Internal Revenue Service
Revenue Ruling
Rev. Rul. 58-589
1958-2 C.B. 266
Sec. 501
IRS Headnote
Criteria or tests for determining whether an organization qualifies for
exemption from Federal income tax under section 501(a) of the Internal
Revenue Code of 1954 as an organization described in section 501(c)(7) of
the Code.
Full Text
Rev. Rul. 58-589
Advice has been requested concerning the criteria or tests to be met in
determining whether a social club can qualify for exemption from Federal
income tax under the provisions of section 501(a) of the Internal Revenue
Code of 1954.
Section 501(c) of the Code describes certain organizations exempt from
income tax under section 501(a) and reads, in part, as follows:
(7) Clubs organized and operated exclusively for pleasure, recreation, and
other nonprofitable purposes, no part of the net earnings of which inures
to the benefit of any private shareholder.
In making a determination whether an organization comes within the
provisions of section 501(c)(7) of the Code, all facts pertaining to its
form of organization, method of operation and activities should be
considered. An organization must establish (1) that it is a club both
organized and operated exclusively for pleasure, recreation and other
nonprofitable purposes and (2) that no part of its net earnings inures to
the benefit of any private shareholder or individual. To meet the first
requirement, there must be an established membership of individuals,
personal contracts and fellowship. A commingling of the members must play a
material part in the life of the organization. See G.C.M. 23688, C.B. 1943,
283.
Section 1.501(c)(7)-1 of the Income Tax Regulations relating to the
exemption of social clubs under section 501(a) of the Internal Revenue Code
of 1954 reads as follows:
(a) The exemption provided by section 501(a) for organizations described in
section 501(c)(7) applies only to clubs which are organized and operated
exculsively for pleasure, recreation, and other nonprofitable purposes, but
does not apply to any club if any part of its net earnings inures to the
benefit of any private shareholder. In general, this exemption extends to
social and recreational clubs which are supported solely by membership
fees, dues, and assessments. However, a club otherwise entitled to
exemption will not be disqualified because it raises revenue from members
through the use of club facilities or in connection with club activities.
(b) 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). Solicitation by advertisement or
otherwise for public patronage of its facilities is prima facie evidence
that the club is engaging in business and is not being operated exclusively
for pleasure, recreation, or social purposes. However, an incidental sale
of property will not deprive a club of its exemption Italics supplied.
It is clear under the foregoing regulations 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, etc., may not be
considered as being organized and operated exclusively for pleasure,
recreation or social purposes. It is equally clear that activities by a
social club such as the solicitation by advertisements or otherwise of
public patronage of its facilities may be adverse to the establishment of
an exempt status.
Therefore, to qualify for income tax exemption, a social club should not
advertise its facilities for nonmember patronage since this would be prima
facie evidence it was engaging in business. Likewise a social club should
not engage in any type of business activity for profit which is designed to
increase or which could result in an increase in net earnings inuring to
the benefit of any shareholder or individual. Net earnings may inure to
members in such forms as an increase in services offered by the club
without a corresponding increase in dues or other fees paid for club
support or as an increase in the club's assets which would be distributable
to members upon the dissolution of the club.
However, this is not to say that a club will necessarily lose its exemption
if it derives income from transactions with other than its bona fide
members and their guests. A club will not be denied exemption merely
because it receives income from the general public, that is, persons other
than members and their bona fide guests, or because the general public on
occasion is permitted to participate in its affairs, provided such
participation is incidental to and in furtherance of its general club
purposes and it may not be said that income therefrom is inuring to
members. This is generally true where the receipts from nonmembers are no
more than enough to pay their share of the expense. Barstow Rodeo and
Riding Club, Inc. v. Commissioner , Tax Court Memorandum Opinion entered
November 30, 1953. Where, however, a club makes its facilities open to the
general public and the purpose is to increase its funds for enlarging its
club facilities or for otherwise benefiting its members, it is evident that
it is not operating as an exempt social club within the intendment of
section 501(c)(7) of the Code. Jockey Club v. Helvering , 76 Fed.(2d) 597;
Aviation Club of Utah v. Commissioner , 162 Fed.(2d) 984. Compare West Side
Tennis Club v. Commissioner , 111 Fed.(2d) 6, certiorari denied, 311 U.S.
674.
Similarly, where a club engages in income producing transactions which are
not a part of the club purposes, exemption will not be denied because of
incidental, trivial or nonrecurrent activities such as sales of property no
longer adapted to club purposes. Santee Club v. White , 87 Fed.(2d) 5. But
in order to retain exemption a club must not enter into outside activities
with the purpose of deriving profit. Section 1.501(c)(7)-1 of the Income
Tax Regulations and Santee Club v. White, supra . If such income producing
activities are other than incidental, trivial or nonrecurrent, it will be
considered that they are designed to produce income and will defeat
exemption. West Side Tennis Club v. Commissioner, supra; Mah Jongg League,
Inc. v. United States , 75 Fed.Supp. 769.
The fact that an organization believes that it falls within the scope of
this Revenue Ruling does not relieve it from the requirement that it file,
with the District Director of Internal Revenue for the internal revenue
district in which is located the principal place of business or principal
office of the organization, an application on Form 1025, Exemption
Application. See see section 1.501(a)-1 of the Income Tax Regulations.
See Revenue Ruling 56-334, C.B. 1956-2, 831, as to the status of an exempt
social club for purpose of the excise tax on club dues imposed by section
4241 of the Code.
