the large percentage of funds and time devoted to the golf course, it
is clear that this is the primary focus. There is no question that ORG clearly believes that the
operation of a golf course is for the common good and general welfare of its citizens. This is the
only golf course in ORG and ORG not only owns a portion of the course in question, but also
regularly contributes substantially towards the cost of capital improvements. It is also clear that
the golf course is available to the general public.

Although the report recognizes the obvious desire of the County to provide this type of recreation
to its citizens, it suggests that this for some reason is not the type of social welfare addressed in
Section 501(c)(4). The providing of recreation by governmental entities is common place and
clearly is a governmental function. The fact that an economically strapped county, such as ORG,
desires to make this type of capital resource available for recreation is proof that the golf course
operation satisfies the social welfare requirement.

The report asserts the finding in a case which benefits a small group of apartment renters as
reason why the golf course is not for the public benefit. There is no comparison between these
two. There is not a select group that benefit from the golf course as there was in the apartment
case. Every citizen is able to enjoy the benefit of this course. Clearly, this is a public and not a
private benefit and the comparison to an apartment complex is completely incorrect. The lack of
benefit to the members is additional evidence of the public purpose of the golf course.

The report also focuses on the restaurant as preventing satisfaction of the “primarily” engaged
requirement. The report is wrong on three points. The activity and cost of operating the
restaurant pales in comparison to the operation of the golf course. Second, the restaurant, for a
small fee required by the State of State, is available to the public. Third, a portion of the

Form 886-A (rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -16-

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

Year/Period Ended
ORG 20XX12, 20XX12

Name of Taxpayer

restaurant itself provides social welfare. It provides a place for various charities and other public
gatherings. In this economically strapped county, the ability for a large public group to gather
satisfies a public welfare requirement. Although the State of State dictated liquor laws place
some technical road blocks for such public gatherings, these have and continue to not be anything
more than technical. For example, member sponsoring is required, but freely given to all. Such
activities are very similar to those involved in Rev. Rul. 65-195, which found a social welfare
activity to be present in conducting community sports contests.

We believe that the regulations and case law provide that once the public welfare benefit is
established, minor profit activities do not destroy its qualifying under Section 501(c)(4).
Although the court found that the primary activity of the taxpayer in People’s Educational Camp
Society, Inc. v. Comr. was the providing of for profit management services, the court indicated
that had this been a secondary activity, the taxpayer would still qualify under Section 501(c)(4).

Similarly, see TAM 9815061, where the entire activity was a for profit activity. This distinction
is best found, however, in TAM 97110004. Here a number of subordinate organizations were
found to have as their “predominant activity” the commercial operations of a bar and restaurant.
However, the parent company that oversaw such subordinate organization as well as other
charitable organizations remained qualified since this commercial activity was not the primary or
principal activity of the parent company. In short, the existence of minor non public welfare
activity does not destroy the qualification.

Here, it is only a minor activity that is arguably a for profit activity. By far and away the vast
majority of the activity is the operation of the public golf course. It is this activity that should
control.

PRIOR APPROVAL: Even if the primary purpose of the golf course is ignored and hence the
golf course is denied 501(c)(4) status, such change cannot be done retroactively. The golf course
obtained a determination letter from the IRS. Neither its organizational documents nor its
operations have changed from those disclosed in the application for this determination. Thus,
this is a re-determination of the same facts and one that must be done prospectively only.

[Letter dated 1/30/20XX] We still disagree on two basic points. First, the regulations do not
prohibit all other activity, but only require that the organization be “primarily” engaged in
promoting the common good and general welfare of the people of the community. Reg.
1.501(c)(4)-1(a)(2)(i). We believe that even if the areas you have focused upon do not fit
squarely in this general welfare requirement, such activities are very minor compared to the real
focus of the golf course operator.

Second, we disagree with your conclusion that the provision to distribute the assets of the golf
course operator to its members results in the sharing in net profits. In fact, the organizational
documents prohibit the sharing in the net profits. Instead, they require the distribution of the

Form 886-A (rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -17-

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

Name of Taxpayer Year/Period Ended
ORG ; 20XX12, 20XX12

remaining assets to the members if the entity ever dissolved. These two provisions are not in
conflict since the net profits would be required to be distributed to a public charity and the initial
capital (the land) distributed to the members.

[Letter dated 3/13/20XX] This is a follow-up to our telephone conversation of about a week
ago. [manager appeal conference] Attached is a summary of the financial income statement for
the ORG. I have tried to allocate the income generated by the golf course versus that generated
by the restaurant/ convention facility. It shows $ of income being generated by the golf course as
compared to $ being generated by the restaurant/convention facility. It is difficult to make this
same allocation based upon expenses since many of the upper level employees jobs are divided
between the two activities.

With respect to the restaurant, management confirmed that for the last several months they have
three different types of non-member use of the restaurant. First, non-members are able to
purchase a one month membership for the $. Second, they can purchase a one day membership
for $ (the minimum permitted by the State of State). Third, and apparently the largest use, is that
non-members are allowed to use the restaurant based upon being a guest of a member. This last
option is used the most and on a very liberal basis. Thus, any time there is any possibility that a
non-member can attach himself or herself to a member, then no fee is charged. The reason being
is that the restaurant needs more customers and hence they have an incentive to permit non-
members use of it.

I had the ORG take a count of member versus non-member use of the restaurant over the time
period from February 26 to March 8" 20XX. During this time, there were 29 members who used
the restaurant and 180 non-members who used the restaurant. According to the ORG
management, this is a typical use ratio.

Given the non-member availability to use the restaurant and the actual use of the restaurant by
non-members, it is obvious that there is no real value to the members and hence no inurement to
them. Given the low or no cost to use the restaurant there is clearly no real value being given to
the members.

I did some research on the issue of the land going to the members upon a dissolution and whether
or not the unrecognized appreciation would be treated as “net income” for purposes of the
prohibition against sharing in income. I was not able to find anything on point going either
direction. The board of directors has no problem amending the bylaws so that to the extent
income was used to improve the property that the value of such improvements would go to a
501(c)(3) charity upon any dissolution. However, as to the real property itself, I still believe that
an entity should be able to distribute such an asset to members upon dissolution without violating
the sharing in net income, whether or not there has been unrecognized appreciation.

Form 886-A (rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -18-

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

Name of Taxpayer Year/Period Ended
ORG 20XX12, 20XX12

L also said that I would check on a modification of the bylaws so that both classes of stock were
able to vote, rather than only the equity class having a right to vote. Because of the conflict
between these two on a dissolution, the board of directors wanted to retain the right to have the
equity class vote. Because ORG dictates how the golf course is to be run and maintained, the
members have little power. For this reason, do not think that the voting disparity is all that
important.

I believe the above covers those issues that were flushed out during our last telephone call.
Hopefully, you will find that this supports my argument that the restaurant is either too
immaterial to be concerned with or alternatively, that it provides a service for the community as a
whole. If so, then the members are receiving no real advantage from the restaurant and it does
not generate an inurement problem.

I like to try to compromise issues wherever possible, including those with the IRS. What I
propose in this case is that the ORG retain its 501(c)(4) status, but that the restaurant is treated as
an unrelated trade or business. I believe this fits with the facts since there is no real inurement to
the members. Thus, to the extent it generates any income, there would be an UBIT. I realize that
this compromise position cuts against my argument that the restaurant serves a community
purpose since the conference rooms are used by the community as a whole. However, since such
is basically free, the restaurant still generates the lion's share of the income.

CONCLUSION:

IRC section 501(c)(4) provides that social welfare organizations must not be organized

for profit and must be operated exclusively for the promotion of social welfare. IRC section
501(c)(4)(B) requires that no net earnings inure to the benefit of any private shareholder or
individual with respect to such organization.

The ORG does not meet the organizational and operational requirements of IRC 501(c)(4)
because it is owned by its stockholding/voting members, membership is limited, revenues
generated by public patronage inure to the benefit of ORG members, and net assets are dedicated
to ORG members upon dissolution.

Therefore, we propose revocation of the ORG’s section 501(c)(4) exempt status retroactive to
January 1, 20XX with consideration given to any request for IRC 7805(b) relief.

Form 886-A (rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -19-