Fraternity alumni group denied 501(c)(7) social club status

Plain-English summary

An alumni organization tied to a college fraternity applied to be reinstated as a 501(c)(7) social club after its earlier group-ruling exemption was automatically revoked for failing to file returns. The IRS denied the application on two independent grounds. First, the group flunked the operational test: it was formed to support the fraternity chapter (helping recruit members, mentoring undergraduates for jobs, maintaining relations with the university, and doing philanthropy), not to provide pleasure and recreation for its own members, and it did not show that regular social mingling among members was a material part of its activities. Second, it flunked the income test: a 501(c)(7) club can take in no more than 35% of its gross receipts from investment income and other outside sources, and this group was funded primarily by investment income, exceeding that limit in three of the four years reviewed. Because the group did not file a protest within 30 days of the proposed denial, the denial became final. It must file corporate income tax returns (Form 1120).

Ruling snapshot

• Question: Does a fraternity alumni organization funded mainly by investment income qualify as a 501(c)(7) social club?
• Outcome: Denied (final adverse determination on the exemption application)
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7)-1(a); Rev. Rul. 58-589; Rev. Rul. 66-149; Public Law 94-568 (S. Rep. No. 94-1318)

Full text (IRS public release)

Department of the Treasury                       Date:
Internal Revenue Service                         02/13/2023
Tax Exempt and Government Entities               Employer ID number:
P.O. Box 2508
Cincinnati, OH 45201

                                                 Form you must file:
                                                 1120
Release Number: 202319022                        Tax years:
Release Date: 5/12/2023                          All
UIL Code: 501.07-01                              Person to contact:

Dear

This letter is our 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). Recently, we sent
you a proposed adverse determination in response to your application. The proposed adverse determination
explained the facts, law, and basis for our conclusion, and it gave you 30 days to file a protest. Because we
didn't receive a protest within the required 30 days, the proposed determination is now final.

You must file the federal income tax forms for the tax years shown above within 30 days from the date of this
letter unless you request an extension of time to file. For further instructions, forms, and information, visit
www.irs.gov.

We'll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection after deleting certain identifying information, as required by IRC Section 6110. Read the
enclosed Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our
proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how
to notify us. If you agree with our deletions, you don't need to take any further action.

If you have questions about this letter, you can call the contact person shown above. If you have questions
about your federal income tax status and responsibilities, call our customer service number at 800-829-1040
(TTY 800-829-4933 for deaf or hard of hearing) or customer service for businesses at 800-829-4933.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Letter 437
Redacted Letter 4034
Redacted Letter 4038

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S

Department of the Treasury
Internal Revenue Service
IRS PO Box 2508
Cincinnati, OH 45201
Date: 12/19/2022

Employer ID number:

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

Legend:                                          UIL:
B = Location of Incorporation                    501.07-01
C = Date of Incorporation
D = Group Ruling Effective Date
E = Prior Revocation Date
F = Date Application Submitted
G = Parent Organization
H = University

Dear

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 501(a). We determined that you don’t qualify for exemption under IRC Section 501(c)(7).
This letter explains the reasons for our conclusion. Please keep it for your records.

Issues

Do you meet the organizational and operational tests for exemption under IRC Section 501(c)(7)? No, for the
reasons stated below.

Facts

Your organization was formed as a corporation in the B on C. Your stated corporate purpose is for education
and mutual improvement, along with receiving, holding, and conveying real and personal property necessary for
the purposes for the corporation. You were granted tax exempt status under IRC Section 501(c)(7) in D as part
of a group ruling. On E, your exemption was automatically revoked for failure to file a return for
consecutive years. On F, you filed a Form 1024 application for re-instatement of your exempt status under IRC
Section 501(c)(7).

You state in your application you were formed to assist G at H. You indicate you accomplish this support in
several ways. You work with G to maintain a positive relationship with H. You assist G in mentoring
undergraduates to obtain employment post-graduation, in obtaining new recruits by funding recruiting events,
and in funding national fraternity activities. Lastly, you work with G to engage in philanthropic activities that
benefit the community.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K


2

Membership is voluntary, but is open to all alumni who are in good standing with G and H. You indicate you
are funded through two primary sources, membership dues and investment income, however the bulk of your
funding will be received through investment income based on the information you provided. Your listed
expenses include charitable contributions, taxes, fees, and other administrative items.

Law

Section 501(c)(7) of the Code exempts 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.

Treasury Regulation Section 1.501(c)(7)-1(a) states exemption will be provided by Section 501(a) for
organizations described in IRC Section 501(c)(7) 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.

Revenue Ruling 58-589, 1958-2 C.B. 266, stipulates expanded criteria for determining whether an organization
qualifies for exemption under Section 501(c)(7) of the Code. An organization must establish (1) that it is a club
both organized and operated exclusively for pleasure, recreation and other nonprofitable purposes and (2) that
no part of its net earnings inures to the benefit of any private shareholder or individual. To meet the first
requirement, there must be an established membership of individuals, personal contacts, and fellowship. A
commingling of the members must play a material part in the life of the organization.

Revenue Ruling 66-149, 1966-1 CB 146 held that a social club was does not qualify for exemption under IRC
Section 501(c)(7) when it receives a substantial part of its income from nonmember sources such as interests
and dividends on investments it owns. This is evident when (1) that such income is derived from nonmember
sources, (2) that income is received in fulfillment of and pursuant to a profit motive, and (3) that income from
investments is substantial in relation to total income.

The Senate Report 94-1318 to Public Law 94-568, 1976-2 C.B. 896, provides that a social club may receive up
to 35 percent of its gross receipts, including investment income, from sources outside its membership without
losing exemption. Within this 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 a club exempt
from taxation described in IRC Section 501(c)(7) is permitted to 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.

Application of law

To meet the requirements of IRC Section 501(c)(7), substantially all of your activities must be geared toward
pleasure, recreation, and other nonprofitable purposes. While you indicate your members are former members
of G and will be assisting G in various areas, you have not provided any material evidence that these activities
meet the requirements of IRC Section 501(c)(7).

You are similar to Rev. Rul. 58-589, as you have shown you meet the requirement of IRC Section 501(c)(7) of
having an established membership. However, you state you were formed to assist G in its endeavors and not
bound by a common objective directed towards pleasure and recreation. You also have not indicated how

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K


3

regular commingling plays a material part in your activities to meet the social, pleasure, and recreational
requirements of the section for which you have applied. Thus, you do not meet the operational requirement of
IRC Section 501(c)(7).

Based on the financial information you provided, you are not supported primarily through membership fees,
dues, and assessments. You are instead primarily supported by investment income. You therefore do not meet
the income requirements for IRC Section 501(c)(7) as outlined in Senate Report 94-1318 Sept. 28, 1976. In
three of the four years of information provided, you exceeded the 35% limit of gross receipts from nonmember
income. This investment activity is regularly carried on and is your primary source of income. The pursuit of
income in this manner is non-distinguishable from a for-profit motive and is substantial in relation to your total
income. Therefore, you do not meet the income requirements for exemption under IRC Section 501(c)(7). See
Treas. Reg. Section 1.501(c)(7)-1(a) and Rev. Rul. 66-149.

Conclusion

Based on the information provided, you do not qualify for exemption under IRC Section 501(c)(7). You have
not provided evidence that substantially all of your activities are for pleasure, recreation, and other non-
profitable purposes and that commingling is a material part of your activities. You do not meet the income
requirements of this section because you are funded primarily through investment income. Therefore, we cannot
grant exemption under IRC Section 501(c)(7).

If you agree

If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from
you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on
your income tax filing requirements.

If you don't agree
You have a right to protest if you don’t agree with our proposed adverse determination. To do so, send us a
protest within 30 days of the date of this letter. You must include:

* Your name, address, employer identification number (EIN), and a daytime phone number
* A statement of the facts, law, and arguments supporting your position
* A statement indicating whether you are requesting an Appeals Office conference
* The signature of an officer, director, trustee, or other official who is authorized to sign for the
  organization or your authorized representative
* The following declaration:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I have examined this request, or this modification to the
request, including accompanying documents, and to the best of my knowledge and belief, the request
or the modification contains all relevant facts relating to the request, and such facts are true, correct,
and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven’t
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K


4

We’ll review your protest statement and decide if you gave us a basis to reconsider our determination. If so,
we’ll continue to process your case considering the information you provided. If you haven’t given us a basis
for reconsideration, we’ll send your case to the Appeals Office and notify you. You can find more information
in Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status.

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court later because the
law requires that you use the IRC administrative process first (IRC Section 7428(b)(2)).

Where to send your protest
Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address:

U.S. mail:                                       Street address for delivery service:
Internal Revenue Service                         Internal Revenue Service
EO Determinations Quality Assurance              EO Determinations Quality Assurance
Mail Stop 6403                                   550 Main Street, Mail Stop 6403
PO Box 2508                                       Cincinnati, OH 45202
Cincinnati, OH 45201

You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you
fax your statement, please contact the person listed at the top of this letter to confirm that they received it.

You can get 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 listed at
the top of this letter.

Contacting the Taxpayer Advocate Service

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 if 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.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K