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PLR 202327016

Social Clubs

Official textIRS Written Determinations (PLR · TAM · CCA)irs.gov
Summarize

# ISSUES

Whether the
501(c)(7) of unless specified). . is qualified to be exempt under Section 1s report refer to the Internal Revenue Code

# FACTS

__ was incorporated
~urposeas: and for
The bylaws, adopted on_, state that there is only one class of membership, and the club is to be goveme~tors 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.
-riods ending followin income and ex nses. , and ---Investment income Total revenue Professional fees and other payments to independent contractors Occu Calalog Number 20810W Page 1 www.lrs.gov was filed bybegan'lllrng , egmmng with the tax e1r tax-exempt status. ,_reported the
Form886-A
(May2017)
Department of the Treasury - Internal Reveoue Service Explanation of Items exhibit Tax Identification Number (fast 4 digits) Year/Period ended • Issued with Letter 3618, Form 4621-A, and Form 6018 on the Service sent investment incom Investment Income
Unrelated business taxable income
-
-
In response to the agent's information document request regarding financials, stated it did not use QuickBooks or any other type of accounting of accounts were provided to the agent. Instead, - provided eek stubs for their business checking account, wffliitems manual following summary.
Revenue
Total Paid at h
---
Late Fees/Pa
New Members at each
---+---
Sa I e of Raffle Tickets
Total Revenue
Lunch
Clerical
Catalog Number 20810W
Page2 www.lrs.gov
Foon886-A (Rev.5-2017)
Form888-A
(May2017)
Total Service Costs
Department of 1he Treasury - Internal Revenue Service Explanation of Items exhibit Tax Identification Number (last 4 digits) Year/Period ended • Total Printin & Office Su I Costs Total Food Costs Total Refreshment Costs airs & Misc Purchase Costs
Total Ex enses
I.__ N_e_t_ln_c_om_e …
(L_os_s
… ) ____ ~---
1
… I __ IIIIIIJ
· ·red abo record keeping practices. administrative tasks were an e a Is , w1 e assIs nee o . itself does not have an office an uses the- address or maI ing purposes. a year,
- would mail letters to~s to collect annual dues. Throughout the year, mem r ues Triclguest ticket receipts are sent to the- by check or PayPat Each check payment is to be photocopied and placed in its corres onffliiamember's file; this ensures that each guest ticket can be traced to an inviting member. stated that policy was for members to pay for ~ts' tickets. Additionally, with assistance, handled all payment of -expenses.
On-. the agent requested a sample of the checks deposited to verify their source. The age~pies of bank d-osit sli s but not copies of the individual checks deposited into the account. The agent spoke with to clarify that the copy of the check deposited would need to be provided, not the deposit s 1p, r e agent to verify whether the deposit came from a member or a guest. No copies of checks deposited by- were provided to the agent.
Membership
To obtain membership, individuals must be sponsored by a current member and their apP-lications 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 Catalog Number 20810W Page3 www.irs.gov
Fonn886-A (Rev_S-2017)
Form888-A
(May 2017)
Explanation of Items exhibit
Tax Identification Number (fast 4 digits) Year/Period ended
- arrangement sounded unusual that existing members would pay for a potential member to join, the agent stated as explained.) The a ent asked for the criteria that the board uses when reviewing a membership application;• stated that the individual must be courteous, not , and have a I .
He exp amed that, typically, it would take such as before a member will sponsor them.
Members were expected to bring guests, and this is how they solicited new members. - provided an example, he would bring guys to the annual event and, maybe, w~ and come again. The 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 . vera , membership had been decl~ due to the passing of members in the as years. urren y, has at least ■ to- members.
Benefits to Members
~t, during the years under exam, members paid annual dues of sill. In return ~nt of the annual dues, a member received an admission ticket to the annuar=ent, raffle tickets, and a member ribbon to wear at the event. Paid members can also invite an unlimited number of guests, until the event cap-ci limit of- individuals was reached. Each guest ticket cost dlll and included raffle tickets. woulcf check everyone at the event entrance to ensurethey had paid; admission enti e eac attendee to food, beer, alcohol, and horseshoes. The agent inquired wh-here 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 gues a e an drank the same amount. t s-annual even at is held on the- . · pays a permit feetotlie same location. Agent asked , stated were two meetings for the board of directors only, one to discuss planning o e even and one afterwards to discuss the results of the event. , e w everyone else. is always second has been held every year except dunng and last year, ■ The agent requested additional details regarding what occurred on the day of the event; -Calalog Number20810W Page4 www.irs.gov Form 886-A (Rev. !>-2017)
Form886-A
(May2017)
Department of the Treasury - Internal Revenue SeMce Explanation of Items exhibit Tax ldentfflcation Number (fast 4 digits) Year/Period ended -Issued with Letter 3618, Form 4621-A, and Form 6018 on stated that the event started at- but some attendees would arrive as early as __ Each attendee's ticket is checkedattheticket shed and exchan ed for a bad e and la~ Attendees would get in various lines to receive
- . Drinks are ordered at the bar from the raining. At a lunch is t of the event is the ach attendee is allo
- that can a en ome. n ch atten
~r a raffle conducted aroun for a c ance o win one of the -~e event, atten ees can talk, play horseshoes and car s, an are a e to p e--- The a ent asked if they kept records on whether a member or guest purchased a - stated they did not. The event ends when the last member or guest leaves, typically aroun Volunteers at the Event sed "volunteers" referred to as the_, that consisted of members and nonmembers.
Individuals on.he were not requi~ the sllllll to attend the annual event. The primary duties of the were to prepare the-• foodpreparation and distribution, bartending, and checking 1c e s.
- stated that the- would arrive one day prior to the event to clean, repair, and ~ready the site forfflee'vent. The day prior to the event, the would be provided meals, hold their own - raffle, and ca~might. Additionally, would provide cash "reimbursements" to t~viduals on the- for out-of-pocket expenses, suchii!ils as. A ent 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 ea name. o 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.
- provided the following attendance information, that indicate that ■% of attendees were ~ers.
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 Page5 www.irs.gov Foon 886-A (Rev. 5-2017)
Form886-A
(May2017)
Department of the Treast.HY - Internal Revenue Service Explanation of Items exhibit Tax Identification Number (last 4 digits} Year/Period ended
• transaction that would have occurred regardless of guest attendance, or variable ("V"), the amount would have fluctuated based upon attendance numbers.
Expenses such as_, state fees, taxes, meetings, insurance, and maintenance were classified as fixed ~mbers would have had to pay regardless of guest attendance.
Revenue
Total Paid at
V Late Fees/Pa
F New Members at each
---+-- v
Sale of Raffle Tickets
V
V
Total Revenue
F
F
V
F
F
F
F
F
F
V Total Service Costs
V Total Printin & Office Su I Costs
V Total Food Costs
V Total Refreshment Costs
-=======--- v
Total
F airs & Misc Purchase Costs
Total Ex nses
… I N_e_t_l_n_co_m_e_(L_o_s_s_) ____ lllllLIIIILIIIJ Calalog Number 20810W Page6 www.irs.gov Form 886-A {Rev. 5-2017)
Form886-A
(May 2017)
Explanation of Items exhibit
Tax Identification Number (last 4 digits) Year/Period ended -T Revenue V Total Paid at V Late Fees/Pa F New Members at each V Sale of Raffle Tickets V V V
Total Revenue
F . I
---
F tate Annual Renewal
V
F
F
F
F
F
F
F
F
F
V Total Service Costs
V Total Printin & Office Su I Costs
V Total Food Costs
V Total Refreshment Costs
V Total
F airs & Misc Purchase Costs
Total Ex nses
Net Income Loss
Based on this allocation, there would have been a net loss of … and … for- and -• respectively, if only members would have attended the e'vent. Flonmembersbrou'gmn aclcfflional net income of 4IIII and 41111, in- and- 1 respectively.
Catalog Number 20810W Page7 www.irs.gov
Form888-A
{May2017)

# LAW

Explanation of Items
Sciledule number or exhibit
Tax Identification Number (last 4 digits) Year/Period ended •
Issued with Letter 3618, Form 4621-A, and Form 6018 on
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 Number20810W Pages www.irs.gov
Form886-A
(May2017)
Explanation of Items exhibit
Tax Identification Nwnber (last 4 digits) Year/Period ended
- 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 Procedure 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 Calalog Number 20810W Page9 www.irs.gov Form 886-A {Rev. 5-2017)
Form886-A
(May 2017)
Explanation of Items exhibit
Tax Identification Number (last 4 digits) Year/Period ended
• 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:
1. The date;
2. The total number in the party;
3. The number of nonmembers in the party;
4. The total charges;
5. The charges attributable to nonmembers
6. The charges paid by nonmembers;
7. 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 Catalog Numbef 20810W Page 10 www.irs.gov Form 886-A (Rev. 5-
Form888-A
(May2017)
Explanation of Items exhibit
Tax Identification Number (last 4 d,gits) Y
• 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 exclusive y or 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,anciTellowship.
• Membership --r-ires that members pay an annual due of~ and attend the annual event. ~g to , a . and sponsorshipby a current member are the only requirements for mem ership. There are no other conditions or requirements for membership.
• Personal contact - It is important for members of social club to have face to face interaction.
The Club conducts only one event that allows its member to come together and comingle.
• 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 i portunities fo~rs to interact with each other. Additionally, event attendance comprised of % nonmembers and- did not meet the recor-kee in requirements outlined in Revenue ocedure 71-17 to est~ost-guest relationship. did not provide documents to show if gross receipts were from members or nonmembers; us, e assumption is that nonmembers paid for themselves. catalog Number 20810W Page 11 www.ira.gov Form 886-A (Rev. 5-
Form886-A
(May2017)
Explanation of Items exhibit
Tax Identification Number (fast 4 digits) Year/Period ended -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-x enses to member and nonmember sources, would have incurred a loss of and in - and , respectively, if only mem ers had attended the event. Th-tes tha un s from nonm!!lr 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) o e egulations.- failed to provide financial information requested by the agent to verify the source of recejptsand did not provide documents that show thereimbursements 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 initiar-- 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, - fails to meet the requirements for an organization exempt under Section 501 (c)(7). Other thari1fiellllevent members did not meet and socialize. Excess revenue from nonmembers were used to subsize iiiiiiiiiiiii expenses. -Ill failed to meet recordkeeping requirements for an organization ex~50ilc"n7).
Accordin I should be disqualified for the tax periods ending_, and Should this disqualification be upheld, -· starting with the tax period en rng catalog Number 20810W Page 12 www.irs.gov Foon 886-A (Rev. 5-

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