Private Letter Ruling
Number: 202150023
Internal Revenue Service
February 28, 2018
   
   
   
DEPARTMENT OF THE TREASURY
Internal Revenue Service
TE/GE EO Examinations
1100 Commerce Street, MC 4920 DAL
Dallas, TX 75242
   
TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION
   
Date: FEB 28 2018
   
Number: 202150023
Release Date: 12/17/2021
   
UIL: 501.03-00
   
Person to Contact:
Identification Number:
Contact Telephone Number:
EIN:
   
CERTIFIED MAIL -- Return Receipt Requested
   
Dear *******:
   
This is a final revocation letter as to your exempt status under §501(c)(7) of the Internal Revenue Code. The Internal Revenue Service's recognition of your organization as an organization described in IRC §501(c)(7) is hereby revoked effective January 1, 20XX.
   
We have made this determination for the following reason(s):
   
IRC §501(c)(7) and Treas.Reg. §1.501(c)(7) exempts from income tax, clubs organized for pleasure, recreation, and other nonprofitable purposes, where substantially all activities are for such purposes and no part of the net earnings inure to the benefit of any private shareholder.
   
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 members of the public. Your organization has exceeded the fifteen percent (15%) non member threshold as outlined in Public Law 94-568, on a recurring basis.
   
As such, you failed to meet the requirements of IRC §501(c)(7) and Treas.Reg. §1.501(c)(7) and you do not qualify for exemption.
   
You are required to file Federal income tax returns on Form 1120. These returns should be filed with the appropriate Service Center for the year ending December 31, 20XX, and for all years thereafter.
   
Processing of income tax returns and assessment of any taxes due will not be delayed should a petition for declaratory judgment be filed under section 7428 of the Internal Revenue Code.
   
If you decide to contest this determination in court, you must initiate a suit for declaratory judgment in the United States Tax Court, the United States Claim Court or the District Court of the United States for the District of Columbia before the 91st day after the date this determination was mailed to you. Contact the clerk of the appropriate court for the rules for initiating suits for declaratory judgment. Please contact the clerk of the respective court for rules and the appropriate forms regarding filing petitions for declaratory judgment by referring to the enclosed Publication 892. Please note that the United States Tax Court is the only one of these courts where a declaratory judgment action can be pursued without the services of a lawyer. You may write to the courts at the following addresses:
   
United States Tax Court
400 Second Street, NW
Washington, DC 20217
   
US Court of Federal Claims
717 Madison Place, NW
Washington, DC 20005
   
U.S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, DC 20001
   
You may call the IRS telephone number listed in your local directory. An IRS employee there may be able to help you, but the contact person at the address shown on this letter is most familiar with your case. You may also call the Internal Revenue Service Taxpayer Advocate. The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. We 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 our assistance, which is always free, we will do everything possible to help you. Visit taxpayeradvocate.irs.gov or call 1-877-777-4778.
   
If you have any questions, please contact the person whose name and telephone number are shown in the heading of this letter.
   
Sincerely yours,
   
Maria Hooke
Director, EO Examinations
   
Enclosures:
Publication 892
   
   
   
Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
Exempt Organizations Examinations
   
Date: July 13, 2017
Taxpayer Identification Number:
Form:
Tax Year Ended:
Person to Contact / ID Number:
Employee ID:
Contact numbers:
Telephone:
Fax:
Manager's Name / ID Number:
Employee ID
Manager's Contact Number
Response Due Date:
   
Certified Mail -- Return Receipt Requested
   
Dear *******:
   
Why you are receiving this letter   
We propose to revoke your status as an organization described in section 501(c)(7) of the Internal Revenue Code (Code). Enclosed is our report of examination explaining the proposed action.
   
What you need to do if you agree   
If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed Action -- Section 7428, and return it to the contact person at the address listed above (unless you have already provided us a signed Form 6018). We'll issue a final revocation letter determining that you aren't an organization described in section 501(c)(7).
   
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 revocation letter. Failing to respond to this proposal will adversely impact your legal standing to seek a declaratory judgment because you failed to exhaust your administrative remedies.
   
Effect of revocation status   
If you receive a final revocation letter, you'll be required to file federal income tax returns for the tax year(s) shown above as well as for subsequent tax years.
   
What you need to do if you disagree with the proposed revocation   
If you disagree with our proposed revocation, you may request a meeting or telephone conference with the supervisor of the IRS contact identified in the heading of this letter. You also may file a protest with the IRS Appeals office by submitting a written request to the contact person at the address listed above within 30 calendar days from the date of this letter.
   
The Appeals office is independent of the Exempt Organizations division and resolves most disputes informally.
   
For your protest to be valid, it must contain certain specific information including a statement of the facts, the applicable law, and arguments in support of your position. For specific information needed for a valid protest, please refer to page one of the enclosed Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status, and page six of the enclosed Publication 3498, The Examination Process. Publication 3498 also includes information on your rights as a taxpayer and the IRS collection process. Please note that Fast Track Mediation referred to in Publication 3498 generally doesn't apply after we issue this letter.
   
You also may request that we refer this matter for technical advice as explained in Publication 892. Please contact the individual identified on the first page of this letter if you are considering requesting technical advice. If we issue a determination letter to you based on a technical advice memorandum issued by the Exempt Organizations Rulings and Agreements office, no further IRS administrative appeal will be available to you.
   
Contacting the Taxpayer Advocate Office is a taxpayer right   
You have the right to contact the office of the Taxpayer Advocate. Their assistance isn't a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate can't reverse a legally correct tax determination or extend the time you have (fixed by law) to file a petition in a United States court. They can, however, see that a tax matter that hasn't been resolved through normal channels gets prompt and proper handling. You may call toll-free 1-877-777-4778 and ask for Taxpayer Advocate assistance. If you prefer, you may contact your local Taxpayer Advocate at:
   
Internal Revenue Service
Office of the Taxpayer Advocate
   
For additional information   
If you have any questions, please call the contact person at the telephone number shown in the heading of this letter. If you write, please provide a telephone number and the most convenient time to call if we need to contact you.
   
Thank you for your cooperation.
   
Sincerely,
   
Maria Hooke
Director, EO Examinations
   
Enclosures:
Report of Examination
Form 6018
Form 4621-A
Publication 892
Publication 3498
   
   
   
                          
   
 ISSUE    
   
Whether ******* continues to qualify as a social club under Internal Revenue Code (IRC) §501(c)(7), given that its income from nonmember sources exceed the permissible limitations.
   
 FACTS  
   
******* was granted tax exemption under IRC §501(c)(7) on March 14, 19XX. Per the Club's Form 1024, application for tax exempt status, the purpose of the organization is "promotion of social welfare of the members with daily social activities at the clubhouse, holiday parties, and annual dinner dance" Members must be ******* by birth or married to a spouse who is ******.
   
The organization's Form 990 was selected for examination for period ending December 31, 20XX ******* due to the reporting of investment income that exceeds the 35% limitation.
   
Our examination determined that the revenue reported as investment income was derived from the rental of two second floor apartments above the organization's clubhouse.
   
Inspection of the organization's filed Forms 990 for years 20XX ******* and 20XX discloses similar levels of revenue from nonmember sources that exceed both the 15% and 35% limitations, as illustrated in the table below.
   
       
   
 LAW    
   
Internal Revenue Code § 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 Income Tax 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:
   
(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 66-149 holds a social club as not exempt as an organization described in Internal Revenue Code § 501(c)(7) where it derives a substantial part of its income from non-member sources.
   
Revenue Procedure 71-17 sets forth the guidelines for determining the effect of gross receipts derived from the general public's use of a social club's facilities on exemption under Internal Revenue Code § 501(c)(7). Where nonmember income from the usage exceeds the standard as outlined in this Revenue procedure, the conclusion reached is that there is a non-exempt purpose and operating in this manner jeopardizes the organization's exempt status.
   
 TAXPAYER'S POSITION    
   
The taxpayer's representative ****** indicated that the organization is most likely to agree to revocation at this time.
   
 GOVERNMENT'S POSITION    
   
****** has exceeded the nonmember income thresholds, permitted in Public Law 94-568 for organizations exempt under IRC § 501(c)(7), on a recurring basis during tax years ending December 31, 20XX ******, December 31, 20XX ******, and December 31, 20XX******.
   
Consequently, revocation of the ******* exempt status as an organization exempt under IRC § 501(c)(7) is warranted.
   
 CONCLUSION    
   
Based on the above facts and circumstances, and in light of the statutory law and rulings cited, the Club does not qualify for tax-exemption under IRC §501(c)(7) and should be revoked. The proposed date of the revocation is January 1, 20XX ******.