Social club exemption revoked for public business

Plain-English summary

A section 501(c)(7) social club operated a bar, golf course, pool, ballroom, and other facilities for members, guests, and nonmembers. Its returns showed recurring nonmember receipts above the permitted level over several years, and it regularly made its facilities available to the public to generate income. Public Law 94-568 generally permits up to 35 percent of gross receipts from outside membership, including investment income, but limits receipts from public use of club facilities or services to 15 percent. The IRS concluded that the club was engaged in business and was no longer operated substantially for members' pleasure, recreation, or other nonprofitable purposes. It revoked the club's exemption and required corporate income tax returns for open years.

Ruling snapshot

• Question: Did recurring public use and excessive nonmember receipts disqualify the social club under section 501(c)(7)?
• Outcome: Revocation
• Key authorities: IRC §§ 277, 501(c)(7), 6501(g); Treas. Reg. § 1.501(c)(7)-1; Public Law 94-568

Full text (IRS public release)

Department of the Treasury Internal Date:
Revenue Service August 10, 2023
Tax Exempt and Government Entities Taxpayer ID number (last 4 digits):

IRS Exempt Organizations Examinations
350 Main Street
550 Main Street                                              Form:
Cincinnati, OH 45202-3222                                     990
Tax periods ended:

Release Number: 202344016 Person to contact:
Release Date: 11/3/2023 Name:

UIL Code: 501.03-00 ID number:
Telephone:

Fax:

Last day to file petition with United States
Tax Court:

Tuesday, November 7, 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: Your gross receipts for
the periods ending ; and exceeded percent from non-member
income, Under Treasury Regulation Section 1.501(c)(7)-1(a) Public Law 94-568 amended the “exclusive”
provision to read “substantially” in order to allow a Section 501(c)(7) organization to receive upto — percent
of its gross receipts, including investment income, from sources outside its membership without losing its tax-
exempt status. However, within this percent amount, not more than percent of the gross receipts should be
derived from the use of a social club’s facilities or services by the general public. As such, you failed to limit
gross receipts from the public. This, coupled with the fact that you allowed the general public to use your
facilities, shows that you engaged in a business and are not being operated for pleasure, recreation, or other non-
profitable purposes. Therefore, your Organization no longer operates in furtherance of IRC Section 501(c)(7).

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.

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,

Lynn A. Brinkley
Director, Exempt Organizations Examinations

Enclosures:

Copy of this letter
Publication 1
Publication 594
Publication 892

cc: (Representative)

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

Department of the Treasury Date: April 28, 2023
Internal Revenue Service Taxpayer ID number:

IRS Tax Exempt and Government Entities

Form:
Tax periods ended:

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

Manager's contact information:
Name:
ID number:
Telephone:

Response due date:

May 26, 2023
CERTIFIED MAIL — Return Receipt Requested
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).

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

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

Sincerely,

Digitally signed by
Omar Garcia

Date: 2023.04.28 14:53:59-05'00 For

Lynn Brinkley
Director, Exempt Organizations
Examinations
Enclosures:
Form 886-A
Form 6018
Publication 892
Publication 3498
Letter 3618 (Rev. 8-2019)

Catalog Number 34809F

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
ISSUE:
Whether the organization will continue to qualify as an exempt social club under Section

501(c)(7) of the Code?
FACTS:

The (the “ ") was granted exemption as a social club exempt from federal
income tax under Internal Revenue Code Section 501(c)(7) pursuant to a ruling issued on
. The purposes as stated in its bylaws are:

The principal activities are providing facilities and services for the pleasure and recreation
of its members, their guests, and non-members. They operate a bar, a golf course, pool, and
ballroom. The allows non-members to attend the facilities and participate in

events.

During the examination, it was determined the receives income from non-members. The
Form 990 return for the period ending , and prior and subsequent year Form
990 returns indicate the percent of gross receipts from non-member use of facilities exceeded
%. The percentages of gross receipts from non-members were derived by dividing total gross

receipts from the public’s use of the facilities reported by total gross receipts reported for
the tax periods ending : : and
. % Of gross receipts
Year/Period from nonmember
Ended

use

LAW:

Internal Revenue Code Section 501(c)(7) provides, clubs organized for pleasure, recreation, and
other nonprofitable purposes, substantially all 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.

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

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

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

Section 1.501(c)(7)-1 of the Income Tax Regulations, relating to the requirements of exemption of
such clubs under Section 501(a), reads in part as follows:

(a) 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 nonprofitable purposes, but does not apply to any club if its net earnings inure 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.

(b) A club which engages in business, such as making its social and recreational facilities
available to the general public or by selling real estate, timber, or other products, is not organized,
and operated exclusively for pleasure, recreation, and other nonprofitable purposes and is not
exempt under Section 501(a). Solicitation by advertisement or otherwise for public patronage of
its facilities is prima facie evidence that the club is engaging in business and is not being operated
exclusively for pleasure, recreation, or social purposes. However, an incidental sale of property
will not deprive a club of its exemption.

Prior to its amendment in 1976, Internal Revenue Code Section 501(c)(7) required that social
clubs be operated exclusively for pleasure, recreation, and other non-profitable purposes. Public
Law 94-568 amended the “exclusive” provision to read “substantially” in order to allow a Section
501(c)(7) organization to receive up to 35 percent of its gross receipts, including investment
income, from sources outside its membership without losing its tax-exempt status. The
Committee Reports for Public Law 94-568 further states:

(a) 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
an exempt social club may 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. These percentages supersede those provided in Revenue
Ruling 71-17, 1971-1 C.B. 683.

(b) Thus, a social club may receive investment income up to the full 35 percent of its gross
receipts if no income is received from non-members’ use of club facilities.

(c) In addition, the Committee Reports state that where a club receives unusual amounts of
income, such as from the sale of its clubhouse or similar facilities, that income is not to be
included in the 35 percent formula.

(d) The Senate report also indicates that even though gross receipts from the general public
exceed this standard, it does not necessarily establish that there is a nonexempt purpose. A

Catalog Number 20810W Page 2 www.irs.gov Form 886-A (Rev. 5-2017)

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

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

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.

If a club exceeds the 15/35% test, then it will maintain its exempt status only if it can show through
facts and circumstances that “substantially all” of its activities are for “pleasure, recreation and
other nonprofitable purposes.”

The following are important facts and circumstances to take into account to determine whether a
club may maintain its exemption under Internal Revenue Code 501(c)(7):

* The actual percentage of nonmember receipts and/or investment income.

* Frequency of use of the club facilities or services by non-members. An unusual or single event
(that is, nonrecurring on a year-to-year basis) that generates all the nonmember income is
viewed more favorably than nonmember income arising from frequent use by non-members.

* Record of nonmember use over a period of years. A high percentage in one year by non-
members, with the other years being within permitted levels, is viewed more favorably than a
consistent pattern of exceeding the limits, even by relatively small amounts. (See S. Rept. 94-
1318, 2d Sess., 1976-2 C.B. 597,599).

* Purposes for which the club’s facilities were made available to non-members.

TAXPAYER'S POSITION:

The has agreed to the proposed revocation of their tax-exempt status as described in
Internal Revenue Code Section 501(c)(7).

GOVERNMENT’S POSITION:

An organization exempt from federal income taxes as described in Internal Revenue Code Section
501(c)(7) must meet the gross receipts test in order to maintain its exemption. In order to meet
the gross receipts test, an organization can receive up to ( %) of its gross
receipts, including investment income, from sources outside its membership without losing its tax-
exempt status. Within this % amount, not more than % of the gross receipts should be
derived from the use of a social club’s facilities or services by non-members.

has exceeded the % gross receipts standard for nonmember income on a
continuous basis for the periods ending ; , and

Based on the large percentage of gross receipts from non-member to total gross receipts, (i.e.,
%, %, and % as noted in the table above), which exceeds the limitation of % as set forth
by Internal Revenue Code 501(c)(7), and the fact that non-member use of the ’s facilities is

Catalog 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
(May 2017) Explanations of Items or exhibit

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
recurring, consistent year after year, and for the purpose of generating income for the _ it is
the Government’s position that the is no longer operated exclusively for the pleasure and
recreation of its members and is not exempt under Section 501(c)(7).
CONCLUSION:
The Internal Revenue Code Section 501(c)(7) tax exempt status of should be
revoked since the gross receipts from non-members received by the exceeded % of the

’s total gross receipts for the year under examination and for prior and subsequent years
reviewed. Furthermore, it allows use of their facilities to the general public reflecting evidence that
the is engaged in a business and is not being “operated substantially for pleasure, recreation,
or other nonprofitable purposes.”

no longer meets the requirements to qualify as exempt from federal income
tax under Internal Revenue Code Section 501(a) as described in Section 501(c)(7). Therefore,
your exempt status under 501(c)(7) of the Internal Revenue Code will be revoked effective

As a taxable entity, the organization is required to file Form 1120, U.S. Corporation Income Tax
Return for the periods open under statute. Under Internal Revenue Code Section 6501(g)
these periods include the years ending , and subsequent tax years.

Additionally, the organization is reminded to review provisions of Internal Revenue Code 277
concerning membership organizations which are not exempt organizations.

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