IRS revokes 501(c)(7) status of a golf and country club with excessive non-member income

Plain-English summary

A tax-exempt social club under section 501(c)(7) ran a country club and golf course that was open to the public most days of the year. The audit found the club earned substantial income from non-members: restaurant and bar sales, non-member green and cart fees, advertising signs sold on the course, tournaments open to the public, and renting a house to a non-member. A 501(c)(7) club may receive no more than 35 percent of its gross receipts from outside its membership, and no more than 15 percent from the general public's use of its facilities. The club's own reported unrelated business income already exceeded the 15 percent limit, and the IRS found additional non-member income (advertising, tournaments, and rent) that the club had not reported and had declined to explain in response to document requests. The IRS revoked the exemption for two tax years. As an alternative position, if revocation is not sustained, the club must amend its Form 990-T to add the unreported unrelated business income.

Ruling snapshot

• Question: Should a 501(c)(7) golf/country club lose exemption when non-member income (including unreported advertising, tournament, and rental income) exceeds the 15%/35% limits on a continuing basis?
• Outcome: Revocation for the two examined years (alternative UBIT-adjustment position stated)
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7)-1; Pub. L. 94-568 (S. Rep. No. 94-1318); IRC § 512(a)(3)(A)-(B); Rev. Rul. 66-149; Rev. Rul. 60-324; Rev. Proc. 71-17; IRC § 7428

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities

Date: February 9, 2022
Taxpayer ID number:
Number: 202246014
Release Date: 11/18/2022
Form:
Tax periods ended:
Person to contact:
Name:
ID number:
Telephone:
Fax:
UIL: 501.07-00

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

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
Internal Revenue Service
Tax Exempt and Government Entities

Date: February 3, 2021
Taxpayer ID number:
Form:
Tax periods ended:
Person to contact:
Name:
ID number:
Telephone:
Fax:
Hours:
Manager's contact information:
Name:
ID number:
Telephone:
Response due date:

CERTIFIED MAIL - Return Receipt Requested

Dear
Why you're receiving this letter

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 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.

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

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.

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 6018, Form 886-A

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

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit Explanation of Items Name of Taxpayer Year/Period Ended

ISSUES:
Whether continues to qualify for tax exemption under
Internal Revenue Code (IRC) § 501(c)(7)?

FACTS:

, hereinafter referred to as " ", was incorporated
under the laws of the state of as a nonstock, nonprofit corporation on purpose as stated in its articles of incorporation and bylaws is:

• To establish, maintain and operate a country club and golf club.
• To build, buy, erect, purchase, rent, lease, own, maintain real estate, buildings
  and all other things of whatsoever kind or nature, suitable, useful and desirable in connection with any or all of the objects and purposes herein set forth.
• The purpose of is to encourage athletic exercises and to promote
  tourism, community growth and development, social intercourse, and to encourage, promote, establish, and manage a Golf Program. Hereby to be known as the " ." This program will be an introduction of the game of golf to the of
  . shall operate on resources generated solely from
  the business or otherwise donated or contributed to
  The Board of Directors, members, or employees of
  shall have no authority to borrow money or otherwise cause
  to become indebted other than in the regular course of conducting business.

An examination was conducted of the organization for the tax years ended and . The audit included an interview, and a review of financial records, minutes, contracts, newsletters and the organization website. The affairs of is governed by the Board of Directors, which consists of unpaid ( ) , elected by membership from its own numbers. ( ) officers are elected by the Board of Directors (President, Vice President, Treasurer, Course Manager and Secretary).

The affairs of the corporation are managed by or under the direction of the Board

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service Page: -1-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit Explanation of Items Name of Taxpayer Year/Period Ended

of Directors. The Board of Directors controls and manages all affairs, property and expenditures of and exercise all of the powers of except such as are expressly prohibited or reserved by the By-Laws. They present an annual budget at the annual meeting for the coming year for approval or rejection by the members. No expenditure above the budget can be made without the approval of the regular members, except as stated in Article VIII of the By-Laws. The Board appoints all committees necessary for conducting the affairs of . The Board of Directors are empowered to employ individuals necessary for the proper operation of the golf course including a golf professional or other individuals to oversee daily play and tournaments and a course superintendent and staff. The Board of Directors recommends the rates and condition of miscellaneous income such as green fees, equipment and shed rentals, and the Board of Directors appoints all committees necessary for conducting the affairs of

has classes of members: Single, Family, Senior( - ), Senior Family, Young Adult( thru), , , Corporate, and Student. The membership requirements and benefits are set forth in bylaws.

Membership is open to any person or business sharing the aims of . Each regular member shall be entitled to one vote in each matter submitted to vote at a meeting of members, but only one vote shall be permitted to be cast for each regular family membership. Membership fees are decided by the Board of Directors, and annual dues, cart, private cart privilege fees and assessments are proposed by the Board of Directors to the regular membership for approval or rejection.

Family membership is limited to husband, wife, and other dependents under years of age, still living at home, and with the approval of the Board, may also include dependent college student who are pursuing a college education full time through the date of graduation.

Student membership has ( ) classes: Student members between the ages of to without voting rights and junior members between the ages of to without voting rights, enrolled in the Golf Program.

The annual meeting of the membership is held each year on such date during the month of as designated by the Board of Directors in the City of for the purpose of electing the Directors and for the transaction of such other business as may come before. The order of business includes reading of minutes, reports and recommendations of officers and directors.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service Page: -2-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit Explanation of Items Name of Taxpayer Year/Period Ended

By the year ended , Members were registered. Dues vary
depending on the membership level. For example, an individual pays $ whereas a corporate pays $ .

Taxpayer files Forms & annually. On Form , Taxpayer reports
unrelated business taxable income ("UBI").

is open for both members and non-members for events, which include
, etc. did separate income between members and non-
members and reported non-member income through Form . There are some accounts, not reported in the , that require further clarification on the membership status of the participants, such as Advertisement Signs, Tournaments, Banquets, Wednesday Night Scramble, Range Sales, and Rental Houses, but has elected not to respond (Information Document Request #6 on Non- member Income)

is open to the public the following days:

Mondays Year Round
Tuesdays through Sundays Year Round
During these times, non-members may participate in several of activities including, but not limited to, different kinds of golf tournaments (e.g.
) and the range. Non-members may enter the grounds of
through an entry gate. In order to participate in these activities, they have only to identify themselves to the employee working the counter in the clubhouse and fill out the sign-in sheet. The counter person then charges them the non-member fee for participating in these activities.

Minutes of meetings and its website indicate that engagement in business, making its social and recreational facilities available to the general public: course rentals, food and drink sales, advertisements, and residential house rental ( )

reported the following sources and amounts of revenue on Form and for the periods ending :

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service Page: -3-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit Explanation of Items Name of Taxpayer Year/Period Ended

Form ____ % UBI

Receipts
Program Service Revenue
Member Green & Cart Fees
Membership Dues & Assessments
Dues
Shed Rent
Advertisement Signs
Tournaments
Course Improvement Fund
UCCC Banquet
Wednesday Night Scramble
Range Sales
Rental House - Soccer Fields
Refunds ( )
Other Revenue
Interest Income
Insurance Claim Proceeds
Gross Sales of Inventory, Less Return and Allowan
Food and Drink Sales
Beer Sales
Misc Income
Miscellaneous Revenue
Non-member Green & Cart Fee
Total

Form ____ %

Receipts
Gross Receipts or Sales
Food and Drink Sales
Beer Sales
Misc. Income
Other Income : Non-member Green & Cart Fees
Total

generated and reported the following non-member incomes:

1. Restaurant and Bar Operation: $
2. Non-member Green and Cart Fee: $

In addition, sold to the public the advertisement spots underneath the signs in each tee box for description of the hole ( ). In Advertisement income of recorded the

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service Page: -4-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit Explanation of Items Name of Taxpayer Year/Period Ended

3. Advertising Signs: $

During the initial interview in , stated that "anybody from
the public can join the tournament without member's invitation." decided not to respond to a request for information on non-member participation to the tournaments ( ). In , recorded the Tournament Income of

4. Tournament Income: $

During the initial interview in , stated that "...in , a
single man rented the entire place and used it [a residence in the Soccer Field] as a place to live." provided a rental contract of the house, signed by a non- member, ( ). In , recorded the Rent Income of

5. Rent Income: $

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.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service Page: -5-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit Explanation of Items Name of Taxpayer Year/Period Ended

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

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

GOVERNMENT'S POSITION:

is open to the public the following days:

Year Round
through Year Round
During these times, received non-member income totaling $ for the tax year ended as reported on Form

The central purpose of social clubs is to provide benefits to members, including access to social and recreational facilities such as club houses, golf courses, and swimming pools. When such benefits are funded by members, exemption has been justified by Congress on the theory that the members will be in the same position as if they had paid for the benefits directly. The practical effect of the exemption is to

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service Page: -6-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit Explanation of Items Name of Taxpayer Year/Period Ended

allow individuals to join together to provide themselves with recreational or social opportunities on a mutual basis without further tax consequences. The individual member is in substantially the same position as if he or she had spent his or her after-tax income on pleasure or recreation without the intervening organization.

Consequently, the exemption for social clubs operates properly only if the club's income is derived exclusively from members. As described in Internal Revenue Code §512(a)(3)(B), Income derived by clubs from outside of their membership (e.g., non-member green and cart fee income), operated to subsidize the recreational facilities or activities for the members, is required to be reported and taxed through Form

Furthermore, where a makes its facilities available to the general public to a substantial degree, is not operated exclusively for the pleasure and recreation of its members. The income is coming from the public or non-members to be used in defraying membership costs. In general, social clubs can receive up to 35 percent of their gross receipts, including investment income, from sources outside their membership. Within the 35 percent, not more than 15 percent should be derived from the use of the club's facilities or services by non-members.

The reported Unrelated Business Income ($ - % of the gross receipts $
) alone exceeds the 15% threshold and would lead to revocation of its exemption status. In addition, received the following non-member incomes which were not included in its return: Incomes from Advertising Signs, Tournament, and House Rental.

We identified that is generating income from selling advertising space in the golf course open to members and nonmembers, which is nontraditional business activities (non-exempt function income). Advertising income derived from members or non-members is unrelated business income under IRC 512(a)(3)(A) because it is not exempt function income. The sale of advertising is a nontraditional business activity because it does not further the pleasure and recreational needs of members or facilitate the use of for recreational or social activity.

Through Information Document Requests, we solicited non-member portion of the tournament income along; however, decided not to respond to the request ( ). Therefore, we considered all of the tournament income as Unrelated Business Income.

We identified a rental of the house to a non-member, . The rental of rooms to non-members primarily serves to provide housing and does not further

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service Page: -7-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit Explanation of Items Name of Taxpayer Year/Period Ended

recreational purposes. A social club that receives substantial rental income and uses that income to defray operating expenses and to improve and expand its facilities isn't exempt under IRC 501(c)(7).

Based on conducting a analysis of gross receipts, received %
and % from non-members, during tax years ending and
, respectively. The percentages would be further increased to
% and % if non-reported Unrelated Business Incomes, such as Advertisement Sign Sales and House Rental, are included in the calculation:

% %
Related Business Income % %
Unrelated Business Income ( NOT Reported) % %
Unrelated Business Income ( Reported)
%
Gross Income

If revocation is not upheld, is responsible for making adjustments to Form for periods ending and , adding the unreported Unrelated Business Incomes.

CONCLUSION:

no longer qualifies for exemption under IRC § 501(c)(7)
because its Unrelated Business Income has exceeded the 15% or 35% threshold on a continuing basis. Therefore, it is proposed that Taxpayer's exempt status under IRC § 501(c)(7) of the Code be revoked for tax years and

If revocation is not upheld, as a result of our examination, we have determined that is liable for making adjustments to add the identified unreported Unrelated Business Incomes to Form

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service Page: -8-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit Explanation of Items Name of Taxpayer Year/Period Ended

Figure 1 Minutes: searching renter (residential area) and hole sponsors (advertisement) Figure 2 Minutes: [illegible] Board contacting local businesses (public) for advertisement Figure 3 Minutes: Selling, serving, and providing alcoholic beverages (self-served) Figure 4 Minutes: Training volunteers to protect the course while serving alcohol during tournaments.
Radio advertisement discussion.
Figure 5 Minutes: Rental payment management (Collection: )
Figure 6 Minutes: Discuss invitation to annual banquet as fundraiser Figure 7 Minutes: Discussion on preparing champion signs to public (for recruitment)

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit Explanation of Items Name of Taxpayer Year/Period Ended

Figure 8 Hosting golf tournaments open to public.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service Page: -10-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit Explanation of Items Name of Taxpayer Year/Period Ended

Figure 9 Raffle winners at the banquet: only are on the membership list ( )

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service Page: -11-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit Explanation of Items Name of Taxpayer Year/Period Ended

Figure 10 Tournament schedule includes non-member tournaments such as

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service Page: -12-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit Explanation of Items Name of Taxpayer Year/Period Ended

Figure 11 and are not on the membership list ( winners)

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service Page: -13-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit Explanation of Items Name of Taxpayer Year/Period Ended

Advertising Signs Sales

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service Page: -14-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit Explanation of Items Name of Taxpayer Year/Period Ended

Tournament Income & Response to Information Document Request #6

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service Page: -15-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit Explanation of Items Name of Taxpayer Year/Period Ended

Rental Income

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service Page: -16-