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

Plain-English summary

A tax-exempt social club under section 501(c)(7) drew a large share of its money
from non-members: banquet food and bar sales, rentals of its hall and equipment
to outsiders, investment income, and reciprocal income from arrangements with
other clubs. A 501(c)(7) club may receive no more than 35 percent of its gross
receipts from sources outside its membership, and within that ceiling no more
than 15 percent from the general public's use of its facilities. The audit found
the club blew past those limits for multiple consecutive years, and that it used
the non-member profits to subsidize member activities. The club had also been
warned in a prior examination to watch its non-member receipts. Because a club
that opens its recreational facilities to the public is not operated for the
non-profit pleasure and recreation of members, the IRS revoked the exemption.
The organization must now file federal income tax returns.

Ruling snapshot

• Question: Should a 501(c)(7) social club lose exemption when non-member income exceeds the 35% (and 15% public-facility) limits for several years and subsidizes member activity?
• Outcome: Revocation (final adverse determination under Letter 6337)
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7)-1(a), (b); Pub. L. 94-568 (S. Rep. No. 94-1318); IRC § 7428; Pittsburgh Press Club v. United States; Polish American Club v. Commissioner

Full text (IRS public release)

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

Date: March 1, 2022
Taxpayer ID number:
Form:
Number: 202246016
Release Date: 11/18/2022
Tax periods ended:
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), 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 non-
profitable purposes and that no part of the earnings inures to the benefit of any private shareholder within the
meaning of IRC Section 501(c)(7). You have made your recreational and social facilities available to the
general public.

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.

[signature illegible]
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: September 27, 2021
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:

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)(3) 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 48373U

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).

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

Sincerely,

For 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 No. or Exhibit
Explanation of Items
Name of Taxpayer Year/Period Ended

ISSUE:
Whether substantial non-member activity and income jeopardize tax-
exempt status.

FACTS:

(" ") is a recognized section 501(c)(7) organization. The
received unrelated business income from non-member banquet food and bar sales, non-
member banquet hall and equipment rentals, investment income and reciprocal income.

The has reciprocal arrangements with the and other in
, , , , and

A thorough examination of the books and records for the fiscal tax year ending
revealed that the received % of its gross receipts from non-member income.

The received %, % and % of its gross receipts from non-member income
during the fiscal years ending , , and , respectively. As
such, the has exceeded the nonmember gross receipts limitation of % in each of the
last years.

The records are maintained in compliance with Revenue Procedure 71-17.

The Form and for the fiscal year ending were examined by the
Internal Revenue Service. The results of the examination of fiscal year ending
included an advisory to monitor its level of non-member receipts to ensure that it complies with
Public Law 94-568. The advisory indicated that organizations exempt under Section 501(c)(7)
jeopardizes its exempt status if it receives gross receipts from non-member sources (defined as
income from passive sources and gross receipts from non-member use of facilities or the sale of
goods to non-members) in excess of % of total receipts. Also, within this % limit, no more
than % of gross receipts may be derived from non-member use of the facilities.

LAW:

Internal Revenue Code section 501(c)(7) provides tax-exemption for social clubs where a social
club has the essential requirement of providing for the recreation of its members. Treasury
Regulation section 1.501(c)(7)-1(a).

However, a social club which makes its recreational facilities available to the public is not
operating for non-profitable purposes. Treasury Regulations section 1.501(c)(7)-1(b).

According to Public Law 94-568, Senate Report Number 94-1318, social clubs are permitted to
receive up to 35 percent of its gross receipts, including investment income, from sources
outside of its membership without losing exempt status. Within this 35 percent limit, not more

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

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.

However, the Senate Report also indicates that even though gross receipts from the public
exceed this standard, it does not necessarily establish that there is a non-exempt purpose. A
conclusion that there is a nonexempt purpose will be based on all the facts and circumstances
including, but not limited to, the gross receipts factor.

The report does not specify any of the relevant facts and circumstances that should be
considered. Other factors may include whether the profits from non-members have been used
to subsidize club activities for members, the frequency of the activity and the profitability of the
activity. The organization may maintain its exempt status if it can show through facts and
circumstances that "substantially all" of its activities are for "pleasure, recreation, and other
nonprofitable" purposes.

In court cases where organizations are revoked for excessive nonmember income, it appears
that the clubs had a previous examination in which they were warned of the problem and had a
chance to correct it. (Pittsburgh Press Club v. U.S.A.; Polish American Club v. Commissioner of
Internal Revenue).

TAXPAYER'S POSITION: Unknown

GOVERNMENT'S POSITION:

For the fiscal year ending , received % of its gross
receipts from non-member income. Therefore, the has exceeded the permissible amount
of non-member receipts of % as outlined in Public Law 94-568 and Senate Report Number
94-1318. In fact, the has exceeded the permissible amount of non-member receipts for at
least the last years.

Additionally, analysis of Form for the fiscal year ending demonstrates that the
non-member activity was used to subsidize member activity as shown in the table below.

                            Gross          Exempt          Non-Exempt

Gross Sales of Inventory $ $ $
Less: COGS $ $ $
Net Sales of Inventory $ ($ ) $

As such, a review of the facts and circumstances demonstrates that the not only exceeded
the 15% non-member income limit, it also used non-member income to subsidize member
activity.

CONCLUSION: tax-exempt status under section 501(c)(7) of the
Internal Revenue Code is revoked as of .

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