IRS revokes a social club's 501(c)(7) exemption because it had no members and lived on rentals to the public

Plain-English summary

The IRS revoked a nonprofit's recognition as a tax-exempt social club under section 501(c)(7). The organization had started life as a 501(c)(2) title-holding company that simply owned a building; after it obtained a state on-premises retail license it applied for and received 501(c)(7) social-club status, but nothing about how it operated actually changed. On audit the IRS found the group had no members, no membership list, no member meetings, and no dues or assessments, so it was not organized or operated for the pleasure and recreation of members the way a social club must be. Its money came almost entirely from renting the facility to community groups and the general public and from food, beverage, and other sales, not from members. That independently fails the basic 501(c)(7) test and blows past the limits on nonmember income (a club may draw no more than 35% of gross receipts from outside its membership, and no more than 15% from use of its facilities by the general public). The taxpayer agreed with the government's position. Because the exemption is revoked, the organization must file federal income tax returns.

Ruling snapshot

• Question: Should an organization keep its 501(c)(7) social-club exemption when it has no members and derives its income from renting its facility to the public?
• Outcome: revocation (final adverse determination; exemption revoked)
• Key authorities: IRC §§ 501(c)(7), 501(c)(2), 7428; Treas. Reg. § 1.501(c)(7)-1; Rev. Proc. 71-17; Rev. Ruls. 58-589, 66-149, 60-324, 55-716, 69-220, 69-635; Senate Report No. 94-1318 (P.L. 94-568); Spokane Motorcycle Club v. United States; Aviation Club of Utah v. Commissioner

Full text (IRS public release)

Transcriber's note: this is a scanned adverse-determination package, comprising a Letter 6337 final revocation letter, a Letter 3618 proposed-revocation letter, and a Form 886-A audit report ("Explanation of Items"). The repeating Form 886-A page-header furniture has been removed and each page replaced with a bracketed [Page N] marker; the cover letters keep their own footers. The report is heavily redacted, so many names, dates, dollar amounts, and percentages appear as blanks, and substantial OCR artifacts remain in that portion; wording is reproduced as scanned. Obvious OCR misreads have been corrected.

Department of the Treasury Date: May 10, 2021
Internal Revenue Service

Tax Exempt and Government Entities

Taxpayer ID number:
Form:
Number: 202230014        Tax periods ended:
Release Date: 7/29/2022  Person to contact:
Name:
ID number:
Telephone:
UIL: 501.07-00           Fax:

CERTIFIED MAIL - RETURN RECEIPT REQUESTED:
Why + we are sending you this letter
This is a final determination that you don’t qualify for exemption from federal i income tax under Internal

Revenue Code (IRC) Section 501{a) as an organization described i in IRC Section SOLE), for the tax
_ periods above. Your determination letter dated is revoked.

Our adverse determination as to your exempt status v was s made for the following r 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 any 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 i income test for tax year ending

7 Organizations that are not exempt under IRC Section 501 generally z are required to file federal i income tax -
returns and pay | tax, where applicable. For further instructions, forms and information please visit www.irs.gov. ae

- 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 ani action n fo
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 TaxCowt = US. Court of Federal Claims US. 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

z Processing of income tax returns and assessments of any taxes due will not be delayed af you file a petition for
declaratory judgment under TRC Section 7428. _

Letter 6337 (12-2020)

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

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, anda copy of this letter.

Keep the original letter for your records.

Sincerely,
heen CC OR the,
» Sean E. O'Reilly a

_ Director, Exempt Organizations Examinations

Enclosures: _
Publication]
Publication 594
Publication 892

Letter 6337 (12-2020) _

_ CERTIFIED MAIL — Return Receipt Requested

Internal Revenue Service

_ Tax Exempt and Government Entities

Dear

Why you’re receiving this letter —

If you agree —

Date:
03/03/2020

- 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:

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 CIRC) Section 501 (7).

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 youa aren't an

organization described i in IRC Section 5 O1(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 | and 2, above, you'll still be able to file a protest with IRS Appeals. Office afer

‘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)

4, Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) .
if you feel the issue hasn’t been addressed i in published precedent or has been. treated inconsistently by the
IRS. os

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 i 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 “1 issue a final

_ adverse determination letter.

Contacting the Taxpayer ‘Advocate Office i 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 f 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, Form 4621-A
Pub 892, Pub 3498 | :

Letter 3618 (Rev. 8-2019)

ISSUE (8) :
ae -” or “organization”) qualifies for-tax-exempt st $s
on 501(c) (7) of the Internal Revenue Code due to
failure to meet statutory requirements, as a social club?

Additionally, is organized and operates pursuant to an
organization exempt under Section 201 Co) (7) of the code?

2. Whether . oo Af met statutory requirement as social

- club -and function asa’ sot (c ) (7). exceeded & of unrelated
business income. ;

FACTS: .

The > . a has been in existence
. since 7 ‘of . _ They were incorporated under the “
State of © © (on: . .- The purpose of | _
as, stated in the by-laws, is “to. hold and maintain prop - ;
commercial: purposes and to provide a home for the : ; 7
; Also, its purpose is to lease space to other community
groups, operate a ane" and. meeting place for. members ;
was initially established as IRC se (2). in

ng title for facility
including the grounds and building. © .
in _. Shortly after the a Submitted a new

application for IRC section 501(c 2) (7) in - Ina etter dated
, The ns = co, Inc
was granted exemption under IRC section. 501(c) (7).. As. stated in the
application, as a: result, they would be able to provide its facility
to a larger range of events suchas soci . _ of no
, and the public. | also stated at
no time would’ activities exceed 6 non- |.) : es. According
to Form  — _, _~the organization incorporates all the members of the
of a for no additional fee.

' Treasury Regulation sactiai: 1.501(c) (7)-1 : states that the exemption
provided by section 501(a) for organizations described in section |
S0l(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

[Page 1]

general, the 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.

In order for. as to meet the statutory requirement as a
social club p~ ion 501(c) (7), it must accomplish the

- following: |

e Must consist of membership organizations supported by dues, fees,.
charges or other funds paid by their members. .

* Organized and operating per the exempt purposes of IRC §
S01 (c) (7).
e The members are bound together by a common objective directed
. : toward pleasure, recreation or similar nonprofit purposes. ;
e The activities are in furtherance of pleasure, recreation or
other similar nonprofit purposes.
@. There is no inurement of income.
e All unrelated trade or business income has heen’ properly reported
* on: the Form 1 Exempt ‘Organizations Business Income Tax
‘Return. So ; ;
e Limits its nénibérship to the members of a particular religion ‘in
order to further its teachings or principles, and not to exclude
individuals of a particular race or color under IRC § 501 (i) (2). —
¢ Limit its membership to individuals of a particular national ——
origin without jeopardizing its exemption.

e Restrict its membership toa particular political party or to
homeowners ina specific housing development. :

‘Since its existen ; a 0 . membership income and no
member listing.- : a , according to the by-laws,
-are only members me Of OF , _—
are _ fforded  embership in this organization.
However, | : recorded no membership list from the ~

of -, no member nembership
activities from said organization. — .

or recreations for pleasure. The in

are not from membership dues, nor is it from revenue ~
through club facility use and activities. On the contrary, revenue is

raised solely through - rentals, - sales, - sales and
sales.

[Page 2]

operates a sg. £t. building which includes an

oe ' podium, storage closets, huge kitchen
stools, tables, chairs, televisions and pool table.

has active license issued by the state authori ;
7 The license type is Retail . = On,

Premises which permits the. sale .and | . of :

The Form ~ reflects all income for food and lounge.sales to be. :
related exempt function. However, the gross rents totals according to-
Form — shows-as more $% of . -s included non-members
income. That % is based on perception prior to audit,
‘that the members from. were their _
‘members. Lease agreements includes cost of sold, however no

separation for non-member . .. Sales reflected.

_ advertises through |
of mouth. Also, at’ the edge of the sidewalk where the
pbuilding is located stands .a tall, - flashing billboard advertising for
weddings and other events call. No specification for “members: only”
an advertisement. .

During the exit interview held _ oy the Power. of ‘attorney.
stated that. agreed with facts ‘and disposition of the case. She
indicates that the organization does not meet the requirements of a
501(c) (7), which was also confirmed in the letter. dated

LAW: -

Internal Revenue Code —

IRC section 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.. :

IRC Section 501 (c ) (2). provide. exemption from income taxes for
corporations organized for the exclusive purpose of holding title to
property, collecting income therefrom, and turning over the entire
amount thereof, less expenses, to an organization which itself is
exempt under Section 501 (a).

Treasury Regulations

[Page 3]

Treas. Reg. §1.501(c) (7)- 1(a) further provides that 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.

A social club that. opens its facilities to the public is deemed to be
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. [Reg. §1.501(c) (7)-
~1(b)] von ; .

Treas. Reg..§ 1.501 (c) (7)-1 :
(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 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.

~ (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 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
_ tub of its exemption.

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

[Page 4]

pleasure, recreation and other | non- profitable purposes, and is not
exempt under section 501(a). | , -

[*Treas. Reg. §1.501(c) (7)-1 has not been updated to reflect P.L. 94-
568 which changed “exclusively” to “substantially ali”.] .

It was ‘the enactment. of: P.L. 94- 568 in 1976 which changed the term
“exclusively” to “substantially all”. This change, as incorporated in

the. IRC allows for an insubstantial amount of income from activities
that do not further the club’s exempt purposes. These activities which
constitute an unrelated trade or business include the use of the club
facilities by the. general public.

senate Report | No. 94-1318 (1976), 2a Session, 1976-2 C.B. 597, at page
599 defines. “substantially all” and explains that a social club is
permitted -to receive up to 35% of its gross receipts, including.
investment ‘income,. from sources outside of its membership without.
losing its tax-exempt status. It is also intended that within this 35%
not more than 15% of the gross. receipts should be derived from the use
of a social club's facilities or services by the general public
(nonmembers) « :

Treas. Reg. $l. 501(¢ ) (2 )-lLta ) further provides that a corporation ;
described in Section 501(c) (2) cannot be exempt under Section 501(a) —
if it engages in any business other. than that of holding title to
property and collecting income therefrom.

Revenue Procedures

Rev. Proc. 71-17, 1971 WL 26186, 1971-1 C.B. 683 sets forth guidelines

' for determining the effect gross receipts derived from use of a social
_ Club's facilities by the- general public have on the club's exemption
from federal income tax under section site )(7) of the Code.

The club must maintain books ‘and records of each such use and the
amount derived therefrom. This: requirement. applies even though the

member pays initially for such use. In each instance the record must.
contain the following information: _

1. The date;
2. The total number in the party;
3. The. number of nonmembers in the party;
4. The total charges; : :
' 5. The charges attributable to nonmembers;
6. The charges paid by nonmembers;

[Page 5]

J. Where a member pays all or part of the charges attributable to
nonmembers, a statement signed by the member indicating whether he has
been-or will be reimbursed for such nonmember use ‘and, if SO, the

amount of thé reimbursement:

8. Where the member's employer reimburses» ‘the mémber or makes direct.
payment to the club for the charges attributable to nonmembers, a

' statement signed by the ‘member indicating the name of his employer;
the amount of the payment. attributable to the nonmember use; the
nonmember's name and business or other relationship to the member; and ~
the ‘business, personal, ‘or social Purpose of the member served by ‘the
nonmember use. —

9. Where a ‘nonmember, other than the enpidyer: of ‘the member, make’:

payment to the club or reimburses a member and a claim is made that

' the amount was paid gratuitously for the benefit of a member, a
statement. signed by the. member indicating the- ‘donor's name and
relationship to the member, and containing. information .to substantiate
the gratuitous nature. .of the payments” or reimbursement.

Exceptions - to. these record keeping requirements are:

“4. Where a group of.eight or fewer individuals, at least one of
whom is a member, uses club facilities, it will be assumed for
audit purposes that the nonmembers are the guests of the
member, provided payment for such use is received by the. club
directly from the member or the member's employer.

2. Where 75 percent or more of a group using club facilities are
members, — ‘it will likewise be assumed for audit purposes that
the nonmembers in the group are guests of members, provided
“payment for such use is received by the club directly from one
or more of the members or the member's employer.

3. Solely for purposes of 1 and 2, above, payment by a member's
employer will be assumed to be for a use ‘that serves a direct
business objective of the employee-member:

Where a club makes its facilities available to. the general public to a
substantial degrée, the club is, not operated exclusively for pleasure,..
recreation, or other non- profitable purposes.

Revenue Rulings .

Rev. Rul. 58-589, 1958- =2CB. 266 examines the ‘criteria for deterinining
_whether an organization qualifies for exemption under IRC section
501(a) as an organization described in section 501(c) ( 1) of the Code.
‘This ruling state 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)

[Page 6]

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.

" 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 Ruling 55-716 states that an organization formed for the
purpose of furnishing television antenna service to its members' 48 not

entitled to exemption from Federal. income tax under section

501(c ) (7)0£ the Internal Revenue Code of 1954 as a club organized
‘exclusively for pleasure, recreation, and other nonprofitable :
“purposes. Furthermore, there are no other provisions of law under
which such an organization may be held to exempt ‘from Federal income

tax. . iy : ;

Revenue Ruling 69-220 states that a social club that receives
substantial portion of its income from the rental of property and uses-

- such . income to defray operating expenses and to improve and expand its
facilities is not exempt under section. 501(c ) (7) of the Code.

Revenue Ruling 69- 635 states 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
: section 501 (c) (7) of the Code. ;

Court Cases

In Spokane Motorcycle Club v. United States, 222 F.Supp. 151, the
court ruled that refreshments, goods, and services furnished to .
members of a charitable, nonprofit corporation from.business  —
enterprise net profits constituted benefits inuring to individual
members, and, therefore, corporation was not exempt from federal
income tax. Judge Powell further stated, “But it is clear that when a

. club, otherwise exempt, engages in a business from which it derives
profits from outside sources wholly disproportionate to its nontaxable
purposes, and such profits inure to the benefit of its members in the
nature of permanent improvements and facilities, it loses its exempt
status under the definitive provisions of the statute. It should be
noted that to be. exempt. from taxation, the club must not. only be

[Page 7]

organized exclusively for pleasure, recreation and other nonprofitable

- purposes, but it must be operated exclusively for those purposes as
well.”

In Aviation Club of Utah v. Commissioner of Internal Revenue, 162 F.2d
984, the court upheld the position taken by the tax court ina
previous ruling whereby the income received by the club from non-
exempt activities was so disproportionate to the income received from
“exempt purposes that the club lost its exempt status. Judge Murrah
invoked the same concept as that in Spokane Motorcycle Club v. United
States, whereby if a club. engages in a business from which it derives
‘profits from outside sources wholly disproportionate to nontaxable
purposes, and such profits inure to the benefit of its members in the
nature of permanent improvements and facilities, the club loses its
exempt status. — .

‘GOVERNMENT’ S$ POSITION:

Tesue 1

As stated in the ‘facts and ‘law of this document earlier, Treasury. ;
Regulation Section 1.501(c)(7)-1 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, the 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.

= her had a club with members or club organized and
co ce - for pleasure, recreation, or club activities.
The organizatio . originally established to hold title to building |

under IRC Section 501(c c)({2): Only after acquisition of the

license in  - , they requested exemption under IRC Section 501(c) (7)

in. _ .. However, nothing else was change structurally in. the

organization or’operation. of the organization. They continued to

Operate as a 501(c)(2) since inception. At the request of the
organization, the Power of Attorney on ‘requested to

restructure its operational, and organizational activities in order ‘to

[Page 8]

meet the statutory requirements” and keep their exemption under IRC
Section 501{(c) (7). . ; ;

Treas. Reg. 1.501(c) (7)-1(a) states IRC Section 501(c) (7) exempt from
-tax clubs organized for pleasure, recreation, and other non- profitable
purposes, substantially all the activities of which are for such |
purposes, and. no part of the net earnings: of which inures to the
benefit of any | ate shareholder. Social and recreational clubs |
‘solely by membership fees, dues, and assessments.
operates with no member listing or membership.
. ; ; from dues or assessments to members. Rev. Rul,
66-149 support — osition stating that -a social club is not exempt
under Code section SO1l(c) (7) if the organization regularly derives a
substantial part of its income from non-member sources, such as
investment income. The organization’s revenue primarily derives from
rental of the from ©. of and general public,
sales, - and sales. _ =

ike the organization in Rev. Rul. 55-716, simply

and by selling - . The organization only
activities cons of the rental, sale ‘and of
You have no member events and that is not exempt under section 501 (a ).

Clubs statutory requirements “mst be organized for pleasure,
“recreation and other non-profitable purposes. The IRC Section
S01(c) (7) has held that these other nonprofitable purposes must be
similar to providing pleasure and recreation. Sponsoring activities
_non-profitable' nature. can lead to denial or revocation if the
activities are not similar to providing pleasure and. ‘recreation. A
club is not exempt if it does not> provide pleasure and recreation on a
profitable basis. . Evidence that a club may be operating on a
profitable basis exists if: Membership - requirements are broad or
vaguely stated, and the initiation charges or dues are ‘so low that
one-time or temporary use of the facilities by the general public is.
encouraged. | The organization did not report membership dues or any
other income from the members: of the organization. ;

It is. the government’ s position that ; does not meet the
statutory requirements. of 501(c VT). use it does not
have members, does not have member listing, does not have member

meetings, does: not have dues or ‘assessments, does not have activities
for pleasure, recreation, or commingling. The facility was used only.
for non-members’ activities which is not in accordance to -IRC_ Section

501(c) (7) exemption requirements.
Issue 2

[Page 9]

Section 501(c ) (7) social club can receive up to % of their gross

receipts, including investment income, from sources outside their
membership without losing their exempts status. Within the 3, not
more than % of gross receipts should be derived from the use of the
social club’s. facilities or services by the general public (non-
members). Social Clubs may exceed these thresholds. Senate Report No.
94-1318; 94 Congress, 2d Session; H.R. 1144, which is the basis for
the 15/35 percent non- -member income test, states that for ;
organizations exceeding the 35 percent and 15 percent limitations, a
facts and circumstances test must be applied when considering
revocation. ; .

Rental income earned from the property does not demonstrate a causal
relationship to the organization and the requirements to be an exempt
social club under IRC 501(c) (7) organization based on the examination

for the year under audit. These incomes combined is  % of the gross
income for the year under audit. This income is well in excess of

both %$ limitation on non- “member income and $ limitation on.
investment income. ;

imilar to the organization in-Rev: Rul. 69-220
for exemption under IRC section 501(¢) (7) because
it receives as . ntial portion of its income from sources other
than members. The club's gross rental income from its commercial
Fenants- -amounts to % of its total gross income.

Based on the information received during the examination, a facts and
circumstances test did not apply in this case, because the
organization had % of non-member income from to present due to
never having members. Reflected below are total income from. =

- Form . ee
and -. Sales | is
| Rental Income
Miscellaneous Tncome _ . 1S

| Total Revenue: - ae ee

[Percentage of non-member income i
‘ &

[Page 10]

To be operated for the purposes describes in IRC section 501(c) (7) of

the code, an organization must have. an established membership of
individuals who meet to make personal contacts and promote fellowship.
The commingling of the members must play a material part in the life
of a tax-exempt social club. Rev. Rul. 69- 635 states that commingling
helps distinguish a SOL (cy (7) social ‘club from a commercial business.

As prescribed ‘in Treasury Regulation section 1. SO1(c c) (7)-1. (b), the.

_ Club is engaging in business activities and is therefore not: organized
and operated exclusively for pleasure, recreation, and other

- nonprofitable purposes. : :

It. is the government’s position | eS - income exceeded |

the 15% threshold for unrelated the income
received during the organization ption including the examination
year were from non-member income. . Hence, the organization does. not

qualify for exemption | under IRC. Section S01(c) (7 ) due to the excess
unrelated business income.

TAXPAYER’ S POSITION:

The organization has agreed to the government’ s position for
revocation. :

CONCLUSION:

The ant ae does not qualify for
exemption from federal. income “bax under IRC, § S01 (c )¢7) because it

‘neither meets the statutory requirements, organized or operates as
such an organization. In addition to this fact, because it does not
meet these basic requirements of social, recreational activities of

. members © or the facility to be use for its members activities, 3 of |
gross income is from non-member sources. This income is well in excess

of both | ‘limitation. on non- “member income and 35% limitation on
investment income.

“Therefore, the exempt status granted to
should be revoked e ctive -

[Page 11]

If revocation is sustained,

is required to f Forms : for the tax years ending
and thereafter.

[Page 12]