IRS denies social-club exemption due to nonmember rental income

Plain-English summary

A fishing and conservation club applied for exemption as a social club under section 501(c)(7). It organized member fishing tournaments, but it also rented its clubhouse to members and nonmembers, with nonmember income averaging more than three times member income during the years provided. The IRS concluded that the regular and substantial public rental activity was a business, exceeded the permitted level of nonmember receipts, and used income to reduce members' funding obligations. After receiving no protest, the IRS issued a final adverse determination denying exemption.

Ruling snapshot

• Question: Does a fishing club with substantial and recurring nonmember clubhouse-rental income qualify under section 501(c)(7)?
• Outcome: denied
• Key authorities: IRC §§ 501(a), 501(c)(7); Treas. Reg. § 1.501(c)(7)-1; Rev. Rul. 58-589; Rev. Rul. 69-220; Pub. L. No. 94-568 committee reports

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
                                                                                  Date:
                                                                                  December 16, 2019
Cincinnati, OH 45201                                                              Employer ID number:

                                                                                  Contact person/ID number:

                                                                                  Contact telephone number:

Number: 202011007                                                                 Form you must file:
Release Date: 3/13/2020
                                                                                  Tax years:




UIL: 501.07-05

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.




                                                      Sincerely,




                                                      Stephen A. Martin
                                                      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


Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201
                                                                            Date:
                                                                            October 2, 2019
                                                                            Employer ID number:


                                                                            Contact person/ID number:


                                                                            Contact telephone number:


                                                                            Contact fax number:




Legend:                                                                     UIL:
X = state                                                                   501.07-05
b = number
c = number
d = number
e = number
f = number
g = number
h = number

Dear


We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 501(a). We determined that you don't qualify for exemption under IRC Section 501(c)(7).
This letter explains the reasons for our conclusion. Please keep it for your records.

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

Facts
Your Certificate of Incorporation states you were formed for such educational and charitable purposes as will
promote conservation of game and fishing; promote conservation of the waterways of X; encourage good
sportsmanlike conduct; attend and host tournaments for sporting events, including, but not limited to hunting
and fishing, and do all things necessary to implement the above.

You hold monthly membership meetings to keep the membership informed, address business issues, vote in
new members, and to provide educational and conservation information as it changes and becomes available.

You organize monthly fishing tournaments for the membership. These tournaments have           volunteer
tournament directors responsible for naming the location of the tournaments, collecting entry fees, and
disbursing prize payouts to winners.

You also host        separate annual tournaments that are open to the membership and the public. These
tournaments are organized by the membership and hosted on your property. Family members of the participants
are invited to join in festivities at your clubhouse (your only listed asset) after each day's designated fishing
times. Children of participants are given the opportunity to see the bass brought in for the day and to learn about
the proper handling of the fish and other pertinent conservation information for both the fish and your public
waterways.

You participated in a Toys for Tots drive for the first time this past holiday season, and you plan on making this
an annual event in order to give back to the community. You encourage the membership to participate in
community events and other organizations' sporting events both as private citizens and representatives of your
organization.

Your income comes from membership dues, tournament entry fees, member club rentals and non-member club
rentals. You rent out your clubhouse to both members and non-members at hourly rates in four, twenty-four and
forty-eight hour increments. The fee for non-members is            the rate for a twenty-four hour rental, and over
      times the rate for a forty-eight hour rental. You pay an active member to manage your clubhouse, such has
cleaning and readying it for events, collecting rent and securing the building. For these services he receives
compensation of b percent of each rental fee received.

You submitted actual income and expenses for the past three years. Breakdowns show non-member income to
be on average over three times the amounts received in comparison to member income in those years. In terms
of percentages, member income totaled c, d, and e versus f, g, and h, respectively, for the three years given.

Law
Treasury Regulation Section 1.501(c)(7)-1(a) states that the exemption provided by Section 501(a) of the Code
for an organization described in 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 inure 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.

Treas. Reg. 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) of the Code. 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.

Rev. Rul. 58-589, 1958-2 CB 266 sets forth the criteria for exemption under section 501(c)(7) of the Code, and
provides that a club may lose its exemption if it makes its facilities available to the general public. A club will not
be denied exemption merely because it receives income from the general public provided such participation is
incidental to and in furtherance of its general club purposes. To retain exemption a club must not enter into outside
activities with the purpose of deriving profit. If such income producing activities are other than incidental, trivial or
nonrecurrent, it will be considered that they are designed to produce income and will defeat exemption.

Rev. Rul. 69-220, 1969-1 CB 154, held 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. The club purchased an office building, part of which is leased to
commercial tenants. operating expenses of the building, including the part used as a clubhouse. The club uses the
net income from the rental operation to make capital improvements and to expand the facilities offered to its
members. This club is not exempt from federal income tax under section 501(c)(7) of the Code because it is
regularly engaged in a business ordinarily carried on for profit and because net income from the activity is inuring
to the members of the club.

The Committee Reports for Public Law 94-568, HR 1144, provides under 501(c)(7) that social clubs be
operated substantially for pleasure, recreation and other non profit purposes. An organization may receive up to
35% of its gross receipts from a combination of investment income and non-member receipts, as long as non-
member receipts do not represent more than 15% of total receipts.

Application of law
Treasury Regulation Section 1.501(c)(7)-1(a) states that the exemption provided by Section 501(a) of the Code
for an organization described in Section 501(c)(7) applies only to clubs which are organized and operated
exclusively for pleasure, recreation, and other nonprofitable purposes. Exemption extends to social and
recreation clubs which are supported solely by membership fees, dues and assessments. Based on your sources
of income you do not qualify as you are supported substantially through non-member, public individuals
through the rental of your clubhouse facility.

Per Section 1.501(c)(7)-1(b) of the Regulations, when a club engages in business it is not organized and
operated exclusively for pleasure, recreation and other nonprofit purposes. As described in Rev. Rul. 58-589,
although a club may receive some income from the general public, your facility rental activities are more than
incidental and, therefore, preclude exemption under Section 501(c)(7) of the Code.

Rev. Rul. 69-220 held a social club that receives a substantial portion of its income from the rental of property
and uses such income to defray operating expenses is not exempt under Section 501(c)(7) of the Code. Your
property rental activity is conducted with the purpose to generate income, decreasing the amounts needed to be
contributed by your members. This rental income is supporting your operations, and as it is decreasing the
obligations of funds required to be paid by your members, it is inuring to their benefit.

A substantial portion of your income is generated from business done with the general public. By receiving, on
average, over % of your revenue from non-members, you fail the membership income tests set forth by the
Committee Reports on Public Law 94-568. You do not meet the facts and circumstances exception for this
income test as your property rental activity is regular and substantial.

Conclusion
You do not qualify for exemption under Section 501(c)(7) of the Code. You exceed the allowable levels of non-
member income and are not organized and operated exclusively for pleasure and recreation of your members.
Accordingly, you cannot be granted exemption under Section 501(c)(7).




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.

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

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

   • A statement of the facts, law, and arguments supporting your position

   • A statement indicating whether you are requesting an Appeals Office conference

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

   • The following declaration:
      For an officer, director, trustee, or other official who is authorized to sign for the organization:
      Under penalties of perjury, I declare that I have examined this request, or this modification to the
      request, including accompanying documents, and to the best of my knowledge and belief, the request
      or the modification contains all relevant facts relating to the request, 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 they haven'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 gave us a basis to reconsider our determination. If so,
we'll continue to process your case considering the information you provided. If you haven't given us a basis
for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information
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 later because the
law requires that you use the IRC administrative process first (IRC Section 7428(b)(2).


Where to send your protest
Send your protest, Form 2848, if applicable, 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
       Mail Stop 6403                                   550 Main Street, Mail Stop 6403
       P.O. Box 2508                                    Cincinnati, OH 45202
       Cincinnati, OH 45201

You can also fax your protest 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 they received it.

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-
pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at
the top of this letter.

Contacting the Taxpayer Advocate Service
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 if 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 877-777-4778.



                                                             Sincerely,




                                                             Stephen A. Martin
                                                             Director, Exempt Organizations
                                                             Rulings and Agreements