IRS revokes a golf club's section 501(c)(7) exemption for excess nonmember income

Plain-English summary

The IRS revoked a golf club's exemption under section 501(c)(7). The club advertised discounted golf to the general public, and the examination found that nonmember income exceeded the limits for an exempt social club. The organization agreed to the revocation and had already filed Form 1120 for the redacted tax years. The IRS concluded that the club did not qualify for exemption because more than 15 percent of its gross receipts came from nonmember use of its facilities or services. The revocation was proposed effective December 1 of the redacted year and the final letter made it effective on that date.

Ruling snapshot

• Question: Did the golf club continue to qualify for section 501(c)(7) exemption despite its nonmember golf-course income?
• Outcome: Revocation
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7)-1; Rev. Proc. 71-17; Public Law 94-568 (1976).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Tax Exempt and Government Entities Division

Exempt Organizations: Examinations

1100 Commerce Street MC 4920 DAL

Dallas, Texas 75242 UIL: 9999.98-00

Release Number: 201322043
Release Date: 5/31/2013

Date: February 15, 2013 Taxpayer Identification Number:

LEGEND Form:
ORG - Organization name Tax Period(s) Ended:
XX - Date Address - address Person to Contact/ID Number:
Contact Numbers:
Phone:

ORG

ADDRESS Fax:

CERTIFIED MAIL - RETURN RECEIPT REQUESTED
Dear ;

In a determination letter dated March 15, 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 December 1, 20XX. This is a final letter with
regard to your exempt status.

We previously provided you a report of examination explaining why we believe revocation of
your exempt status was necessary. At that time, we informed you of your right to contact the
Taxpayer Advocate, as well as your appeal rights. On October 11, 20XX, you signed Form
6018-A, Consent to Proposed Action, agreeing to the revocation of your exempt status under
section 501(c)(7) of the Code.

You are required to file Federal income tax returns for the tax period(s) shown above. If you

have not yet filed these returns, please file them with the Ogden Service Center within 60 days
from the date of this letter, unless a request for an extension of time is granted. File returns for
later tax years with the appropriate service center indicated in the instructions for those returns.

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate
assistance is not a substitute for established IRS procedures, such as the formal appeals
process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend
the time fixed by law that you have to file a petition in a United States court. The Taxpayer
Advocate can, however, see that a tax matter that may not have been resolved through normal
channels gets prompt and proper handling. You may call toll-free, 1-877-777-4778, and ask for
Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate
at:

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

Thank you for your cooperation.

Sincerely,

Nanette M. Downing
Director, EO Examinations

DEPARTMENT OF THE TREASURY
Internal Revenue Service
M/S 1112
PO Box 12307
TAX EXEMPT AND Ogden, UT 84412

GOVERNMENT ENTITIES
DIVISION

June 13, 2011

Taxpayer Identification Number:

ORG
ADDRESS Form:

Tax Year(s) Ended:
Date and Time of Appointment:

Place of Appointment:

Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Dear
I am writing to confirm our appointment for the examination of the above periods.

We realize some organizations may be concerned about an examination of their
returns. We hope we can relieve any concerns you may have by briefly explaining why
we examine exempt organization returns and what your appeal rights are if you do not
agree with the results.

We examine returns to verify the correctness of income or gross receipts, deductions
and credits, and to determine that the organization is operating in the manner stated
and for the purpose set forth in its application for recognition of exemption. In many
cases, we close examinations without changes.

When we complete the examination, we will explain our recommendations and how they
may affect your exempt status or tax liability, such as employment, excise or unrelated
business income taxes. You should fully understand any recommended changes and
their ramifications. Please do not hesitate to ask questions about anything that is not
clear to you.

Letter 3613 (04-2002)
Catalog Number 34804C

If we recommend changes involving your tax liability and you agree with the changes,
we will ask you to sign an agreement form. By signing the form, you will indicate your
agreement to the amount shown as a refund due or additional tax owed.

You do not have to agree with our recommendations. You may request a conference at
a higher level as explained in the copy of the appeal procedures that we will provide
you.

If you do not wish to have someone present through the examination, we would
appreciate having an officer or representative available at the beginning of the
examination to discuss the operations of the organization and again at the end of the
examination to discuss the results.

If we conduct our examination with your representative, you must file a Power of
Attorney in order for your representative to receive or inspect confidential information.
You may use Form 2848, Power of Attorney and Declaration of Representative (or any
other properly written power of attorney or authorization), for this purpose.

To help make the examination as brief as possible, please have the records listed on
the attached Information Document Request (IDR) available for the year(s) under
examination.

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,
Shay Green
Enclosures:
Publication 1
IDR
Notice 609

Letter 3613 (04-2002)
Catalog Number 34804C

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
Mail Stop 1112, PO Box 12307
Ogden, UT 84412

DATE OF THIS NOTICE:
September 27, 2011
ORG CONTACT PERSON/ID NUMBER:
ADDRESS
CONTACT TELEPHONE NUMBERS:

Toll Free
Long Distance

RESPONSE DUE DATE:

Employer Identification Number:
Tax Period(s):
Form(s):

CERTIFIED MAIL - RETURN RECEIPT REQUESTED
Dear

We have enclosed a copy of our report of examination explaining why we believe
revocation of your organization's exempt status is necessary.

If you do not agree with our position you may appeal your case. The enclosed
Publication 3498, The Examination Process, explains how to appeal an Internal
Revenue Service (IRS) decision. Publication 3498 also includes information on your
rights as a taxpayer and the IRS collection process.

If you request a conference, we will forward your written statement of protest to the
Appeals Office and they will contact you. For your convenience, an envelope is
enclosed.

If you and Appeals do not agree on some or all of the issues after your Appeals
conference, or if you do not request an Appeals conference, you may file suit in United
States Tax Court, the United States Court of Federal Claims, or United States District
Court, after satisfying procedural and jurisdictional requirements as described in
Publication 3498.

You may also request that we refer this matter for technical advice as explained in
Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues. If a
determination letter is issued to you based on technical advice, no further administrative
appeal is available to you within the IRS on the issue that was the subject of the
technical advice.

If you accept our findings, please sign and return the enclosed Form 6018, Consent to
Proposed Adverse Action. We will then send you a final letter revoking your exempt

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

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 Examinations

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

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

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
ORG Year/Period Ended
November 30,
20XX
LEGEND
ORG - Organization name XX - Date City - city CO-1 - 1st COMPANY
ISSUES

Whether the tax-exempt status of ORG a 501(c)(7) social club that operates a golf
course should be revoked.

FACTS

The subject organization is recognized as a section 501(c)(7) tax-exempt organization.
According to its articles of incorporation, the primary purpose of the organization is to
promote and practice for amusement and social recreation for activities such as, golf,
polo, tennis, swimming, bowling, horseback riding, dancing, and cards. Membership is
open to CO-1 employees, along with City and City area residents.

The organization is advertising to the area residents through internet ads and in local
monthly publications. They are advertising golf at a discount rate for the general public.

The Revenue Agent completed a sample of five months of income from the
organizations daily receipt summary. The organization had % of non-member income
on the use of the golf course.

NON-MEMBER Member
MARCH
JUNE
JULY
OCTOBER
NOVEMBER
TOTAL
Total Percent Non-Member Income %

LAW

Section 501(c)(7) of the Code provides exemption for Clubs organized for pleasure,
recreation, and other non profitable purposes, substantially all of the activities of which
are for such purposes and no part of the net earnings of which inure to the benefit of
any private shareholder.

Social clubs exempt under IRC 501(c)(7) may receive up to 35% of its gross receipts
including investment income from sources outside its membership. Of the 35%, up to
15% of the gross receipts may be derived from the use of the club facilities or services

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
ORG Year/Period Ended
November 30,
20XX

by the general public or from other activities not furthering social or recreational
purposes for members.

1.501(c)7-1 Income Tax (b) (b) A club which engages in business, such as making its
social and recreational 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 section 501(a).
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. However, an incidental sale of
property will not deprive a club of its exemption

Revenue Procedure 71-17 Sec 2.2 states, “Where a club makes its facilities available to
the general public to a substantial degree; the club is not operated exclusively for pleasure,
recreation, or other non-profitable purposes”.

TAXPAYER’S POSITION

The organization agreed to the revocation of their tax exempt status. The President
signed the Form 6018. The organization also filed Form 1120 for the tax years ended
20XX, 20XX, and 20XX.

GOVERNMENT’S POSITION

As a result of our examination of your Form 990 return for periods ending November
30, 20XX we have determined that your organization no longer qualifies as an exempt
social club described in Internal Revenue Code section 501(c)(7). Your non-member
revenue consistently exceeds the percentage allowed by law. Your non-member
income in the tax year ended November 30, 20XX averaged % of total gross receipts,
whereas Revenue Procedure 71-17 and Public Law 94-568 allow a maximum of %.

Because social clubs are primarily supported by their members’ payments, their tax
exemption has the practical effect of allowing the membership to join together to
provide themselves with recreational or social facilities without further tax
consequences, when the club's income is limited to membership receipts. This
justification should not result in any tax advantage. By receiving such a large amount of
nonmember income from the use of the facilities, the members do receive financial
advantages.

The term “general public” as used in this procedure means persons other than
members of a club, their dependents, or guests. “Total gross receipts” is defined as the
receipts from normal and usual activities of the club including charges, admissions,

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
ORG Year/Period Ended
November 30,
20XX

membership fees, dues and assessments.

To qualify for income tax exemption, a social club should not advertise its facilities for
nonmember patronage since this would be prima facie evidence it was engaging in
business. A social club should not engage in any type of business activity for profit
which is designed to increase or which could result in an increase in net earnings
inuring to the benefit of any shareholder or individual. Net earnings may inure to
members in such forms as an increase in services offered by the club without a
corresponding increase in dues or other fees paid for club support or as an increase in
the club's assets which would be distributable to members upon the dissolution of the
club.

Income Tax Regulation (ITR) section 1.501(c)(7)-1 states that if a Social Club makes its
social and recreational facilities available to the general public it will not qualify for tax-
exempt status. However, Revenue Procedure 71-17 1971-1 C.B. 683 as amended by
Public Law 94-568 sets forth guidelines for determining the effect of gross receipts
derived from use of a social club's facilities by the general public have on the club's
exemption under section 501(c)(7) of the Code. The revenue procedure states that
where a club makes its facilities available to the general public to a substantial degree,
the club is not operated exclusively for pleasure, recreation, or other non-profitable
purposes. Social Clubs may receive up to 35% of their total gross receipts, including
investment income, from sources outside of their membership without jeopardizing their
tax-exempt status. Within this 35% limit, no more than 15% of a club's gross receipts
may be derived from nonmember use of the club's facilities and/or services. If these
standards are exceeded, a Social Club will not qualify for exemption pursuant to IRC
section 501(c)(7).

CONCLUSION

The organization does not meet the requirements of 501(c)(7) because they received
more than 15 percent of its income from non-members, the organization does not
qualify for exemption under 501(c)(7). We propose a revocation of your exempt status
under section 501(c)(7) effective December 1, 20XX. As a taxable entity, you are
required to file Form 1120, U.S. Corporation Income Tax Return, for the periods open
under statute which are the tax years ended November 30, 20XX, November 30, 20XX,
and November 30, 20XX.

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

Page: -3-