IRS revokes 501(c)(7) social-club exemption for exceeding the nonmember-income limit and failing to keep required records

Plain-English summary

A social club, recognized years earlier as tax-exempt under IRC Section 501(c)(7), was audited and lost its exemption. A 501(c)(7) club is a members-only recreation group, funded mainly by member dues, and it can take in only a limited amount from outsiders: no more than 35 percent of gross receipts from investment income and nonmember use combined, and within that, no more than 15 percent from nonmembers using the club's facilities. Here the club rented out its clubhouse and grounds, hosted open game nights and boot camps that the general public could attend, and offered day passes to anyone. On audit, the IRS found the club's nonmember income from facility rentals exceeded the 15 percent limit. Just as important, the club kept no attendance rosters and no adequate books, so it could not distinguish member from nonmember use as Revenue Procedure 71-17 requires. Without those records the club could not prove it stayed within the limits. The IRS revoked the exemption, meaning the organization must file Form 1120 and pay corporate income tax going forward.

Ruling snapshot

• Question: Should a social club's IRC § 501(c)(7) exemption be revoked when its nonmember facility-rental income exceeded the 15% limit and it kept no records to distinguish member from nonmember use?
• Outcome: Revocation (final adverse determination)
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7)-1; Pub. L. 94-568 (S. Rep. No. 94-1318); Rev. Ruls. 66-149, 60-324; Rev. Proc. 71-17; Pittsburgh Press Club v. United States, 536 F.2d 572 (3d Cir. 1976)

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 12/14/2021
Tax Exempt and Government Entities Taxpayer ID number:

Form:

Number: 202244022

Tax periods ended:
Release Date: 11/4/2022

Person to contact:
Name:
ID number:
Telephone:
Fax:

UIL: 501.07-00

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 income tax under Internal
Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(7), effective

. 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 for other
nonprofitable purposes and no part of the net 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 year ending

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:

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,

[illegible signature]
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

CERTIFIED MAIL — Return Receipt Requested

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
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
Publication 892
Publication 3498

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

Form 886-A Department of the Treasury - Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax identification Number (last 4 digits) Year/Period ended

ISSUE:

1. Whether the , herein referred to as the " ", is operating as a
   social club exempted under Internal Revenue Code section 501(c)(7)?
2. Whether the " " tax-exempt status as an IRC section 501(c)(7) social club, should be revoked?

FACTS:
The organizing document is the Charter and By-laws. The was organized ,
however the proposed charter was filed in the state of in County on
. The exact legal name of the organization in the by-laws and proposed charter is

The purpose stated in the charter were to promote the game of and all
other games which its members may play in conjunction with the game of
The was granted exemption under IRC section 501(c)(7) as of . The original letter of
exemption was not located nor provided neither the original application for exemption. However, the
organization provided a copy of a letter dated that verified the organization's tax
exemption status as social club exempted under IRC section 501(c)(7) with an effective date of

On , the filed Form for the year ending and reported the
following revenues:

Membership dues $
Contributions $
Rental of facilities $
League fees $
Special events $
Tournament fees $
Inventory $

The described its mission on the Form as to promote the game of and other
recreational activities for the pleasure and pastime of its members and the public.

On the was contacted by Letter 3611, informing the organization that its
Form had been selected for examination. The organization was informed that the examination and
request for documents was to verify the organization's continued qualification for exemption under Internal
Revenue Code section 501(c)(7) as a social club and any unrelated business income from investments,
non-member revenue and other sources which may subject the organization to tax under IRC section 512.

On , initial contact via telephone was made with the organization, Executive Director:
. During the call, it was discussed the types of records that were being requested from the
organization on the Information Document Request. The organization was advised on the recordkeeping
requirements for social clubs as outlined in Revenue Procedure 71-17.

Catalog Number 20610W Page 1 www.irs.gov Form 886-A (Rev. 8-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax identification Number (last 4 digits) Year/Period ended

On , a telephone interview was conducted with the Organization's Executive Director,
and Treasurer,

Per the interview, the is currently the oldest and largest remaining in the , with
currently members. Basic annual membership dues in were $ for individuals and $ or $
for a family membership. The also offered Day membership at a rate of $ per day, whereas anyone
can pay a nominal fee to have access to the . Individuals choosing this type of membership were not
granted the same benefits as members who purchased the basic/family memberships. The activities
consist of games for members-unorganized ways, game nights with members, annual
meeting/holiday parties, and tournaments at the district and state level.

The sources of the revenue are membership fees, league fees, rental of facilities, merchandise sales
(such as t-shirts, cups and water bottles) and the annual (fundraiser event).

The organization is governed by a board of directors. The Executive Director, who is also on the Board,
makes the daily decisions for the . The Executive Director must obtain the Board's approval for any
transactions over $

On the submitted the response to information document request. The organization
submitted books, records and bank statements for the year ending . The organization
did not use an accounting system for the tax period under examination.

The leases the facilities from the for a nominal fee, $ monthly. The facilities
consist of a Clubhouse, room and bridge room kitchen, , and
space, which is a space for food trucks, a tent, or outdoor games such as croquet or cornhole. In the
lease agreement between the and the there is a clause that states 'if Licensee
is a club or other organization that is leasing the Premises for a nominal fee, then the Licensee shall
maintain provisions in its charter and by-laws stipulating that among its purposes is the providing of public
services and the Licensee's use of the Premises under the agreement shall be for providing such public
services".

The hosts various events such as boot camps and open game nights whereas the
general public is involved. No records for attendance/rosters were maintained during any of the
organization's events to track members and nonmembers attendance and participation. The organization
submitted all rental agreements for facilities rentals for . It included one contract for that was paid
in and contracts for events that were paid in

Per the initial interview, the rents out the facilities to mostly members. The Executive Director advised
that the intentions of the were to only rent the facilities to members of the however there were
occasions where a rental contract would be executed before membership was initiated/obtained.

Catalog Number 20610W 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
(May 2017) Explanations of Items
Name of taxpayer Tax identification Number (last 4 digits) Year/Period ended

Per the Form , the reported total revenues of $ The reported $ in
gross receipts. The organization reported nonmember or unrelated business income sources as follows:
Form
Part VIII Statement of Revenues
Line 3 Investment
income
Line 6 Net rental
income
Unrelated Business Revenue
Line 12

As per examination of the organization's books, records and review of the Form filed by the
organization, the following is a computation of the organization total revenue and the nonmember
percentage of the total revenue.

NONMEMBER INCOME PERCENTAGE OF TOTAL REVENUE
Form

Nonmember income Nonmember rental of facilities Total nonmember income

Club Facilities

investment income

donations

special events/tournament

merchandise/inventory

TOTAL

Total gross receipts
percentage %

LAW:

IRC Section 501(c)(7) exempts from tax clubs organized for pleasure, recreation, and other non-profitable
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. In general, this exemption extends to social and
recreational 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.

Catalog Number 20610W 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
(May 2017) Explanations of Items
Name of taxpayer Tax identification Number (last 4 digits) Year/Period ended

IRC Section 501(c)(7) exempts from tax: Clubs organized for pleasure, recreation, and other non-
profitable 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 and Social and
recreational clubs which are supported solely by membership fees, dues, and assessments (Treas.
Reg. 1.501(c)(7)-1(a))

Treas. Reg. 1.501(c)(7)-1 states (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).
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.

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.

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

Catalog Number 20610W Page 4 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax identification Number (last 4 digits) Year/Period ended

conclusion reached is that there is a non-exempt purpose and operating in this manner jeopardizes the
organization's exempt status.

Revenue Procedure 71-17 sets forth the record-keeping requirements for social clubs exempt under IRC
Section 501(c)(7) with respect to nonmember use of the club's facilities.

In Pittsburgh Press Club v. U.S., 536 F.2d 572 (1976), 579 F.2d 751 (1978), and 615 F.2d 600 (1980),
the court found that a substantial portion of the club's total gross receipts was from nonmember use of club
facilities (determined to be between 11--17% of gross income). This indicated to the court that the club was
engaged in business with the general public. The court also stated that the taxpayer has an obligation "to
maintain records adequate to establish a right to the tax exemption", 536 F.2d at 576, and in particular to
maintain adequate records which clearly show the frequency of nonmember use and the gross receipts
derived therefrom, Rev.Proc. 71-17, 1971-1 C.B. 683.

TAXPAYER'S POSITION:
To be determined.

GOVERNMENT POSITION:

The cited law above provides criteria for recognition of a tax-exempt organization under IRC 501(c)(7).
Generally, an organization is to be organized and operated exclusively for pleasure, recreation, and other
nonprofit purposes for its members. In general, this exemption extends to social and recreation clubs which
are supported solely by membership fees, dues, and assessments. The is in operation for not only its
members but is available and open to the general public.

In the case of the organization under examination, it was granted exemption in as a social club under
IRC 501(c)(7). IRC 501(c)(7) organizations are limited to the amount of nonmember income that it can
receive and still maintain its exempt status. The nonmember income limitation for facilities rental is up to
15% of the gross revenue received.

In the year of examination, the Club's nonmember income from rental of the facilities was %. The
facts provided about the organization under examination shows that the entity exceeded the nonmember
income limitation. The organization does not qualify for exemption under IRC 501(c)(7). The exemption
status should be changed and revoked.

Furthermore, the did not maintain adequate records to differentiate between member and nonmember
income neither the recordkeeping requirements as set forth in Revenue Procedure 71-17. Revenue
Procedure 71-17 outlines recordkeeping requirements for social clubs. Social clubs must maintain specific
records as to the use of its facilities in order to substantiate a guest-host relationship for determining
member versus nonmember usage.

A club relying on the people or fewer assumption outlined in Rev. Proc. 71-17, Section 3 must
maintain adequate records to substantiate that the group was comprised of or fewer individuals, that
at least of them was a member, and that payment was received by the directly from members or

Catalog Number 20610W Page 5 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax identification Number (last 4 digits) Year/Period ended

their employers. A club relying on the — percent or more member assumption must maintain adequate
records to substantiate that percent or more of the persons in the group were, in fact, members of the
at the time of such use and that payment was received by the directly from members or their
employers. Where payment is made directly to the by the member, the is under no obligation to
inquire about reimbursement.

Additionally, a must maintain books and records for all instances involving use by nonmembers where
the guest-host relationship cannot be assumed. Revenue Procedure 71-17 sets forth a list of information
that is required to be recorded.

Failure to maintain records or make them available to the Service for inspection will preclude use of the
minimum gross receipts standard and audit assumptions outlined in Rev. Proc. 71-17. All income derived
from the use of the facilities would be considered unrelated business income and subject to income
tax. Further, all income that cannot be traced to members is considered to be from nonmember sources
and may be considered unrelated business income and subject to income tax. A could be subjected to
the loss of its tax-exempt status, if it does not keep adequate books and records to show that it qualifies for
exemption.

CONCLUSION:

Based on the above facts and circumstances, and considering the statutory law and rulings cited. The
organization has exceeded the 15% nonmember income limitation. The organization does not qualify for
tax-exemption under IRC section 501(c)(7) and should be revoked. The proposed date of the revocation is

Form 1120, U.S. Corporation Income Tax Return, should be filed for and thereafter if the organization
continues to be subject to income tax.

Catalog Number 20610W Page 6 www.irs.gov Form 886-A (Rev. 5-2017)