Social Clubs (I.R.C. 501(c)(7))

General Discussion

Section 501(c)(7) provides for the exemption from federal income tax of clubs organized and operated for pleasure, recreation and other nonprofitable purposes, substantially all 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.

Section 1.501(c)(7)-1(b) states that a club which engages in business, such as making its social and recreational facilities available to the general public or by 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).

Rev. Rul. 58-588 holds that a social club that sells an unlimited number of memberships to so-called “members,” who have no voice in the management of the club and whose only rights are to use the club’s facilities upon payment of specified fees, is not a tax-exempt social club within the meaning of section 501(c)(7).  Income from the members was, in reality, income from the general public.

Rev. Rul. 66-225 holds that a nonprofit organization that provides entertainment to its members does not qualify for exemption under section 501(c)(7) where it is controlled by a taxable corporation and operated as an integral part of such corporation’s business.

Rev. Rul. 69-635 holds that an automobile club whose principal activity is rendering automobile services to its members but has no significant social activities, does not qualify for exemption under section 501(c)(7).  The basis for this conclusion is the fact that the club had no significant commingling of its members.

In Chattanooga Automobile Club v. Commissioner, the court held that to be exempt under the act of Congress, a club must have been organized and operated exclusively for pleasure, recreation and other non-profitable purposes.  The court further stated that the words “other non-profitable purposes” must be construed as coming within the same classification as pleasure and recreation.  In addition, there must be at least some sort of commingling of members to constitute a club.  The court held that the two automobile clubs petitioning the court were not exempt under section 101(9) of the Internal Revenue Code of 1939 as a social club because the members of these clubs did not commingle.

Private Letter Rulings

PLR 201430019 (Jul. 28, 2014):  The organization’s activities satisfied the activities test because all of its activities were “normal and usual” activities for a social club. The organization’s solicitation and receipt of advertising income for a club magazine from nonmembers, the solicitation and receipt of car racing event sponsorship payments from nonmembers and the conduct of an annual raffle limited to members were activities traditionally carried on by exempt social clubs.

PLR 201551010 (Sept. 23, 2015):  Corporation formed as a private club that “will be for the pleasure and enjoyment of its members, their families and guests, and arrange for suitable facilities at a premise where activities of a hospitable, social, and fraternal nature may be conducted as a private club in accordance with D” (state law concerning private club alcohol licenses) is not found to qualify for exemption under I.R.C. 501(c)(7).  The corporation was like the corporation in Rev. Rul. 66-225 in that it was organized as an integral part of a for profit corporation (the manager).  There was also insignificant commingling.  Members do not have any interaction other than being at the same location to purchase alcohol.  It seems the corporation was some sort of alcohol buying club.

PLR 201425016: A 501(c)(7) golf-related social club’s sale of a conservation easement to the municipal entity did not cause the club to not be engaged in exempt activity.

 

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