IRS Denies Exemption to Fishing Association

Contact person/ID number: * * *
Contact telephone number: * * *

UIL Number: 501.07-00
Release Date: 5/29/2020

 Date: March 5, 2020

Employer ID number: * * *

Form you must file: * * *

Tax years: * * *

Dear * * *:

This letter is our final determination that you don't qualify for tax-exempt status under Section 501(c)(7) of the Internal Revenue Code (the Code). 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 federal income tax returns for the tax years listed at the top of this letter using the required form (also listed at the top of this letter) within 30 days of this letter unless you request an extension of time to file.

We'll make this final adverse determination letter and the proposed adverse determination letter available for public inspection (as required under Section 6110 of the Code) after deleting certain identifying information. Please read the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Notice 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 contact the person listed at the top of this letter. If you have questions about your federal income tax status and responsibilities, call our customer service number at 1-800-829-1040 (TTY 1-800-829-4933 for deaf or hard of hearing) or customer service for businesses at 1-800-829-4933.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Notice 437
Redacted Letter 4034, Proposed Adverse Determination under IRC Section 501(a)
Redacted Letter 4040, Final Adverse Determination under IRC Section 501(a) Other Than 501(c)(3) — No Protest

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Contact person/ID number: * * *
Contact telephone number: * * *
Contact fax number: * * *

UIL: 501.07-00

Date: January 13, 2020

Employer ID number: * * *

LEGEND:

B = date
C = association
D = university
e dollars = amount

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 are an association formed on B. Your Constitution states your purpose is:

• To unite men and women through the common bond of fishing.

• To educate anglers and develop angling skills (emphasis on bass fishing).

• To strengthen student camaraderie.

• Promote sportsmanship through athletic competition and fellowship.

• Encourage good stewardship of our natural resources.

• To develop and train student athletes for participation in tournament angling.

• To participate in activities that enhance the future of the sport of angling.

You bring students together to enjoy the sport of bass fishing. The club is affiliated with C and competes in affiliated C sanctioned tournaments. Any club member may participate but must earn a spot through a tryout process. You will also teach fishing tactics to all levels of fishermen and will participate in community activities that enhance the future of bass fishing.

Annually, the club participates competes in * * * regional tournaments that involve travel, lodging, and operating expenses that are all provided out of pocket by club members, who compete in * * * boat fields to qualify for that year's national championship event. Any purse money won goes back to the club for funding and support, not the angler's pockets.

You organize and run a tournament each spring where a percentage of funds is retained for club use. The remainder is paid out to top finishers. This tournament is an open invite, open to the public.

The club volunteers at youth and community fishing related events, including running and helping at local river clean-ups and youth fishing derbies to promote the sport of fishing and make such events possible due to limited manpower that the organizations who organize such events have. Personal travel expenses fall on the volunteers, and no form of income or payment to the club or to the volunteers is received. One event like this is expected each spring and fall. You also attend and operate a booth at a local fishing expo. Members attend the booth to distribute information, promote the annual tournament, help run games and a kid zone, and to sell branded apparel raising funds for the club.

Additionally, you hold regular meetings and work to promote the club through social media and other forms including advertising at D. The membership requirement for the club is that one must be a currently enrolled student at D.

While your Constitution indicates members pay a fee of e dollars, you have stated you have no non-member income because there are no club dues, and all income comes from companies and corporate sponsors that donate money to the club or fundraisers held by the club. The money received by the club is then used to pay for expenses at fundraiser events or given to club members to cover travel expenses. Your sources of income are listed as the annual tournament, apparel sales, crowd-sourced fundraising, sponsorships, purse money from competitions and outside donations.

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 arc 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)-1(a) states that the exemption provided by Section 501(a) of the Code for an organization described in IRC 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 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.

Treas. Reg. Section 1.501(c)(7)-1(b) states that a club which engages in business, such as 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 Section 501(a) of the Code. An incidental sale of property will not deprive a club of its exemption.

Rev. Rul. 58-589, 1958-2 C.B. 266, stipulates expanded criteria for determining whether an organization qualifies for exemption under Section 501(c)(7) of the Code. The ruling considers the significance of the assertion of Treas. Reg. Section 1.501(c)(7)-1(b) that an organization that sells real estate, timber, or other products, is not organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes. 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. 66-149 states a social club is not exempt from federal income tax as an organization described in Section 501(c)(7) where it regularly derives a substantial part of its income from non-member sources. To the extent that income is derived from non-member sources, it inures to the benefit of the members. If such activities are other than incidental, trivial, or non-recurrent, it is considered that they are intended to produce income and are reflective of a purpose inconsistent with exemption under Section 501(c)(7) of the Code.

Public Law 94-568, 1976-2 C.B. 596, provides that a social club may receive up to 35% of its gross receipts, including investment income from sources outside its membership, without losing exemption. Within this 35% amount, not more than 15% 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% of its gross receipts from a combination of investment income and receipts from nonmembers so long as the latter do not represent more than 15% of the total receipts.

Application of law

Per Treas. Reg. Section 1.501(c)(7)-1(a), substantially all of your activities are not for pleasure, recreation, or other nonprofit purposes. However, all of your income is derived from non-member sources, and as a result, income from non-member sources is used to defray membership costs resulting in inurement to members. These reasons disqualify you from exemption under IRC Section 501(c)(7).

Your apparel sales, and the receipt of sponsorships and sponsor discounts in exchange for advertising and promotion of products, is not incidental, and are therefore described as prohibited sales activities in Treas. Reg. Section 1.501(c)(7)-1(b) that do not promote a social or recreational purpose. While an organization exempt under IRC Section 501(c)(7) may conduct traditional, permissible business activities these may not constitute more than 15% of organizational revenue (see Public Law 94-568). Further, generally 35% of your gross receipts cannot come from sources outside your membership. Your income generating activities are regular and not incidental, totaling well over the allowed 35% and 15% thresholds and above consideration for facts and circumstances.

Rev. Rul. 58-589 further describes how these aforementioned income producing activities removes you from consideration as operating exclusively for purposes under IRC Section 501(c)(7). Participation with these sources of revenue must be incidental to and in furtherance of general club purposes and a club must not enter into outside activities with the purpose of deriving profit. As little or no member dues are charged, you are reliant on sponsorships, sales, donations and tournament proceeds for your operations. This income is not trivial, incidental, or non-recurring but are your primary sources of income, paid to you regularly.

You are similar to the organization denied exemption in Rev. Rul. 66-149 because your income producing activities are recurring, rather than sporadic, and produce income over the allowable limits from non-member sources. Further, your non-member income accounts for nearly all of your income, with little to no member-related income with which to offset.

Conclusion

Based on the facts provided above, we hold that you do meet the requirements for tax exemption under IRC Section 501(c)(7). While you are conducting social and recreational activities you receive a majority of your income from non-member sources on a recurring basis hereby disqualifying you from exemption.

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 Decision 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:

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