IRS revokes 501(c)(7) status of a women's cultural club whose investment income exceeded the limit on receipts from outside the membership

Plain-English summary

A women's club organized to promote cultural, intellectual, and civic activities was tax-exempt as a social club under IRC § 501(c)(7), and the IRS revoked that exemption. A § 501(c)(7) club is supposed to be supported mainly by member dues, fees, and assessments. Public Law 94-568 lets such a club take up to 35% of its gross receipts (including investment income) from outside its membership, and no more than 15% from public use of its facilities, without losing exemption. Here the club's revenue came primarily from investment income (trading securities), and that outside income consistently exceeded the 35% limit. The IRS concluded the club was no longer supported substantially by its membership and revoked the exemption, citing Rev. Rul. 66-149, Rev. Rul. 60-324, and Rev. Proc. 71-17. The final determination (Letter 6337, dated March 5, 2021) makes the earlier proposed revocation final; the club did not provide its position. Once revoked, the organization must file Form 1120 as a taxable corporation.

Ruling snapshot

• Question: Does a social club still qualify under IRC § 501(c)(7) when its investment and other non-member income consistently exceeds the 35% limit on receipts from outside the membership?
• Outcome: Revocation (final adverse determination; no taxpayer position provided)
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7); Public Law 94-568; Rev. Rul. 66-149; Rev. Rul. 60-324; Rev. Rul. 63-190; Rev. Proc. 71-17

Full text (IRS public release)

Department of the Treasury                          Date: March 5, 2021
Internal Revenue Service
Tax Exempt and Government Entities

                                                    IRS Taxpayer ID number:

                                                    Form:

Number: 202226019
Release Date: 7/1/2022                              Tax periods ended:

                                                    Person to contact:
                                                    Name:
                                                    ID number:
                                                    Telephone:
                                                    Fax:
UIL: 501.07-00

CERTIFIED MAIL - RETURN RECEIPT REQUESTED

Dear

Why we are sending you this letter

This is a 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), for the tax
periods above. Your determination letter dated , is revoked.

Our adverse determination as to your exempt status was made for the following reasons: During the tax year in
question, you did not qualify for exemption as a social club described in IRC Section 501(c)(7) because your
gross receipts have consistently exceeded the limitation of 35%, including investment income, from sources
outside of your membership.

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.

What you must do if you disagree with this determination
If you want to contest our final determination, you have 90 days from the date this determination letter was
mailed to you to file a petition or complaint in one of the three federal courts listed below.

How to file your action for declaratory judgment
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.

Please contact the clerk of the appropriate court for rules and the appropriate forms for filing an action for
declaratory judgment by referring to the enclosed Publication 892, How to Appeal an IRS Determination on
Tax-Exempt Status. You may write to the courts at the following addresses:

United States Tax Court          U.S. Court of Federal Claims     U.S. District Court for the District of Columbia
400 Second Street, NW            717 Madison Place, NW            333 Constitution Ave., N.W.
Washington, DC 20217             Washington, DC 20439             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.

Letter 6337 (12-2020)
Catalog Number 74808E

Information about the IRS Taxpayer Advocate Service

The IRS office whose phone number appears at the top of the notice can best address and access your tax
information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate
Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't
working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects
taxpayer rights. Contact your local Taxpayer Advocate Office at:

Internal Revenue Service
Taxpayer Advocate Office

Telephone:
Fax:

Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights,
go to taxpayeradvocate.irs.gov. Do not send your federal court pleading to the TAS address listed above. Use
the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to
file an action for declaratory judgment.

Where you can find more information
Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for
more comprehensive information.

Find tax forms or publications by visiting www.irs.gov/forms or calling 800-TAX-FORM (800-829-3676).
If you have questions, you can call the person shown at the top of this letter.

If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best
time to call, and a copy of this letter.

Keep the original letter for your records.

Sincerely,

Sean E. O'Reilly
Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

Letter 6337 (12-2020)
Catalog Number 74808E

------------------------------------------------------------------------

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

                                                    Date: 01/10/2020

                                                    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:

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.

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.

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,

Director, Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018, 4621-A

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

------------------------------------------------------------------------

Form 886-A                Department of the Treasury — Internal Revenue Service
(May 2017)                            Explanations of Items

Name of taxpayer          Tax Identification Number (last 4 digits)    Year/Period ended

ISSUES:
Whether                              is organized and operated exclusively under Internal
Revenue Code (IRC) §501(c)(7) as a social club? And,
Whether or not                Activities and Revenues are in furtherance of its exempt purpose under
section 501(c)(7)?

FACTS:
The                          is exempt as an organization described in IRC § 501(c)(7) to
provide social, recreational and other related activities to its members. The benefits provided to
the members include enjoyable cultural advancement and fellowship with community involvement
was an integral part of the club. The              included luncheons, bus trips,
while presentations on music were being presented.

The specific and primary purpose of the                    is the formation of a
membership of women interested in promoting interest in cultural, intellectual, and civic activities,
and to further such philanthropic work as the club may desire.

Revenue Sources:

The sources of revenue since 20__ including year ended December 31,
20__ was from investment income and membership dues.

The organization reported the following sources and amounts of revenue on Form 990 for the
periods ended December 31, 20__. The subsequent return for December 31, 20__ has also been
filed.

990 for period 201712
CONTRIBUTIONS, GIFTS GRANTS & OTHER SIMILAR AMOUNTS
Line
8   Contributions, gifts, grants
9   Program service
10  Investment Income
11  Other Revenue
12  Total Revenue

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

Based on conducting an analysis of gross receipts, it has been noted that the organization
received       % from non-members, during tax years ended December 31, 20__, respectively.

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.

Section 1.501(c)(7) of the Regulations provides that, in general, the exemption extends to social
and recreation clubs supported solely by membership fees, dues and assessments. However, a
club that engages in a business, such as making its social and recreational facilities open to the
general public, is not organized and operated exclusively for pleasure, recreation and other non-
profitable purposes, and is not exempt under section 501(a).

Clubs must be organized for pleasure, recreation and other non-profitable purposes. The Service
has held that these other nonprofitable purposes must be similar to providing pleasure and
recreation. Sponsoring activities of a noncommercial nature can lead to denial or revocation if the
activities are not similar to providing pleasure and recreation. In Rev. Rul. 63-190, 1963-2 C.B. 212,
an organization was held not to qualify for exemption under IRC 501(c)(7) where it provided its
members with sick and death benefits.

Social and recreational clubs were originally granted exemption in the Revenue Act of 1916.
Congress stated that the reason for their exemption was that the experience of the Treasury
Department had been that securing returns from clubs had been a source of expense and
annoyance and had resulted in the collection of little or no tax. By contrast, the justifications offered
by Congress for the majority of other exempt classifications are that they provide some sort of
community service or public benefit.

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
"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.

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

(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.

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.

TAXPAYER'S POSITION

Taxpayer's Position has not been provided.

GOVERNMENT'S POSITION

Based on the examination results and the facts listed under the heading of this report,
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 recreational clubs which are supported solely by membership fees, dues, and
assessments.

The examination results and the information returns filed by                for fiscal
year ended December 31, 20__ and 20__ show that       % of the revenues came from investment
income, trading securities. Therefore, it precludes                     from tax
exemption under IRC §1.501(c)(7). In addition, the following revenue rulings supports this
conclusion.

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

Rev. Rulings. 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".

The organization has exceeded the 15% non-member threshold as outlined in Public Law 94-568,
on a recurring basis during tax years ended June 30, 20__ and 20__

Sources of Income:

Per our revenue reconciliation from Form 990 return and your books and records including
General Ledger, Balance Sheet, checking account, accounts, we found investment
income as the primary source of income reported. The investment income was recorded on the
following two accounts Account number ( ) and Account
number ( ).

Based on Form 990 and analysis of gross receipts, it was noted that the organization total income
received was from investments (trading securities) for fiscal years ended December 31, 20__
respectively. The primary source of income reported on return and on the books and records
reviewed year ended December 31, 20__

Conduct of an Unrelated Business

The percentage guidelines and facts and circumstances tests apply only to nonmember use of
club facilities. P.L. 94-568 does not allow a social club to include income from sources other than
nonmember use of club facilities and investment income within the percentage guidelines and was
not intended to allow a club to engage in activities previously forbidden. While the law was
intended to increase the allowance of nonmember income from club facilities, it was not meant to
eliminate the prohibition against engaging in nontraditional business. The Committee reports state:

It is not intended that these organizations should be permitted to receive, within the 15 or
35 percent allowances, income from the active conduct of businesses not traditionally
carried on by these organizations.

The conduct of a business "not traditionally carried on" by social clubs should preclude exemption.
An example of a business not traditionally carried on would be the sale of sporting goods to the
general public from a location not physically attached to the club. This has all the characteristics of
a business: solicitation of the general public, a recurring activity, and the conduct of an activity
unrelated to the exempt function of a social club. Current thinking within the Service, although not
yet finalized, is that the phrase "not traditionally carried on" means, in this context, not normally
and usually engaged in by social clubs generally (as opposed to the particular club in question).

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

However, where an activity is recurring, or the club obtained property with the motive of generating
a profit instead of furthering its exempt purposes, then it appears that the resulting income would
not be the type of income Congress intended to exclude and would jeopardize the club's exempt
status.

CONCLUSION

The                          no longer qualifies for exemption under § 501(c)(7) of the Code
since the nonmember income has exceeded the 15% nonmember threshold on a continuing basis.
Therefore, it's proposed that your exempt status under § 501(c)(7) of the Code be revoked
effective June 30, 20__

Should this revocation be upheld, Form 1120 must be filed starting with tax periods beginning
January 1, 20__

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