Section 501(c)(7) Requires Individual, not Corporate, Members for Exempt Status

As reported by the Daily Tax Report, a tax law specialist in the IRS’s Exempt Organizations office commented in a recent IRS webcast that social clubs must have individual, not corporate, members to qualify for tax-exempt status under Section 501(c)(7).  In order to meet the social interaction and recreational purposes of 501(c)(7), individuals are necessary in that “corporate members are incapable of personal contact.”  If individuals hold memberships sponsored by corporations, the particular country club or sports club will still qualify for tax-exempts status.

As explained by the IRS, “substantially all” of a tax-exempt social club’s income must come from dues, fees, assessments or other payments for typical social functions, or facilities that the club provides to its members.  The IRS reiterated that this is a key consideration for tax-exempt status under 501(c)(7).  The “substantially all” rule does permit a club to receive up to 35 percent of its gross receipts from non-member sources. Within that 35 percent rule, no more than 15 percent of the organization’s gross receipts can be from the use of its facilities or services by nonmembers.  If the “35-15 test” is not met, the IRS will examine all facts and circumstances to determine if a 501(c)(7) determination is proper.

Nicholas Mirkay