Social Clubs |
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Requirements for Exemption - In General: To be exempt under Internal Revenue Code section 501(c)(7), a social club must be organized for pleasure, recreation, and other similar nonprofitable purposes and substantially all of its activities must be for these purposes. A club will not be recognized as tax exempt if its charter, by laws, or other governing instrument, or any written policy statement provides for discrimination against any person based on race, color, or religion. There is an exception, however, for a club that in good faith limits its membership to members of a particular religion, to further the teachings or principles of that religion and not to exclude individuals of a particular race or color.
Personal Contact Required: An essential earmark of an exempt club is personal contact, commingling, and face-to-face fellowship. Members must share interests and have a common goal directed toward pleasure, recreation, and other nonprofitable purposes. Fellowship need not be present between each member and every other member of the club so long as it is a material part in the life of the organization. A statewide or nationwide organization that is made up of individual members, but is divided into local groups, satisfies this requirement if fellowship is a material part of the life of each local group.
Limited Membership Required: Another earmark of a social club is limited membership. A club that issues corporate memberships is dealing with the general public (the corporation's employees). Evidence that a club's facilities will be open to the general public (persons other than members or their dependents or guests) may cause denial of exemption. This does not mean, however, that any dealing with outsiders will automatically deprive a club of exemption.
Support by Membership Dues Required: In general, a club should be supported solely by membership fees, dues, and assessments. A section 501(c)(7) organization may receive up to 35 percent of its gross receipts, including investment income, from sources outside of its membership without losing its tax-exempt status. No more than 15 percent of this amount may be derived from the use of the club's facilities or services by the general public or from other activities not furthering social or recreational purposes for members. If an organization has non-member income that exceeds these limits, all the facts and circumstances will be considered in determining whether the club continues to qualify for exempt status.
Inurement Prohibited: The statute prohibits exemption if any part of the organization's net earnings inures to the benefit of any person having a personal and private interest in the activities of the organization. Inurement is not limited to overt distributions; even undistributed earnings may benefit members by decreasing membership dues or increasing the services the club makes available to its members without a corresponding increase in dues or other fees paid for club support. Fixed fee payments to members who bring new members into the club are not an inurement of the club's net earnings, if the payments are reasonable compensation for performing necessary administrative service.
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Page Last Reviewed or Updated: January 05, 2009