Determination 1338044: IRS revokes social club’s exemption over non-member services

Plain-English summary

The IRS revoked an organization’s exemption under IRC § 501(c)(7). The organization was formed around property owners and provided services including snow removal, a summer shuttle, access to facilities, and temporary dumpsters. Its rules limited beach access for some guests, but did not apply the same restriction to other guests or members’ tenants, and the shuttle contract did not limit use to members. The IRS concluded that the organization had not operated in accordance with the requirements for its exempt social-club status.

Ruling snapshot

• Question: Did the organization continue to qualify as a social club exempt under IRC § 501(c)(7)?
• Outcome: Revocation. The IRS issued a final adverse determination and required the organization to file federal income tax returns.
• Key authorities: IRC § 501(c)(7).

Full text (IRS public release)

TAX EXEMPT AND
GOVERNMENT ENTITIES DALLAS, TEXAS 75242 501.07-00

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TE/GE EO EXAMINATIONS
1100 COMMERCE ST. MAIL CODE 4920 DAL

DIVISION

Date: June 3, 2013

Taxpayer Identification Number:
Number: 201338044
Release Date: 9/20/2013

LEGEND

ORG - Organization name Form:
XX - Date Address - address
Tax Years Ended:

Person to Contact/ID Number:

ORG Contact Numbers:
ADDRESS Telephone:
Fax:

CERTIFIED MAIL — RETURN RECEIPT REQUESTED

Dear

In a determination letter dated October 19, 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.

You are required to file Federal income tax returns for the tax periods shown above. If you have
not yet filed these returns, please file them with the Ogden Service Center within 60 days from
the date of this letter, unless a request for an extension of time is granted, or unless an
examiner's report for income tax liability was issued to you with other instructions. File returns
for later tax years with the appropriate service center indicated in the instructions for those
returns.

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

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

Sincerely,

Nanette M. Downing
Director, EO Examinations

Internal Revenue Service Department of the Treasury
TE/GE Division

Mail Stop SF 7-4-01
450 Golden Gate Avenue
San Francisco, California 94102-3412

Taxpayer Identification Number:

Date: November 6, 2012
Form:

ORG

ADDRESS 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 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 Examinations

Enclosures:
Publication 892
Publication 3498
Form 6018

Report of Examination
Envelope

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

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(Rev. January 1994)

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN December 31, 20XX
Issue:

Is ORG a social club exempt from tax under section 501(c)(7) of the Internal Revenue Code?

Facts:

ORG was incorporated on or about May 29, 19XX. It received a letter of determination recognizing it as a social club exempt under
Internal Revenue Code Section 501(c)(7) dated October 19, 19XX.

In its application for determination it answered no to the question “Are non-members other than bona fide guests of members
permitted or will they be permitted to use the club facilities or participate in or attend any functions or activities conducted by the
organization.”

It included in the application a copy of its Articles of Incorporation. Article II stated the purposes of the organization, which included
promoting the collective and individual property and civic interests of property owners in its tract, regulating the beach and
recreational facilities owned by ORG, care for and maintain public areas dedicated to community use, maintain a clubhouse or social
hall, cooperate with owners of vacant lots in keeping them in good order, aid members of the association in the enforcement of
conditions, covenants and restrictions, along with any necessary general powers.

The Internal Revenue Service examined the organization for the year ending December 31, 20XX. The organizations activities were:
arrange to have snowplows plow the driveways of its members in winter; operate a shuttle bus service during the summer through the
community to provide transportation to the ORG; make payments to the ORG so that its members, guests and member’s tenants
could use its facilities; and provide dumpsters for the use of its members for a few days during the summer.

The bylaws of the organization provided that day guests of the members would need to be accompanied by a member to use the
beach, but did not apply this restriction to other guests or tenants of the members. Tenants could not extend guest privileges to others
not staying with them.

The snow removal contract provided that the organization would give a list of members by street address and designate which were
full time residents, so that the snow removal company would provide snow removal only from members’ driveways.

The contract with the shuttle bus company did not contain a provision limiting its use to members.

The expenses of the organization for that year were as follows:

Clean Up Shuttle Use of Beach Snow Removal Misc Expense and Overhead Total
and other payments
to ORG
$ $ $ $ $ $
% % % % % %

The organization did not maintain a clubhouse or social hall.

Law:

Section 501(c)(7) of the Internal Revenue Code provides for exemption from taxation for “ Clubs organized for pleasure, recreation,
and other nonprofitable purposes, substantially all of the activities of which are for such purposes and no part of the net earnings of
which inures to the benefit of any private shareholder.

Form 886-A (1-1994) Catalog Number 20810W Page 1 publish.no.irs.gov Department of the Treasury-Internal Revenue Service