IRS revokes social club exemption for excess nonmember use

Plain-English summary

The IRS revoked a sportsmen's club's § 501(c)(7) exemption after its records showed nonmember use above the permitted threshold. The club operated a small members-only bar and meeting space, maintained a hunting camp for members, and rented ground-floor space to three businesses. Its nonmember-use percentages were 22%, 22%, and 18% for three examined years, exceeding the 15% guideline each year. Nonmember income was 25%, 26%, and 20%, while bar sales and rental income generated most of the club's revenue. The IRS concluded that the club did not show that substantially all of its activities remained for pleasure, recreation, and other nonprofit purposes. The club consented to revocation, which became effective on a redacted January 1 date.

Ruling snapshot

• Question: Did recurring nonmember use and income prevent the sportsmen's club from remaining exempt under § 501(c)(7)?
• Outcome: Revocation
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7)-1(b); Rev. Rul. 60-324; Rev. Rul. 69-220; Rev. Proc. 71-17

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TAX EXEMPT AND

GOVERNMENT ENTITIES FEB 23, 2009
DIVISION . 4
Release Number: 201451039 ‘
Release Date: 12/19/2014 ; Taxpayer Identification Number:
UIL Code: 501.07-00
Person to Contact/ID
Contact Numbers:
Voice:
Fax:

CERTIFIED MAIL — RETURN RECEIPT REQUESTED

Dear

in a determination letter dated September 19XX 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 January 24,
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:

Internal Revenue Service
Taxpayer Advocate

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
20XX
20XX

Please note that this is not a FINAL REPORT. This report is subject to review by our
Mandatory Review staff, who may modify it.

ISSUE

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

BRIEF EXPLANATION OF FACTS

The club is limited to members only, involved in conservation of the environment and protection
of sportsmens interests. The club is located on the second level of a building in downtown

. The club has a pool room, a small bar (about 4 bar stools and 2 tables), a small
kitchen, and a meeting room, (about 12' x 20'), Only members are allowed in the facility, as
each has a key to it. It is open Monday through Friday for about six hours, or less depending on
the crowd. There are no hunting or fishing areas here. The club maintains a hunting camp for its

members near . This is a camp only, and is used only by the members at no
charge.

The majority of the club’s income is generated through bar sales ($ ), and rental of building
space ($ ) to three businesses on the ground level of the facility.

A non member use test was performed based on records provided by the club. This test resulted
in non member use of 22% (limited to 15%) in 20XX 22% in 20XX and 18% in 20XX. A non
member income test was also performed. This test resulted in nonmember income of 25%
(limited to 35%) in 20XX, 26% in 20XX and 20% in 20XX.

LAW

Treasury Regulation 1.501(c)(7)(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 non profitable 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.

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
  20XX
  20XX
  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
from outside its membership and no
more than 15% of its gross receipts
are derived from nonmember use
of club facilities

The organization may maintain its exemption under IRC 501(c)(7)

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.

Revenue Ruling 69-220, 1969-1 CB 154.

A social club that receives a substantial portion of its income from the rental of property and uses
such income to defray operating expenses and to improve and expand its facilities is not exempt
under section 501(c)(7) of the Code,

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -2-

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

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.

Pittsburgh Press Club v. United States 579 F.2d at 761.
In Pittsburgh Press Club v. U.S. , 536 F.2d 572 (1976); 579 F.2d 751

(1978); and 615 F.2d 600 (1980), the court found that a substantial portion
of the club’s total gross receipts was from nonmember use of club facilities
(determined to be between 11--17% of gross income). This indicated to the
court that the club was engaged in business with the general public.

GOVERNMENT’S POSITION

Based on the facts of the examination, the organization does not qualify for exemption because it
over 15% of it’s income is derived from non member sources for the last three years. The
organization is not being operated exclusively for pleasure, recreation, or social purposes. If the
club exceeds the 15/35% test, it 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
non profitable purposes.

Facts and circumstances show that for the years of 20XX through 20XX the club has derived 22%
of its income from non member sources.

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
20XX
20XX

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.

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