Private Letter Ruling
Number: 202216021
Internal Revenue Service
March 3, 2021
   
   
   
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce Street, MC 4020DAL
Dallas, TX 75242
   
TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION
   
Number: 202216021
Release Date: 4/22/2022
   
Date:
March 3, 2021
Taxpayer ID Number:
Form:
For Tax Period(s) Ending:
Person to Contact:
Identification Number:
Telephone Number:
   
UIL: 501.07-00
   
CERTIFIED MAIL -- Return Receipt Requested
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 May 19 **** is revoked.
   
Our adverse determination as to your exempt status was made for the following reasons:
   
You have not established that you are operated substantially for pleasure and recreation of your members or other non-profitable purposes and no part of the earnings inures to the benefit of private shareholder within the meaning of IRC Section 501(c)(7). You have made your recreational and social facilities available to the general public. You have exceeded the non-member income test for tax year ending April 30, 2018.
   
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:
   
United States Tax Court
400 Second Street, NW
Washington, DC 20217
   
U.S. Court of Federal Claims
717 Madison Place, NW
Washington, DC 20439
   
U.S. District Court for the District of Columbia
333 Constitution Ave, N W
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.
   
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.taxpayeradvocateirs.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 with-let the person listed at the top of this letter.
   
Sincerely,
   
Sean E. O'Reilly
Director, Exempt Organizations Examinations
   
Enclosures:
Publication 892
   
   
   
Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
   
Date:
August 3, 2020
Taxpayer ID number:
Form:
Tax periods ended:
Person to contact:
Name:
ID number:
Telephone:
Fax:
Hours:
Manager's contact information:
Name:
ID number:
Telephone:
Response due dale:
   
CERTIFIED MAIL -- Return Receipt Requested
   
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   
1. Request a meeting or telephone conference with the manager shown at the top of this letter.
   
2. Send any information you want us to consider.
   
3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information.
   
The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent 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 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,
   
Sean E. O'Reilly
Director, Exempt Organizations
Examinations
   
Enclosures:
Form 886-A
Form 6018
Publication 892
Publication 3498
   
   
   
                          
   
ISSUE   
   
Whether the organization continues to qualify for exemption under Internal Revenue Code section 501(c)(7) if its investment income is greater than 35% of its gross receipts?
   
FACTS 
   
 Organizational Structure    
   
The organization, ****** (******), was incorporated on May 24, ****** in the state of ******
   
The Certificate of Incorporation states that the purpose of the organization is to own, operate, and maintain a membership club, clubhouses, club rooms, recreation centers, and reception and assembly rooms for the purpose of providing for the members' entertainment, sport, recreation, and amusement of all kinds; to furnish, equip, decorate, and fit up such clubs and club rooms; to promote social and friendly intercourse among the members of such club or among their guests; to provide and supply any and all appurtenances that may be necessary, useful or convenient for the carrying on of sports, recreations and diversions of all kinds and description for the entertainment, welfare and convenience of the members and their guests and friends. To promote friendship among its members; to inculcate in them a high sense of loyalty to each other; to stimulate their intellectual advancement and to hold meetings and social gatherings for the better realization of such purposes.
   
 Form 990-EZ and Form 990-T    
The ****** was examined for the tax year ending April 30, 20**. The name of the organization listed on Form 990-EZ is:
   
The ****** reported $ ****** in total gross receipts for the year ending April 30, 20**. The following is a breakdown of revenues reported in Part I, Revenue, Expenses, and Changes in Net Assets or Fund Balances, of the Form 990-EZ:
   
       
   
The organization's primary exempt purpose stated in Part Ill, Statement of Program Service Accomplishments, is "Fraternal Organization."
   
The ****** Form 990-T was viewed but not examined for the year ending April 30, 20**. The ****** reported Unrelated Trade or Business Income on Form 990-T as $ ****** in Part 1, Unrelated Trade or Business Income, as follows:
   
       
   
 Initial Contact    
Revenue Agent was first contacted by ******, the power of attorney (POA), for the ******. The POA indicated that the organization no longer coducts any activities and all the Income received is derived from a ******-year note receivable for the sale of the ****** clubhouse in 20**.
   
Initial Appointment   
A field examination was not scheduled as the POA stated the ****** sold its clubhouse in ****** and since stopped conducting any operations. The examination was conducted through correspondence.
   
Membership   
The Club did not receive any income other than investment income as verified on the bank statements provided.
   
Facility   
As explained by the POA over the phone, the ****** clubhouse has been sold on July 15 ****** to an unrelated entity. Revenue Agent received a signed statement by the POA stating that the entity that bought the clubhouse was not related and are not former members of the ******.
   
 Social and Recreational Activities    
The POA stated that the ****** no longer conducts any social and recreational activities and will move forward to dissolving the ******.
   
LAW   
   
 Internal Revenue Code (IRC)    
IRC §501(d)(7) provides exemption from income taxes for 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.
   
 Treasury Regulation    
Treasury Regulation §1.501(c)(7)-1(a) further provides that in general, this exemption extends to social and recreation clubs which are supported solely by membership fees, dues, and assessments. However, a club otherwise entitled to exemption will not be disqualified because it raises revenue from members through the use of club facilities or in connection with club activities.
   
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;
   
(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 club may receive investment income up to the full 35 percent of its gross receipts if no income is derived from non-members' use of club facilities.
   
(c) In addition, the Committee Report states that where a club receives unusual amounts of income, such as from the sale of its clubhouse or similar facilities, that income is not to be included in the 35 percent formula.
   
 Revenue Ruling    
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, for example, dividends and interest on investment it owns.
   
TAXPAYER'S POSITION   
   
Revenue Agent discussed the proposed revocation with ****** POA, explained the requirements of an organization exempt under IRC section 501(c)(7), and why the ****** no longer meets those requirements. The POA stated that he agrees with the proposed revocation.
   
GOVERNMENT'S POSITION   
   
As a result of the examination, the ****** fails to establish that it is a social and recreational club that qualifies for exemption from federal income tax under section 501(c)(7) of the IRC and section 1.501(c)(7)-1 of the Treasury Regulations because its investment income exceeds the allowable 35% investment income limitation. Furthermore, the ******* is no longer conducting any social and recreational activities.
   
The ****** received ** % of its income for tax year ending April 30, ****** from investment income, calculated in the following table:
   
       
   
The ****** investment income exceeds the 35% threshold permissible for an organization tax-exempt under section 501(c)(7) of the IRC.
   
Public Law 94-568 provides that social clubs are permitted to receive up to 35% of their gross receipts from sources outside of their membership without losing their tax-exempt status, and that within that 35%, not more than 15% of gross receipts should be derived from the use of a social club's facilities or services by the general public.
   
The ****** is like the organization in Revenue Ruling 66-149, in that the ****** derives a substantial part of its income from non-member sources; ** % of the ****** income is investment income.
   
CONCLUSION   
   
As a result of the examination, the ****** is not a club organized for pleasure, recreation, and other nonprofitable purposes because its investment income exceeds the allowable 35% investment income for organizations under section 501(c)(7) of the IRC. Moreover, the ****** no longer conducts any social and recreational activities.
   
The ****** should no longer be tax-exempt under section 501(c)(7) of the IRC. Therefore, it is proposed that the ****** tax exempt status under section 501(c)(7) of the IRC be revoked effective May 1, 20**. The organization will be required to file Form 1120 for all tax periods subsequent to the revocation of their exempt status.
   
If you agree with this conclusion, please sign the attached forms. If you disagree, please submit a statement of your position.