Social Club Loses Exemption

Person to Contact: * * *
Identification Number: * * *
Telephone Number: * * *
Fax Number: * * *

UIL: 501.07-00
Release Date: 12/24/2020

Date: August 6, 2020

Taxpayer ID Number: * * *

Form: * * *

For Tax Period(s) Ending: * * *

LAST DAY FOR FILING A PETITION WITH THE TAX COURT: * * *

Dear * * *:

This is a final determination that you do not 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) for the tax period(s) above.

Our adverse determination as to your exempt status was made for the following reasons:

During the tax year in question, you did not qualify for exemption as a social club described in IRC section 501(c)(7) because you have had no members since 20XX and your gross receipts have consistently exceeded the limitation of 35%, including investment income, from sources outside of your membership.

Organizations that are not exempt under IRC 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 IRC Section 7428 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 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 IRC Section 7428.

You may 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.

Taxpayer Advocate assistance can't be used as substitute for established IRS procedures, formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically correct tax determination, nor extend the time fixed by law that you have to file a petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling.

You can get any of the forms or publications mentioned in this letter by calling 800-TAX-FORM (800-829-3676) or visiting our website at www.irs.gov/forms-pubs.

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

Sincerely,

Sean E. O'Reilly
Director, EO Examinations

Enclosures:
Publication 892

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Person to contact:
Name: * * *
ID number: * * *
Telephone: * * *
Fax: * * *
Address: * * *

Manager's contact information:
Name: * * *
ID number: * * *
Telephone: * * *

Date: January 21, 2020

Taxpayer ID number: * * *

Form: * * *

Tax periods 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.

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,

Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018

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ISSUE

Whether the * * * is still qualified for exemption under Section 501(c)(7) of the Internal Revenue Code?

FACTS

* * * was a local chapter of a national fraternity. This local chapter was originally colonized on the campus in * * * in 19XX. The organization was granted its exempt status in May 19XX as an exempt organization under section 501(c)(7) of the Internal Revenue Code. The chapter purchased a property which became the residence for the fraternity members for many years.

In 19XX, the chapter folded. The property was subsequently sold in * * *. Since that time, the local chapter has been acting as the mortgage holder and collecting the monthly payments from the sale.

The chapter was once recolonized at * * * in * * *, and the * * * acted as the provider of student housing for the fraternity members by renting another facility and charging the students a rental fee which coincided with the semester term of the school. However, those students did not act in a responsible manner, the chapter again closed in 20XX. Since then, the chapter has been collecting the mortgage payments and investing the funds to build up savings so that the chapter can be recolonized at some point in the future.

The organization currently has * * * officers who oversee the funds and make investment decision. There are no official minutes from meeting. * * * did not have any member or any social event in the past * * * years. The organization's source of income has been solely from the investment since 19XX.

LAW

Section 501(c)(7) of the Internal Revenue Code defines an exempt organization under this section as one that is organized and operated exclusively for the pleasure, recreation, and other nonprofit purposes, for its members.

Section 1.501(c)(7)-1 of the Income Tax Regulations provides that, in general, the exemption extends to social and recreation clubs which are supported by membership fees, dues, and assessments. However, 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).

Revenue Procedure 71-17 as amended by Public Law 94-568 provides certain gross receipts safe harbors; i.e. Social Clubs may receive up to 35% of their total gross receipts, including investment income, from sources outside of their membership without jeopardizing their tax-exempt status. Within this 35% limit, no more than 15% of a club's gross receipts may be derived from nonmember use of the club's facilities and/or services. If these standards are exceeded, a Social Club will not qualify for exemption pursuant to IRC section 501(c)(7).

TAXPAYER'S POSITION

The position of the taxpayer is unknown at this time.

GOVERNMENT'S POSITION

* * * has failed to qualify to be exempt under 501(c)(7) because it has no members since 20XX and its gross receipts has consistently exceeded the limitation of 35%, including investment income, from sources outside of their membership. Therefore, the * * * no longer qualifies as an organization that is organized and operated as a Social Club as described in IRC section 501(c)(7).

Revocation of its tax-exempt status is warranted, effective January 1, 20XX.

CONCLUSION

As a taxable entity, the organization is required to file Form 1120, U.S. Corporation Income Tax Return beginning in the tax year ending December 31, 20XX and in all future tax years.

Additionally, the organization is reminded of the provisions of Internal Revenue Code Sec 277 concerning membership organizations which are not exempt organizations.

In accordance with the provisions of Internal Revenue Code Section 6014, copies of these examination conclusions and consent to the revocation of tax exemption will be submitted to the * * * Department of Revenue at the conclusion of the examination.