Social Clubs

Department of the Treasury
Internal Revenue Service
IRS Tax ExemDt and Government Entitles Number: 202244022 Release Date: 11/412022
Ull: 501.07-00
CERTIFIED MAIL - RETURN RECEIPT REQUESTED
Wily we are sending you this letter
Date:
12/14/2021
T apayer ID nurl'l,ber:
Form:
Tax periods enc:ktd:
Penson to conta<:t:
Name:
ID number:
Telephone:
Fax:
This is a final determination that you don't qualify for exemption fr001 federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(7), effective . Yom determination letter dated , is revoked.
Our adverse determination as to yom exempt status was made for the following reasons: You have not established that you are operated substantially for pleasure and recreation of your me.mbers or for other oonprofitable pmposes and no part of the net earnings inures to the benefit of any private shareholder within the meaning of IRC Section 501(c)(7). You have exceeded the oon-member income test for tax year ending Organizations that are not exempt under IRC Section 501 generally are required to fifo federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit www.irs.gov.
What you must do if you disagree witll this determination If you want to contest om final determination, you have 90 days from the date this 4~t,erm.ination 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 may file an action for declaratory judgme111t unoor the provisions ofIRC Section 7428 in one of the following three venues: I) United States Tax Court, 2) tltle United States Court of Federal Claims or 3) the United States District Court for the District of Columbia.
Please contact the clerk of the appropriate court for rules and the appropriate forms for filing an action for declaratory judgment by referring to the enclosed Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. You may write to the courts at the following addresses:
United States Tax Court U.S. Court of Federal Claims U.S. District Court for tlle District of Columbia 400 Second Street, NW 717 Madison Place, NW 333 Constitution Ave .• N.W.
Washington, DC 20217 Washington, DC 20439 Washington. DC 20001 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.
Letter 6337 (12-2020)
C8lalog Number 7 4808E
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. T AS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Contact your local Taxpayer Advocate Office at:
Or call T AS at 877-777-4 778. For more information about T AS 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 T AS 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 www.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.
Keep the original letter for your records.
Enclosures:
Publication 1
Publication 594
Publication 892
Sincerely, t7 (' l"))f;_\, ) • / f/, ?r1 ~--E~O'Reilly; .<,,(T · · Director, Exempt drganizations Examinations
Letter 6337 (12-2020)
Catalog Number 74808E ,. ~ of tbe Treasury .. ln18mal Revenue Service
IRS Ta Exempt and Government Entltiea
CERTlftED MAIL-Return Receipt …
DIii:
July 23, 2021
T.,..,.,,ID … -:
FOffll:
TUpedodllendld:
… contlCt:
Name:
IDnumber:
Telephane:
Fax:
Addr8N: ... ..,.. cmact hlfonnatian:
Hane:
ID l'IJfflber.
Telephone:
… ,GIi __ __
Why JOll'N receirin& tJait 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

(JRC) Section SOl(c)(7).
11,, … ,..
If you haven•t already, please sign the enclosed Form 6018, Consent to Prq,osed Action, and retum it to the contact person shown at 1he top of this letter. We'll issue a final •h'Cl'Se letter determining that you aren't an organization described in IRC Section SO 1 ( c )(7) for- the periods above.
After we issue the final adverse determination letter, we•IJ announce that your organization is no longer eligible to ieceive tax deductible contributions under JRC Section 170. lfJIOII …
1. Request a meeting or telephone conference with the manager shown at the top of this Jetter.
2. Send any information you want us to consider.
3. F'de a pmat with the IRS Appeals Office. lfyou request a meeting with the manager or send additional inbmauon as stated in I and 2, above, yo1tll still be able 11:o file a protest with IRS Appeals Office after 1be meeting or alter we consider the infonna.tion.
The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing ag€:nt 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 bear 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 (T AS) is an independent organization within the IRS that can help protect your taxpayer rights. T AS 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 T AS assistance, which is always free, T AS will do everything possible to help you.
Visit www. taxpayeradvocate. irs.go\: 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).
2
Letter 3818 (Rev. 8-2019)
Catalog Number 34809F
If you have questions, you can contact the person shown at the top of this letter.
Enclosures:
Form886-A
Form6018
Form4621-A
Publication 892
Publication 3498
Sincerely,
Sean E. o•Reilly
Director, Exempt Organizations Examinations 3 Letter 3618 (Rev. 8--2019) catalog ~mbel 34809F
Form888-.A
(May2017)
Name of taxpayer
ISSUE;
Department" the Treaeury - tntemal RIMnu& Service
Explanations of Items
Tex Identification Number (la:tt 4 dlglt:t} Schedule number or exhibit Year/Period ended
1. Whether the , herein referred to as the " •, ls operating as a social club exempted under Internal Revenue Code section 501 (c)(7)?
2. Whether the" • tax-exempt status as an IRC section 501(c){7) social club, should be revoked?

# FACTS

The organizing document ia the Charter and Bv-laws. The was organized . however the proposed charter was filed in the state of in County on . The exact legal name of the organization in the by-laws and proposed charter is The purpose stated in the charter were to promote the game of and all other games which Its members may play in conjunction with the game of The was granted exemption under IRC section 501(c)(7) as of The original letter of exemption was not located nor provided neither the original application for exemption. However, the organization provided a copy of a letter dated that verified the organization's tax exemption status as social club exempted under fRC section 501(c){7) wilh an effective date of On , the filed Form for the year ending following revenues:
1. Membership dues $
2. Contributions $
3. Rental of faclities $
4. League fees $
5. Special events $
6. Tournament fees $
7. Inventory $
The desaibed its mission on the Form as to promote the game of recreational activities for the pleasure and pastime of its members and the public. and reported the and other On , the was contacted by letter 3611, infonning the organization that its Form had been selected for examination. The organization was informed that the examination and request for documents was to verify the organization's continued qualification for exemption under Internal Revenue Code section 501 (c)(7) as a social club and any unrelated business income from investments, non-member revenue and other sources which may subject the organization to tax under IRC section 512.
On , inttfal contact via telephone was made with the organization, Executive Director: . During the call, It was discussed the types of records that were beirig requested from the organiZation on the Information Document Request The organization was advised on the recordkeeping requirements for sodal clubs as outlined in Revenue Procedure 71-17.
Catalog Number 20810W Page _1_ www.lnl.gov Form 886-A (Relf. 6-2017)
Form886-A
(May2017)
Oepertment ~ the Treuu,y - lntemat Revenue Servloe
Explanations of Items
Schedule number or exhibit
Name of taxpayer Tax lden1fflcatlon Number (fast 4 digits) Year/Period ended
On , a telephone interview was conducted with the Organization's Executive Director, and Treasurer,
Per the interview, the is currently the oldest and largest remaining in the . with currently members. Basic annual membership dues in . were ~ For indMcluals and $ or $ for a family membership. The also offered Day membership at a rate af $ per day, whereas anyone can pay a nominal fee to have access to the Individuals choosing this type of membership were not granted the same benefits as members who purchased the basic/family memberships. The activities consist of games for membenHJnorganlzed ways, game nights with members, amual meeting/holiday parties, and toumaments at the district and state level.
The sources of the revenue are membership fee&, league fees, rental af facilities, merchandise sales (such as t-shlrts, cups and water bottles) and the annual (fundralser Etvent).
The organization ia governed by a board of directors. The Executive Director, who Is also on the Board, makes the daily deciaions for the . The Executive Director must obtain the Board'&, approval for any transactions over $ On . the submitted the response to information document reque1n. The organization submitted books, records and bank statements for the year ending . The organization did not use an accounting system for the tax period under examination.
The leases the facilities from the for a nominal tee. $ monthlv. The facilities consist of a Clubhouse, room and bridge room kitchen, ., and space, which is a space for food trucks, a tent, or outdoor games such as croquet or cornhole. In the lease agreement between the and the there Is a clause that states "if Licensee is a club or other organization that is leasing the Premises for a nominal fee, then the L.icensee shall maintain provisions in its charter and by-laws stipulating that among Ha purposes is the, providing of public services and the Uoeneee's use of the Premises under the agreement shall be for Pl'O\i'iding such public services•.
The hosts various events such as boot camps and open game nights whereas the general public is involved. No records for attendance/rosters were maintained during any of the organization's events to track members and nonmembers attendance and participation. The organization submitted all rental agreements for facllties rentals for It included one contract fc>r that was paid in and contracts for events that were paid in Per the initial interview, the -ants out the facilities to mostly members. The Execu1ive Director advised that the intentions of the were to only rent the facilities to members of the however there were occasions where a rental contract would be executed before membership was inHiatedlobtained. catalog Nwnber 20810W www.i,._gov t=onn 888-A {Re¥. 5-2017) Form888-A (May2017) Name of taxpayer Dllparlmant of the T, … ury- lmlmal Revenue Set'l/loe
Explanations of Items
Tex ldentlficatton Number (last 4 digit8)
Sd1edule number or exhibit
Year/Period ended
Per the Form , the reported total revenues of $ The reported $ in gross receipts. The organization reported nonmember or unrelated business Income S4)uroe& as follows:
--
Fonn
Part VIII Statement of Revenues
Line 3 Investment income
Linea Net rental income
Unrelated Business Revenue
Line 12
As per examination of the organization's book&, records and review of the Form fihad by the organization, the following la a computation of the organization total revenue and the n,::mmember percentage of the total revenue.
NONMEMBERINCOMEPERCENTAGEOFTOTALREVENUE
Fonn
Nonmember Income Nonmember rental of facllltles Total non""""ber Income
Club Facilities
Investment Income donations
- l events/toumament merchandile/lnventorv
TOTAL
Total aroes recaiDtA ;.;_ ____ .. _
"
%
---••~-M-~- .LAY!i
IRC Section 101(c)(7} exempts from tax clubs organized for pleasure, recreation, and other non~profitable purposes, substantially aH of the activities of which are for such purposes, and no part c>f the net earnings of which inures to the benefit of any private shareholder. In general, this exemption mends to social and recreational clubs which are supported solely by membership fees, dues and assess!'™:mts. However, a club otherwise entitled to exemption will not be disqualified because it raises revenue from members through the UN of dub facilities or in connection with club activities.
Catalog Nwnber2081(1N www.n.gov
Fonn886-A
(May2017)
Name of taxpayer
Department IX the Truaury- lntemel Revenue SeMce
Explanations of Items
Tax Identification Number (la.st 4 dir,its)
Schedule number orexhiblt
Year/Period ended
IRC Section 601(c)(7) exempts from tax: Clubs organized for pleasure, n1Creation, 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 1o the benefit of any private shareholder and Social and recreational clubs which are supported solely by membership fees, dues, and assessments (Treas.
Reg. 1.501(C)(7)•1(8))
Treas. Reg. 1.801(c)(7)-1 states (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 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 feea, dues, and assessments. However, a club otherwise entitled to exemption wiU not be disqualified because it raises revenue from members through the use of club faciltles or in connection with club activities.

(b) A cfub which engages In business, such as making its social and recreational facilities available to the general publtc or by se!fing 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 otherwiee for public patronage of its facilities is prima facle 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, IRC § 501(c)(7) required that social olube be opera-led exclusively for pleasure, recreation and other nonprofttable pLM"pOSeS.
Public Law 94 568 amended the •exclusive• provision to read "substantially' in order to allow an IRC § 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 (Senate Report No. 94-1318 2d Ses.sion, 1976-2 C.B. 597) further states;

(a) Within the 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.

(b) Thus, a social cfub may receive investment income up to the full 35 percent of it.s gross receipts if no income is derived from non-members' use of club facilities.
Revenue Ruling 66-149 holds a soclal club aa not exempt as an organization described in IRC § 501(c)(7) where it derives a substantial part of it8 income from non-member sources.
Revenue Ruling 80-32' states by making Its social facilities available to the general public the cfub cannot be treated as being operated exclusively for pleasure, recreation or other non-profitable purposes.
Revenue Procedure 71-17 sets forth the guidelines for detennlning the effect of gross receipts derived from the general public's use of a social club's facilities on exemption under IRC §, 501{c)(7). Where nonmember income from the usage exoeeda the etandan:I as outlined in this Revenue procedure, the Catalog … 20810IN Page_!_ F<mn 886-A (Rev. 5-2017)
Form886-A
(May2017)
Department of the TfllUUry- lntemal Rewinue SeMce
Explanations of Items
Schedule number or exhibit
Name d taxpayer Tax ldentifica1ion Number (last 4 atg;ts,> Year/Period ended conolusion reached is that there is a non-exempt purpose and operating in this manner jeopardizes the organization's exempt status.
Revenue Procedure 71-17 sets forth the record-keeping requirements for social clubs. exempt under IRC Section 501 (c)(7) with respect to nonmember use of the club's facilities.
In Pittsburgh Pr- Club v. U.S., 536 F.2d 672 (1976), 579 F.2d 751 (1978), and 61!, F.2d 600 (1980), the court found that a substantial portion of the club's total gross receipt& was from nonmember use of club facilities (determined to be between 11-17% of gross income). This Indicated to the court that the club was engaged in business with the general public. The court also stated that the taxpayer haa an obligation •to maintain records adequate to establish a right to the tax exemption•, 536 F.2d at 576, and in particular to maintain adequate records which clearly show the frequency of nonmember use and the gross receipts derived therefrom, Rev. Proc. 71-17, 1971-1 c.a. 683.
TAXPAYER'S POSITIION:
To be determined.
GOVERNMENT PQSffiQN;
The cited law above provides criteria for recognition of a tax-exempt organization under IRC 501(c)(7).
Generally, an organization is to be organized and operated exclusively for pleasure, recreation, and other nonprofit purposes for its members. In general, this exemption extends to social and recreation clubs which are supported solely by membership fees, dues, and assessments. The is in operation for not only its members but Is available and open to the general public.
In the case of the organization under examination, it was granted exemption in , as a social club under IRC 501 (c)(7). IRC 501 (c)(7) organizations are limited to the amount of nonmember inc:ome that it can receive and still maintain its exempt status. The nonmember income limitation for facilities rental is up to 15% of the gross revenue received.
In the year of examination, the Club's nonmember income from rental of the facilities was %. The facts provided about the organization under examination shows that the entity exceeded the nonmember income limitation. The organization does not qualify for exemption under IRC 501 (c)(7). The exemption status should be changed and revoked.
Furthermore, the did not maintain adequate records to differentiate between member and nonmember income neither the recordkeeping requirements as set forth in Revenue Procedure 71-·I 7. Revenue Procedure 71-17 outlines recordkeeplng requirements for social clubs. Social clubs must maintain specific records as to the use of its facilities in Of'der to ustantiate a guest-host relationship for determining member veraua nonmember usage.
A relying on the people or fewer assumption outlined In Rev. Proc. 71-17, Section 3 must maintain adequate records to substantiate 'that the group was comprised of or fewer Individuals, that at least of them was a member, and that payment waa received by lhe directl)' from members or c.alog Number 2081IMI Paot … L www.n.gov fotm 881-A (Rev. 5-2017)
Form886-A
(May2017)
Depmtment cl the Treaaury - Internal Revenue Setvlce
Schedule number or exhibit
Explanations of Items
Name <A taxpayer Tax Identification Nt.mber (l8$1 4 digits) Year/Period ended their employers. A club relying on the percent or more member assumption must maintain adequate records to sub&tantiate that percent or more of the persons in the group were, in fact, members of the at the time of such use and that payment was received by the directly from members or their employers. VVhere payment is made directly to the by the member, the is under no obligation to inquire abOut reimbursement Additionally, a must maintain books and records for al instances involving use by nonmembers where the guest-host relationship cannot be assumed. Revenue Procedure 71-17 sets forth a list of information that is required to be recorded.
Failure to maintain records or make them available to the Service for Inspection wil preclude use of the minimum gross receipts standard and audit assumptions outlined in Rev. Proc. 71-17. All income derived from the uae of the facilities would be considered unrelated business income and subject to income tax. Further, all income that cannot be traced to members is considered to be from nonmember sources and may be considered unrelated business income and subject to income tax. A could be subjected to the loss of its tax-exempt status, If It does not keep adequate books and reoords to show that it qualifies for exemption.

# CONCLUSION

Based on the above facts and circumstances, and considering the statutory law and rulings cited. The organization has exceeded the 15% nonmember inoome limitation. The organization does not qualify for tax-exemption under IRC section 501 (c)(7) and should be revoked. The proposed date of the revocation is Form 1120, U.S. Corporation Income Tax Return, should be filed for continues to be subject to income tax.
Catalog Number 20810W PIIQ8_6_ WWW.ire.gov and thereafter if the organization
Fonn 881-A (Rev. 5-2017)