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    Internal Revenue Service
 Revenue Ruling

Rev. Rul. 66-149

1966-1 C.B. 146

Sec. 501

IRS Headnote

A social club is not exempt from Federal income tax as an organization
described in section 501(c)(7) of the Internal Revenue Code of 1954 where
it regularly derives a substantial part of its income from nonmember
sources such as, for example, dividends and interest on investments which
it owns. However, a club's right to exemption under section 501(c)(7) of
the Code is not affected by the fact that for a relatively short period a
substantial part of its income is derived from investment of the proceeds
of the sale of its former clubhouse pending the acquisition of a new home
for the club. 

I.T. 3302, C.B. 1939-2, 105, superseded. 

Full Text

Rev. Rul. 66-149 

Advice has been requested whether a social club which regularly receives a
substantial part of its income from interest and dividends on investments
qualifies for exemption from Federal income tax under section 501(c)(7) of
the Internal Revenue Code of 1954. 

The income of the club consists of amounts received from its members in the
form of fees, dues, and assessments plus a substantial amount from
investments. Any excess of income over expenditures is generally reinvested
in income producing assets. 

Section 501(c)(7) of the Code provides that clubs organized and operated
exclusively for pleasure, recreation and other nonprofitable purposes are
exempt from Federal income tax provided no part of the net earnings inures
to the benefit of any private shareholder. 

Section 1.501(c)(7)-1 of the Income Tax Regulations provides that, in
general, the exemption extends to social and recreation clubs which are
supported by membership fees, dues, and assessments. However, a club
otherwise entitled to exemption will not be disqualified merely because it
raises revenue from members through the use of club facilities or in
connection with club activities. 

The statute contemplates that club falling within the ambit of section
501(c)(7) of the Code are designed primarily to provide for the pleasure
and recreation of members. These activities may be supported by funds
obtained from members, such as dues, assessments, and payment for the use
of club facilities. However, to the extent that income is derived from
nonmember sources, it inures to the benefit of the members. If such
activities are other than incidental, trivial, or nonrecurrent, it is
considered that they are intended to produce income and are reflective of a
purpose inconsistent with exemption under section 501(c)(7) of the Code.
See Rev. Rul. 58-589, C.B. 1958-2, 266, at 268, and the cases cited
therein. 

This case is distinguishable from that described in I.T. 3302, C.B. 1939-2,
105, where it was held that a social club's exemption from Federal income
tax was not affected by the fact that, for the time being, a substantial
part of its income was derived from interest. There, the investment was
found to be not made for profit, but incidental to the acquisition of new
club facilities following the sale of its old club-house for reasons found
not to have been motivated by profit. 

Such situation does not prevail in the instant case. Here the club's funds
are invested primarily for the purpose of producing income through
dividends, interest, or capital appreciation. It is evident (1) that such
income is regularly derived from nonmember sources, (2) that the income is
received in fulfillment of and pursuant to a profit motive, and (3) that
the income from investments is substantial in relation to total income.
Furthermore, as stated in Revenue Ruling 58-589, above, net earnings inure
to members through an increase in services offered by the club, without a
corresponding increase in dues, or through an increase in the amount which
would be distributed upon dissolution of the club. 

Accordingly, a social club is not exempt from Federal income tax as an
organization described in section 501(c)(7) of the Code where it regularly
derives a substantial part of its income from nonmember sources such as,
for example, dividends and interest on investments which it owns. However,
a club's right to exemption under section 501(c)(7) of the Code is not
affected by the fact that for a relatively short period a substantial part
of its income is derived from investment of the proceeds of the sale of its
former clubhouse pending the acquisition of a new home for the club. 

I.T. 3302, C.B. 1939-2, 105, is superseded.