Social Club Loses Exemption

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

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

Date: August 11, 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. Your determination letter dated July, 19XX is revoked.

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

Your non-member income, primarily from renting the * * * apartments, makes up 0% of your gross income for the year under audit. For the last five tax years, your nonmember income has comprised between 0 percent and 0 percent of your gross income well in excess of both 15 percent limitation on non-member income and the 35 percent limitation on investment income.

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 any questions about this letter, please contact the person whose name and telephone number are shown in the heading 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 1, 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.

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,

Denise Gonzalez
for Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018
Publication 892
Publication 3498

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ISSUE

Should the * * * continue to qualify as an organization described in Section 501(c)(7) of the Internal Revenue Code?

FACTS

The * * * is exempt as an organization described in IRC § 501(c)(7) to provide social, recreational and other activities to its members. The organization was created to provide support and involvement for the deaf community in their area.

The organizing holds social gatherings for the neighborhood. This include events such as Thanksgiving fairs, Halloween party, and St. Patrick events. Some events include admission fees and some charge for refreshments. The events may also involve games and prizes. The organization also has workshops for services relating to the deaf community.

The organization has a facility consisting of large open rooms, a kitchen, a basement, and a large meeting room. They hold monthly meetings at the facility and use it for storing various items that the organization uses for its various fundraisers. These items include coolers, paper plates and cups, and other miscellaneous material.

The facility also has units upstairs that are rented out as apartments. The apartments are available for rent to the general public.

The organization reported investment income on its Form 990 EZ return. The investment income reported is non-member rental income derived from renting the apartment units in their facility. The rental income has been reported on Form 990-T, Exempt Organization Business Income Tax Return, for the periods December 31, 20XX - December 31, 20XX, as follows:

Form 990	20XX	20XX	20XX	20XX	20XX
Nonmember Income (gross rents)	$0	$0	$0	$0	$0
Total Revenue	$0	$0	$0	$0	$0
Percentage of non-member income	0%	0%	0%	0%	0%

LAW

IRC § 501(c)(7) exempts from federal income tax clubs organized for pleasure, recreation, and other non-profitable purposes, substantially all of the activities of which are for such purposes and not part of the net earnings of which inures to the benefit of any private shareholder.

Section 1.501(c)(7) of the Regulations provides that, in general, the exemption extends to social and recreation clubs supported solely by membership fees, dues and assessments. However, a club that engages in a business, such as making its social and recreational facilities open to the general public, is not organized and operated exclusively for pleasure, recreation and other non-profitable purposes, and is not exempt under section 501(a).

Prior to its amendment in 1976, IRC § 501(c)(7) required that social clubs be operated exclusively for pleasure, recreation and other nonprofitable purposes. 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 Session, 1976-2 C.B. 597) further states;

Revenue Ruling 66-149 holds a social club as not exempt as an organization described in IRC § 501(c)(7) where it derives a substantial part of its income from non-member sources.

TAXPAYER’S POSITION

Taxpayer’s position has not been provided.

GOVERNMENT’S POSITION

Based on the examination, the organization does not qualify for exemption as a social club described in IRC § 501(c)(7) and Treas. Reg. §1.501(c)(7) which provides that in general, this exemption extends to social and recreation clubs which are supported solely by membership fees, dues, and assessments.

Rev. Rul. 66-149 support this position stating that a social club is not exempt under Code section 501(c)(7) if it regularly derives a substantial part of its income from nonmember sources, such as investment income.

The organization’s non-member income, primarily from renting the * * * apartments, makes up 0% of its gross income for the year under audit. For the last five tax years, the non-member income has comprised between 0 percent and 0 percent of its gross income well in excess of both 15 percent limitation on non-member income and the 35 percent limitation on investment income.

Accordingly, it is proposed that the organization’s tax-exempt status be revoked effective January 1, 20XX.

CONCLUSION

The * * * did not qualify for exemption under section 501(c)(7) of the Code during tax period ending December 31, 20XX, as your nonmember income has exceeded the 15 percent nonmember income and 35 percent investment income limitations on a continuing basis. Therefore, it is proposed that your exempt status under § 501(c)(7) of the Code be revoked effective January 1, 20XX.

Should this revocation be upheld. Form 1120 must be filed starting with tax periods ending December 31, 20XX.

If you agree to this conclusion, please sign the attached Forms.

If you disagree please submit a statement of your position.