IRS Revokes Club's Tax-Exempt Status

Person to Contact: * * *
Employee Identification Number: * * *
Employee Telephone Number:
(Phone) * * *

UIL: 501.03-00
Release Date: 3/1/2019

Date: November 15, 2018

Tax Year(s) Ending: * * *

Taxpayer Identification Number: * * *

Dear * * *:

This is a final determination that you do not qualify for exemption from Federal income tax under Internal Revenue Code (the “Code”) section 501(a) as an organization described in Code section 501(c)(7) for the tax period(s) above. Your determination letter dated 01/21/19XX is revoked.

Our adverse determination as to your exempt status was made for the following reason(s):

You have exceeded the 35% gross receipts limitation on income from non-member sources. Also, you do not adhere to the record keeping requirements of Revenue Procedure 70-17 as you were unable to produce records regarding your membership or your rental income.

This letter isn't a determination of your exempt status under section 501 for any periods other than the tax period(s) listed above.

Organizations that are not exempt under section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms, and information please visit www.irs.gov.

If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of section 7428 of the Code in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for the District of Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date this determination letter was mailed to you. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment by referring to the enclosed Publication 892. You may write to the courts at the following addresses:

Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under section 7428 of the Internal Revenue Code.

You may also be eligible for help from the Taxpayer Advocate Service (TAS). 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 1-877-777-4778.

If you have any questions about this letter, please contact the person whose name and telephone number are shown in the heading of this letter.

Sincerely,

Maria Hooke
Director, EO Examinations

Enclosures:
Publication 892

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Person to Contact: * * *
Employee ID: * * *
Telephone: * * *
Fax: * * *
Manager's Contact Information: * * *
Employee ID: * * *
Telephone: * * *

Date: June 7, 2018

Taxpayer Identification Number: * * *

Form: * * *

Tax Year(s) Ended: * * *

Response Due Date: * * *

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

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).

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

Sincerely,

[signed]

for Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018

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Issue

Should the tax exempt status of * * * under IRC Section 501(c)(7) be revoked as of January 1, 20XX?

Facts

* * * Bylaws were approved and adopted on January 27, 19XX and states membership must be male and female people of * * * origin (which includes the * * * and * * * in what is now known as Northern * * *). Acceptable for membership will also be men or women married to person of such descent, or person of such parentage either on mother's or father side. All members must be 18 years of age and over. All applicants must be of sound mind and of good character.

The organization was incorporated in the State of * * * on February 25, 19XX. The Certificate of Incorporation states the purpose of the organization is to promote the friendship of its members, to inculcate in them a high sense of loyalty to each other, to stimulate their intellectual advancement, to hold meetings and social gatherings, to foster interest in and promote civic patriotic and social work in the community, to cultivate social intercourse among its members, to establish a center of work and interest for the members in order to improve their health, physical and mental condition, to promote friendship social ability and culture among members.

* * * received Letter 948 dated January 21, 19XX indicating that the organization was exempt under Section 501(c)(7) of the Internal Revenue Code. Letter 948 states in part "A section 501(c)(7) organization is permitted to receive up to, 35% of its gross receipts, including investment income, from sources outside of its membership without losing its tax-exempt status. Of the 35%, not more than 15% of the gross receipts may be derived from the use of the club's facilities or services by the general public. Income in excess of these limits may jeopardize your continued tax exempt status."

Our examination of Form 990 EZ filed with the IRS for the tax years ending December 31, 20XX and December 31, 20XX shows that the organization received Rental Income of $0 in 20XX and $0 in 20XX. Total membership dues for the same periods equal $0 and $0 respectively. The organization owns a * * * facility located at * * *, * * * and rents * * *. There are * * * apartments on each floor. In total, * * * apartments are rented. The service has no record of the organization filing Form 990-T to report rental income for the tax years ending December 21, 20XX and December 31, 20XX. Our review of the organization's books and bank records determined income was derived from the sources as reported below:

	12/31/20XX	12/31/20XX	Total
Membership Dues	$0.00	$0.00	$0.00
Rental Income	$0.00	$0.00	$0.00
Gross Income from Fundrai:	$0.00	$0.00	$0.00
Total	$0.00	$0.00	$0.00

The investment income represent 0% and 0% of Gross Receipts for the years under exam. The membership dues represent 0% and 0% of Gross Receipts for the years under exam.

A membership roster and the amount of dues each member paid was requested but the organization was unable to provide this information. The organization stated that there were 0 members who paid $0 in annual dues in 20XX and 0 who paid a $0 in annual dues in 20XX. No additional supporting documents were provided.

Lease Agreements for the apartment rentals and a schedule of payments was requested but the organization was not able to any of these agreements and only produced a list as follows:

20XX
* * *	$0/month
* * *	$0/month
* * *	$0/month
* * *	$0/month
20XX
* * *	$0/month
* * *	$0/month
* * *	$0/month
* * *	$0/month

No additional supporting documents were provided.

An Internet search shows that organization listed the apartments for rent on the following websites:

https://* * *
https://www.* * *

See attached Exhibit 1, Exhibit 2 and Exhibit 3.

The organization fails to maintain records to support that is activities are for exempt purposes.

Law

Internal Revenue Code Section 501(c)(7) provides exemption to 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."

Income Tax Regulation 1.501(c)(7)-1(a) states, in part, exemption is provided only to "clubs which are organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes . . ." and ". . . exemption extends to social clubs and recreation clubs which are supported solely by membership fees, dues, and assessments."

Revenue Procedure 70-17, 1971-1 C.B 683 describes the records required when nonmembers use a club's facilities. It states in part that a club must maintain books and records of each use and that the amount derived from each use.

The Committee Reports for Public Law 94-568 (Senate Report No. 94-1318 2d Session, 1976-2 C.B. 597) states that it is intended that social clubs be permitted to receive up to 35% of their gross receipts, including investment income, from sources outside of their membership without losing their tax-exempt status. Within this 35%, no more than 15% of the gross receipts may be derived from the use of the club's facilities or services by the general public.

Rev. Rul. 58-589, 1958-2 C.8. 266 states, in part the organization must have an established membership of individuals, personal contacts and fellowship. The commingling of members must be material to the organization.

Revenue Ruling 66-149, 1966-1 C.8. 146 states, in part, a social club is not exempt from Federal income tax as an organization described in section 501(c)(7) of the Code where it regularly derives a substantial part of its income from nonmember sources.

Taxpayer's Position

The organization does not agree that the tax-exempt status of * * * should be revoked.

Governments Position

It is the government's position that the tax exempt status of * * * be revoked because the organization has exceeded the 35% gross receipts limitation on income from non-member sources.

The organization also does not adhere to the recordkeeping requirements of Revenue Procedure 70-17 as they were unable to produce records regarding their membership or the rental income.

* * * exempt status should be revoked because it regularly derives a substantial part of its income from nonmember sources. Forms 990 EZ clearly discloses that the revenue exceeds the 35% limitation on nonmember income sources established by Public Law 94-568.

Conclusion

* * * is not operating as an organization described in Section 501(c)(7) of the Internal Revenue Code. Accordingly, we propose to revoke the organization's exempt status effective as of January 1, 20XX. The organization will be required to file Form 1120 for all tax periods subsequent to the revocation of their tax exempt status.