IRS revokes a shooting club's exemption for public use and excess nonmember income

Plain-English summary

A Section 501(c)(7) social club operated indoor and outdoor shooting ranges and allowed the general public to use the outdoor range. A roadside sign and the club's website advertised that range as open to the public, and its prices were competitive with other local ranges. The examination found that the club had understated nonmember receipts by failing to count fees from nonmembers who participated in shooting matches. After correction, nonmember income exceeded the 15 percent guideline in consecutive years, reaching 46.5 percent in 2017 and 40.9 percent in 2018. The IRS also found that public use was frequent, profitable, and subsidized club expenses or capital improvements for members. The club agreed to the proposed revocation, and the IRS revoked its Section 501(c)(7) exemption because it no longer operated substantially for members' pleasure and recreation and its nonmember profits resulted in private inurement.

Ruling snapshot

• Question: Did the shooting club remain exempt under Section 501(c)(7) despite regularly opening its outdoor range to the public and receiving substantial nonmember income?
• Outcome: Revocation, effective January 1 of the redacted year.
• Key authorities: IRC §§ 277, 501(a), 501(c)(7), 6501(g), 7428; Treas. Reg. § 1.501(c)(7)-1; Public Law 94-568; Pittsburgh Press Club v. United States

Full text (IRS public release)

This document is an OCR transcription of a scanned IRS release. Wording is preserved verbatim; obvious scanning misreads have been corrected, and identifying details removed from the scan are marked [redacted].

[Page 1]

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Number: 202123009
Release Date: 6/11/2021

UIL: 501.07-00

Date: September 22, 2020
Taxpayer ID Number:
Form:
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. Your determination letter dated June 19XX is revoked.

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

[Page 2]

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

[Page 3]

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

Date:
03/16/2020
Taxpayer ID number:
Form:
Tax periods ended:
Person to contact:
Name:
ID number:
Telephone:
Manager's contact information:
Name:
ID number:
Telephone:
Response due date:

CERTIFIED MAIL — Return Receipt Requested

Dear

Why you’re receiving this letter

We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke
your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(7).

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.

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.

[Page 4]

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.

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,

Peter Jensen
for Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018

[Page 5]

Form 886-A
Department of the Treasury — Internal Revenue Service
Explanations of Items

Year/Period ended
Dec. 31, 20XX &
Dec. 31 20XX

ISSUE:

Whether the [redacted] (Organization) is tax-exempt under
Internal Revenue Code (IRC) Section (Sec.) 501(c)(7), as a social club.

FACTS:

The Organization’s Articles of Incorporation state, the Organization was incorporated on March 16, 19XX,
in the State of [redacted]. The Organization submitted a Form 1025, Exemption Application, on June 10,
19XX, requesting exempt status under IRC Sec. 501(c)(7). The Organization was granted exemption as a
social club exempt from Federal income tax under IRC Sec. 501(c)(7) pursuant to a determination in June
19XX.

The Organization’s Articles of Incorporation state its purposes are: “[redacted].”

The Organization operates an indoor shooting range and an outdoor shooting range. The indoor shooting
range is used primarily by the Organization’s “[redacted]”. The [redacted] program is for youth
from ages 0 to 0. The [redacted] provides training in firearm safety and handling procedures and
coaching from basic to advanced shooting techniques. The outdoor range is used by members and made
available for use to the public (non-members). The Organization hosts shooting matches at the outdoor
range and both members and non-members participate in the matches.

The Organization’s general ledger, bank deposits, and receipts, show income received by the Organization
includes membership dues & initiation fees, grants, donations, ammunition & target sales, entrance fees
from nonmember use of the outdoor shooting range, and member and nonmember fees for participating in
club shooting matches.

The Organization’s 20XX Form 990, Return of Organization Exempt From Income Tax, indicate the percent
of gross receipts from nonmember use of the Organization’s facilities exceeded 15% beginning with tax
year 20XX continuing through 20XX, while investment income was less than 0% for all years. See the table
below for the investment income and non-member use income as reported on the Organization’s Form
990, for the tax years 20XX through 20XX:

[Page 6]

CHART DELETED

The phrase “open to the public” appears on the Organization’s outdoor sign that faces the road in front of
the shooting range. Additionally, the Organization’s website states the range is a public shooting range. A
review of shooting ranges in the area shows the price for nonmembers to use the Organization’s outdoor
shooting range is competitive with other local ranges.

LAW:

Internal Revenue Code (IRC)

IRC Sec. 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.

Treasury Regulations (Treas. Reg.)

Treas. Reg. 1.501(c)(7)-1 relating to the requirements of exemption of such clubs under section 501(a),
reads in part as follows:

(a) 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 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.

[Page 7]

(b) A club which engages in business, such as making its social and recreational facilities available to
the general public or by selling real estate, timber or other products, is not organized and operated
exclusively for pleasure, recreation, and other nonprofitable purposes and is not exempt under
section 501(a). 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.

Legislative History

Public Law 94-568 amended the “exclusive” provision to read “substantially” in order to allow an IRC Sec.
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.

(d) If an organization has outside income in excess of the 35-percent limit (or 15-percent limit in the
case of gross receipts derived from nonmember use of a club's facilities), all the facts and
circumstances are to be taken into account in determining whether the organization qualifies for
exempt status.

Court Cases

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

[Page 8]

• 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 Sec. 501(c)(7).

Revenue Rulings (Rev. Rul.)

Rev. Rul. 58-589, 1958-2 C.B. 266 - examines the criteria for determining whether an organization qualifies
for exemption under IRC Sec. 501(a) as an organization described in IRC Sec. 501(c)(7) of the Code.
These 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.

Rev. Rul. 60-324, 1960-2 C.B. 173 - 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.

Rev. Rul. 66-149, 1966-1 C.B. 146 - holds a social club as not exempt as an organization described in IRC
Sec. 501(c)(7) where it derives a substantial part of its income from non-member sources.

TAXPAYER'S POSITION:

The Organization has agreed to the proposed revocation of their tax-exempt status as described in IRC
Sec. 501(c)(7).

GOVERNMENT'S POSITION:

It is the Government's position; the Organization does not qualify for exemption under IRC Sec. 501(c)(7)
as a social club.

Public Law 94-568 amended the “exclusive” provision to read “substantially” in order to allow an IRC Sec.
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. Senate Report No. 94-1318 2d
Session, 1976-2 C.B. 597 further states: 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.

[Page 9]

Here, the Organization was granted exempt status under IRC Sec. 501(c)(7) and operates an indoor and a
separate outdoor shooting range. The Organization has dues paying members. However, the Organization
allows non-members to use the Organization's outdoor shooting range. The Organization has a sign at the
outdoor shooting range entrance, facing the road, that states the range is “open to the public”. The
Organization’s website states that the outdoor shooting range is a public range.

Due to extensive non-member use of the facilities, a review of non-member income was conducted. The
review shows non-member income annually exceeds 15% of the total revenue received by the
Organization.

Form 990 reported income in the 20XX tax year as
follows: Total Reportable Income $ 0
Non-Member Income $ 0

% of Income from Non-Members 0.0%

Upon examination of the Organization's books and records it was determined that the Organization had
underreported non-member income from the use of the club’s facilities by not reporting the income from
non-member participation in club shooting matches as non-member income on the Form 990.

The Organization did not track the shooting match income received from members and non-members
separately. After a review of the Organization’s match sign-in sheets it was determined that most of the
shooting match participants were members except for the ([redacted]) shooting matches.
The Organization provided a spreadsheet of payments received from the online registration system for the
matches that the Organization began using in March 20XX. [redacted], the Organization's treasurer,
agreed to use the member/non-member participation percentage calculated from the spreadsheet to
determine the amount of [redacted] match income that was non-member income. Analysis of the spreadsheet
showed the member/non-member participants by percentage as 0.0% non-members and 0.0% members.

As a result of including 0.0% of the [redacted] shooting match income, the 20XX Form 990 revenues should be
reflected as follows:

Form 990 income (after correction) in the 20XX tax year as
follows: Total Reportable Income $ 0
Non-Member Income $ 0

% of Income from Non-Members 0.0%

The Form 990, for the tax period ended December 31, 20XX, was opened for examination as a result of
the findings in the Form 990, for the tax period ended December 31 [redacted] examination. Analysis of the
return showed the Organization received non-member income in excess of 15% of the total revenue
received by the Organization.

Form 990 reported income in the 20XX tax year as
follows: Total Reportable Income $ 0
Non-Member Income $ 0

% of Income from Non-Members 0.0%

[Page 10]

In 20XX, the Organization continued to not track the shooting match income received from members and
non-members separately and it was determined that the Organization had underreported non-member
income from the use of the club’s facilities by not reporting the income from non-member participation in
club shooting matches as non-member income on the Form 990, for the tax period ended December 31,
20XX. The member/non-member participation percentage that was agreed upon by the Organization was
used to allocate non-member income from non-member match participation. Thus, the Form 990, for
the tax period ended December 31, 20XX, should be as follows:

Form 990 income (after correction) for the 20XX tax year as
follows: Total Reportable Income $ 0

Non-Member Income $ 0

% of Income from Non-Members 0.0%

Therefore, it has been determined that the Organization received more than 15 percent of gross receipts
from non-member use of the Organization's facilities during 20XX (0.0%) and 20XX (0.0%), which places
the Organization’s exemption at risk for revocation. The facts and circumstances must be considered to
determine whether the Organization continues to qualify for exemption.

Facts and Circumstances

The Committee Reports for Public Law 94-568 (Senate Report No. 94-1318 2d Session, 1976-2 C.B. 597)
states that if an organization has outside income in excess of the 35-percent limit (or 15-percent limit in the
case of the gross receipts derived from nonmember use of a club’s facilities), all facts and circumstances
are to be taken into account in determining whether the organization qualifies for exempt status. In
Pittsburg Press Club v. United States, the court considered five factors in its facts and circumstance
analysis.

The five factors established in Pittsburgh Press Club V. United States are applied below:

• The actual percentage of non-member receipts and/or investment income

◦ 2017 — 46.5%, 2018 — 40.9%. Here, the percentages are considerably higher than the 15%
allowed in the Code.

• The frequency of non-member use of the 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 non-member income arising from frequent use by nonmembers).

◦ Here, the Organization permits almost unrestricted use of its outdoor shooting range. The
range is open and available for public use on most days of the year. The non-member
income is not generated from a single or non-recurrent event but from frequent use by non-
members of the Organization’s facilities.

[Page 11]

• The number of years the percentage has been exceeded. (The record over a period of years is also
relevant. The higher percentage in one year, with the others 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).

◦ Here, the Organization has exceeded the 15% gross receipts standard for non-member
income on a continuous basis for the last 0 years as reported on the Organization’s Form
990, in the chart below:

CHART DELETED

As it was determined above, the 20XX and 20XX gross non-member receipts were
underreported. Based on the determination for 20XX and 20XX, the actual non-
member income percentages are higher than shown in the table above.

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

◦ The purpose for which the club’s facilities were made available to nonmembers was for the
general public to use the outdoor shooting range for a price competitive with local shooting
ranges, like any other for-profit enterprise.

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

◦ Here, it was determined, upon examination, that the costs directly attributable to non-
member use of the outdoor range are minimal. Even after establishing a reasonable
allocation method to allocate the Organization’s expenses to non-member income the
Organization still showed a profit from non-member use. The profits derived from non-
member income inure to the Organization’s members to pay for things that would otherwise
be paid for by the Organization’s members such as club expenses or capital improvements.

The facts and circumstances test completed above, in accordance with the court case Pittsburg Press Club
v. United States, show that the Organization is operating in a manner consistent with a for-profit business.
The Organization advertises and makes its outdoor range available for public use. Year after year, the
Organization receives more than an insubstantial part of its gross receipts allowed by the Internal Revenue
Code from outside its membership and the profits inure to the Organization’s members.

[Page 12]

Therefore, it is the Government's position that the Organization is no longer operated exclusively for the
pleasure and recreation of its members and is not exempt under IRC Sec. 501(c)(7).

CONCLUSION:

It has been determined the Organization does not meet the requirements for recognition of tax exemption
under IRC Sec. 501(c)(7). The non-member income far exceeds the limitations established in Public Law
94-568. The Organization’s continuous dependence on non-member income to fund the Organization
constitutes private inurement to its members which precludes tax exemption under IRC Sec. 501(c)(7). The
Organization is no longer operated exclusively for pleasure, recreation, and other nonprofitable purposes.

[redacted], no longer meets the requirements to qualify as exempt from
federal income tax under IRC Sec. 501(a) as described in IRC Sec. 501(c)(7). Therefore, its exempt status
under 501(c)(7) of the Internal Revenue Code will be revoked effective January 1, 20XX.

As a taxable entity, the organization is required to file Form 1120, U.S. Corporation Income Tax Return
for the periods open under statute. Under 6501(g) these periods include the years ending December
31, 20XX, and subsequent tax years.

Additionally, the organization is reminded of the provisions of IRC 277 concerning membership
organizations which are not exempt organizations.