501(c)(7) social club loses exemption because its main activity was managing property, not member recreation

Plain-English summary

A tax-exempt social club under section 501(c)(7) lost its exemption after an IRS audit found it was really in the business of managing real estate rather than providing recreation and fellowship to members. The club owned a Lodge and several cottages; the cottages were "owned" by particular members for their exclusive use, and the club's meetings were limited to planning property maintenance and management. The IRS concluded the club failed the "social" test of 501(c)(7) because its primary activity was managing and maintaining property, not commingling and fellowship among members. The IRS also found prohibited inurement: because the cottages were reserved for certain members and membership looked like a formality tied to cottage ownership, the arrangement benefited private individuals. The taxpayer verbally indicated it understood and accepted the findings. The IRS revoked the exemption, so the organization must now file Form 1120 and pay corporate income tax.

Ruling snapshot

• Question: Does a 501(c)(7) social club keep its exemption when its primary activity is managing and maintaining property (with cottages reserved for certain members) rather than member recreation and fellowship?
• Outcome: Revocation (final adverse determination)
• Key authorities: IRC § 501(c)(7); Public Law 94-568; Rev. Rul. 69-635; Rev. Rul. 74-30; Rev. Rul. 70-32; Rev. Rul. 55-716; Rev. Rul. 67-139; Rev. Rul. 66-179

Full text (IRS public release)

Department of the Treasury                       Date:
Internal Revenue Service
IRS Tax Exempt and Government Entities           Taxpayer ID number:

                                                 Form:
Release Number: 202319019                        Tax periods ended:
Release Date: 5/12/2023
UIL Code: 501.07-00                              Person to contact:
                                                 Name:
                                                 ID number:
                                                 Telephone:
                                                 Fax:

                                                 Last day to file petition with United States
                                                 Tax Court: April 4, 2023

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: Organizations
described under IRC Section 501(c)(7) are organized and operated for the pleasure and recreation of their
members or other non-profitable purposes and no part of the net earnings inure to the benefit of any private
shareholder. You have not established that you are organized and operated exclusively for an exempt purpose
within the meaning of IRC Section 501(c)(7). Your primary activity is managing and maintaining property. As
a result, you are not operating substantially for pleasure, recreation, or other non-profitable purposes.

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 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 can file an action for declaratory judgment under the provisions
of Section 7428 of the Code in either:

* The United States Tax Court,
* The United States Court of Federal Claims, or
* The United States District Court for the District of Columbia

You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this
determination letter to you. You can download a fillable petition or complaint form and get information about
filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one
of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee
with the petition or complaint.

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E

You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available
on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to
do so. You may also file your petition at the address below:

United States Tax Court
400 Second Street, NW
Washington, DC 20217
ustaxcourt.gov

The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain
instructions about how to file your completed complaint electronically. You may also file your complaint at one of
the addresses below:

US Court of Federal Claims
717 Madison Place, NW
Washington, DC 20439
uscfc.uscourts.gov

US District Court for the District of Columbia
333 Constitution Avenue, NW
Washington, DC 20001
dcd.uscourts.gov

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 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.

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E

You may fax your documents to the fax number shown above, using either a fax machine or online fax service.
Protect yourself when sending digital data by understanding the fax service's privacy and security policies.

Keep the original letter for your records.

Sincerely,

[illegible]
Acting Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E


Department of the Treasury                       Date:
Internal Revenue Service                         August 26, 2022
IRS Tax Exempt and Government Entities           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:
                                                 September 26, 2022

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).

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

Sincerely,

Jerry Morrow

Jerry Morrow for Lynn A. Brinkley
Acting Director
Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018

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


Form 886-A     Explanation of Items          Schedule No. or Exhibit
Name of Taxpayer          Year/Period Ended

ISSUE:
Whether (“     ”) meets the requirements for exemption under
Internal Revenue Code (“IRC”) section 501(c)(7).

FACTS:

     was originally incorporated on     . The articles of incorporation were last
amended with the State of     . Per the Articles, its purpose is to “promote,
foster and encourage in its members, the study, understanding, and appreciation of the history of
     , the background and     ”

On     ,     was issued a determination letter from the Internal Revenue Service
(“IRS”) advising it that it had been recognized as exempt under IRC Section 501(c)(7). The letter
included a caveat that states “IRC 501(c)(7) exempts from Federal Income tax “clubs organized for
pleasure, recreation, and other nonprofitable purposes and no part of the net earnings of which
inures to the benefit of any private shareholder. You are advised that matters relating to the cottages
have to be in compliance with the above mentioned requirements.”

     owns and manages the property at     , including a Lodge and several cottages that are
“owned” by certain members for their exclusive use. Property taxes are paid through     who
charges cottage members for their portion of taxes.     rents the lodge out to members and non-
members for activities such as weddings, meetings, etc. In partnership with the     and the
     ,     sponsors a seasonal series of breakfasts open to the public and for
the purpose of subsidizing the upkeep of the Lodge.     meetings and activities are limited to
planning and implementing property maintenance and property management and does not regularly
include many of the cottage owners, many of whom live significant distances from     

LAW:

IRC section 501(c)(7) exempts from federal income tax clubs organized for pleasure, recreation, and
other non-profitable purposes.

Prior to its amendment in 1976, IRC section 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 section 501(c)(7)
organization to receive up to 35% of its gross receipts, including investment income, from sources
outside its membership without losing its tax exempt status.

P. L. 94-568 amended IRC 501(c)(7) to provide for exemption from federal income tax of clubs
organized for pleasure, recreation, and other nonprofitable 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.

Various revenue rulings have defined the requirement for fellowship, commingling, and the sharing
of interest and goals including:

* Rev. Rul. 69-635, 1969-2 C.B. 126
* Rev. Rul. 74-30, 1974-1 C.B. 137
* Rev. Rul. 70-32, 1970-1 C.B. 132
* Rev. Rul. 55-716, 1955-2 C.B. 263 (Face-to-Face interaction)
* Rev. Rul. 67-139, 1967-1 C.B. 129 (Mineral Society)
* Rev. Rul. 66-179, 1966-1 C.B. 139 (Garden Club)

Therefore, an IRC section 501(c)(7) organization must satisfy the following statutory requirements:

* A club which may consist of a membership of individuals, the existence of personal contact,
commingling, fellowship among members, sharing of active interests amongst members, and
sharing goals by members justifying the existence of the organization;
* Organized for pleasure, recreation, and other nonprofitable purposes;
* Substantially all of the activities of which are for such purposes;
* No part of the net earnings inure to the benefit of a private shareholder; and

GOVERNMENT’S POSITION:

Based upon the facts found during the examination,     is not operated exclusively for exempt
purposes within the scope of IRC Section 501(c)(7) and as a result, it does not qualify for exemption
under IRC Section 501(c)(7).

     primary activity is managing and maintaining the property and not fellowship and
commingling related to the stated purpose of the organization and fails the social component of IRC
section 501(c)(7).

Cottages are not open to all member’s use and enjoyment, and in fact, membership in     appears
to be a pro forma requirement for members to maintain their cottage ownership. This fails the
prohibition on inurement in IRC section 501(c)(7).

We are proposing revocation of your tax-exempt status for tax years ended
     through     and effective     . For the years referenced,
     has a Form 1120 filing requirement and is responsible for filing the Form 1120
with the Service.

TAXPAYER’S POSITION:

Taxpayer has verbally indicated that they understand the IRS position and accept the Service’s
findings

CONCLUSION:

(“     ”) does not meet the requirements for exemption under
Internal Revenue Code (“IRC”) section 501(c)(7) and therefore, the Service recommends revocation.

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