Social Clubs and 501(c)7 Tax Exempt Status

By | November 11, 2015

What are Social Clubs under IRS Rules?

Social clubs are organized to provide pleasure or recreation to your members. Many different types of organizations may fall into this category. Typical examples include country clubs, college fraternities and sorority, dinner clubs, hobby clubs, golf and tennis clubs, swimming clubs, and amateur sport clubs. But that by no means is a complete list. A social club can be focused on just about any non-business recreation or social activity that a group of people might get together to enjoy. Social clubs that meet requirements are exempt from federal income tax under Section 501c(7) of Internal Revenue Code.


What are the Benefits of Social Club Status?

A social club that is exempt under Section 501c(7) generally does not pay tax on dues, fees, charges, or similar amounts that it’s members pay for the goods, facilities, or services that the club provides to the members and their family and guests. In the lingo of the tax code, this is called exempt function income. We’ll talk about it in more detail later. In this way, 501c(7)s are similar to other types of tax-exempt organizations.


What is Considered a Social Club by IRS?

They generally are not taxed on the income they generate that is substantially related to furthering their exempt purpose. For instance, a tax-exempt 501c(3) school generally is not taxed on the tuition its students pay. On the other hand, social clubs generally are taxed on all of their other income, called unrelated business taxable income, or UBTI. Generally, UBTI is income derived from outside the club membership, including amounts that non-members pay for the club’s services or facilities and from investment income, also called passive income. The tax on investment income is perhaps the most significant difference between the tax treatment of tax exempt social clubs and most other tax exempt organizations. Those other types of organizations generally are not taxed on their investment income. So the tax benefits granted to c(7)s are more limited than the tax benefits for most other types of tax-exempt organizations


How to maintain IRS Social Club Status?

The requirements for an organization to obtain and maintain exempt status under Section 501c(7) are; one, it must be a club; two, it must be organized for pleasure, recreation, or other non-profitable purposes;three, substantially all of its activities must be for such purposes; four, no part of it or net earnings can enure to the benefit of any private shareholder; and, five, it can’t have a written policy which discriminates against individuals seeking membership on the basis of race, color, or religion. Let’s talk about each of these five requirements in a little more detail. At the outset, though, I want to mention that, in particular the third factor, that substantially all of the social club’s activities must be for its exempt purpose of providing recreation or pleasure to its members may be of the most interest to you all today. But first, the first requirement is that the organization must be a club. That might sound obvious, but it’s worth talking about the characteristics of a club, because they help explain why some organizations do or do not qualify for c(7) status. In particular, you’ll see that this requirement helps us at the IRS to distinguish a c(7) organization from a regular commercial operation doing business with the public, which is not eligible for tax exempt status.


Keeping IRS Social Club Status

It is a requirement that substantially all of the c(7)’s activities must be for exempt recreational pleasure or similar non-profit purposes. That means that substantially all the c(7) income must be from member fees, dues, assessment, or other payments for the traditional social activities or facility that the organization provides to its members. Another way to put this is that this requirement limits the amount of income a c(7) can earn from non-membership sources, including investment income.

Well traditional activity are those that are engaged with a member which further exempts purpose of the organization to provide pleasure, recreation, or other non-profit purposes. For example, a golf club income from green fees will be a traditional income, as with member payment for meals in a dining room of the social club or country club. Investment income is also treated as traditional income for this purpose, and so it is measured on the 35/15 test and not the more restricted standard. Non-traditional activities are those that will not further these purposes, even if conducted with members. For example, the sale of packaged liquors and food for takeout are not traditional activities.


Filing Tax Return as s Social Club?

A social club can file form 1024 to obtain the IRS’s recognition of the club status as a tax exempt 501c(7) organization. The club can show on the form 1024 how it is organized and how it is or will be operated so that it meets the five requirements for exemption; that it is a club organized for recreational, social, or similar purpose; substantially all the activities of which further its exempt purposes; that there is no inurement; and that it does not have a written discriminatory policy. If we determine the club meets the five requirements based on the form 1024, we’ll issue the club a determination letter confirming that we recognize the club as exempt under Section 501c(7). A club that gets a determination letter from the IRS after filing a form 1024 has the benefit of assurance from the IRS that as long as the club is organized and operated as described in the form 1024 application it is exempt.

Social Club IRS Exempt Status

However, a social club is not required to seek recognition of its exempt status from the IRS. A club that believes it meets the five requirements can take the position that it is tax exempt and operate as such, without receiving recognition of its status from the IRS. But the club still must file the annual returns required of a 501c(7) organization, which we will talk about momentarily. Additionally, and perhaps more importantly, the club will not have any assurance or comfort that the IRS agrees that the club is tax exempt under Section 501c(7). As a practical matter, this means that even though a club may operate and file returns for several years, claiming that it owes no tax, the IRS could examine the organization and determine that it did not meet the organizational and operational requirements for its past years.The club would then not only be prevented from claiming tax exempt status going forward but could be revoked for past years, and, therefore, owe tax on its income for those prior years.