Golf club denied social-club exemption

Plain-English summary

A golf club sought exemption under section 501(c)(7) after previously operating as a for-profit entity. It regularly opened its golf course, fishing access, tournament, clinic, and clubhouse to nonmembers and planned to advertise winter specials to the public. Nonmember use produced 43 percent of gross receipts during the stated period, well above the 15 percent public-use guideline, while green and cart fees were the club's largest revenue source. The IRS concluded that the club operated like a business, made its facilities regularly available to the public, and used the fees to maintain and improve facilities for members. After the club did not protest the proposed adverse determination within 30 days, the IRS made the denial of section 501(c)(7) status final.

Ruling snapshot

• Question: Did the golf club qualify for section 501(c)(7) social-club exemption despite substantial and recurring public use?
• Outcome: Denied.
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7)-1; Public Law 94-568; Rev. Rul. 60-324, 65-63, and 69-219.

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service

P.O. Box 2508
IRS Cincinnati, OH 45201

Release Number: 201635008 Date: May 17, 2016

Release Date: 8/26/2016

UIL Code: 501.07-00 Employer ID number:
501.07-05

Contact person/ID number:
Contact telephone number:
Form you must file:

Tax years:

Dear

This letter is our final determination that you don’t qualify for tax-exempt status under Section 501(c)(7) of the
Internal Revenue Code (the Code). Recently, we sent you a proposed adverse determination in response to your
application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it
gave you 30 days to file a protest. Because we didn’t receive a protest within the required 30 days, the proposed
determination is now final.

You must file federal income tax returns for the tax years listed at the top of this letter using the required form
(also listed at the top of this letter) within 30 days of this letter unless you request an extension of time to file.

We'll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection (as required under Section 6110 of the Code) after deleting certain identifying information.
Please read the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Notice
437 on how to notify us. If you agree with our deletions, you don’t need to take any further action.

If you have questions about this letter, you can contact the person listed at the top of this letter. If you have
questions about your federal income tax status and responsibilities, call our customer service number at
1-800-829-1040 (TTY 1-800-829-4933 for deaf or hard of hearing) or customer service for businesses at
1-800-829-4933.

Letter 4040 (Rev. 7-2014)
Catalog Number 47635Z


Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Notice 437
Redacted Letter 4034, Proposed Adverse Determination under IRC Section 501(a) Other Than 501(c)(3)

Redacted Letter 4040, Final Adverse Determination under IRC Section 501(a) Other Than 501(c)(3) - No
Protest

Letter 4040 (Rev. 7-2014)
Catalog Number 47635Z

. Department of the Treasury
Internal Revenue Service
IRS P.O. Box 2508
Cincinnati, OH 45201
Date: March 24, 2016
Employer ID number:
Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:

L= Year 501.07-00
M= Year 501.07-05
N = Year

P = Date Range

R = Name

S = City

T = State

V = County

W = Date

x dollars = Amount
y dollars = $Amount

Dear

We considered your application for recognition of exemption from federal income tax under Section 501(a) of
the Internal Revenue Code (the Code). Based on the information provided, we determined that you do not
qualify for exemption under Section 501(c) (7) of the Code. This letter explains the basis for our conclusion.
Please keep it for your records.

Issues
Do you qualify for exemption under section 501(c) (7) of the Code? No, for the reasons stated below.

Facts

You were created on W in the State of T. Prior to filing your application for tax exemption, you operated as a
for-profit entity. You provide recreational opportunities for the local rural community of S, T, as well as other
surrounding counties in the southeast. You provide general golfing activities at seasonal rates. General golfing
activities account for 65 percent of your total activities. Your other golf activities consist of serving as a host
facility for practice and competitive matches for V High School and V Middle School boys and girls golf teams
which accounts for 20 percent of your activities and for ten years you have hosted junior golf activities

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K

associated with the R golf tournament which accounts for 10 percent of your activities. Funds generated from
the tournament are used for scholarships and to promote junior golf in the local area. Proceeds have been used
to sponsor local youth in summer golf clinics. Another 5 percent of your activities consist of serving as the host
facility for the local recreation department’s youth golf tournaments at no charge. In addition to golfing
activities, you allow access to the lake on your property for fishing.

You would like to seek public patronage of your club by offering reduced price winter specials in the local
newspapers. Nonmembers may use your club grounds during normal business hours and the may also utilize
your lake for fishing. Nonmembers are invited to compete in the annual R golf tournament and may bring their
kids to the clinic hosted on your grounds. Nonmembers may also rent out your club house facility for wedding
showers or other events.

Your largest source of revenue is from green and cart fees from members and nonmembers. For the period P,
56% of your gross receipts came from green and cart fees. In N, 57 % of your gross receipts were from the
green and cart fees. In M, it was 53% and in L it was 60%. Your other revenue sources include membership
dues, equipment sales from the pro shop, food and drink sales, club tournaments, range ball sales, sponsor dues,
fishing fees, range ball dues, and club house rentals. Your largest expenses are for salaries and wages, repairs
and maintenance, fertilizer, chemical, and turf supplies, utilities, payroll taxes, insurance, and other equipment
and supplies. Your financial information for P shows your total revenue is x dollars for the period, of which y
dollars was attributed to income from nonmembers. Revenue from nonmember use of your facilities made up
43% of your gross receipts for the period P.

Law

Section 501(c)(7) of the Internal Revenue Code (the Code) provides for exemption from federal income tax 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 inures to the benefit of any private
shareholder.

Treasury Regulation Section 1.501(c)(7)-1(a) states the exemption provided by section 501(c)(7) applies only to
clubs which are organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes,
but does not apply to any club if any part of its net earnings inures to the benefit of any private shareholder. In
general, this exemption extends to social and recreation clubs which are supported solely by membership fees,
dues, and assessments. However, a club otherwise entitled to exemption will not be disqualified because it
raises revenue from members through the use of club facilities or in connection with club activities.

Treasury Regulation Section 1.501(c)(7)-1(b) states that 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.

Public Law 94-568, 1976-2 C.B. 596, provides that a social club may receive up to 35 percent of its gross
receipts, including investment income, from sources outside its membership without losing exemption. Within
this 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

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K


percent of its gross receipts from a combination of investment income and receipts from nonmembers so long as
the latter do not represent more than 15 percent of the total receipts.

Revenue Ruling 60-324, 1960-2 C.B. 173, states that a club which has been granted exemption from federal
income tax under section 501(c)(7) of the Internal Revenue Code of 1954 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 65-63, 1965-1 C. B. 240, states that a nonprofit organization which is conducting sports car
events for the pleasure and recreation of its members, permits the general public to attend such events for a fee
on a recurring basis, and solicits patronage by advertising does not qualify for exemption as a club organized
and operated exclusively for pleasure, recreation, and other nonprofitable purposes under section 501(c)(7) of
the Internal Revenue Code.

Revenue Ruling 69-219, 1969-1 C.B. 153, states that a social club that regularly holds its golf course open to
the general public and charges established green fees that are used for maintenance and improvement of club
facilities is not exempt under section 501(c)(7) of the Code.

Application of law

You are not described under section 501(c)(7) of the Code because you are not organized for pleasure,
recreation, or other nonprofitable purposes. Your main activity consists of providing general golfing activities at
seasonal rates to members as well as nonmembers. Your largest source of revenue is from green/cart fees from
members as well as nonmembers. From P, 43% of your gross receipts were from nonmembers which far
exceeds the 15% limitation for nonmember use of a social club’s facilities or services in Public Law 94-568.
Although you did not provide the exact amount of nonmember income for the years L through N, it appears that
you would likely exceed the limitation set forth in Public Law 94-568 for those years due to the fact that over
half of your gross receipts each year are from green and cart fees from members and nonmembers. The fees
you collect are then used to pay your expenses including salaries and wages, repairs and maintenance, and turf
upkeep. You therefore operate more like a business.

Per Treas. Reg. Section 1.501(c)(7)-1(b) you are not organized and operated for pleasure, recreation, and other
nonprofitable purposes because you make your activities available to the general public. Like the organization
in Rev. Rul. 60-324, you do not qualify for exemption under section 501(c)(7) of the Code because your
activities and facility are available to the general public on a regular recurring basis. Nonmembers are able to
take part in your activities on a regular basis during normal business hours.

You are like the organization in Rev. Rul. 65-63. Although your activities are for the pleasure and recreation of
your members, you also allow nonmembers to participate in the golf and fishing activities on a regular basis
during normal business hours. The public participation in your activities is not incidental and the magnitude and
recurrence of the public patronage of your activities constitute engaging in a business. In addition, you would
like to seek public patronage by offering reduced price winter specials in the local newspapers. Per Treas. Reg.
Section 1.501(c)(7)-1(b), the solicitation of public patronage by advertising is evidence that you are engaged in
a business and not operated exclusively for pleasure, recreation, or social purposes.

You are like the organization in Rev. Rul. 69-219. Your golf course is open to the general public on a regular
basis during normal business hours and you charge nonmembers (as well as members) green fees and cart fees.
Like the organization in Rev. Rul. 69-219, you do not qualify for exemption under section 501(c)(7) of the

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K

Code since you are engaged in business with the general public. You regularly hold your golf course open to the
general public for use upon payment of established green/cart fees and the income from the fees is inuring to the
benefit of your members because it is being used for the maintenance and improvement of your club facilities.
Per Treas. Reg. Section 1.501(c)(7)-1(a), exemption under section 501(c)(7) of the Code does not apply to any
club if any part of its net earnings inures to the benefit of any private shareholder.

Conclusion

You do not qualify for exemption under section 501(c) (7). By making your activities and facility open to the
general public for fees, you are engaging in a business and are not organized and operated exclusively for
pleasure, recreation, and other nonprofitable purposes. Additionally, income from the fees is inuring to the
benefit of your members because it is being used for the maintenance and improvement of your club facilities.

If you don’t agree
You have a right to file a protest if you don’t agree with our proposed adverse determination. To do so, you
must send a statement to us within 30 days of the date of this letter. The statement must include:

• Your name, address, employer identification number (EIN), and a daytime phone
number

• A copy of this letter highlighting the findings you disagree with
• An explanation of why you disagree, including any supporting documents
• The law or authority, if any, you are relying on

• The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization, or your authorized representative

• One of the following declarations:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I examined this protest statement, including

accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

For authorized representatives:

Under penalties of perjury, I declare that I prepared this protest statement, including
accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if he or she hasn’t
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We’ll review your protest statement and decide if you provided a basis for us to reconsider our determination. If
so, we'll continue to process your case considering the information you provided. If you haven’t provided a

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K


basis for reconsideration, we’ll forward your case to the Office of Appeals and notify you. You can find more
information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-
Exempt Status.

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court at a later date because
the law requires that you use the IRS administrative process first (Section 7428(b)(2) of the Code).

Where to send your protest
Please send your protest statement, Form 2848, if needed, and any supporting documents to the applicable

address:
U.S. mail: Street address for delivery service:
Internal Revenue Service Internal Revenue Service
EO Determinations Quality Assurance EO Determinations Quality Assurance
Room 7-008 550 Main Street, Room 7-008
P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your statement and supporting documents to the fax number listed at the top of this letter. If
you fax your statement, please contact the person listed at the top of this letter to confirm that he or she received
it.

If you agree

If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from you
within 30 days, we’ll issue a final adverse determination letter. That letter will provide information on your
income tax filing requirements.

You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If
you have questions, you can contact the person listed at the top of this letter.

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K