Property-management club loses Section 501(c)(7) status

Plain-English summary

A social club owned and managed property containing a lodge and cottages used exclusively by certain members. Its meetings and activities focused on property maintenance and management, while many cottage owners did not regularly participate. The lodge was rented for events, seasonal public breakfasts helped subsidize its upkeep, and cottage access was not shared among all members. The IRS concluded that the club's primary activity was property management rather than member fellowship, recreation, or another nonprofitable social purpose. It also found that cottage ownership and access created prohibited private inurement, with membership functioning largely as a requirement for maintaining a cottage. The IRS therefore revoked the club's Section 501(c)(7) status.

Ruling snapshot

• Question: Does a club primarily managing a lodge and member cottages remain operated substantially for the pleasure, recreation, and fellowship of its members?
• Outcome: revocation
• Key authorities: IRC § 501(c)(7), as amended by Pub. L. 94-568; Rev. Ruls. 55-716, 66-179, 67-139, 69-635, 70-32, and 74-30

Full text (IRS public release)

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

Date:
April 3, 2023

Taxpayer ID number (last 4 digits):

Form:

Tax periods ended:

Person to contact:
Name:
ID number:
Telephone:
Fax:
Last day to file petition with United States
Tax Court:

Number: 202326021
Release Date: 6/30/2023

UIL CODE: 501.07-00

CERTIFIED MAIL - Return Receipt Requested
Dear [redacted]:

Why we are sending you this letter
This is a final determination explaining why your organization doesn’t qualify as an organization described in
Internal Revenue Code (IRC) Section 501(c)(7) for the tax periods above.

In the future, if you believe your organization qualifies for tax-exempt status and would like a determination
letter from the Internal Revenue Service, you can request a determination by filing Form 1024, Application for
Recognition of Exemption Under Section 501(a), or Form 1024-A, Application for Recognition of Exemption
Under Section 501(c)(4) of the Internal Revenue Code, (as applicable) and paying the required user fee.

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

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


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.

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:

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.

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

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.

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,

Lynn A. Brinkley
Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

cc:

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

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

Date:
September 1, 2022

Taxpayer ID number:

Form:

Tax periods ended:

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

Copy to:

Manager's contact information:
Name:
ID number:
Telephone:
Response due date:

Certified Mail - Return Receipt Requested

Dear [redacted]:

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. Filea 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

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
ISSUE:
Whether the [redacted] (“[redacted]”) meets the requirements for
exemption under Internal Revenue Code (“IRC”) section 501(c)(7).
FACTS:

[redacted] was originally incorporated on [redacted]. Per the Articles, its purpose is “performing and

engaging in educational, charitable, and athletic activities and encouraging temperance and morality
among its members in the community”.

There is no determination ruling for the [redacted] in the IRS records

[redacted] owns and manages the property at [redacted], including a Lodge and several cottages that are
“owned” by certain members for their exclusive use. Property taxes are paid through [redacted] who
charges cottage members for their portion of taxes. [redacted] rents the lodge out to members and non-
members for activities such as weddings, meetings, etc. In partnership with the [redacted],
[redacted] sponsors a seasonal series of breakfasts open to the public and for
the purpose of subsidizing the upkeep of the Lodge. [redacted] 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 [redacted].

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:

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


Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended

• Rev. Rul. 69-635, 1969-2 C.B. 126

• Rev. Rul. 74-30, 1974-1 C.B. 137

• Rev. Rul. 70-32, 1970-1 CB. 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
• No written policy discriminating against individuals seeking membership on the basis of race,
color, or religion.
GOVERNMENT’S POSITION:

Based upon the facts found during the examination, [redacted] 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).

[redacted] primary activity is managing and maintaining the [redacted] 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 [redacted] 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 [redacted]
through [redacted] and effective [redacted]. For the years referenced, [redacted] has a
filing requirement and is responsible for filing the [redacted] with the Service.
Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page: -2-

Department of the Treasury - Internal Revenue Service

Form 886A. Schedule No. or
= Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
TAXPAYER’S POSITION:
Pending
CONCLUSION:
Pending Taxpayer response

Page: -3-