One nonmember-heavy annual event did not sustain social-club exemption

Plain-English summary

A social club's principal activity was one annual food, drink, raffle, and fellowship event, with only two board meetings at other times. Members and guests paid the same amount, members could invite unlimited guests, and most attendees were nonmembers. The club did not provide deposited checks or other records needed to trace guest payments to members and establish host-guest relationships under Revenue Procedure 71-17. The IRS allocated revenue and expenses between member and nonmember sources and concluded that the event would have produced losses if only members attended, meaning nonmember revenue subsidized member benefits. The club also lacked support for reimbursements and other financial items. Because member interaction was limited, nonmember participation was high, and the required records were missing, the IRS determined that the club did not qualify under Section 501(c)(7) for the examined periods.

Ruling snapshot

• Question: Did the club qualify under Section 501(c)(7) when its only social event was attended mainly by nonmembers and its records did not establish member-sponsored guest use?
• Outcome: denied
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7)-1; Public Law 94-568; Rev. Rul. 58-589; Rev. Rul. 69-635; Rev. Proc. 71-17

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service April 13, 2023

Tax Exempt and Government Entities Taxpayer ID number (last 4 digits):

Form:

Tax periods ended:
Person to contact:
Name:
ID number:
Release Number: 202327016 Telephone:
Release Date: 7/7/2023 Last day to file petition with United States
UIL CODE: 501.07-00 Tax Court:

CERTIFIED MAIL - Return Receipt Requested

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: 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 only social event is attended primarily by nonmembers. Furthermore, your club did
not meet the record keeping requirements outlined in Revenue PProcedure 71-17 to establish a host-guest
relationship. 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:

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.

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

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

Department of the Treasury Date:
Internal Revenue Service 01/13/2023
Tax Exempt and Government Entities Taxpayer ID number:

Form:

Tax periods ended:

Person to contact:

ID number:
Telephone:

Address:

CERTIFIED MAIL — Return Receipt Requested

Manager's contact information:

Name:

ID number:
Telephone:

Response due date:

Why you’re receiving this letter
We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that your organization
doesn’t qualify as an organization described in Internal Revenue Code (IRC) Section 501(c)(7).

This letter is not a determination of your tax-exempt status under IRC Section 501 for any period other than the
tax periods above.

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.

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

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.

In the future, if you believe your organization qualifies for tax-exempt status and would like a status determination
letter from the IRS, you can request a determination by filing Form 1024, Application for Recognition of
Exemption Under Section 501(a), and paying the required user fee.

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,

. Digitally signed by Christopher M. Holmes
Christopher M. Holmes Date: 2023.01.12 16.2430 0800"

Lynn Lynn A. Brinkley
Director, Exempt Organizations Examinations

Enclosures:
Form 4621-A
Form 886-A
Form 6018

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

Form 886-A Department of the Treasury - Internal Revenue Service Schedule number or exhibit
(May 2017) Explanation of Items °

Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

issued with Letter 3618, Form 4621-A, and Form 6018 on

ISSUES:

Whether the organization is qualified to be exempt under Section
501(c)(7) of the Internal Revenue Code (all Sections in this report refer to the Internal Revenue Code

unless specified).

FACTS:

Background

On , the organization was incorporated
in the state o . Article II of the articles of incorporation states its purpose as:

wee and for
the general purpose of social intercourse among ourselves and associates.

The bylaws, adopted on ameermnaicat state that there is only one class of membership, and
the club is to be governed by a board of directors consisting of members. Each director is

entitled to one vote on all matters; no other members have voting rights. is managed by

three officers, the President, Secretary, and Treasurer, who are appointed by the board of directors.
There are no term limits on each officer position and the Secretary and Treasurer position can be
held by the same member.

was filed by
began filing

following income and expenses.
om service revenue

Investment income

Total revenue
Professional fees and other payments to independent
contractors
Occupancy, rent, utilities, and maintenance
Printing, publications, postage, and shipping
Other expenses

Total expenses
Excess or (deficit) for the year

Catalog Number 20810W Page 1 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886- A Department of the Treasury - Internal Revenue Service
(May 2017) Explanation of Items

Schedule number or
exhibit

Year/Period ended

Name of a Tax Identification Number (last 4 digits)

issued with Letter 3618, Form 4621-A, and Form 6018 7 i.

the Service sent
investment income. Subsequently, filed
, and reported the following:

$

investment Income
Less: Expenses
Less: Specific deduction
Unrelated business taxable income

Examination

The agent initiated an examination of the

 for the year ended
agent expanded the examination t

o the year ende

In response to the agent’s information document request regarding financials, stated it did

not use QuickBooks or any other type of accounting
were provided to the agent. Instead,
for their business checking account, wi
summary.

software. No general ledger or chart of accounts
provided   check stubs
items manually entered within the stubs, and the following

_ Revenue
Total Paid at $j each
Late Fees/Paypal Adj _
New Members at each
Sale of Raffle Tickets
Bar/Beer/Tips
Total
Declined and disputed cards as of

Total Revenue

Expenses

Brd Mt and workda Lunch
Board Mt
Clerical

| e of State Annual Renewal i |

Pay Reimbursements

Catalog Number 20810W Page 2 www.irs.gov

Form 886-A (Rev. 5.2017)

Form 886-A Department of the Treasury - internal Revenue Service sone number or
, ; ex
(May 2017) Explanation of Items

Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

ewer

Issued with Letter 3618, Form 4621-A, and Form 6018 on a.

Renewal tags on trailer ( #1)(#2)
Tax Prep and Costs

Meeting-computer programmer
Bank charge- cash handling

Tips Training

Total Service Costs

Total Printing & Office Supply Costs
Total Food Costs

Total Refreshment Costs

Total Maintenance, Repairs & Misc Purchase Costs
Total Expenses

| Net Income (Loss) | iC = ~—CO|

During the interview on the agent inquired about record keeping practices.
stated that administrative tasks were
itself does not

andied at nis wi

have an office and uses the address for mailing purposes. Each year,
would mail letters to members to collect annual dues. Throughout the year, member dues

and guest ticket receipts are sent to the by check or PayPal. Each check payment is to be
photocopied and placed in its _ : member's file; this ensures that each guest ticket can

be traced to an inviting member. stated that policy was for members to pay for
their guests’ tickets. Additionally, with
Pt expenses.

On a rearrpech the agent requested a sample of the checks deposited to verify their source. The
agent received copies of bank — aT but not copies of the individual checks deposited into the

assistance, handled all payment of

account. The agent spoke with to clarify that the copy of the check deposited would need
to be provided, not the deposit slip, for the agent to verify whether the deposit came from a member
or a guest. No copies of checks deposited by i were provided to the agent.

Membership
To obtain membership, individuals must be sponsored by a current member and their applications

are subject to approval by the board of directors. The sponsoring member must pay the
initiation fee, in addition to the annual dues of | for each new member. (Although this

Calalog Number 20810W Page 3 www.irs.gov Form 886-A (Rev.5-2017)

Form 886-A Department of the Treasury - Internal Revenue Service Schedule number or
i 1 ex!
(May 2017) Explanation of Items

Name of taxpayer Tax Identification Number (last 4 digits)

Year/Period ended

issued with Letter 3618, Form 4621-A, and Form 6018 a LUUtéi‘COCS*@S

arrangement sounded unusual that existing members would pay for a potential member to join, the
agent stated as explained.)

stated that the individual must be courteous, not _and have a |

explained that, typically, it would take [MEE such as before a member will

sponsor them.

The agent asked for the criteria that the board uses when reviewing a membership application: il
a e

Members were expected to bring guests, and this is how they solicited new members. enna
provided an example, he would bring = guys to the annual event and, maybe, would like |
and come again. They start to become interested in what they can bring to the event and in
becoming a member. membership numbers varied year to year, but there were about

members in membership had been declining due to the passing of
members in the las has at least [Ij to fj members.

Benefits to Members
GEE state0 trot during the years under exam, members paid annual dues of . In return
or payment of the annual dues, a member received an admission ticket to the annual event, raffle
tickets, and a member ribbon to wear at the event. Paid members can also invite an unlimited
number of guests, until the event capacity limit of = individuals was reached. Each guest ticket
cost and included raffle tickets. — would check everyone at the event entrance to
ensure they had paid; admission entitled each attendee to food, beer, alcohol, and horseshoes. The
agent inquired “i there was no difference in cost between the annual dues and the guest

admission ticket, stated they felt no need to charge a different amount since each
member and guest ate and drank the same amount.

that is held on the
pays a permit fee to the
every year to reserve the same location. Agent asked
e year, a stated there were two meetings for the
board of directors only, one to discuss planning of the event and one afterwards to discuss the
results of the event.

stated in a letter dated

lie the members and guests enjoy th

, play horseshoes, watch the most years, play cards-in stric

compliance with law, and socialize with everyone else. is always on the second
after and has been held every year except during and last year, | |

The agent requested additional details regarding what occurred on the day of the event,

Catalog Number 20810W Page 4 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury - Internal Revenue Service Schone number or
. : ex
(May 2017) Explanation of Items

Name of a Tax Identification Number (last 4 digits)

sonnel

issued with Letter 3618, Form 4621-A, and Form 6018 on
stated that the event started | but some attendees would arrive as early as a.
Each attendee’s ticket is checked at the ticket shed and exchanged for a badge and lanyard.

Attendees would get in various lines to receive remeron a errr
a. Drinks are ordered at the bar from the bartender, a volunteer who had received state

alcohol training. At lunch is provided, in addition to The highlight of
the event is the . Each attendee is allocated
that can taken home. In addition , each attendee has at ieast
entries for a raffle conducted round i for a chance fo win one of the
Throughout the event, attendees can talk, play horseshoes and cards, and are able to
pure = nn The agent asked if they kept records on whether a member or guest

purchased a

guest leaves, typically aroun

Year/Period ended

stated they did not. The event ends when the last member or

Volunteers at the Event

sed “volunteers” referred to as the , that. consisted of members and nonmembers.
Individuals on the were not required to pay the to attend the annual event. The primary
duties of the were to prepare the =. food preparation and distribution, bartending,
and checking tickets.

eu stated that the would arrive one day prior to the event to clean, repair, and
otherwise ready the site for the event. The day prior to the event, the would be provided

meals, hold their own raffle, and camp overnight. Additionally, would provide cash
“reimbursements” to the individuals on the for out-of-pocket expenses, such as gas. Agent
requested a copy of invoices or receipts to support these reimbursement amounts. |
provided a list of names with dollar amounts, ranging from to , next to each name. No
other documents were received by the agent to support these reimbursement amounts.

Guests at the Event

In addition to there being no limit on the number of guests that each paid member can bring, there is
no limit to how many times a guest can attend the annual event. The only requirement was that each
guest must behave themselves and the | be paid for their admission ticket.

BE provides the following attendance information, that indicate that [J% of attendees were
nonmembers.

Attendees | Percentage | Attendees | Percentage

Paid Members % %
Paid Guests % %
Total Paid Attendees % %,

Member versus Nonmember Sources
Based on the nature of the revenue or expense, items were classified as either fixed (“F”), a

Catalog Number 20810W Page 5 www.irs.gov Form 886-A (Rev. 5.2017)

Form 886-A

{May 2017}

Department of the Treasury - Internal Revenue Service
Explanation of Items

Schedule number or
exhibit

Name of — Tax identification Number (last 4 digits)

Year/Period ended

enone

issued with Letter 3618, Form 4621-A, and Form 6018 iii.

transaction that would have occurred regardless of guest attendance, or variable (“V”), the amount
would have fluctuated based upon attendance numbers.

Expenses such as a. state fees, taxes, meetings, insurance, and maintenance were
classified as fixed costs that members would have had to pay regardless of guest attendance.

Revenue Total ($) Member ($)

Total Paid at each

Late Fees/Paypal Adj

Guest ($)

New Members at E each

Sale of Raffle Tickets

=
</</<|")<[<f5

Bar/Beer/Tips from
Total

Total Revenue

Clerical

Expenses

Brd Mt and workda

Lunch

Sec of State Annual Renewal

Pay Reimbursements
Fee PAID
-D & O, Liability

Renewal tags on trailer (

#1)(#2)

Tax Prep and Costs

Tips Training

Total Service Costs

Total Printing & Office Supply Costs

Total Food Costs

Total

on]
TS |< ]<]<]< pm [mpm pm im ni < in ining

Total Refreshment Costs

Total Maintenance, Repairs & Misc Purchase Costs

Total Expenses

| Net Income (Loss)

Catalog Number 20810W

Page 6 www.irs.gov Form 886-A (Rev. 5-2017)


Form 886-A Department of the Treasury - Internal Revenue Service ee number or
: ' e
(May 2017) Explanation of items x

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

noel

issued with Letter 3618, Form 4621-A, and Form 6018 or iii.

__ Revenue Total ($) | Member ($)
Total Paid at $j each i
Late Fees/Paypal Adj_
New Members at $j each
Sale of Raffle Tickets

Bar/Beer/Tips
Total
Declined and disputed cards as of

Total Revenue

Ex: Expenses

Sard io

Clerical

-property tax
Renewal tags on trailer ( #1)(#2)

Tax Prep and Costs

Meeting-computer programmer
Bank charge- cash handling
Tips Training

Total Service Costs

Total Printing & Office Supply Costs
Total Food Costs

Total Refreshment Costs

Total
Total Maintenance, Repairs & Misc Purchase Costs
Total Expenses

- _|
MHS |<] <[<j< rpm npn innit < nm ions <|<|<]<|™</1< 65

| Net Income (Loss)

Based on this allocation, there would have been a net loss of =: ‘a and
a. respectively, if only members would have attended the event. Nonmembers brou
additi

ional net income of | and a. in and ii BB, respectively.

Catalog Number 20810W Page 7 www.irs.gov Form 886-A (Rev.5-2017)

Form 886-A Department of the Treasury - Internal Revenue Service Schedule number or
r i ex
(May 2017) Explanation of Items

Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

Issued with Letter 3618, Form 4621-A, and Form 6018 a 0Uti‘ C“C™SOC‘*@S

LAW:

Section 501(a) states, “An organization described in subsection (c)...shall be exempt from taxation
under this subtitle unless such exemption is denied under section 502 or 503.”

Section 501(c)(7) states, “Clubs organized for pleasure, recreation, and other nonprofitable
purposes, substantially all of the activities of which are for such purposes and no part of net earnings
of which inures to the benefit of any private shareholder.”

Section 6001 states “Every person liable for any tax imposed by the title, or for the collection
thereof, shall keep such records, render such statements, make such returns, and comply with such
rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgement
of the Secretary it is necessary, he may require any person, by notice served upon such person or
by regulations, to make such returns, render such statements, or keep such records, as the
Secretary deems sufficient to show whether or not such person is liable for tax under this title.”

Section 6033(a)(1) states “Every organization exempt from tax under section 501(a) shall file an
annual return, stating specifically the items of gross income, receipts and disbursements, and such
other information for the purposes of carrying out the internal revenue laws as the Secretary may by
forms or regulations prescribe, and shall keep such records, render under oath such statements,
make such other returns, and comply with such rules and regulations as the Secretary may from
time to time prescribe.”

Section 1.501(c)(7)-1(a) of the Federal Tax Regulations (the “Regulations”) states “The
exemption provided by section 501(a) for organizations described in section 501(c)(7) applies only to
clubs which are organized and operated exclusively for pleasure, recreation, and other non-profitable
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. However, a club otherwise entitled to
exemption will not be disqualified because it raises revenue from members through the use of club
facilities or in connection with club activities.”

Section 1.501(c)(7)-1(b) of the Regulations state, “A club which engages in business, such as
making its social and recreational facilities available to the general public ... is not organized and
operated exclusively for pleasure, recreation, and other nonprofitable purposes, and is not exempt
under section 501(a).”

Section 1.6001-1(c) of the Regulations states, “In addition to such permanent books and records
as are required by paragraph (a) of this section with respect to the tax imposed by section 511 on
unrelated business income of certain exempt organizations, every organization exempt from tax
under section 501(a) shall keep such permanent books of account or records, including inventories,
as are sufficient to show specifically the items of gross income, receipts and disbursements. Such

Catalog Number 20810W Page 8 www.irs.gov Form 886-A (Rev.5-2017)

Form 886-A Department of the Treasury - Internal Revenue Service Schedule number or
' ex!
(May 2017) Explanation of Items

Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

Issued with Letter 3618. Form 4621-A, and Form 6018 a 0Uti‘<‘ C“‘éCS@

organizations shall also keep such books and records as are required to substantiate the information
required by section 6033.”

Section 1.6001-1(e) of the Regulations states, “The books or records required by this section shall
be kept at all times available for inspection by authorized internal revenue officers or employees, and
shall be retained so long as the contents thereof may become material in the administration of any
internal revenue law.

Public Law 94-568, 1976-2 C.B. 596 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.

Revenue Ruling 58-589, 1958-2 C.B. 266, describes the characteristics of a social club as personal
contacts, fellowship, and a commingling of members. In making a determination whether an
organization comes within the provisions of Section 501(c)(7), all facts pertaining to its form of
organization, method of operation and activities should be considered. 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. Regarding the second requirement, a social club
should not engage in any type of business activity for profit which is designed to increase, or which
could result in an increase in net earnings inuring to the benefit of any shareholder or individual. Net
earnings may inure to members in such forms as an increase in services offered by the club without
a corresponding increase in dues or other fees paid for club support or as an increase in the club’s
assets which would be distributable to members upon the dissolution of the club.

Revenue Ruling 69-635, 1969-2 C.B. 126, the principal purpose of this organization is rendering
automobile service to its members there is no significant commingling with respect to this activity and
therefore the membership did not qualify for exemption under Section 501(c)(7). Most of the services
offered are a type generally available to motorists on a commercial basis.

Revenue PProcedure 71-17, 1971-1 C.B. 683, provides guidance for social clubs on determining
nonmember status and recordkeeping requirements. The two relevant sections are reproduced here:
Section 3.03 Assumption as to status of nonmembers

1. Where a group of eight or fewer individuals, at least one of whom is a member, uses
club facilities, it will be assumed for audit purposes that the nonmembers are the
guests of the member, provided payment for such use is received by the club directly
from the member or the member's employer.
2. Where 75 percent or more of a group using club facilities are members, it will likewise
be assumed for audit purposes that the nonmembers in the group are guests of the
members, provided payment for such use is received by the club directly from one or

Catalog Number 20810W Page 9 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury - Internal Revenue Service Schedule number or
i ; ex
(May 2017) Explanation of Items

Name of taxpayer Tax Identification Number (last 4 digits) | YearfPeriod ended

issued with Letter 3618, Form 4621-A, and Form 6078 on

more of the members or the member's employer.

3. Solely for the purposes of 3.03.1 and 3.03.2 above, payment by a member’s
employer will be assumed to be for a use that serves a direct business objective of
the employee-member.

4. In all other situations, a host-guest relationship will not be assumed but must be
substantiated. See section 4 of the revenue procedure for the records required.

Section 4 Recordkeeping requirements
.01 With respect to the situation described in section 3.03-1, above, the records specified in
section 4.03, below, need not be maintained by the club. However, the club must maintain
adequate records to substantiate that the group was comprised of eight or fewer individuals,
that at least one of them was a member, and that payment was received by the club directly
from members or their employers. Where payment is made directly to the club by the member,
the club is under no obligation to inquire about reimbursement.

.02 With respect to the situation described section 3.03-2, above, the records specified in
section 4.03, below, need not be maintained by the club. However, the club must maintain
adequate records to substantiate that 75 percent or more of the persons in the group were, in
fact, members of the club at the time of such use and that payment was received by the club
directly from members or their employers. Where payment is made directly to the club by the
member, the club is under no obligation to inquire about reimbursement.

.03 With respect to all other occasions involving use by nonmembers, the club must maintain
books and records of each such use and the amount derived therefrom. This requirement
applies even though the member pays initially for such use. In each instance the record must
contain the following information:

The date;

The total number in the party;

The number of nonmembers in the party;

The total charges;

The charges attributable to nonmembers

The charges paid by nonmembers;

Where a member pays all or part of the charges attributable to nonmembers, a

statement signed by the member indicating whether he has been or will be

reimbursed for such nonmember use and, if so, the amount of reimbursement;

8. Where the member’s employer reimburses the member or makes direct payment to
the club for the charges attributable to nonmembers, a statement signed by the
member indicating the name of his employer; the amount of the payment attributable
to the nonmember use; the nonmember’s name and business or other relationship to
the member; and the business, personal, or social purpose of the member served by
the nonmember use...

9. Where a nonmember, other than the employer of the member, makes payment to the
club or reimburses a member and a claim is made that the amount was paid

NOOB WN =

Catalog Number 20810W Page 10 www.irs.gov Form 886-A (Rev. 5-
2017)


Form 886-A Department of the Treasury - Internal Revenue Service scneave number or
(May 2017) Explanation of Items be

Name of a Tax Identification Number (iast 4 digits)

issued with Letter 3618, Form 4621-A, and Form 6018 i.

Year/Period ended

gratuitously for the benefit of a member, a statement signed by the member indicating
the donor’s name and relationship to the member, and containing information to
substantiate the gratuitous nature of the payments or reimbursement.

.04 Failure to maintain such records or make them available to the Service for examination
will preclude use of the minimum gross receipts standard and audit assumptions set forth in
this Revenue Procedure.

TAXPAYER’S POSITION:

Taxpayer’s position has not been provided.

GOVERNMENT’S POSITION:

It is the government’s position that does not qualify for exemption. In order to qualify for tax
exemption under Section 501(c)(7), must show that it is both:

1. 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, Revenue Ruling 58-589 states that must demonstrate that
there is an established membership of individuals, personal contact, and fellowship.

e Membership conn requires that members pay an annual due of and attend the
annual event. According to ,a _ and sponsorship by a current member
are the only requirements for membership. There are no other conditions or requirements for
membership.

e Personal contact — It is important for members of a social club to have face to face interaction.
The Club conducts only one event that allows its member to come together and commingle.

• Fellowship — Per letter, the sole purpose of the event is for members and guests
to eat and socialize.

The event held was social and recreational in nature. However, there were no other
opportunities for members to interact with each other. Additionally, event attendance comprised of
nonmembers and the club did not meet the record keeping requirements outlined in Revenue

Procedure 71-17 to establish a host-guest relationship. did not provide documents to show
if gross receipts were from members or nonmembers; thus, the assumption is that nonmembers paid
for themselves.

Catalog Number 20810W Page 11 www. its.gov Form 886-A (Rev. 5-
2017)

Form 886-A Department of the Treasury - Internal Revenue Service Schedule number or
(May 2017) Explanation of Items ex

Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

issued with Letter 3618, Form 4621-A, and Form 6018 on] iy

To meet the second requirement, individual members must be in substantially the same position as if
they had spent their own funds to conduct the event, without existence. However, after
allocating income and oe to member and nonmember sources, would have incurred

a loss of and in and , respectively, if only members had attended the
event. This indicates that funds from nonmember sources are being used to subsidize the cost of the

event for members.

Additionally, failed to provide records as required under Section 6033(a)(1) and Section
1.6001-1(e) of the Regulations. acer failed to provide financial information requested by the
agent to verify the source of receipts and did not provide documents that show the
reimbursements were supported by an invoice or pre-approved rate, such as mileage or per diem.
The agent was unable to determine if was operating for an exempt purpose from the
financial records that were provided.

Overall, the lack of other opportunities for members to interact, the high percentage of nonmember
attendance at the event, and lack of record-keeping support the government's position that
does not meet the requirements to be exempt under Section 501(c)(7). Aside from the initial
exclusivity of a member invite, there is little to distinguish the annual event from a commercial food
event.

CONCLUSION:
Based on the available records and information provided, Sg Oe to meet the requirements for

an organization exempt under Section 501(c)(7). Other than the vent, members did not meet
and socialize. Excess revenue from nonmembers were used to subsidize expenses. cl
C)(7).

= failed to meet recordkeeping requirements for an organization exempt under Section 50
ccordingl should be disqualified for the tax periods ending | and

Should this disqualification be upheld, must file
BEE. starting with the tax period ending .

Catalog Number 20810W Page 12 www.irs.gov Form 886-A (Rev. 5-
2017)