Social club denied 501(c)(7) exemption for excess nonmember income

Plain-English summary

An equine and rodeo club applied to be recognized as a tax-exempt social
club under IRC § 501(c)(7). Social clubs get that exemption only if they are
supported substantially by member dues and do not run a business open to the
public. This club leased its arena to other rodeo associations for a fee, held
public rodeos, and collected camping fees, food sales, and sponsor money, so a
large share of its receipts came from nonmembers. The IRS applied the 35%/15%
guideline (a club may take up to 35% of gross receipts from outside its
membership, and no more than 15% from public use of its facilities) and found
the club exceeded those limits. Because the nonmember income was too large to
ignore, the IRS issued a final adverse determination denying exemption. The
club did not protest the earlier proposed denial within 30 days, so the denial
became final and it must file federal income tax returns.

Ruling snapshot

• Question: Does the club qualify for exemption as a social club under IRC § 501(c)(7)?
• Outcome: Denied (final adverse determination)
• Key authorities: IRC § 501(c)(7); Treas. Reg. § 1.501(c)(7)-1(a), (b); Rev. Rul. 69-220; Public Law 94-568 (35%/15% member-income limits)

Full text (IRS public release)

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

Date: 03/17/2026

Employer ID number:
Form you must file:
Tax years:
Person to contact:

Release Number: 202624008
Release Date: 6/12/26
UIL Code: 501.07-00, 501.07-03

Dear

This letter is our final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(7). Recently, we sent you a proposed adverse determination in response to your application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it gave you 30 days to file a protest. Because we didn't receive a protest within the required 30 days, the proposed determination is now final.

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

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

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

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Letter 437
Redacted Letter 4034
Redacted Letter 4038

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

Department of the Treasury
Internal Revenue Service

Date: 01/27/2026

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

Legend:
B = State
C = Date
D = City
f percent = Income

UIL: 501.07-00, 501.07-03

Dear

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

Issues

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

Facts

You claim you were incorporated in B on C. You did not provide a copy of your articles of incorporation. You provided the name registration for B which states your purpose is to promote, educate and stimulate community interest and activity in horses and animals, to promote and display horses in the show ring, parade, and in rodeos, and to promote the charitable organizations in D. Your Bylaws are silent on a purpose. In your application, you state you operate a property with an arena for paid members to use for the equine activities, and each member is considered an owner. You also have a scholarship program to assist area youth further their education.

You lease your facility to other rodeo associations to conduct their own rodeo activities for a fee, and this is open to the public. You also sponsor a club for area youth to teach them about equine activities, horsemanship, working together, and community awareness. Two times a year you sponsor your own rodeos and invite the general public, for a fee to come and enjoy a full rodeo performance. All proceeds go to the cost of the production and provide revenue for your property maintenance.

You state that you are funded primarily by membership dues and fees for the use of your facility. Your application also indicates that you receive income in the form of camping fees, sponsors, sale of food, and other items. You further state in the Schedule D of your application that f percent of your gross receipts is received

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

2

from non-members for the use of your facilities and or attendance at your events. The financial data provided in your application confirms this. Also, the financial data you provided indicates that any expenses incurred are used to maintain the property and to defray the cost of any operating expenses.

Law

IRC Section 501(c)(7) provides for the exemption from federal income tax of clubs organized and operated exclusively for pleasure, recreation, and other non-profitable purposes, if no part of their net earnings inures to the benefit of any private shareholder.

Treasury Regulation Section 1.501(c)(7)-1(a) states that, in general, this exemption extends to social and recreational 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)-1(b) provides, in part, that a club which engages in business, such as by 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.

Revenue Ruling 69-220, 1969-1 C.B. 154, states 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 facilities is not exempt under IRC Section 501(c)(7).

Public Law 94-568, 1976-2 C.B. 596, changed the language of IRC Section 501(c)(7) from "operated exclusively for" to "substantially all" allowing Section 501(c)(7) organizations to receive some outside income without losing their exempt status. Explaining the new law, Senate Report 94-1318 noted that it is intended that these organizations be permitted to receive up to 35 percent of their gross receipts, including investment income, from sources outside of their membership without losing their tax-exempt status. It is also intended that 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.

Application of law

You do not meet the requirements for exemption of IRC Section 501(c)(7). While you are organized as a social club as described in Treas. Reg. Section 1.501(c)(7)-1(a), receiving a substantial part of your revenue from non-member sources is contrary to the requirements for exemption as described below.

Based on the information provided in your application, you are operating in a similar fashion to the organization described in Rev. Rul. 69-220 and Treas. Reg. Section 1.501(c)(7)-1(b). While you do provide activities and opportunities for your members to take part in equine activities in a social and recreational manner, the fact that a substantial portion of your income is not received from dues from your members in a traditional manner, but admittedly from fees received from the rental of your facility and other related activities from nonmembers and events open to the public to defray the cost of operating your facility also used extensively by your members, is a feature that is too large to ignore to grant you exemption.

In addition, you state in your application that f percent of our income is generated solely from sources outside of your membership. Because of this, you fail the membership income tests set forth by the Committee Reports on

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

3

Public Law 94-568. The financial information submitted with your application highlights that you consistently fail to meet the 35%/15% requirement for organizations exempt under IRC Section 501(c)(7).

Conclusion

Based on the information provided, you do not qualify for exemption as an organization described in IRC Section 501(c)(7). While you are conducting social and recreational activities, you receive a substantial amount of your gross receipts from outside of your membership. In addition, the income received from your business activities from the rental of your facility are used to maintain and operate the facility. Because your rental income constitutes a substantial part of the club's gross receipts and exceeds the income requirement from nonmembers use of your facilities, you do not qualify for exemption under Section 501(c)(7).

If you agree

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

If you don't agree

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

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

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

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

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

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

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

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

U.S. mail:
Internal Revenue Service
EO Determinations Quality Assurance
Mail Stop 6403
PO Box 2508
Cincinnati, OH 45201

Street address for delivery service:
Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Mail Stop 6403
Cincinnati, OH 45202

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

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at the top of this letter.

Contacting the Taxpayer Advocate Service

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

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