IRS denies § 501(c)(7) social-club status to a food buying club

Plain-English summary

A group that runs a food buying club applied to be recognized as a tax-exempt social club
under Section 501(c)(7), and the IRS said no. Section 501(c)(7) is for clubs organized for
pleasure and recreation whose members actually mingle, and which are supported mainly
by member dues. This organization's only activity was pooling members' orders for
discounted organic and non-GMO household goods from a single supplier, then distributing
the goods; it had no social or recreational activities, and its sole support was a rebate from
the supplier (a non-member), not dues. Because there was no meaningful commingling of
members and the support came from outside the membership, the IRS concluded the group
does not qualify. This is a final adverse determination: the organization did not protest the
earlier proposed denial within 30 days, so the denial became final, and the group must file
regular federal income tax returns.

Ruling snapshot

• Question: Does a food buying club with no social activities and support from a supplier rebate qualify as a § 501(c)(7) social club?
• Outcome: Denied (final adverse determination)
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7)-1(a); Rev. Rul. 55-716; Rev. Rul. 58-589

Full text (IRS public release)

Transcription note: This determination is a scanned document made up of two letters,
the final adverse determination (Letter 4038) followed by the enclosed proposed adverse
determination (Letter 4034). Per the runbook's OCR proofreading duty, obvious scanning
misreads have been corrected; genuinely unreadable spots are marked [illegible]; blanks
where the IRS redacted identifying details are left as gaps. The scan's "Release Date"
field on the first page is garbled; the index release date is 4/15/2022. Wording is
otherwise reproduced verbatim.

Department of the Treasury                          Date:
Internal Revenue Service                            01/18/2022
IRS   Tax Exempt and Government Entities            Employer ID number:

                                                    Form you must file:

                                                    Tax years:

                                                    Person to contact:
                                                      Name:
                                                      ID number:
                                                      Telephone:
Release Number: 202215016
Release Date: [illegible]/2022                       [ ] 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 800-879-4933 for deaf or hard of hearing) or customer service for businesses at 800-879-4944

Sincerely,

Stephen A. Martin
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


Department of the Treasury
Internal Revenue Service
IRS   PO Box 2508
      Cincinnati, OH 45201

Date: November 30, 2021

Employer ID number:

Person to contact:
  Name:
  ID number:
  Telephone:
  Fax:

Legend:                          UIL:
X = organization                 501.07-00

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 are organized and have been operating as a buying club of individuals and families for over    years, with
your only activity being purchasing household products, specialty items and organic food at a reduced cost.
Your stated purpose is, "To secure for its members, [ . . . ]."

Your members are families interested in reasonably priced, non-GMO, organic foods and products that are safe
for your families and the environment. You place orders with X when there is sufficient demand from your
members, generally once a month, dependent on whether minimum ordering reaches levels to avoid shipping
costs. Orders are combined and sent through your order coordinator who facilitates the process for members;
the order coordinator collects orders, payments, makes deposits and sorts/distributes the order for member
pickup. You receive a rebate from X based on your dollar orders for the year. The rebate is your sole source of
support. You have no recreational or social activities outside of those required for ordering, delivery and
informational updates on new products and healthy choices.

Law

IRC Section 501(c)(7) provides for the exemption from federal income tax for clubs organized for pleasure,
recreation, and other non-profitable 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.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

2

Treasury Regulation Section 1.501(c)(7)-1(a) states that in general, this exemption extends to social and
recreation clubs which are supported solely by membership fees, dues and assessments.

Rev. Rul. 55-716, 1955-2 CB 263, holds that an organization formed for the purpose of furnishing television
antenna service to its members upon payment of a stipulated membership fee and a monthly charge for
maintenance of the antenna was not tax exempt under Section 501(c)(7) of the Code. The term "club," as used
with Section 501(c)(7), contemplates a commingling of members, one with the other, in fellowship. Personal
contacts and fellowship must play a material part in the life of an organization for it to come within the meaning
of the term "club."

Rev. Rul. 58-589, 1958-2 CB 266, discussed the various criteria for recognition of exemption under Section
501(c)(7) of the Code. In order to establish that a club is organized and operated for pleasure, recreation, and
other non-profitable purposes, "there must be an established membership of individuals, personal contacts, and
fellowship. A commingling of the members must play a material part in the life of the organization."

Application of law
You do not meet the requirements of IRC Section 501(c)(7). Your only activity is purchasing items from X and
distributing the items to members. You have no social or recreational activities.

You do not meet the support requirements of Treas. Reg. Section 1.501(c)(7)-1(a). Your only source of support
are rebates you receive from X, a non-member. You are not supported by membership fees, dues, or
assessments.

To be operated for the purposes described in IRC Section 501(c)(7), an organization must have an established
membership of individuals who meet to make personal contact and promote fellowship. The commingling of
the members must play a material part in the life of a tax exempt social club, as described in Rev. Rul. 55-716
and 58-589. With no material commingling of your members, you do not meet the requirements for exemption
under Section 501(c)(7).

Conclusion

Based on the information provided, we conclude that you are not organized for pleasure, recreation or other
non-profitable purposes and there is no commingling of your members. 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

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

3

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

* The following declaration:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I have examined this request, or this modification to the
request, including accompanying documents, and to the best of my knowledge and belief, the request
or the modification contains all relevant facts relating to the request, and such facts are true, correct,
and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven't
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We'll review your protest statement and decide if you gave us a basis to reconsider our determination. If so,
we'll continue to process your case considering the information you provided. If you haven't given us a basis
for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information
in Publication 892, How to Appeal an IRS Determination 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
PO 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

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS
will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K