IRS revokes 501(c)(7) status of a social club left with no members and only investment income

Plain-English summary

A tax-exempt social club (a subordinate chapter under a parent group exemption) had its 501(c)(7) status revoked after an IRS audit. A 501(c)(7) club must be organized and operated substantially for the pleasure and recreation of its members, and it can take no more than 35 percent of its gross receipts from outside its membership (such as investment income) without losing exemption. The audit found this club had been asked to leave the campus where it operated and, as a result, had no members left at all. With no members and no dues, its income came entirely (100 percent) from investments, far over the 35 percent nonmember-income ceiling. The IRS concluded the club no longer functioned as a members' social club, offered no opportunity for fellowship or commingling among members, and therefore no longer qualified under 501(c)(7). Exemption was revoked effective June 1, and the organization must now file Form 1120 as a taxable corporation. The letter cites Treas. Reg. § 1.501(c)(7)-1, the 35 percent limit added by Public Law 94-568, and Rev. Rul. 66-149 (a club is not exempt if it draws a substantial part of its income from nonmember sources like investments).

Ruling snapshot

• Question: Does a 501(c)(7) social club that has lost all its members and receives income only from investments still qualify for exemption?
• Outcome: Revocation (no members, no member fellowship; nonmember/investment income exceeds the 35% limit), effective June 1
• Key authorities: IRC § 501(a), (c)(7); Treas. Reg. § 1.501(c)(7)-1; Public Law 94-568 (35% gross-receipts test); Rev. Rul. 66-149; IRC § 512(a)(3)(B)

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Date: JUN 22 2022
IRS Independent Office of Appeals

Person to contact:
Name:
Employee ID Number:
Phone:
Fax:
Hours:

Release Number: 202237013
Release Date: 9/16/2022
Uniform Issue List (UIL): 501.07-00

Employer ID number:

Certified Mail

Dear

This is a final adverse determination that you do not qualify for exemption from federal income tax under
Internal Revenue Code (the "Code") Section 501(a) as an organization described in Section 501(c)
of the Code.

We have hereby revoked the favorable determination letter to you dated April 15, 19, and you are no longer
exempt under Section 501(a) of the Code effective June 1, 20.

We made the adverse determination for the following reasons:

This is a final adverse determination that you do not qualify for exemption from federal income tax under
Internal Revenue Code (the "Code") Section 501(a) as an organization described in Section 501(c)(7) of the
Code. Organizations described in section 501(c)(7) of the Internal Revenue Code and exempt from tax under
section 501(a) must be organized for pleasure, recreation, and other non-profitable purposes, and substantially
all of the activities of the organization must be for such purposes. A section 501(c)(7) organization may receive
up to 35 percent of its gross receipts, including investment income, from sources outside its membership
without losing its tax-exempt status. Your organization has no members and the sole source of income is from
investments, which results in excessive nonmember and investment income exceeding 35 percent of your total
income. Accordingly, your organization is not organized and operated exclusively for exempt purposes within
the meaning of section 501(c)(7).

You're required to file federal income tax returns on Forms 1120, U.S. Corporation Income Tax Return. Mail
your form to the appropriate Internal Revenue Service Center per the form's instructions. You can get forms and
instructions by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676).

We'll make this letter and the proposed adverse determination letter available for public inspection under
Section 6110 of the Code after deleting certain identifying information. We provided to you, in a separate
mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the documents attached
that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in
Notice 437.

Letter 1371 (Rev. 7-2020)
Catalog Number 40683R

If you decide to contest this determination, you can file an action for declaratory judgment under the provisions
of Section 7428 of the Code in either:

• The United States Tax Court,
• The United States Court of Federal Claims, or
• The United States District Court for the District of Columbia

You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this
determination letter to you. Contact the clerk of the appropriate court for rules and the appropriate forms for
filing petitions for declaratory judgment. You can write to the courts at the following addresses:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

US Court of Federal Claims
717 Madison Place, NW
Washington, DC 20005

US District Court for the District of Columbia
333 Constitution Avenue, NW
Washington, DC 20001

Note: We will not delay processing income tax returns and assessing any taxes due even if you file a petition for
declaratory judgment under Section 7428 of the Code.

You also have the right to contact 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 877-777-4778.

TAS assistance is not a substitute for established IRS procedures, such as the formal appeals process. TAS
cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a
petition in a United States Court.

If you have questions, contact the person at the top of this letter.

Sincerely,
Commissioner
By
Timothy D Jarvis
Appeals Team Manager

Enclosures:
cc:

Letter 1371 (Rev. 7-2020)
Catalog Number 40683R

Department of the Treasury
Internal Revenue Service
IRS Tax Exempt and Government Entities
Date: April 30, 20[illegible]

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: May [illegible], 20[illegible]

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.

After we issue the final adverse determination letter, we'll announce that your organization is no
longer eligible to receive tax deductible contributions under IRC Section 170.

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

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

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.

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.

For 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,
Denise Gonzalez for
Sean E. O'Reilly
Director, Exempt Organizations
Examinations

Enclosures:
Form 886-A
Form 6018
Pubs 892 & 3498

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

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

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

ISSUE
Should [EO] (hereafter EO) continue to qualify as an organization described in Section 501(c)(7) of the
Internal Revenue Code?

FACTS
EO was originally incorporated under the name . It subsequently filed an amendment changing its name to
on May 18, 19. It submitted Form 1024, Application for Recognition of Exemption under Section 501(a), and
received individual exemption under section 501(c)(7) with effective date April 15, 19 on December 28, 19 in the .

In March 19 the EO became a subordinate organization under group exemption number . The parent
organization, , is exempt under section 501(c)(7).

The EO's stated purpose is the maintenance of , known as " ", for the benefit of at .

The EO's January 21, 20 response to Information Document Request (IDR) #1, requesting membership
information states that "there are currently no members of the ". The EO's narrative also states: "In 20 , the
Chapter was asked to leave campus because of violations of certain college rules (social gatherings that were
not within the parameters set forth by ) and, as a result, there were no longer any members for which the
Chapter could provide services."

No member dues were reported on the organization's return for years 20 and 20. The table below summarizes
the income reported in years 20 (year under audit) and 20 (inspected return)

Year ending May 31 20 20
Member Dues $ $
Investment Income
Total Revenue (line 12 of Form __)
Percent of Total Revenue % %

The parent organization's website lists all subordinates and their status at . On that page, the is listed with a
Status of " ".

The website of at states the following with respect to the EO's building on campus:

LAW

Section 501(a) of the Internal Revenue Code exempts from taxation organizations described at
subsection 501(c)(7) as clubs organized for pleasure, recreation, and other non-profitable purposes,
substantially all of the activities of which are for such pleasure, recreation, and other non-profitable
purposes and no part of the net earnings of which inures to the benefit of any private shareholder.

Section 1.501(c)(7)-1 of the Income Tax Regulations states in pertinent part, that:

(a) The exemption provided by § 501(c)(7) of the Code applies only to clubs which are
organized and operated exclusively for pleasure, recreation, and other non-profitable
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 that 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 their products, is not
organized and operated exclusively for pleasure, recreation, or social purposes.

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.

(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; 1966-1 C.B., holds a social club as not exempt from Federal income tax as
an organization described in IRC § 501(c)(7) of the Internal Revenue Code of 1954 where it derives a
substantial part of its income from non-member sources such as, for example, dividends and interest
on investments which it owns.

Internal Revenue Code Section 512(a)(3)(B) states that for purposes of subparagraph (A), the term
"exempt function income" means the gross income from dues, fees, charges, or similar amounts paid
by members of the organization as consideration for providing such members or their dependents or
guests goods, facilities, or services in furtherance of the purposes constituting the basis for the
exemption of the organization to which such income is paid. Such term also means all income (other
than an amount equal to the gross income derived from any unrelated trade or business regularly
carried on by such organization computed as if the organization were subject to paragraph (1)), which
is set aside for a purpose specified in section 170(c)(4).

TAXPAYER'S POSITION

Unknown at this time

GOVERNMENT'S POSITION

An organization exempt from federal income taxes as described in IRC section 501(c)(7) must be a
membership supported organization which provides the opportunity for personal contact between its
members and must meet the gross receipts test in order to maintain its exemption. In order to meet
the gross receipts test, an organization can receive up to thirty-five percent (35%) of its gross
receipts, including investment income, from sources outside its membership without losing its tax-
exempt status. Within this 35% amount, not more than fifteen percent (15%) of the gross receipts
should be derived from the use of a social club's facilities or services by non-members.

Based on the examination, the EO 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 recreation clubs which are supported solely by membership fees, dues, and assessments.

Rev. Rul. 66-149 supports this position stating that a social club is not exempt under Code section
501(c)(7) if it regularly derives a substantial part of its income from nonmember sources, such as
investment income.

Per Treas. Reg. Section 1.501(c)(7)-1(a), substantially all of the organization's activities are not for
pleasure, recreation, or other nonprofit purposes. All of its income is derived from non-member
sources and it has no members.

The EO reported no member dues and investment income comprised 100% of their gross income in
the year ending 20. Inspection of the EO's return for year-ending 20 shows that, again, no member
dues were reported and investment income was % of gross income. The EO exceeded the 35% non-
member threshold as outlined in Public Law 94-568.

Accordingly, it is proposed that the EO should be removed from the parent organization's group
exemption number effective June 1, 20.

CONCLUSION

no longer qualifies for exemption under § 501(c)(7) of the Code as there are no members, no
opportunity for fellowship or commingling of members exists and nonmember income has exceeded
the 35% investment income threshold on a continuing basis.

Accordingly, the EO is not entitled to tax exemption under 501(c)(7) of the Code and should be
removed from the group exemption, effective June 1, 20. Form 1120, U.S. Corporation Income
Tax, should be filed for tax year ending , 20 and thereafter.

You have the right to file a protest if you disagree with this determination. To protest, you must
submit a statement of your position and fully explain your reasoning within 30 days from the date of
this letter. Details of filing a protest can be found in the enclosed publications. We will consider
your statement and decide if that information affects our determination. If your statement does not
provide a basis to reconsider our determination, we will forward your case to Appeals Office.

If you agree with this conclusion, please sign and return the enclosed Form 6018.

Catalog Number 20810W Form 886-A (Rev. 5-2017)