IRS denies 501(c)(7) social-club status to a corporation running a seasonal trailer park

Plain-English summary

A corporation applied for tax-exempt status as a 501(c)(7) social club. It owns and operates a seasonal trailer park in which each mobile-home site corresponds to a share of the company's stock, so only the owner of a mobile home on the land can hold a share. It maintains the common grounds, docks, and utility lines, sets rules for how members improve or sell their sites, and is funded by member assessments for taxes and utilities. The IRS issued a proposed adverse determination and made it final after the group filed no protest. To qualify as a tax-exempt social club, an organization must be organized and operated for pleasure, recreation, and other nonprofitable purposes, and fellowship and commingling among members must be a material part of its activities. The IRS found this group runs no recreational programs and exists mainly to manage property for the convenience of its member site-owners, with no evidence of member fellowship or commingling, so it fails the 501(c)(7) test. Because it is not exempt, the group must file federal income tax returns.

Ruling snapshot

• Question: Does a corporation that operates a seasonal trailer park, where each stock share equals a mobile-home site, qualify as a tax-exempt social club under § 501(c)(7)?
• Outcome: Denied (no recreational purpose and no member commingling or fellowship; it merely provides property services for members' convenience)
• Key authorities: IRC § 501(c)(7); Rev. Rul. 55-716; Rev. Rul. 58-589; Rev. Rul. 69-281; Rev. Rul. 69-635

Full text (IRS public release)

Transcriber's note: this document is a degraded scan. Per the runbook's proofreading duty, obvious OCR misreads have been corrected, wording is kept verbatim, and the IRS's redaction blanks are preserved as gaps. Genuinely unreadable spots are marked [illegible]. List bullets appear in the scan as stray letters and are left as-is.

Department of the Treasury Date:
Internal Revenue Service January 4, 2022
I Tax Exempt and Government Entities Employer ID number:

Box 2508
Cincinnati, OH 45201

Form you must file:

Tax years:
Release Number: 202213011 Person to contact:
Release Date: 4/1/2022 Name:
UIL: 501.00-00, 501.07-00 ID number:
Telephone:

L_] Check if 501(c)(3) denial
[ ] Check if valid POA

Dear

This letter is our final determination that you don't 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). 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 the federal income tax forms for the tax years shown above within 30 days from the date of this
letter unless you request an extension of time to file. For further instructions, forms, and information, visit
WWW. irs. gov.

We'll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection after deleting certain identifying information, as required by IRC Section 6110. Read the
enclosed Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our
proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 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 call the contact person shown above If you have questions
about your federal income tax status and responsibilities, call our customer service number at 800-829-1040
(TTY 800-829-4933 for deaf or hard of hearing) or customer service for businesses at 800-829-4933,

Sincerely,

Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Letter 437

Redacted Letter 4034
Redacted Letter 4038

[] Hide blank fields.

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S

e Department of the Treasury
Internal Revenue Service

IRS P.O. Box 2508
Cincinnati, OH 45201
Date: October 26, 2021
Employer ID number:
Contact person/il number:
Contact telephone number:

Contact fax number:

Legend: UIL:

C = State 501 .00-00
D = Date 501.07-00
E = Number

F = Number

x dollars = Amount

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 IRC Section 501(c)(7)? No, for the reasons stated below.

Facts

You were formed on D under the laws of the State of C as a domestic business corporation. Under the
provisions of your Articles of Incorporation, you are formed for the purpose of engaging in any lawful act or
activity for which a corporation may be formed under the Business Corporation Law of C. You are not formed
to engage in any act or activity requiring the consent or approval of any state official, department, board, agency
or other body without such consent or approval first being obtained. Further, you are formed to own, operate,
manage, acquire and deal in property, real and personal, which may be necessary to the conduct of the business.

Your Articles of Incorporation also state that you are authorized to issue up to E shares of no-par value stock,
while your bylaws provide that you have the authority to issue F shares of stock with an authorized value of x
dollars.

Your primary activity is operating a trailer park with F sites on land you own which is opened seasonally. You
stated there is no public use of the trailer park other than for members, their families and friends. Besides the
mobile home sites, there are boat slips offered on a first come first serve basis, and a large field for storage of
boats and utility trailers. Each of the F sites is represented by a share of your stock. Specifically, each share of
your stock represents a legal interest in one of the F mobile home sites. No person can be a shareholder who

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

2

does not have title, either individually or with another, to a mobile home and situated on land with your legal
address.

Per your bylaws, you provide maintenance that is limited to the common grounds of the trailer park to include
water lines and systems and electrical lines and water shut-off valves positioned on each site post. You are also
responsible for any common structures and equipment including the tractor, shed, pump house, docks, cribs,
marina bulkhead, and waterfront patio. Each shareholder/site owner is responsible for any repair actions and all
damages or loss to their own mobile home and fixtures on their site. Shareholders pay equal annual assessment
fees which cover all permits, water and common electric service as well as dock and property insurance,
landscaping, and maintenance costs.

Your bylaws also provide that at time of a mobile home sale, the mobile home must be sold by the seller at
market value. Further, when disposing, of their stock interest, shareholders are obligated to initially make the
sale of their share in you to other shareholders and their family members. If there is no interest from these
preferential parties, the share may be offered to the general public.

Concerning operation of the park, the following apply:

e When a shareholder is replacing their mobile home or making capital improvements, they must gain
your approval to the footprint easements of the site and must comply with all governing rules and
approvals of the town where you are located.

e Replacement activities should be conducted in the off season so as not to disrupt other shareholders sites
and families during seasonal use.

e When a shareholder wishes to make additions and/or structure improvements, including decks, sheds,
porches or modifications on their site, they must get the approval consent of two-thirds of the
shareholders in writing. Specifically, plans for modification must be presented to the board and general
membership for approval. Your board will have the responsibility to review all plans, drawings, etc.
before approval may be given to ensure easement guidelines are met. It will be the shareholder’s
responsibility to present plans and obtain all required permits from the town where you are located, and
to pay all expenses incurred.

You are managed by a Board of Directors, which consists of the President, Vice President, Secretary, Treasurer
and Trustee. Each Board Member must also be a shareholder.

You are funded primarily by membership fees and assessments to members for taxes and utilities. Your
operating expenses primarily include lawn care, maintenance, testing of water and insurance.

Law

IRC Section 501(c)(7) provides exemption 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.

Revenue Ruling 55-716, 1955-2 C.B. 263, held that an organization formed for the purpose of furnishing
television antenna service to its members is not entitled to exemption from federal income tax under Section
501(c)(7) of the Internal Revenue Code of 1954 as a club organized exclusively for pleasure, recreation, and
other nonprofitable purposes. The only activity of the instant organization is the operation and maintenance of a
television antenna system providing television services to its members in their homes. Furthermore, fellowship

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

3

does not constitute a material part of the life of the organization, since the services do not afford an opportunity
for personal contacts and commingling among members receiving such services.

Revenue Ruling 58-589, 1958-2 C.B. 266, sets forth the criteria for exemption under Section 501(c)(7) and
provides 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.

Revenue Ruling 69-281, 1969-1 C.B. 155, held that a social club providing exclusive and automatic
membership to homeowners in a housing development, with no part of its earnings inuring to the benefit of any
member, may qualify for exemption under Section 501(c)(7). The club was incorporated by a housing developer
as a nonprofit membership corporation for the purpose of establishing and operating social facilities, including a
swimming pool, for the benefit of purchasers of homes in the development. Membership in the club is open
only to homeowners in the development, which consists of several hundred family housing units.

Revenue Ruling 69-635. 1969-2 C.B. 126, held that an automobile club whose principal activity is rendering

automobile services to its members but has no significant social activities does not qualify for exemption under
IRC Section 501(c)(7).

Application of law

In order to qualify under IRC Section 501(c)(7), an organization must be 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 inure to the benefit of any private shareholder.

You fail to meet the requirements under IRC Section 501(c)(7). You are not organized and do not operate for
pleasure, recreation or other nonprofitable purposes. Your primary purpose is to maintain ownership of a
property where persons, who wish to purchase a single share of your stock, have the right to domicile their
trailer on a designated site, for use as their seasonal residence. You maintain the property and impose rules on
the members/site owners with respect to how they may use the property while they are in residence. You further
impose requirements with respect to how a member may dispose of their common share. You conduct no
recreational programs.

Further, a social club is generally denoted as having membership and personal contact, comingling, fellowship,
and the sharing of interests and goals. Therefore, the commingling of the members must play a material part in
the life of a tax-exempt social club, as described in Rev. Rul. 58-589 and Rev. Rul. 69-635. In your case,
membership is automatic based on buying a share of stock. There is no evidence that you promote fellowship,
comingling, or personal contact among members. None of the revenue generated from your members is
dedicated for social, recreation or other nonprofitable purposes.

You are similar to the organization described in Rev. Rul. 55-716. The services you provide to members do not
provide the opportunity for personal contacts and fellowship among members which disqualifies you from
exemption under IRC Section 501(c)(7).

You are not operated like the qualifying organization described in Rev. Rul. 69-281 where members in a
housing development had an automatic right to the use of social facilities owned and operated in the
development. You differ in that you do not sponsor social or recreational programs irrespective of whether
members would choose to avail themselves of such an opportunity.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

Your position

You stated that you are exempt as members of the general public can become shareholders by purchase of a
common share and adherence to your bylaws.

Our response to your position

You failed to provide any information that shows you meet the qualifications for IRC Section 501(c)(7). As
explained previously, qualification for exemption under Section 501(c)(7) is premised on the organization being
organized and operated for social, recreation or other nonprofitable purposes. You lack all three purposes. The
fact that the general public may apply for membership is immaterial as to whether you are operating primarily
for purposes described in Section 501(c)(7).

Conclusion

Based on the information provided, we conclude that you are not organized or operated for pleasure, recreation,
or other non-profitable purposes because there is no commingling of members. You primarily provide services
for the convenience of members who reside in the trailer park you operate. Accordingly, you do not qualify for
recognition of exemption under IRC 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

Letter 4034 (Rev. 11-2018)
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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

Letter 4034 (Rev. 11-2018)
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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

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K