Inactive swim club no longer operated for social or recreational purposes

Plain-English summary

A former swim club sought recognition under § 501(c)(7) after its earlier exemption was automatically revoked for failing to file required returns. The pool had closed because of ground movement, and for more than a decade the organization collected no dues and conducted no substantial social or recreational program. Its remaining gatherings were annual property-maintenance work parties, and it located former members to sell the property, repay advances, dissolve, and distribute the remaining proceeds. The IRS concluded that the organization lacked an active membership and regular member commingling and therefore did not qualify as a tax-exempt social club.

Ruling snapshot

• Question: Was the inactive former swim club organized and operated for pleasure, recreation, and other nonprofitable purposes under § 501(c)(7)?
• Outcome: denied
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7)-1; Rev. Ruls. 58-589, 69-232, and 69-635

Full text (IRS public release)

Internal Revenue Service Department of the Treasury

Appeals Office
4330 Watt Avenue SA 7890 Employer Identification Number:
Sacramento, CA 95821-7012

Date: AUG 0 3 2016 Person to Contact:

Employee ID Number:
Number: 201644021 Tel:
Release Date: 10/28/2016 Fax:
UIL: 501.07-00

Certified Mail
Dear

We considered your appeal of the adverse action proposed by the Director, Exempt Organizations,
Rulings and Agreements. This is our final determination that you do not qualify for exemption from
Federal income tax under Internal Revenue Code (the “Code”) section 501(a) as an organization
described in section 501(c)(7) of the Code.

Our adverse determination was made for the following reasons:

Organizations exempt from tax under section 501(c)(7) of the Internal Revenue Code must be clubs
organized and operated exclusively for pleasure, recreation, and other non-profitable 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. Your organization does not operate for pleasure, recreation, and other
non-profitable purposes and promote commingling of your members with personal contacts and
fellowship as a material part of your organization and its membership of individuals. Therefore, you are
not an organization described in Code section 501(c)(7).

You are required to file Federal income tax returns on Forms 1120. File your returns with the appropriate
Internal Revenue Service Center per the instructions of the return. For further instructions, forms, and
information please visit www.irs.gov.

We will make this letter and the proposed adverse determination letter available for public inspection
under Code section 6110 after deleting certain identifying information. We have provided to you, in a
separate mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the
documents attached that show our proposed deletions. If you disagree with our proposed deletions, follow
the instructions in Notice 437.

If you decide to contest this determination, you may file an action for declaratory judgment under the
provisions of section 7428 of the Code in one of the following three venues: 1) United States Tax Court,
2) the United States Court of Federal Claims, or 3) the United States District Court for the District of
Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date
this determination letter was mailed to you. Please contact the clerk of the appropriate court for rules and
the appropriate forms for filing petitions for declaratory judgment by referring to the enclosed Publication

892. You may write to the courts at the following addresses:

United States Tax Court
400 Second Street, N.W.
Washington, D.C. 20217

U.S. Court of Federal Claims
717 Madison Place, N.W.
Washington, D.C. 20439

U.S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, D.C. 20001

Processing of income tax returns and assessments of any taxes due will not be delayed if you file a
petition for declaratory judgment under section 7428 of the Internal Revenue Code.

You may also be eligible for help from the Taxpayer Advocate Service (TAS). 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
www.taxpayeradvocate.irs.gov or call 1-877-777-4778.

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

Sincerely Yours,

Appeals Team Manager

Enclosure: Publication 892


Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Date: JAN 21 2016
Employer ID number:
Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:
P 501.07-00
Q
R
S
T
U
b j dollars $0
c k
d dollars $0 m dollars $0
e dollars $0 n dollars $0
f dollars $0 o dollars $0
g dollars $0 p dollars $0
h dollars $0 q dollars $0

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 don’t 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
Are you organized and operated for pleasure, recreation, and other non-profitable purposes as defined in
section 501(c)(7) of the Code? No, for the reasons given below.

Facts

You were formed as a nonprofit corporation with members on P in the state of Q. You were previously granted
tax exemption under Section 501(c)(7) of the Code. Your exemption was automatically revoked on May 15,

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

20XX for failure to file Form 990, Form 990EZ or 990N for three consecutive years. Accordingly, you
submitted the Form 1024, application for exemption.

Your Articles of Incorporation state your primary purpose is to construct, own, maintain and operate a swim
club and other community recreational facilities. According to your Form 1024, you have been inactive since S
because your swimming pool had to be closed due to soil subsidence and ground movement causing the pool
walls to crack and disintegrate. At a general meeting in S, your members voted to close the doors to all
swimming activities. You sold the property in T which was over a decade later.

Your activities between S and T primarily consisted of maintaining the grounds and a large recreational hall,
which had a pool table, card tables, a sink, stove, refrigerator and restrooms. Annual work parties comprised
of active members organized to do repair and maintenance such as pulling weeds, needed painting and
generally kept up your property in a presentable condition. You explained these work parties resulted in
bringing the members together for social gatherings using the club premises. Your members also held special
events for birthdays and weddings. Moreover, your recreation hall was used once by the local county as an
election polling place for one year after the pool was closed. Your recreation hall was also used by a local
high school for graduation night workshops.

No dues or revenues were collected after S. About seven years after the pool closed, you began searching for
members who may own a share in your assets. An attorney advised you to mail a letter to the last known
address of all resigned members. All members replying to the request for membership status were required to
pay current any unpaid past dues from the last dues they had paid to year S. These amounts would be adjusted
to the individual equity share upon dissolution and disbursement of any remaining funds you may have. You
eventually found c members. These members met at the end of U and decided to dispose of the property.

Expenses between S and T (k years) consisted of the following:

Property taxes: d dollars
Fire/Liability Insurance premiums: e dollars
Tree removal costs: f dollars
Administrative expenses: g dollars
Subtotal: h dollars

In addition, there were various miscellaneous service expenses including computer, secretarial, property
maintenance and administrative fees for k years and totaled j dollars.

The portion of these expenses requiring contemporary disbursement of cash was funded by members who
made advances to you totaling m dollars. Of this, your treasurer and your president who are husband and
wife paid about n dollars.

Basis in this property (land, building and improvements) was approximately o dollars. The sale resulted in an
approximate gain of p dollars before taking into account all the carrying costs of the property for the years S to
T. These carrying costs include property taxes, fire and liability insurance, maintenance, administrative and
other expenses totaling q dollars spread over k years. The loans were repaid from these proceeds.

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

Law

Section 501(c)(7) of the Code provides for the exemption from federal income tax of 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 1.501(c)(7)-1 provides as follows:

(a) 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 a 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.

(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 nonprofitable purposes, and is not exempt under section 501(a) [26
USCS § 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.

Revenue Ruling 58-589, 1958-2 C.B. 266, sets forth the criteria for determining whether an organization
qualifies for tax-exempt status per Internal Revenue Code section 501(c)(7). The ruling provides that a
commingling of the members must play a material part in the life of the organization as indicated by an
established membership of individuals, personal contacts and fellowship.

Revenue Ruling 69-232, 1991-1 C.B. 154, held that an organization is exempt under section 501(c)(7)
of the Internal Revenue Code where the organization sold the property to land developers at a profit.
The club then used the proceeds to purchase land and build a more modern clubhouse and golf course
farther out in the country.

Revenue Ruling 69-635, 1969-2, C.B. 126, in situation 3 held that an organization was not exempt under
section 501(c)(7) of the Internal Revenue Code because the organization was designed to provide services to its
members and there was no significant commingling of members.

Application of law

You do not meet Section 501(c)(7) of the Code and 1.501(c)(7)-1(a) of the Regulations because you have
not shown that you are both organized and operated substantially for pleasure, recreation or other
nonprofitable purposes. You have not conducted substantial social and recreational activities since S,
over a decade ago when your membership voted to close the pool; in addition, you have not had an
active membership and have collected no dues past S nor had any other sources of revenue. Your
annual work parties with b members held to conduct physical property maintenance does not constitute
social or recreational activities.

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

Similar to Revenue Rulings 58-589 and 69-635, you do not qualify under 501(c)(7) as you have provided
no evidence of regular commingling of members. You have not had an established membership of
individuals since S. You only located former inactive members after an attorney advised you to for
dissolution purposes. Your only gatherings have consisted of work parties of b members who met annually
to clean up your property .

You are not similar to the organization described in the Revenue Ruling 69-232 because while you did sell the
property, it was your intent to dissolve and distribute the net proceeds to your inactive members; you did not
buy and relocate your facility to continue your activities.

Conclusion
You are not organized and operated for pleasure, recreation, and other non-profitable purposes as defined
in section 501(c)(7) of the Code. Further, your have had no regular activities and are not organized and
operated substantially for pleasure, recreation and other nonprofitable purpose. For these reasons you do not
qualify under Section 501(c)(7) of the Code.

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.

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

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
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.

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

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

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