IRS disqualifies a self-declared 501(c)(7) club whose members never meet or commingle

Plain-English summary

An organization had been treating itself as a tax-exempt social club under 501(c)(7) without ever getting a formal ruling from the IRS and without being covered by any group exemption. On audit, the IRS found it was really a mail-order membership operation: members pay annual dues and receive a membership package (a card and other items), and the group runs a website, but its members are scattered across the country and never meet, socialize, or commingle. It holds no meetings or events, owns no property or facility, and has a single board member with no other officers. The IRS explains that a 501(c)(7) club must offer members the opportunity for personal contact and fellowship, with commingling playing a material part in its activities (Rev. Rul. 58-589; Rev. Rul. 74-30). Because this group provides no means for members to interact, it fails the operational test and does not qualify as an exempt social club. The IRS disqualified its self-declared exempt status effective a stated date and told it to begin filing federal income tax returns. This document is the final adverse determination plus the underlying audit report (Form 886-A).

Ruling snapshot

• Question: Does a self-declared 501(c)(7) club qualify when its dues-paying members receive only a membership package and never meet, socialize, or commingle?
• Outcome: Revocation (self-declared exempt status disqualified; fails the operational test, no personal contact or fellowship among members)
• Key authorities: IRC § 501(c)(7); Rev. Rul. 58-589; Rev. Rul. 74-30; Rev. Rul. 69-632; Rev. Rul. 70-32

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Tax Exempt and Government Entities
Date: May 10, 2021

Taxpayer ID number:

Form:
Release Number: 202237014
Release Date: 9/16/2022
UIL CODE: 501.07-00

Tax periods ended:
Person to contact:
Name:
ID number:
Telephone:
Fax:

CERTIFIED MAIL - RETURN RECEIPT REQUESTED

Dear

Why we are sending you this letter
This is a final determination explaining why your organization doesn't qualify as an organization described in Internal Revenue Code (IRC) Section 501(c)(7) for the tax periods above.

In the future, if you believe your organization qualifies for tax-exempt status and would like a determination letter from the Internal Revenue Service, you can request a determination by filing Form 1024, Application for Recognition of Exemption Under Section 501(a), or Form 1024-A, Application for Recognition of Exemption Under Section 501(c)(4) of the Internal Revenue Code, (as applicable) and paying the required user fee.

Our adverse determination as to your exempt status was made for the following reasons: You have not established that you are organized and operated exclusively for an exempt purpose within the meaning of IRC Section 501(c)(7). You have not established that you are organized and operated exclusively for pleasure, recreation, and other nonprofitable 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 private shareholder.

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
400 Second Street, NW
Washington, DC 20217

U.S. Court of Federal Claims
717 Madison Place, NW
Washington, DC 20439

U.S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, DC 20001

Letter 6337 (12-2020)
Catalog Number 74808E

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.

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, 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

cc:

Letter 6337 (12-2020)
Catalog Number 74808E

Department of the Treasury
Internal Revenue Service
IRS Tax Exempt and Government Entities
Date: June 25, 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: July 27, 2020

Dear

Why you're receiving this letter

We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that your organization doesn't qualify as an organization described in Internal Revenue Code (IRC) Section 501(c)(7).

This letter is not a determination of your tax-exempt status under IRC Section 501(c)(7) for any period other than the tax periods above.

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

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

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.

In the future, if you believe your organization qualifies for tax-exempt status and would like a status determination letter from the IRS, you can request a determination by filing Form 1024, Application for Recognition of Exemption Under Section 501(a), and paying the required user fee.

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,

Sean E. O'Reilly
Director, Exempt Organizations
Examinations

Enclosures:
Form 886-A
Form 6018
Publication 3498 and 892

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

Department of the Treasury — Internal Revenue Service
Form 886-A
Explanations of Items

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

ISSUE

Does (hereafter the "EO") qualify as a tax exempt organization described in Section 501(c)(7) of the Internal Revenue Code (hereafter the "Code")?

FACTS

is a self-declared tax-exempt organization pursuant to Section 501(c)(7) of the Code. The EO has not been given a ruling or determination letter granting tax exempt status from the IRS, and it is not covered under a group exemption ruling. The EO was organized under State Law in and began filing a Form _, Return of Organization Exempt from Income Tax, in .

The EO's purpose, per its Bylaws, is " ".

On the examiner conducted an interview via teleconference with the regarding the examination of the EO's Form for the tax year ending . During the interview, explained that the EO is supported by membership dues which are collected annually through . Once the membership dues are received, ships the members a membership package which includes a , , membership card, and a . The EO maintains a website that provides the members with information on membership, , and content regarding .

The members of the EO are located throughout the and do not have the opportunity to physically commingle or socialize. There are no meetings or events that provide social interactions amongst the members. is the and the only board member. The EO does not have a vice president, secretary, or treasurer. The EO does not have any tangible or intangible property or any facility for its members to use or for the purpose of comingling or socializing.

LAW
Required purposes

Section 501(c)(7) of the Code allows for federal income tax exemption of clubs organized for pleasure, recreation, and other non-profitable purposes if substantially all of a club's activities are for such purposes and no part of the net earnings from such activities inures to the benefit of any private shareholder.

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

A social or recreational club must provide the opportunity for personal contact between its members and the members must be bound together by a common objective of pleasure, recreation, and other nonprofitable purposes. See Rev. Rul. 74-30, 1974-1 C.B. 137, Rev. Rul. 69-632, 1969-2 C.B. 126, and Rev. Rul. 70-32, 1970-1 C.B. 132.

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

TAXPAYER'S POSITION
The EO has not stated their position.

GOVERNMENT'S POSITION

Based on the examination, the EO does not qualify for exemption as a social club described in Section 501(c)(7) of the Code since the EO does not meet the operational requirement of providing members the opportunity to socialize or establish physical contact per Rev. Rul. 74-30, 1974-1 C.B. 137. Rather, the EO's activities consist of providing members with a membership package that does not include any means of physical or virtual socializing or comingling. The organization does not have any property or facility for its members to use. The EO does not have any meetings and there are no opportunities for their members to commingle or conduct social activities.

CONCLUSION

does not qualify as a tax-exempt entity under Section 501(c)(7) of the Code because it does not provide its members the opportunity for personal contact or activities that bind the members together by a common objective of pleasure, recreation, and other nonprofitable purposes.

Therefore, it is proposed that your self-declared exempt status under § 501(c)(7) of the Code be disqualified effective .

Should this disqualification be upheld, Form must be filed starting with tax periods ending .

If you agree to this conclusion, please sign the attached Form .

If you disagree please submit a statement of your position.

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