IRS revokes a golf/social club's 501(c)(7) status for excessive public (nonmember) use of its facilities

Plain-English summary

A social or recreational club is tax-exempt under Internal Revenue Code § 501(c)(7) only if it is supported mainly by members and keeps outside income modest: no more than 35% of gross receipts from outside the membership, and within that, no more than 15% from the general public's use of club facilities. This club ran a golf course, swimming pool, bar, and pro shop, and its gaming activities were open to the public without restriction. The examiner found that nonmember (public) use produced far more than the 15% limit, year after year, showing a pattern of recurring commercial-style operation rather than a members' club. Under the regulations and long-standing revenue rulings, a club that opens its facilities to the public to a substantial degree is not operated exclusively for pleasure and recreation and loses its exemption. The taxpayer agreed that nonmember use exceeded 15% and that it no longer met the § 501(c)(7) requirements. The IRS revoked the club's exempt status effective the start of the specified year, meaning it must file regular corporate income tax returns going forward. The release includes the final determination letter, the proposed revocation letter, and the examiner's detailed Form 886-A report (whose dollar figures and percentages were redacted before release).

Ruling snapshot

• Question: Does the club still qualify under § 501(c)(7) when public (nonmember) use of its facilities exceeds the 15% limit?
• Outcome: Revocation (exempt status revoked; taxpayer agreed nonmember use exceeded 15%)
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7)-1(a), (b); Pub. L. 94-568 (S. Rep. No. 94-1318); Rev. Ruls. 58-589, 66-149, 60-324; Rev. Proc. 71-17; Pittsburgh Press Club v. United States, 536 F.2d 572 (1976)

Full text (IRS public release)

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

TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION

Date: MAY 03 2018

Release Number: 201844010

Release Date: 11/2/2018

UIL Code: 501.03-00

Taxpayer Identification Number: [redacted]
Tax Period Ended: [redacted]
Person to Contact: [redacted]
Identification Number: [redacted]
Contact Information:
Telephone: [redacted]
Fax: [redacted]

CERTIFIED MAIL - Return Receipt Requested

Dear [redacted]:

This is a 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 Code section 501(c)(7) for the tax period(s) above.

Your exempt status is hereby revoked effective January 1, 20[redacted].

Our adverse determination as to your exempt status was made for the following reason(s):

You have not demonstrated that you are operated exclusively for exempt purposes within
the meaning of Internal Revenue Code § 501(c)(7) and Treasury Regulations 1.501(c)(7)-1.
Exempt clubs are organized for pleasure, recreation, and other nonprofitable purposes.
The exemption extends to social and recreation clubs that are supported solely by
membership fees, dues, and assessments. Your activities are not in furtherance of
operated exclusively for pleasure, recreation or other similar nonprofit purposes and are
not exempt under section 501(a).

Organizations that are not exempt under section 501 generally are required to file federal
income tax returns and pay tax, where applicable. For further instructions, forms, and
information please visit www.irs.gov.

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.

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that
can help protect your taxpayer rights. We 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 our assistance, which is always free, we will do everything possible to help
you. Visit taxpayeradvocate.irs.gov or call 1-877-777-4778.

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

Sincerely yours,
Maria D. Hooke
Director, EO Examinations

Enclosure: Publication 892


Date: January 5, 2018

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
Exempt Organizations Examinations
1100 Commerce Street, MS 4900 DAL
Dallas, TX 75242

Taxpayer Identification Number: [redacted]
Form: [redacted]
Tax Year(s) Ended: [redacted]
Person to Contact / ID Number: [redacted]
Employee ID: [redacted]
Contact numbers:
Telephone: [redacted]
Fax: [redacted]
Manager's Name / ID Number: [redacted]
Employee ID: [redacted]
Manager's Contact Number: [redacted]
Response Due Date: [redacted]

Certified Mail - Return Receipt Requested

Dear [redacted]:

Why you are receiving this letter

We propose to revoke your status as an organization described in section 501(c)(7) of the
Internal Revenue Code (Code). Enclosed is our report of examination explaining the proposed
action.

What you need to do if you agree

If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed
Action - Section 7428, and return it to the contact person at the address listed above (unless
you have already provided us a signed Form 6018). We'll issue a final revocation letter
determining that you aren't an organization described in section 501(c)(7).

If we don't hear from you

If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll
issue a final revocation letter. Failing to respond to this proposal will adversely impact your legal
standing to seek a declaratory judgment because you failed to exhaust your administrative
remedies.

Effect of revocation status

If you receive a final revocation letter, you'll be required to file federal income tax returns for the
tax year(s) shown above as well as for subsequent tax years.

What you need to do if you disagree with the proposed revocation

If you disagree with our proposed revocation, you may request a meeting or telephone
conference with the supervisor of the IRS contact identified in the heading of this letter. You also
may file a protest with the IRS Appeals office by submitting a written request to the contact
person at the address listed above within 30 calendar days from the date of this letter.

The Appeals office is independent of the Exempt Organizations division and resolves most
disputes informally.

For your protest to be valid, it must contain certain specific information including a statement of
the facts, the applicable law, and arguments in support of your position. For specific information
needed for a valid protest, please refer to page one of the enclosed Publication 892, How to
Appeal an IRS Decision on Tax-Exempt Status, and page six of the enclosed Publication 3498,
The Examination Process. Publication 3498 also includes information on your rights as a
taxpayer and the IRS collection process. Please note that Fast Track Mediation referred to in
Publication 3498 generally doesn't apply after we issue this letter.

You also may request that we refer this matter for technical advice as explained in Publication

892. Please contact the individual identified on the first page of this letter if you are considering
requesting technical advice. If we issue a determination letter to you based on a technical
advice memorandum issued by the Exempt Organizations Rulings and Agreements office, no
further IRS administrative appeal will be available to you.

Contacting the Taxpayer Advocate Office is a taxpayer right

You have the right to contact the office of the Taxpayer Advocate. Their assistance isn't a
substitute for established IRS procedures, such as the formal appeals process. The Taxpayer
Advocate can't reverse a legally correct tax determination or extend the time you have (fixed by
law) to file a petition in a United States court. They can, however, see that a tax matter that
hasn't 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

For additional information

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,

Maria Hooke
Director, EO Examinations

Enclosures:
Report of Examination
Form 6018
Publication 892
Publication 3498

Letter 3618 (Rev. 6-2012)
Catalog Number 34809F


Form 886-A          Explanation of Items          Schedule No. or Exhibit
Name of Taxpayer: [redacted]

ISSUE:
Whether ( [redacted] ) qualifies for exemption under Internal Revenue
Code (IRC) § 501(c)(7) due to exceeding the 15% non-member use of the facilities and services.

FACTS:
The [redacted] was incorporated on July 7, 19XX in the State of [redacted].
[redacted] operates an [redacted]-hole golf course, a swimming pool, bar, and pro shop which are open to
members. The income received by [redacted] includes membership dues, greens fees, cart rentals, bar
sales, pro shop sales, and gaming income. The members pay monthly dues. The pool is available
to the general public for rent during off hours as well as the hall.

[redacted] filed the State of [redacted] Quarterly Report
for the year ending December 31, 20XX reporting total income from gaming activities with non-
members on Line 8 reporting the quarterly and total figures; [redacted] also reported gross income on
the Form 990 (Page 9, Part VIII, Statement of Revenue) and viewed (but did not audit) the Form
990-T reporting Unrelated Trade or Business Income (Page 1, Part I) for the year ending December
31, 20XX. The examiner made the same review for a second tax year ending December 31, 20XX.

[The Form 886-A here reproduces the taxpayer's state quarterly gaming reports and its Form 990
Part VIII (Statement of Revenue) and Form 990-T Part I (Unrelated Trade or Business Income)
tables for two tax years, along with a member vs. non-member income summary. All dollar amounts
and percentages are redacted in the public release (they appear as "$ 0" and "0.000%"/"0%"). The
narrative conclusion is that revenue attributable to non-members exceeded the allowable
thresholds. -- transcriber]

LAW:
Internal Revenue Code

IRC § 501(c)(7) provides exemption from income taxes for clubs organized for pleasure,
recreation, and other nonprofitable 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.

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 94-568 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.

Treasury Regulations

Treas. Reg. § 1.501(c)(7)-1(a) further provides that 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.

A social club that opens its facilities to the public is deemed to be not organized and operated
exclusively* for pleasure, recreation, and other nonprofitable purposes, and is not exempt under
§ 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. [Reg. § 1.501(c)(7)-1(b)]

[*Treas. Reg. § 1.501(c)(7)-1 has not been updated to reflect P.L. 94-568 which changed
"exclusively" to "substantially all".]

Revenue Rulings

Rev. Rul. 58-589, 1958-2 C.B. 266 examines the criteria for determining whether an organization
qualifies for exemption under IRC § 501(a) as an organization described in IRC § 501(c)(7) of the
Code. This ruling states it is clear under the foregoing regulations 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, etc., may not be considered as being organized and operated exclusively for
pleasure, recreation or social purposes. It is equally clear that the solicitation by advertisements
or otherwise of public patronage of its facilities may be adverse to the establishment of an
exempt status.

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

Revenue Ruling 60-324 states by making its social facilities available to the general public the
club cannot be treated as being operated exclusively for pleasure, recreation or other non-
profitable purposes.

Revenue Procedures

Rev. Proc. 71-17, 1971 WL 26186, 1971-1 C.B. 683 sets forth guidelines for determining the
effect gross receipts derived from use of a social club's facilities by the general public have on the
club's exemption from federal income tax under IRC § 501(c)(7) of the Code.

The club must maintain books and records of each such use and the amount derived therefrom.
This requirement applies even though the member pays initially for such use. In each instance,
the record must contain the following information:

The date;

The total number in the party;

The number of nonmembers in the party;

The total charges;

The charges attributable to nonmembers;

The charges paid by nonmembers;

Where a member pays all or part of the charges attributable to nonmembers, a statement
signed by the member indicating whether he has been or will be reimbursed for such
nonmember use and, if so, the amount of the reimbursement;

8. Where the member's employer reimburses the member, or makes direct payment to the
club for the charges attributable to nonmembers, a statement signed by the member
indicating the name of his employer; the amount of the payment attributable to the
nonmember use; the nonmember's name and business or other relationship to the
member; and the business, personal, or social purpose of the member served by the
nonmember use.

9. Where a nonmember, other than the employer of the member, makes payment to the club
or reimburses a member and a claim is made that the amount was paid gratuitously for the
benefit of a member, a statement signed by the member indicating the donor's name and
relationship to the member, and containing information to substantiate the gratuitous
nature of the payments or reimbursement.

Exceptions to the record keeping requirements are:

1. Where a group of eight or fewer individuals, at least one of whom is a member, uses
club facilities, it will be assumed for audit purposes that the nonmembers are the
guests of the member, provided payment for such use is received by the club directly
from the member or the member's employer.

2. Where 75 percent or more of a group using the club's facilities are members, it will
likewise be assumed for audit purposes that the nonmembers in the group are guests
of members, provided payment for such use is received by the club directly from one
or more of the members or the member's employer.

3. Solely for purposes of 1 and 2, above, payment by a member's employer will be
assumed to be for a use that serves a direct business objective of the employee-
member.

Where a club makes its facilities available to the general public to a substantial degree, the club
is not operated exclusively for pleasure, recreation, or other non-profitable purposes.

Court Cases

Pittsburgh Press Club v. USA, 536 F.2d 572, (1976)

While the reports mandate the application of a "facts and circumstances test" in the event that
gross receipts from nonmember and/or investment income reach the prohibited levels, they do
not specify any of the relevant facts and circumstances that should be considered. However, the
Court of Appeals in this case has indicated some factors to consider in determining exempt
status.

Factors to consider in applying this test include:

• The actual percentage of nonmember receipts and/or investment income.

• The frequency of nonmember use of club facilities. (An unusual or single event (that is,
non-recurrent on a year to year basis) that generates all the nonmember income should be
viewed more favorably than nonmember income arising from frequent use by
nonmembers).

• The number of years the percentage has been exceeded. (The record over a period of
years is also relevant. The high percentage in one year, with the other years being within
the permitted levels, should be viewed more favorably to the organization than a
consistent pattern of exceeding the limits, even by relatively small amounts).

• The purposes for which the club's facilities were made available to nonmembers.

• Whether the nonmember income generates net profits for the organization. Profits derived
from nonmembers, unless set aside, subsidize the club's activities for members and
result in inurement within the meaning of IRC § 501(c)(7).

GOVERNMENT'S POSITION:

[redacted] doesn't qualify for exemption under IRC § 501(c)(7) as a social club due to the extensive
non-member use of the facilities and services provided to the non-members. The non-member
usage annually exceeds [redacted]% of the total revenue received by [redacted].

[The report sets out Form 990 reported income for two tax years (Total Reportable Income, Member
Income and % from members, Non-Member Income and % from non-member use). The dollar
amounts and percentages are redacted in the public release. -- transcriber]

[redacted] permits unrestricted use of its gaming activities by the general public. Year over year,
[redacted] receives more than the insubstantial part of its gross receipts allowed by the IRC from outside its
membership. The amount received for public's use of facilities averaged [redacted]% for the 20XX
and 20XX tax years. This is considerably higher than the 15% allowed under P.L. 94-568 and
shows a pattern of frequency and reoccurring use by the public. The facts of the case show that it
is operating in a manner consistent with a for-profit business.

[redacted] total expenses exceed the total revenue that they received for the tax years ending
December 31, 20XX and December 31, 20XX.

TAXPAYER'S POSITION:

[redacted] position is that they agree that non-member usage is above the 15% annually. [redacted] agrees
that they don't meet the requirements under IRC § 501(c)(7).

CONCLUSION:

The organization [redacted] doesn't qualify for exemption from federal income tax under
IRC § 501(c)(7).

The proposed date of the revocation is January 1, 20XX.

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