IRS disqualifies a self-declared social club whose income came almost entirely from nonmembers

Plain-English summary

This letter is a final determination that a self-declared social club does not qualify for tax exemption under IRC § 501(c)(7). The club owned its building, operated bars and rented its halls to the general public, sold packaged alcohol for off-premises consumption, and ran video gambling machines, and it had no membership requirements (it had been open to the public since the 1990s). Because the club could not produce the nonmember recordkeeping required by Revenue Procedure 71-17, the IRS treated all of its income as coming from nonmembers, far above the 35%/15% nonmember limits Congress set in Public Law 94-568. The IRS also found the club lacked the membership, personal contacts, and commingling that define a 501(c)(7) club. The organization signed a Form 6018 consent agreeing to the determination. In the released copy, every dollar figure is redacted and appears as $0.

Ruling snapshot

• Question: Does the self-declared organization qualify for exemption as a social club under IRC § 501(c)(7)?
• Outcome: Revocation (final determination of non-qualification; taxpayer consented).
• Key authorities: IRC §§ 501(a), 501(c)(7), and 7428; Treas. Reg. § 1.501(c)(7)-1; Public Law 94-568; Rev. Proc. 71-17; Rev. Ruls. 66-149, 69-219, 60-324, 68-535, 67-428, and 58-589; Pittsburgh Press Club v. United States; Polish American Club Inc. v. Commissioner.

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
Date: April 24, 2020
Number: 202052024
Release Date: 12/24/2020 Taxpayer ID Number:
Form:
UIL: 501-07.00 For Tax Period(s) Ending:

Person to Contact:
Identification Number:
Telephone Number:

Fax Number:

CERTIFIED MAIL — Return Receipt Requested
LAST DAY FOR FILING A PETITION WITH THE TAX COURT:

Dear

This is a final determination that you do not qualify for exemption from federal income tax
under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC
Section 501(c)(7) for the tax period(s) above.

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 letter from the Internal Revenue Service,
you can request a determination by filing Form 1024, Application for Recognition of Exemption
Under Section 501(a), or Form 1024-A, Application for Recognition of Exemption Under
Section 501(c)(4) of the Internal Revenue Code (as applicable) and paying the required user
fee.

Our adverse determination as to your exempt status was made for the following reasons:

You have not established that you are organized and operated exclusively for an
exempt purpose within the meaning of IRC Section 501(c)(7). You have not
established that you are organized and operated exclusively for pleasure,
recreation, and other nonprofitable purposes, substantially all 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.

Organizations that are not exempt under IRC 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.

We previously provided you a report of examination explaining the proposed denial of your
tax-exempt status. At that time, we informed you of your right to contact the Taxpayer
Advocate, as well as your appeal rights. On December 13, 2019, you signed Form 6018,
Consent to Proposed Action — Section 7428, in which you agreed to the denial of your tax
exempt status as described under IRC 501(c)(7). This is a final determination letter with
regards to your Federal tax-exempt status under Section 501(a).

If you decide to contest this determination, you may file an action for declaratory judgment
under the provisions of IRC Section 7428 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 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, NW
Washington, DC 20217

U.S. Court of Federal Claims
717 Madison Place, NW
Washington, DC 20005

U. S. District Court for the District of Columbia
333 Constitution Ave., NW
Washington, DC 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 IRC Section 7428.

You may 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.

Taxpayer Advocate assistance can't be used as substitute for established IRS procedures,
formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or
technically correct tax determination, nor extend the time fixed by law that you have to file a
petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not
have been resolved through normal channels gets prompt and proper handling.

You can get any of the forms or publications mentioned in this letter by calling 800-TAX-FORM
(800-829-3676) or visiting our website at www.irs.gov/forms-pubs.

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.

Enclosures:
Publication 892

Sincerely,

Maria D. Hooke
Director, EO Examinations

Department of the Treasury
Internal Revenue Service

CERTIFIED MAIL — Return Receipt Requested

Dear

Tax Exempt and Government Entities

Why you're receiving this letter
We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that your organization
doesn't qualify as an organization described in Internal Revenue Code (IRC) Section 501(c)(7).

Date:
December 3, 2019

Taxpayer ID number:

Form:
Tax periods ended:

Person to contact:
Name:
ID number:
Telephone:

Fax:
Address:

Manager's contact information:
Name:
ID number:
Telephone:

Response due date:

This letter is not a determination of your tax-exempt status under IRC Section 501 for any period other than the
tax periods above.

If you agree
If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the
contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an
organization described in IRC Section 501(c)(7) for the periods above.

If you disagree

1. Request a meeting or telephone conference with the manager shown at the top of this letter.

2. Send any information you want us to consider.

3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional
   information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after
   the meeting or after we consider the information.

The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes
informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of
limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case.
For your protest to be valid, it must contain certain specific information, including a statement of the
facts, applicable law, and arguments in support of your position. For specific information needed for a
valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status.

Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't
apply now that we've issued this letter.

Letter 3618 (Rev. 8-2019)
Catalog Number 34809F

4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities)
   if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the
   IRS.

If you're considering requesting technical advice, contact the person shown at the top of this letter. If you
disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as
explained above. A decision made in a technical advice memorandum, however, generally is final and
binding on Appeals.

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
adverse determination letter.

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

Contacting the Taxpayer Advocate Office is a taxpayer right

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 www.taxpayeradvocate.irs.gov or call 877-777-4778.

Additional information
You can get any of 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 shown at the top of this letter.

Sincerely,

for Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018

Letter 3618 (Rev. 8-2019)
Catalog Number 34809F

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
12/31/20XX

ISSUE:
Whether the tax-exempt status of ( ), an IRC Section 501(c)(7) social club, should
be disqualified.

FACTS:
The Secretary of State website indicated, on April 10th, 19XX, incorporated in (the
State); its principal office is located in ; and, entity status with the State is active and
in good standing. The calendar year 20XX Form 990 indicated, was incorporated for the purpose of
promoting and extending fraternal, charitable, civic and social pursuits.

Our records do not indicate that applied for tax-exemption status. Our records indicate prior to calendar
year 20XX filed Form 1120. In calendar year 20XX, filed Form 990 and 990-T; thereby, self-
declaring as a tax-exempt entity. filed both Forms 990 and 990-T timely. On Form 990, Part VIII, line
2a, BAR/BANQUET FACILITY income was classified as unrelated trade or business income.
BAR/BANQUET FACILITY represented total income for calendar year 20XX. In addition,
reported 0% of its total income and expenses on Form 990-T. On Form 990-T the specific deduction was not
taken. Corporate tax rates were applied and paid.

owns its building in which its activities are conducted. operates bars and an event scheduling
service for its halls. The sources of *s income are: the sale of alcohol and snacks; various
venues/events conducted in their halls; video gambling machines (keno and poker); annual banquet ticket
sales; fundraising from mail solicitations: and, interest income.

On August 27, 20XX, AGENT interviewed (TREASURER) and
(ACCOUNTANT). discussed that does not have membership requirements; the
club has been open to the general public since the "90s"; sells package alcohol for off premises
consumption; the club stopped paying their officers due to financial troubles; and, the club does not have
members.

In addition, and discussed that they were not aware of Revenue Procedure 71-17 and Senate
Report 94-1318; they were not able to provide a copy of the original application for tax exemption; and, in
calendar year 20XX they decided to file Form 990 as the previous accountants were not knowledgeable about
the proper filing requirements.

Catalog Number 20810W Page 1 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
12/31/20XX

FACTS (continued):

On August 27, 20XX, AGENT conducted an examination of books and records. The scope
of our examination is to schedule and analyze records to determine if records are in compliance
with the record keeping requirements of Revenue Procedure 71-17; and, to determine if is organized
and operated exclusively for pleasure, recreation, and other nonprofitable purposes within the meaning of
Public Law 94-568 (Senate Report 94-1318).

During the course of the examination, we scheduled and analyzed transactions and supporting documentation
for the following sources of income: Sales — Beverages and Food (account # ); Rental Income — Hall
(account # ); Merchandise Income (account # ); Gambling Machine Income (account

); Income (account # ); and, (account # ).

Revenue Procedure 71-17 (Rev. Proc. 71-17) requires, Section 501(c)(7) organizations, to maintain adequate
records to substantiate the gross receipts derived from nonmembers. Section 4 of Rev. Proc 71-17 provides
the recordkeeping requirements that Section 501(c)(7) organizations are required to prepare and maintain.
AGENT was not able to locate records prepared under the aforementioned recording keeping
requirements. AGENT was not able to substantiate that sources of income were derived from
members. Therefore, all sources of income were assumed to be derived from nonmembers.

books and records reported income from following sources:

Description                              Sources of income                    Amount
Beverages and Food                       Nonmember                            $0
Rental income                            Nonmember                            $0
[ ] income                               Nonmember                            $0
Gambling machine income                  Nonmember                            $0
Donations                                Nonmember                            $0
Merchandise income                       Packaged alcohol for off premises    $0
                                         consumption
Investment income and other income       Nonmember                            $0
Total income - Per Form 990,             Bar/Banquet Income                   $0
Part VIII, line 2a

Catalog Number 20810W Page 2 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
12/31/20XX

Below are the results that were discovered during the examination or reported on Form 990.

Reporting Year        Total Income        Total nonmember       Nonmember       Net income /
(Per Form 990,        income (Per         % of total            <Net loss>
Part I, line 7a)      examination or      income                (Per Form 990,
                      Form 990,                                 Part I, line 19)
                      Part V, line 10b)

20XX                  $0                  $0                    0%              $0
20XX                  $0                  $0                    0%              $0
20XX                  $0                  $0                    0%              <$0>
20XX                  $0                  $0                    0%              $0

Catalog Number 20810W Page 3 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
12/31/20XX

LAW:

Treasury regulations:

Section 501(c)(7) of the Internal Revenue Code (the Code) provides for the exemption from federal income
tax 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.

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

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 exemption 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 purpose. However, an incidental sale of property will not deprive
a club of its exemption.

Public Law 94-568, 1976-2 C.B. 896, 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 a club exempt from taxation
described in Section 501(c)(7) is to be permitted to 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.

Revenue rulings:

Revenue Ruling 66-149, 1966-1 C.B. 146, held that a social club is not exempt from Federal income tax as
an organization described in Section 501(c)(7) of the Internal Revenue Code of 1954 where it regularly
derives a substantial part of its income from nonmember sources such as, for example, dividends and
interest on investments which it owns. However, a club's right to exemption under section 501(c)(7) of the
Code is not affected by the fact that for a relatively short period a substantial part of its income is derived
from investment of the proceeds of the sale of its former clubhouse pending the acquisition of a new home
for the club.

Catalog Number 20810W Page 4 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
12/31/20XX

LAW (continued):

Revenue rulings (continued):

Revenue Ruling 69-219, 1969-1 C.B. 153, held 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 exemption under Section 501(c)(7) of the Code.

Revenue Ruling 60-324, 1960-2 C.B. 173, held that A social club which has been granted exemption from
Federal income tax under Section 501(c)(7) of the 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 68-535, 1968-2 C.B. 219, held that a social club that regularly sells liquor to its members
for consumption off its premises is not entitled to exemption under Section 501(c)(7).

Revenue Ruling 67-428, 1967-2 C.B. 204, held that a federation of clubs does not qualify for exemption
from Federal income tax under section 501(c)(7) of the Internal Revenue Code of 1954.

Revenue Ruling 58-589, 1958-2 C.B. 266, held that a social club must establish (1) that it is a club both
organized and operated exclusively for pleasure, recreation and other nonprofitable purposes. To meet the
first requirement, there must be an established membership of individuals, personal contracts and
fellowship. A commingling of the members must play a material part in the life of the organization.

Court cases:

Pittsburgh Press Club v. USA, 536 F.2d 572, (1976) the Court held that 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.

Catalog Number 20810W Page 5 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
12/31/20XX

LAW (continued):

Court cases (continued):

Factors to consider in applying this test include:

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

• The frequency of nonmember's 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).

In Polish American Club Inc v. Commissioner 33 T.C.M 925 (1974) the Court held that making club
facilities available to the general public, for a fee, represented a substantial activity disqualifying the club
from exemption under Section 501(c)(7) of the Code.

Revenue procedures:

Revenue. Procedure. 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 section 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:

1. The date;

2. The total number in the party;

3. The number of nonmembers in the party;

4. The total charges;

5. The charges attributable to nonmembers;

6. The charges paid by nonmembers;

7. 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;

Catalog Number 20810W Page 6 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
12/31/20XX

LAW (continued):

Revenue procedures (continued):

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; and,

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 these 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 club 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.

Catalog Number 20810W Page 7 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
12/31/20XX

GOVERNMENT'S POSITION/ANALYSIS:

The Pittsburgh Press Club v. USA court case indicate that when nonmember income reaches a prohibited level
the following facts and circumstances should be considered:

• The frequency of nonmember's 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).

Based upon the aforementioned facts, activities, including but not limited to the sale of alcohol for
off-premises consumption, which derive gross receipts solely from nonmembers, are substantial and recurring.
In addition, does not have a membership of individuals. Therefore, does not qualify for exemption
as a social club described in Section 501(c)(7) of the Code: Treasury Regulation Section 1.501(c)(7)-1(a);
and, Treasury Regulation Section 1.501(c)(7)-1(b) as is not organized and operated exclusively for
pleasure, recreation, and other nonprofit purposes.

Revenue Rulings 67-428 and 58-589 stated that a club must have a membership of individuals, personal
contacts, and fellowship. A commingling of members must play a material part in the activities of the
organization. Although fellowship need not be present between each member and every other member of the
club, it must constitute a material part of the organization's activities. Therefore, the aforementioned revenue
rulings support the position that an organization must have membership with individuals to qualify under
Section 501(c)(7).

Catalog Number 20810W Page 8 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
12/31/20XX

GOVERNMENT'S POSITION/ANALYSIS (continued):

Revenue Rulings 66-149, 69-219, and, 60-324 supports the position that a social club described in Section
501(c)(7) of the Code which regularly derives a substantial part of its income from nonmember sources is not
exempt from Federal income tax.

Revenue Ruling 68-535 supports the position that the sale of alcohol for consumption off the club's premises
does not constitute the raising of income from members using the club's facility. Neither is it income from
the sale of merchandise to members through the operations of a bar. The regular sale of liquor for off premises
consumption is not in furtherance of the social club's exempt purposes. This activity is neither recreation nor
social. Therefore, regularly conducting this activity and deriving substantial amounts of income from it will
disqualify the club's exemption from Federal income tax.

Public Law 94-568, 1976-2 C.B. 896, quantitatively defines substantial amounts of income from nonmembers.
The law supports the position that a social club, which is open to the general public, shall not derive more
than 15 percent of its total gross receipts from sources outside of membership without losing exemption from
Federal income tax. It appears from calendar year 20XX to 20XX activities exceeded these limitations.

In Polish American Club Inc v. Commissioner, the courts' decision supports the position that a social club
described in Section 501(c)(7) of the Code which regularly derives a substantial part of its income from
nonmember sources, on a recurring basis, is not exempt from Federal income tax.

TAXPAYER'S POSITION

On November 5, 20XX, the power of attorney (POA) and the taxpayer was offered a closing conference via
telephone call. The POA and the taxpayer did not make a decision.

CONCLUSION

did not qualify, during the year 20XX, for exemption, under Section 501(c)(7) of the Code as your
nonmember income has exceeded the 15% limit set by Congress in Public Law 94-568. Therefore, it is
proposed that your exempt status under Section 501(c)(7) of the Code be disqualified for the yearend
December 31, 20XX.

Catalog Number 20810W Page 9 www.irs.gov Form 886-A (Rev. 5-2017)