Other 1343024: IRS revokes a golf club's exemption for public use of its facilities

Plain-English summary

The IRS revoked a golf and country club's exemption under IRC § 501(c)(7). The club advertised that golfing was open to the public, rented its banquet and snack-bar facilities to a for-profit partner, and did not keep records separating member and nonmember use. The IRS concluded that the club's public activities and nonmember income showed it was operating as a business rather than exclusively for members' pleasure and recreation. As an alternative, the IRS determined that nonmember income would be unrelated business taxable income under IRC § 512(a)(3) if the exemption were not revoked.

Ruling snapshot

• Question: Should a social club's exemption be revoked when it makes its facilities available to the public and fails to document member and nonmember activity?
• Outcome: Revocation. The IRS concluded that the organization did not qualify under IRC § 501(c)(7) and should file Form 1120.
• Key authorities: IRC §§ 277(a), 501(a), 501(c)(7), 511(a), 512(a)(3); Treas. Reg. § 1.501(c)(7)-1(b); Rev. Proc. 71-17; Rev. Rul. 60-324; Rev. Rul. 66-149; Public Law 94-568

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

Attn: Mandatory Review, MC 4920 DAL
1100 Commerce Street
Dallas, TX 75242

Release Number: 201343024 UIL: 501.07-01
Release Date: 10/25/2013

Legend:

ORG = Name of Organization Date: March 6, 2009

Address = Address of Organization EIN:

Year = xx Person to Contact/ID Number:

Contact Numbers:
Voice:
Fax:

CERTIFIED MAIL — RETURN RECEIPT REQUESTED

Dear:

In a determination letter dated August, 1969, you were held to be exempt from Federal
income tax under section 501(c)(7) of the Internal Revenue 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 August 25,
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 therefore required to file Form 1120, U.S. Corporation Income Tax Return, for
the years ended December 31, 20xx and 20xx with the Ogden Service Center. 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.

Sincerely,

Renee B. Wells
Acting Director, EO Examinations

Form 886A 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 = Name of ORG
State = Name of State
Partner = Name of For-Profit Partner
Year = xx

ISSUE

Whether the tax exempt status of an organization that operates a golf course, and engages in
activities with the general public, should be revoked.

BRIEF EXPLANATION OF FACTS

The organization is recognized as a section 501(c)(7) tax exempt organization. According to its
statement of exempt purpose, the organization is to maintain grounds suitable for the playing of
golf and to promote social relations between its members. There are several classes of
membership. These include Full, Full family, Senior, Monday — Friday, Junior Dependants, and
Social. The club is located in State, and contains a club house/snack bar/banquet hall. The club
entered into an agreement with Partner, ., whereas Partner is to operate the bar and banquet
facilities of the club. The club would still pay utilities, etc. Partner paid the club $ for this use
in 20xx. All alcohol, food, hired help, etc., was provided by Partner.

The majority of the organization's income is generated through green fees, membership dues, cart
rentals, and rental of the banquet hall/snack bar. The club advertises that golfing is open to the
public. No records are kept showing member or nonmember participation.

A nonmember use test was performed based on records provided by the club. This test resulted in
nonmember use of 0% (limited to %) in 20xx, 0% in 20xx, and 0% in 20xx. A nonmember
income test was also performed. This test resulted in nonmember income of 0%
(limited to %) in 20xx, 0% in 20xx, and 0% in 20xx. Green fees were determined to be all
nonmember income, as member green fees are included in the member dues. Cart use is paid for
by all, member or nonmember. No records are kept of this separation, so all cart rental income
is determined to be nonmember. Likewise, as records per Revenue Procedure 71-17 are not kept,
income from the rental to Partner, is also nonmember income.

LAW

Treasury Regulation 1.501(c)(7)-1(b)

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -1-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20xx12
20xx12

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.

P.L. 94-568

Social clubs are permitted to receive a certain amount of income from the general
public and investments. “Substantially all” was substituted for “exclusively” in IRC 501(c)(7).
(2) The following table explains the consequences of receiving income from outside
of the club membership.

IF THE ORGANIZATION THEN

Receives 35% of its receipts The organization may maintain its exemption
from investments under IRC 501(c)(7)

Receives no more than 15% of The organization may maintain its exemption
its gross receipts from nonmember under IRC 501(c)(7)
use of club facilities and/or services

Receives 35% of its gross receipts The organization may maintain its exemption
from outside its membership and no under IRC 501(c)(7)
more than 15% of its gross receipts
are derived from nonmember use
of club facilities

Exceeds the 35% and/or 15% The organization may maintain its exempt status
limitations if it can show through facts and circumstances that
substantially all of its activities are for “pleasure,
recreation, and other nonprofitable purposes”.

Rev. Rul. 60-324, 1960-2 C.B. 173.

Use by outside organizations — A social club exempt from Federal income tax
under IRC 501(c)(7) may lose its exemption if it makes its club facilities available
to the general public on a regular, recurring basis since it may then no
longer be considered to be organized and operated exclusively for its exempt
purpose.

Rev. Rul. 66-149, 1966-1 C.B. 146

holds a social club not exempt as an organization described in IRC 501(c)(7) where it
regularly derives a substantial part of its income from nonmember sources such as, for
example, dividends and interest on investments it owns.

Rev. Proc. 71-17, 1971-1 C.B. 683.

Nonmember use of facilities; guidelines and recordkeeping requirements — Revenue Procedure
71-17 describes the record-keeping requirements for social clubs exempt under IRC 501(c)(7)
with respect to nonmember use of their facilities; it sets forth guidelines for determining the
effect of gross receipts derived from public use of the club's facilities on exemption and liability
for unrelated business income tax.

Solicitation of the general public to utilize club facilities will disqualify the social club for tax
exemption. Keystone Automobile Club v. Commissioner; United States v. Fort Worth Club
of Fort Worth, Texas, 345 F.2d 52; Polish American Club, Inc. v. Commissioner 33 T.C.M.
925.

Revenue derived from nonmembers is used to benefit members since the outside revenue
permits the club to assess lower dues than would otherwise be required to support the club's
facilities and operations. Pittsburgh Press Club v. United States 579 F.2d at 761.

TAXPAYER'S POSITION

The Treasurer of the organization agrees that there is a substantial amount of nonmember
income received by the country club. She has also stated that this income is needed to keep the
club operating at a successful level. The Treasurer stated that with the Board's approval, she
would agree to a revocation of exempt status, and have a CPA firm prepare Form 1120's for tax
years 20xx and 20xx.

GOVERNMENT'S POSITION

Based on the facts of the examination, the organization does not qualify for exemption because it
engages in a business which makes its social and recreational facilities available to the general
public. The organization's 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. If the club exceeds the 15/35% test, it

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -3-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20xx12
20xx12

will maintain its exempt status only if it can show through facts and circumstances that
“substantially all” of its activities are for pleasure, recreation, and other nonprofitable purposes.
Facts and circumstances show that for the years of 20xx through 20xx the club has derived 0% to
0% of its income from nonmember sources.

CONCLUSION

Based on the foregoing reasons, the organization does not qualify for exemption under section
501(c)(7) and its tax exempt status should be revoked. A conference with IRS management was
offered, but declined.

ALTERNATIVE ISSUE

In the alternative, if the organization qualifies for exemption under IRC 501(c)(7), should they be
subject to the unrelated business income tax under IRC 512(a)(3)?

BRIEF EXPLANATION OF FACTS

The country club earns nonmember income through the selling of green fees, renting of golf
carts, and the renting of its banquet hall and snack bar. Records are not kept per Revenue
Procedure 71-17, concerning member and nonmember income. All of the expenses are related
to either the golfing or rental income.

LAW

Section 511(a) of the Code provides for the taxation of unrelated business taxable income of
organizations described in section 501(c).

IRC section 512(a)(3) provides for the taxation of all income other than exempt function
income. Exempt Function Income is defined in IRC section 512(a)(3)(B) as "gross income from
dues, fees, charges, or similar amounts paid by members of the organization as consideration
for providing such members or their dependents or guests goods, facilities, or services in
furtherance of the Purposes constituting the basis for the exemption of the organization to
which such income is paid."

Non-exempt function income is all income that is not exempt function income.
Non-exempt function income includes traditional income, such as income from
investments and food and beverage sales to nonmembers, as well as income
from non-traditional activities, such as the sale of liquor to members for off-premises
consumption.

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20xx12
20xx12

TAXPAYER'S POSITION

The organization agrees to a revocation of exempt status. However, they also agree that if
revocation is not upheld, Form 990-T's should be prepared to disclose nonmember income and
expenses.

GOVERNMENT'S POSITION

The country club earns nonmember income through the selling of green fees, renting of golf
carts, and the renting of its banquet hall and snack bar. Records are not kept per Revenue
Procedure 71-17, concerning member and nonmember income.

As such, the organization is subject to Unrelated Business Income Tax as described in section
512 of the Internal Revenue Code.

CONCLUSION

As an alternative position, the income classified as nonexempt function income should be
unrelated business taxable income, reported on Form 990-T.

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