Social club exemption revoked for recurring public income

Plain-English summary

A tax-exempt social club regularly opened some shooting facilities to the public and also sold calendars to nonmembers. The IRS examination found that the club repeatedly received more than 15 percent of its gross receipts from nonmember use, while the club acknowledged nonmember and investment income above the applicable limits. The IRS concluded that the recurring public use and calendar sales showed a nonexempt business purpose inconsistent with section 501(c)(7). The club consented to the proposed action, and the IRS revoked its exemption effective on the redacted date.

Ruling snapshot

• Question: Did a social club remain exempt under section 501(c)(7) after recurring nonmember receipts exceeded the permitted threshold?
• Outcome: Revocation, the club consented and its exemption was revoked effective on the redacted date.
• Key authorities: IRC §§ 501(a), 501(c)(7), 277, and 6501(g); Treas. Reg. § 1.501(c)(7); Rev. Rul. 66-149; Rev. Proc. 71-17; Public Law 94-568

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce, MC 4920 DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Number: 201612014
Release Date: 3/18/2016 Taxpayer Identification Number:

Form:

Tax Year(s) Ended:

Date: November 30, 2015
Person to Contact/ ID Number

UIL: 501.07-00
Contact Numbers:

CERTIFIED MAIL – RETURN RECEIPT REQUESTED

Dear                 :

In a determination letter dated July, 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 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 April 30, 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. The Taxpayer Advocate Service
(TAS) is an independent organization within the IRS that can help protect your taxpayer rights.


TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been
able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free,
TAS will do everything possible to help you. Visit taxpayeradvocate.irs.gov or call 1-877-777-4778.
If you prefer, you may contact your local Taxpayer Advocate at:

Internal Revenue Service
Office of the Taxpayer Advocate

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,

Margaret Von Lienen
Director, EO Examinations


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

Exempt Organizations: Examinations

1100 Commerce Street, MS 4900 DAL

Dallas, TX 75242-1100

Date: October 26, 2015
Taxpayer Identification Number:
Form:

Tax Period(s) Ended:

Person to Contact/ID Number:
Contact Telephone Number:

Fax Number:
Dear                 :

During our examination of the return(s) indicated above, we determined that your organization
was not described in Internal Revenue Code section 501(c) for the tax period(s) listed above
and therefore, it does not qualify for exemption from federal income tax. This letter is not a
determination of your exempt status under section 501 for any period other than the tax
period(s) listed above.

The attached Report of Examination, Form 886-A, Explanation of Items, summarizes the facts,
the applicable law, and the Service's position regarding the examination of the tax period(s)
listed above. You have agreed with our determination by signing Form 6018-A, Consent to
Proposed Action, accepting our determination of non-exempt status for the period(s) stated
above. You have filed the required income tax returns.

In the future, if you believe your organization qualifies for tax-exempt status and would like to
establish its status, you may request a determination from the Internal Revenue Service by filing
Form 1024, Application for Recognition of Exemption Under Section 501(a), and paying the
required user fee.

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 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
Office of the Taxpayer Advocate

Letter 4097 (3-2006)
Catalog Number 48368B


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,
Margaret Von Lienen
Director, EO Examinations

Enclosures:
Form 886-A

2 Letter 4097 (3-2006)
Catalog Number 48368B


Department of the Treasury - Internal Revenue Service

Form 886A
Explanation of Items

Name of Taxpayer Year/Period Ended

20XX
20XX
ISSUE
Does continue to qualify for exemption under

Internal Revenue Code § 501(c)(7) given that it receives more than 15% of its income
from the general public on a recurring basis?

FACTS

is open to the public the following day:

Sundays 9am — 1pm May thru September

During these times, nonmembers may participate in several of the Club’s activities of
the Trap Fields. Nonmembers may enter the grounds of the Club through an entry gate
that is unlocked during these hours. In order to participate in these activities, they have
only to identify themselves to the employee working the counter in the Clubhouse. The
counter person then solicits the nonmembers to become a member and charges them
the “league member” fee for participating in these activities. Therefore, the new
members can participate in club shoots. League members do not have the same
privileges as regular members. All members have access to the remaining property

owned by the Club.

The is organized and operating as an organization described in
Internal Revenue Code § 501(c)(7) to provide social, recreational and other activities to
its members. The benefits provided to the members include, but are not limited to, the
following activities: Trap Shooting, hunter safety and Clubhouse social activities.

The specific and primary purpose of the , per its’ Constitution, is
“the formation of a membership of sportsmen interested in outdoor recreation, wildlife
conservation, restoration and education.”

Your organization reported the following sources and amounts of revenue on Forms
990 for periods ending December 31, 20XX and December 31, 20XX.

Year/Period Ended

% of gross
receipts from
nonmember use

% of gross receipts
from investment
income

Total % investment
income /
nonmember income

December 31,
20XX

%

%

%

December 31,
20XX

%

%

%

Form 886-A (Rev. 4-68)

Department of the Treasury - Internal Revenue Service

Page: -1-


Form 886A Department of the Treasury - Internal Revenue Service
Explanation of Items

Name of Taxpayer Year/Period Ended
20XX

20XX

While reviewing the general ledger, Income Statement, Minutes of meetings, your
website, as well as other internal documents provided by your organization, such as
cash register receipts and Counter Income/Expense Report, it has been noted that
your organization is open to the general public on a regular basis, as stated
previously. The nonmember income has been recorded in the following accounts
within your General Ledger and Counter Income/Expense Report:

Nonmember League Membership
Nonmembers Trap Leagues
Nonmember Calendar Sales
Nonmember Bar Income
Advertising Income

Based on conducting a two-year analysis of gross receipts, it has been noted that the

organization received % and %, respectively, during tax years ending December 31,
20XX and December 31, 20XX. The gross receipts received by your organization are

well over the 15% threshold permitted in Public Law 94-568.

Member use of Facilities:                 20XX                 20XX
Total Receipts                            $                    $
Less:
General Membership Dues                   $                    $
Scrip Sales                               $                    $
Leagues Income Members                    $                    $
Raffles                                   $                    $
Club House Rental                         $                    $
Memorial                                  $                    $
Bar Income                                $                    $
Calendar Sales                            $                    $
Total                                     $                    $

Adjusted gross receipts per Rev. Proc 71.17

Nonmember use of Facilities:              20XX                 20XX
League Membership Dues                    $                    $
Leagues Income Non-members                $                    $
Calendar Ads                              $                    $
Bar Income                                $                    $
Calendar Sales                            $                    $
Total Nonmember Income                    $                    $

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


Form 886A Department of the Treasury - Internal Revenue Service
Explanation of Items

Name of Taxpayer Year/Period Ended
20XX
20XX

20XX
Nonmember use Test: = %
(Limited to 15%)

Nonmember Income:
Nonmember use                         $
Interest                              $
Total Nonmember & Investment Income   $

Nonmember Income test: = %
(Limited to 35%)

20XX
Nonmember use Test: = %
(Limited to 15%)

Nonmember Income:
Nonmember use                         $
Interest                              $
Total Nonmember & Investment Income   $

Nonmember Income test: = %
(Limited to 35%)

LAW

Internal Revenue Code § 501(c)(7) exempts from Federal income tax: “Clubs
organized for pleasure, recreation, and other non-profitable purposes, substantially all
of the activities of which are for such purposes and not part of the net earnings of
which inures to the benefit of any private shareholder.”

Section 1.501(c)(7) of the Income Tax Regulations provides that, in general, the
exemption extends to social and recreation clubs supported solely by membership
fees, dues and assessments. However, a club that engages in a business, such as
making its social and recreational facilities open to the general public, is not organized
and operated exclusively for pleasure, recreation and other non-profitable purposes,
and is not exempt under section 501(a).

Prior to its amendment in 1976, IRC § 501(c)(7) required that social clubs be operated
exclusively for pleasure, recreation and other nonprofitable purposes. Public Law 94-

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

Page: -3-


Form 886A Department of the Treasury - Internal Revenue Service
Explanation of Items

Year/Period Ended
20XX
20XX

Name of Taxpayer

568 amended the “exclusive” provision to read “substantially’ in order to allow an IRC
§ 501(c)(7) organization to receive up to 35 percent of its gross receipts, including
investment income, from sources outside its membership without losing its tax exempt
status. The Committee Reports for Public Law 94-568 (Senate Report No. 94-1318
2d Session, 1976-2 C.B. 597) further states;

(a) Within the 35 percent amount, not more than 15 percent of the gross
receipts should be derived from the use of a social club’s facilities or services by the
general public. This means that an exempt social club may receive up to 35 percent
of its gross receipts from a combination of investment income and receipts from non-
members, so long as the latter do not represent more than 15 percent of total receipts.

(b) Thus, a social club may receive investment income up to the full 35
percent of its gross receipts if no income is derived from non-members’ use of club
facilities.

(c) In addition, the Committee Report states that where a club receives
unusual amounts of income, such as from the sale of its clubhouse or similar facilities,
that income is not to be included in the 35 percent formula.

Revenue Ruling 66-149 holds a social club as not exempt as an organization
described in Internal Revenue Code § 501(c)(7) where it derives a substantial part of
its income from non-member sources.

Revenue Procedure 71-17 sets forth the guidelines for determining the effect of gross
receipts derived from the general public’s use of a social club’s facilities on exemption
under Internal Revenue Code § 501(c)(7). Where nonmember income from the usage
exceeds the standard as outlined in this Revenue procedure, the conclusion reached
is that there is a non-exempt purpose and operating in this manner jeopardizes the
organization’s exempt status.

TAXPAYER’S POSITION

Historically, did operate within the rules of Internal Revenue Code
Section 501(c)(7) as a social club. In order to raise money for operations and for
programs to promote conservation within the community the organization began a
calendar sale. Calendars were sold by members to nonmembers, resulting in
nonmember income in excess of 15% of gross receipts and nonmember and
investment income in excess of 35% of gross receipts. , did not
intentionally disregard the 501(c) (7) rules.

While the organization would have liked the opportunity to correct operations to
comply with the rules, they accept the revocation of their exempt status.

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

Page: -4-


Form 886A Department of the Treasury - Internal Revenue Service
Explanation of Items

Name of Taxpayer Year/Period Ended
20XX

20XX

GOVERNMENT’S POSITION

Your organization has exceeded the 15% non-member threshold on a recurring basis
during tax years ending December 31, 20XX and December 31, 20XX and therefore
revocation of your organization’s exempt status is warranted.

CONCLUSION

The IRC Section 501(c) (7) tax-exempt status of should be revoked
since the nonmember income received by the Club exceeded 15% of the Club’s total
gross receipts for the years under examination. Further, it main activity of selling
calendars to the general public and use of their facilities to the general public
reflecting evidence that the Club is engaged in a business and is not being “operated
exclusively for pleasure, recreation, or social purposes.”

no longer meets the requirements to qualify as exempt from
federal income tax under IRC section 501(a) as described in section 501(c)(7).
Therefore, your exempt status under 501(c) (7) of the Internal Revenue Code will be
revoked effective January 1, 20XX.

As a taxable entity, the organization is required to file Form 1120, U.S. Corporation
Income Tax Return for the periods open under statute. Under 6501(g), these periods
include the years ending December 31, 20XX and subsequent tax years.

Additionally, the organization is reminded of the provisions of IRC 277 concerning
membership organizations, which are not exempt organizations. IRC § 277(a)
stipulates in the case of a membership organization which is not exempt from taxation,
deductions for the taxable year attributable to furnishing services, goods or other items
of value to members shall be allowed only to the extent of income derived from
members.

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

Page: -5-