Public hall rentals revoke social club status

Plain-English summary

A self-declared social club had three members, charged no membership dues, and rented its banquet hall and other facilities to the public. It advertised the hall and reported nonmember rental income on Form 990-T. The IRS found that nonmember receipts repeatedly exceeded both the 35 percent overall limit and the 15 percent public-facility-use limit. The IRS revoked the club’s claimed Section 501(c)(7) status for two tax years.

Ruling snapshot

• Question: Did the club qualify under Section 501(c)(7) when public facility rentals produced excessive nonmember income?
• Outcome: Revocation for two tax years.
• Key authorities: IRC §§ 501(c)(7) and 7428; Treas. Reg. § 1.501(c)(7)-1; Rev. Proc. 71-17; Rev. Ruls. 60-324, 66-149, and 68-119; Public Law 94-568

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
Number: 202110035
Release Date: 3/12/2021
UIL: 501.07-00
Date: September 22, 2020
Taxpayer ID Number: [redacted]
Form: [redacted]
For Tax Period(s) Ending: [redacted]
Person to Contact: [redacted]
Identification Number: [redacted]
Telephone Number: [redacted]
Fax Number: [redacted]

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

Dear [redacted]:

This is a final determination explaining why your organization doesn't qualify as an organization
described in Internal Revenue Code (IRC) Section 501(c)(7) for the tax periods listed above.

In the future, if you believe your organization qualifies for tax-exempt status and would like 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 operated substantially for pleasure and
recreation of your members or other non-profitable purposes and no part of the
earnings inures to the benefit of private shareholder within the meaning of IRC
Section 501(c)(7). You have made your recreational and social facilities available to
the general public. You have exceeded the non-member income test for tax years
ending December 31, 20XX and December 31, 20XX.

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.

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 20439

U. S. District Court for the District of Columbia
333 Constitution Ave., N.W.
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, you can contact the person listed at the top of this letter.

Enclosures:
Publication 892

Sincerely,

Sean E. O'Reilly
Director, Exempt Organizations Examinations

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities

Date: 03/04/2020
Taxpayer ID number: [redacted]
Form: [redacted]
Tax periods ended: [redacted]

Person to contact:
Name: [redacted]
ID number: [redacted]
Telephone: [redacted]
Fax: [redacted]
Address: [redacted]
Stop: [redacted]

Manager's contact information:
ID number: [redacted]
Telephone: [redacted]
Response due date: [redacted]

CERTIFIED MAIL — Return Receipt Requested

Dear [redacted]:

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).

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,
Maria Hooke, Director,
Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018

Pub 892
Pub 3498

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

Form 886-A (May 2017)
Department of the Treasury — Internal Revenue Service
Explanations of Items
Schedule number or exhibit: [redacted]
Name of taxpayer: [redacted]
Tax Identification Number (last 4 digits): [redacted]
Year/Period ended
20XX
20XX
ISSUE(S):
1.) Whether [redacted] qualifies for exemption

under Internal Revenue Code (IRC) section 501(c)(7)?

FACTS:

A compliance examination for the year ending December 31, 20XX and December 31, 20XX for

the return form 990EZ Short Form Return was conducted for [redacted]
(hereinafter, “EO”, “Taxpayer”, “Organization [redacted]”). [redacted]
is a self-declared organization under IRC§ 501(c)(7). The
relevant facts apply. [redacted] was incorporated
in the State of [redacted] on December 13, 19XX. The organization self-declared its exemption in

July 20XX by filing a 990 return.

Per the organizing documents the purposes for which this association is formed are to acquire and
hold lands for lodge halls and [redacted], fraternal-beneficial and educational halls or meeting
buildings and to buy, sell, exchange or mortgage the lands of said association in the fur-therance
of such purposes and no other.

The primary activity of the organization is to provide a meeting place for its members the
[redacted] 20XX. The organization is open to the public for rental of the banquet hall, pavilion area

and picnic area.

The form 990-EZ return the EO stated the primary exempt purpose: To provide the facilities and
raise funds to assist and further the charitable goals of the [redacted] and
[redacted].

For the years under examination the EO filed 990-T returns reporting nonmember income for
rental of the hall. During the initial interview the organization treasure [redacted] confirmed that
the hall is rented to non-members.

Per the Bylaws of the organization the membership consist of all the members in good standing of
the [redacted] 20XX and the dues of the association shall be

$0.00 per year for each member.

During the initial interview EO was asked how many members does your organization have? The
EO response was three members. The EO was asked what are the dues or fees for membership?
The EO response was zero dues for membership. What are the requirements for membership? EO
answered there are no requirements for membership.

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

Form 886-A (May 2017)
Department of the Treasury — Internal Revenue Service
Explanations of Items
Schedule number or exhibit: [redacted]
Name of taxpayer: [redacted]
Tax Identification Number (last 4 digits): [redacted]
Year/Period ended
20XX
20XX
The other sources of revenue for the organization is fundraising events, [redacted], raffles and
annual picnic.
The EO paid for advertising with the [redacted] for 20XX and 20XX to show case
the Hall to the general public.
For the year 20XX the EO purchased advertising ad with the [redacted] for the

event.

The EO provided this statement below via information document request:

DELETED

Below is communication from EO to preparer regarding allocation for non-member and member
hall rentals for 20XX and 20XX. For both years EO stated 0% of hall rentals comes from non-
members.

DELETED

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

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

DELETED

Below is a statement EO provided via information document request regarding how they
determined member vs non-member hall rental contracts.

DELETED

20XX Member nonmember
Hall rental/ 0.00 0.00
Keg, Ice,
Soda sales
Investment 0.00
Income
0.00 0.00
Picnic 0.00 0.00
Gun Raffle 0.00
ATV Raffle 0.00
Putt Putt golf 0.00
Total Gross 0.00 0.00 0.00
Receipts
Nonmember 00.00%
income %
20XX Member nonmember
Hall rental/ Keg, Ice, Soda 0.00 0.00
sales
Investment Income 0.00
0.00 0.00
Picnic 0.00 0.00

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

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

Total Gross Receipts 0.00 0.00 0.00

Nonmember income % 00.00%

Per review of invoices for keg, ice, soda sales and rental contracts for the hall for each year under
audit.

All other income was taken from the balance sheets for each year under audit.

Picnic allocation % was based on EO written statement of 0% nonmember for each year under
audit.

[redacted] allocation was 0% to nonmembers for each year under audit.

LAW

IRC § 501(c)(7) exempts from federal income tax clubs organized for pleasure, recreation, and
other non-profitable purposes, substantially all of the activities of which are for such purposes and
not part of the net earnings of which inures to the benefit of any private shareholder.

§1.501(c)(7)-1(a) of the Federal Tax Regulations states that the exemption provided by section
501(a) for organizations 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 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.

§1.501(c)(7)-1(b) of the Federal Tax Regulations 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.

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

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

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

“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.

Public Law 94-568 provides that social clubs are permitted to receive up to 35% of their gross
receipts from sources outside of their membership without losing their tax-exempt status, and that
within that 35%, not more than 15% of gross receipts should be derived from the use of a social
club’s facilities or services by the general public.

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 Procedure 71-17 sets forth the guidelines for determining the effect of gross receipts
derived from the general public’s use of a social club’s facilities on exemption under IRC §
501(c)(7). Where nonmember income from the usage exceeds the standard as outlined in this
Revenue procedure, the conclusion reached is that there is a non-exempt purpose and operating
in this manner jeopardizes the organization’s exempt status.

In Revenue Ruling 68-119, 1968-1 C.B. 268 an equestrian social club that holds an annual one-
day steeplechase meet which is open to the general public is found to be tax-exempt under IRC
501(c)(7). In this case, the club is said to derive a small amount of income from nonmembers in
excess of expenses attributable to their participation and attendance. If any profit results, it is
turned over to charity. Other club activities are supported by member dues. Therefore, the ruling
holds, the income from non-members does not inure to the club’s members.

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

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

TAXPAYER’S POSITION

Taxpayer's position has not been provided.

GOVERNMENT’S POSITION

Based on the examination, the organization does not qualify for exemption as a social club
described in IRC §501(c)(7) and Treas. Reg. §1.501(c)(7) which provides that in general, this
exemption extends to social and recreation clubs which are supported solely by membership fees,
dues, and assessments.

Rev. Ruls. 66-149 and 60-324 support this position stating that a social club that opens to the
public and derives a substantial part of its income from non-member sources is not exempt as an
organization described in 501(c)(7).

The EO permits use of its facilities by the general public, through hall rental contracts. The
organization has exceeded both the 35% limit on non-member gross receipts, and the 15% non-
member facility use gross receipts threshold as outlined in Public Law 94-568, on a recurring basis
during tax years ending December 31, 20XX and December 31, 20XX.

The use of advertising in the [redacted] for the Banquet Hall and the [redacted], and
thus represents prima facie evidence that the club is engaging in a business, is not being operated
exclusively for pleasure, recreation, or social purposes, and is thus in direct conflict with Treasury
Regs. §1.501(c)(7)-1(b).

Accordingly, it is proposed that the [redacted] tax
exempt status be disqualified for December 31, 20XX and December 31, 20XX effective January 1,
20XX and January 1, 20XX.

CONCLUSION

The [redacted] no longer qualifies for exemption
under § 501(c)(7) of the Code as your nonmember income has exceeded both the 35% limit on
non-member gross receipts, and the 15% non-member facility use gross receipts on a continuing
basis. Therefore, it is proposed that your exempt status under § 501(c)(7) of the Code be revoked
effective January 1, 20XX for year ending December 31, 20XX and effective January 1, 20XX for
year ending December 31, 20XX.

Should this revocation be upheld, Form 1120 must be filed starting with tax periods ending
December 31, 20XX and December 31, 20XX.

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