Dog club denied social-club exemption because most income came from nonmembers

Plain-English summary

A licensed dog club applied for exemption as a social and recreational club under § 501(c)(7). It held dog shows, raffles, member meetings, public education programs, and occasional charitable activities. The club reported that a majority of its receipts came from nonmembers, primarily through dog-show entry fees and raffles. The IRS found those public-facing income activities were regular and substantial rather than incidental, exceeded the 35 percent limit described in the legislative history, and reduced the amount members otherwise had to contribute. The IRS therefore concluded that the income benefited members and that the club was engaged in business with the public. Exemption was denied, and the determination became final when the club did not protest within 30 days.

Ruling snapshot

• Question: Does a dog club funded mostly by public dog shows and raffles qualify as a § 501(c)(7) social club?
• Outcome: Denied.
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7)-1; Rev. Rul. 58-589; Rev. Rul. 69-220; Public Law 94-568 committee reports.

Full text (IRS public release)

      Department of the Treasury                                          Date:

f,m Internal Revenue Service 01/30/2025
Tax Exempt and Government Entities Employer ID number:
IRS
"
PO Box 2508
Cincinnati, OH 45201 Form you must file:
1120
Tax years:
Release Number: 202517018 All
Release Date: 4/25/2025 Person to contact:
UIL Code: 501.07-00

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 50l(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 ofintention 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

u
IRS
Department of the Treasury
Internal Revenue Service
PO Box 2508
Cincinnati, OH 45201

                                                                        Date: 12/12/2024

                                                                        Employer ID number:

                                                                        Person to contact:

                                                                         Name:
                                                                         ID number:
                                                                         Telephone:
                                                                         Fax:

Legend: UIL:
B = Organization 501.07-00
C = Date of formation
D = State
F= Type
G = Type
x percent= Number

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 50l(c)(7).
This letter explains the reasons for our conclusion. Please keep it for your records.

Issues
Do you qualify for exemption under IRC Section 501(c)(7)? No, for the reasons stated below.

Facts
You were incorporated in D on C. Your corporate purposes include:
• Attempting to bring the natural qualities of pure bred of the F to perfection.
• Urging members and breeders to accept the standard of the Fas approved by Bas the only standard of
excellence for which they will be judged.
• Conducting sanctioned and specialty shows under the rules of B.
• Protecting and advancing the interests of the breeds.
• Encouraging sportsman like conduct at dog shows.

You are a B licensed dog club. Regular (individual), household, honorary, and lifetime memberships are open to
any adult who is in good standing with B and subscribes to your purposes. You conduct monthly membership
meetings where you plan and discuss club activities. You explained that each year in early spring you will
sponsor a B sanctioned dog show for the F in which both members and nonmembers may participate. The show
will be conducted in affiliation with another B licensed club which is a G club. During the show, your members
will provide educational programs and demonstrations to the general public about caring for dogs and

                                                                                 Letter 4034 (Rev. 01-2021)
                                                                                 Catalog Number 47628K
                                                      2

promoting the dog breed qualities. Usually, a raffle is held during the dog show to help raise money for
activities and charitable programs.

You also explained that once a year, you may sponsor a non-sanctioned F dog show at a local venue. This is an
unofficial dog show where the public is invited to attend and participate by showing dogs. B points are not
awarded but this is a good practice match for those wanting to learn about showing dogs. Members may help
mentor those showing for the first time.

Further, you conduct community outreach programs at a local pet store or mall where you teach the general
public about good citizenship for dogs and owners. You also make charitable donations once or twice a year to
the local police K-9 unit or canine rescues.

You receive your funds from raffles at the dog shows, entry fees from the dog shows, and membership fees.
We asked you to provide your gross receipts received from nonmembers. You explained that in the range of x
percent of your gross receipts is from nonmember sources.

Law
IRC Section 501 (c)(7) exempts from federal income tax, 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.

Treasury Regulation Section 1.501(c)(7)-l(a) states that the exemption provided by IRC Section 50l(a) for an
organization 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 any part of 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.

Treas. Reg. Section 1.501(c)(7)-l(b) states that 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 IRC Section 50l(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.

Rev. Rul. 58-589, 1958-2 C.B. 266, sets forth the criteria for exemption under IRC section 501(c)(7), and
provides that a club may lose its exemption if it makes its facilities available to the general public. A club will
not be denied exemption merely because it receives income from the general public provided such participation
is incidental to and in furtherance of its general club purposes. To retain exemption a club must not enter into
outside activities with the purpose of deriving profit. If such income producing activities are other than
incidental, trivial or nonrecurrent, it will be considered that they are designed to produce income and will defeat
exemption.

Rev. Rul. 69-220 1, 1969-1 C.B. 154, held a social club that receives a substantial portion of its income from
the rental of property and uses such income to defray operating expenses and to improve and expand its

                                                                                    Letter4034 (Rev. 01-2021)
                                                                                    Catalog Number 47628K
                                                      3

facilities is not exempt under IRC Section 50l(c)(7). This club is not exempt from federal income tax under
Section 50 I (c)(7) because it is regularly engaged in a business ordinarily carried on for profit and because net
income from the activity is inuring to the members of the club.

The Committee Reports for Public Law 94-568, HR 1144, provides under IRC Section 50l(c)(7) that social
clubs be operated substantially for pleasure, recreation, and other non-profit purposes. An organization may
receive up to 3 5% of its gross receipts from a combination of investment income and non-member receipts, as
long as non-member receipts do not represent more than 15% of total receipts.

Application of law
Treasury Regulation Section l.50I(c)(7)-l(a) states that the exemption provided by IRC Section 50l(a) for an
organization described in Section 501 (c)(7) applies only to clubs which are organized and operated exclusively
for pleasure, recreation, and other nonprofitable purposes. Exemption extends to social and recreation clubs
which are supported solely by membership fees, dues, and assessments. Based on your sources of income you
do not qualify as an exempt social club because you are supported substantially through non-member income
sources primarily from dog shows and raffles.

Per Treas. Reg. Section l.50l(c)(7)-l(b), when a club engages in business it is not organized and operated
exclusively for pleasure, recreation, and other nonprofit purposes. As described in Rev. Rul. 58-589, although a
club may receive some income from the general public, your dog show and raffle activities are more than
incidental and, therefore, preclude exemption under IRC Section 50l(c)(7).

Rev. Rul. 69-220 held a social club that receives a substantial portion of its income from the rental of property
and uses such income to defray operating expenses is not exempt under IRC Section 501 (c)(7). Your activities
of conducting dog shows and raffles are conducted with the purpose to generate income, decreasing the
amounts needed to be contributed by your members. This income is in part supporting your activities, which
decreases the financial obligations of your members, and therefore this income is inuring to their benefit.

A substantial portion of your income is generated from business done with the general public. By receiving in
the range of x percent of your revenue from non-members, you fail the membership income tests set forth by the
Committee Reports on Public Law 94-568. You do not meet the facts and circumstances exception for this
income test as your dog show and raffle activities are regular and substantial.

Conclusion
Based on the information you have provided you do not qualify for exemption under IRC Section 50l(c)(7).
You receive a majority of your income from non-member sources which is substantially more than the 35%
allowed for Section 501(c)(7); therefore, you do not qualify to tax exemption under said section.

If you agree
If you agree with our proposed adverse determination, you don't need to do anything. Ifwe 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:

                                                                                    Letter 4034 (Rev. 01-2021)
                                                                                    Catalog Number 47628K
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• 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 94 7, Practice Before the
IRS and Power of Attorney.

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 '11 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

                                                                                    Letter4034 (Rev. 01-2021)
                                                                                    Catalog Number 47628K
                                                    5

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