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    Internal Revenue Service
 Revenue Ruling

Rev. Rul. 66-225

1966-2 C.B. 227

Sec. 501

IRS Headnote

A nonprofit organization which provides entertainment for its members does
not qualify for exemption under section 501(c)(7) of the Internal Revenue
Code of 1954 where it is controlled by a taxable corporation and operated
as an integral part of such corporation's business. 

Full Text

Rev. Rul. 66-225 

Advice has been requested whether a nonprofit organization incorporated to
provide entertainment for its members qualifies for exemption as a social
club under section 501(c)(7) of the Internal Revenue Code of 1954 where it
is controlled by a  taxable corporation and operated as an integral part of
such corporation's business. 

The club's articles of incorporation state that its purpose is to operate a
private club for its members and to provide entertainment, food, and
refreshment for them. The club has three classes of memberships: (1) An
annual dues paying membership; (2) a 90-day membership; and (3) a weekly
membership for persons temporarily residing at an adjoining motel. 

The club has a dining area and a cocktail lounge. The club's patrons are
permitted to bring liquor and alcoholic beverages to the club. 

The clubhouse with all fixtures and equipment is leased by the organization
from the motel for a nominal fee, but the motel retains the exclusive right
to serve food and other beverages to the club's members. The club has no
net worth. Its income is received from membership dues and fees, about
one-fourth of which is realized from temporary members. Practically all of
the organization's income is spent for entertainment. 

The club was formed and incorporated by the owners of the motel. The motel
serves the club's patrons from its own restaurant which also adjoins the
motel. All waitresses, bartenders, and other persons working at the club
are motel employees. All receipts from meals and beverages are received
directly by the motel and its personnel. 

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. 

Under the circumstances described above the motel owners organized the club
to operate a cocktail lounge and cafe as an integral part of their motel
and restaurant business. Therefore, the club is not organized and operated
exclusively for pleasure, recreation, and other nonprofitable purposes. 

Accordingly, it does not qualify for exemption under section 501(c)(7) of
the Code.