Revocation of 501(c)(7) social-club exemption where endowment investment income exceeded the nonmember limit

Plain-English summary

The IRS revoked the tax-exempt status of a family genealogical society
recognized under section 501(c)(7). The society existed to research and
publish the history and genealogy of families sharing a surname and to
foster friendly ties among its members. A 501(c)(7) club is meant to be
supported mainly by member dues, and it may take in only up to 35 percent
of gross receipts from outside its membership, including investment income.
On audit, the society's own membership materials said an endowment fund
paid a large share of operating expenses, and its treasurer said
investments were the main source of support. For the two years examined,
investment income (dividends, interest, capital gains) exceeded the 35
percent limit. Because the club drew a substantial part of its income from
investments year after year, the IRS concluded it was no longer operated
substantially for the pleasure and recreation of members and proposed
revocation. Once revoked, the society must file regular income tax returns.
This document combines the final revocation letter (Letter 6337), the
earlier proposed-revocation letter (Letter 3618), and the Form 886-A audit
explanation.

Ruling snapshot

• Question: Does a genealogical society keep its IRC § 501(c)(7)
  exemption when endowment investment income regularly exceeds the 35
  percent nonmember-income limit?
• Outcome: Revoked (taxpayer provided no position)
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7); Pub. L.
  94-568 (Senate Report No. 94-1318); Rev. Rul. 66-149

Full text (IRS public release)

Department of the Treasury                    Date: June 28, 2021
Internal Revenue Service
Tax Exempt and Government Entities            Taxpayer ID number:
Number: 202240023

Release Date: 10/7/2022

Form:

Tax periods ended:

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

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: You have not
established that you are operated substantially for pleasure and recreation of your members or other
nonprofitable 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 exceeded the non-member income test for tax years ending
        and        .

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

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                    Date: March 12, 2021
Internal Revenue Service                      Taxpayer ID number:
IRS Tax Exempt and Government Entities
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.

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.

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


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.

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).

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


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
Form 4621-A
Pub 892
Pub 3498

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


Form 886-A          Department of the Treasury — Internal Revenue Service          Schedule number or exhibit
Explanations of Items
Name of taxpayer          Tax Identification Number (last 4 digits)          Year/Period ended

ISSUE
Whether        continue to qualify for exemption under IRC (IRC) § 501(c)(7)?

FACTS
A compliance examination for the year ending        and for the        return form Short Form Return was
conducted for        (hereinafter, "EO", "Taxpayer", "Organization"). The        is exempt as an organization
described in IRC § 501(c)(7) to provide social, recreational and other activities to its members. The relevant
facts apply. The        was incorporated in the State of        on        . The organization received its exemption in
        by submitting form        exemption application.

Certificate of Incorporation:
Per the organizing documents the purpose for which this        is formed are to awaken an interest in the history
and genealogy of families surnamed        (including all Variations in the orthography of the name); of affording an
opportunity for the presentation of papers etc. which may interest its members and encourage further research;
of recording whatever is honorable in the lives of past and present generations of extending the advantages of
friendly intercourse; of renewing and perpetuating the principles of spiritual and mental freedom for which our
ancestors stood.

Constitution:
The objective of the        is to research and record genealogical data from all sources pertaining to the        ;
to report such information in papers read before the        ; and to publish such information in pamphlet or book
form for distribution to the        membership or to other genealogical societies thus perpetuating the story of the
ancestors of the        and their contribution to the history of the        ,        , and other parts of the World.

Exemption application:
The EO was approved for exemption under IRC code section 501(c)(7) and the determination letter was dated
        .

        return:
The EO form        for        was received on        . The return reflected        on line L of the form and        for
Investment income Line 4 of section Part I. The form        was filed for the year ending        on        .
On Part I of the        under Revenue        was reported for Investment income on line 4 and        was reported on
line 9 for total revenue.

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


Form 886-A          Department of the Treasury — Internal Revenue Service          Schedule number or exhibit
Explanations of Items
Name of taxpayer          Tax Identification Number (last 4 digits)          Year/Period ended

Examination:
On        the EO was mailed Letter 3611 informing the organization that a correspondence audit was opened on
the year ending        . A phone interview was conducted on        with the Treasurer of the EO. During the phone
interview the EO was asked. What is the primary source of income for the organization? The EO stated
Investment accounts. The EO is a membership organization that members pay a        dollar one-time payment
for lifetime or they can pay        dollars every        years. In response to the First IDR request the EO provided a
membership application on        , page        of the application has a written statement that "The National
Organization is maintained by the membership dues and by an Endowment Fund, which pays about        of the
operating expenses. The Endowment Fund continues to grow through donations and Investments." Form 4564
was mailed to the EO on        , informing the EO the audit is to be expanded to include the year ending        .
(Exhibit 1 Membership application pg.2)

Books and Records:
EO provided year end statements of Financial accounts and spreadsheets for all accounts. From the review of
books and records the dividend income was overstated for both years under examination. The EO counted the
qualified dividends separately from the ordinary dividends.

EO has Investment accounts with the investment objective of growth and income for        and the objective
change to growth in        . (see Exhibits at conclusion of report. Exhibit 2 Investment accounts        , Exhibit 3
Investment accounts        and Exhibit 4 Investment accounts        .) The chart below is Gross receipts for years
under examination.

Gross Receipts for Year-ending        
Net Publication Income                                          
Membership dues                                                
Investment Income (Dividends, Interest, Capital Gains, Partnership Income)        
Donation from member                                           
Total Gross receipts                                           
Investment Income percentage                                          %

Gross Receipts for Year-ending        
Net Publication Income                                          
Membership Dues                                                
Investment Income (Dividends, Interest, Capital Gains, Partnership Income)        
Total Gross receipts                                           
Investment income percentage                                          %

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


Form 886-A          Department of the Treasury — Internal Revenue Service          Schedule number or exhibit
Explanations of Items
Name of taxpayer          Tax Identification Number (last 4 digits)          Year/Period ended

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).

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.

Rev. Rul. 66-149, 1966-1 C.B. 146 States a social club is not exempt from Federal income tax as an
organization described in section 501(c)(7) of the Internal Revenue Code of 1954 where it regularly derives a
substantial part of its income from nonmember sources such as, for example, dividends and interest on
investments which it owns. However, a club's right to exemption under section 501(c)(7) of the Code is not
affected by the fact that for a relatively short period a substantial part of its income is derived from investment of
the proceeds of the sale of its former clubhouse pending the acquisition of a new home for the club.

TAXPAYER'S POSITION
Taxpayer's position has not been provided.

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


Form 886-A          Department of the Treasury — Internal Revenue Service          Schedule number or exhibit
Explanations of Items
Name of taxpayer          Tax Identification Number (last 4 digits)          Year/Period ended

GOVERNMENT'S POSITION
Based on the examination, the organization 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 support this position stating that a social club where it regularly derives a substantial part of its
income from nonmember sources such as dividends and interest on investments which it owns, is not exempt as
an organization described in 501(c)(7).

The EO Investment income as stated on the membership application that the Endowment fund pays about        of
the operating expenses. When asked in interview what is the EO main support the EO stated the investments.
For the year ending        the investment income percentage was        % and, in the year, ending        the
investment income percentage was        %. The investment income is from different investment portfolios that are
both invested in growth and income objectives, showing the purpose for the investments are to support the
organization. The organization has exceeded the        % of its gross receipts threshold of investment income as
outlined in Public Law 94-568, on a recurring basis during tax years ending        and        .
Accordingly, it is proposed that the tax exempt status be revoked effective        .

CONCLUSION
        no longer qualifies for exemption under § 501(c)(7) of the Code as your investment income has exceeded
the        % investment income threshold on a continuous basis. Therefore, it is proposed that your exempt status
under § 501(c)(7) of the Code be revoked effective        .

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

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