The Rules: Part1 The Gov’ment

C. SOCIAL CLUBS - IRC 501(c)(7) by Jim Langley and Conrad Rosenberg

1. Introduction
Social clubs are exempt from federal income tax under IRC 501(a) as
organizations described in IRC 501(c)(7) if they are "organized for pleasure,
recreation, and other nonprofitable purposes." They were originally granted
exemption from federal income tax in the Revenue Act of 1916. Generally, social
clubs are membership organizations primarily supported by dues, fees, charges or
other funds paid by their members.

The central purpose

The central purpose of social clubs is to provide benefits to members,
including access to social and recreational facilities such as club houses, golf
courses, and swimming pools. When such benefits are funded by members,
exemption has been justified by Congress on the theory that the members will be
in the same position as if they had paid for the benefits directly. The practical
effect of the exemption is to allow individuals to join together to provide
themselves with recreational or social opportunities on a mutual basis without
further tax consequences. The individual member is in substantially the same
position as if he or she had spent his or her after-tax income on pleasure or
recreation without the intervening organization.
Consequently, the exemption for social clubs operates properly only if the
club's income is derived exclusively from members. For many years, however,
income derived by clubs from outside of their membership (e.g., investment
income), operated to subsidize the recreational facilities or activities for the
members with revenue that was taxed neither to the members nor to the club. To
prevent club members from receiving benefits not contemplated by IRC 501(c)(7),
Congress extended the unrelated business income tax to social clubs in the 1969
Tax Reform Act. In doing so, however, Congress decided that, unlike most other
types of exempt organizations, which were exempted because they provide some
sort of community service or public benefit, clubs should be taxed on all income
derived from outside their membership, including investment income. Special
rules were provided for nonrecognition of gain from certain sales of club property
when the proceeds are reinvested by the club for exempt purposes.
The enactment of IRC 512(a)(3) in 1969 created an almost unique status for
social clubs in that they alone among exempt organizations are taxed on passive
income (dividends, rents, and interest). (Although the terms of IRC 512(a)(3) also
apply to organizations described in paragraphs (9), (17) and (20) of IRC 501(c),
the nature of these organizations, plus special rules in IRC 512(a)(3) relating to
set-asides for charitable and similar purposes, virtually negate the tax theoretically
imposed on them by IRC 512(a)(3).)

7.25.7 Social and Recreational Clubs (02-23-1999)


  1. IRC 501(c)(7) exempts from federal income tax, clubs \"organized for pleasure, recreation, and other nonprofitable purposes, substantially all of the activities of which are for such purposes and no part of the net earnings of which inures to the benefit of any private shareholder.\"
  2. Social clubs are membership organizations.

    1. The exemption of social clubs is based on the logic of allowing members to pool their funds for recreational purposes, rather than for a compelling public benefit.
    2. IRC 501(c)(7) was amended by P.L. 94–568, 1976–2 C.B. 596. Prior to the amendment, IRC 501(c)(7) provided that clubs needed to be organized and operated exclusively for pleasure, recreation and other nonprofitable purposes. A club could only receive investment income or nonmember income if the income was incidental, trivial or nonrecurrent to its tax exempt purpose.
    3. The effect of IRC 501(c)(7) being changed to provide that \"substantially all\" of a club’s activities must be for recreational purposes is to allow social clubs to receive some investment income and income from nonmember use of its club facilities without jeopardizing its tax exempt status.
    4. Support received by members is not taxed, but any other income such as nonmember payments and passive income is taxed under IRC 512(a)(3). See discussion on section 512(a)(3) in IRM 7.27.7. Some familiarity with IRC 512(a)(3) is helpful in understanding the tax status of social clubs because exemption operates properly only if passive sources of income are taxed to the organization as unrelated business taxable income.
  3. Organizations which may be described in IRC 501(c)(7) include, but are not limited to:

    • College fraternities (See Rev. Rul. 69–573, 1969–2 C.B. 125, and Rev. Rul. 64–118, 1964–1 C.B. 182).
    • Country clubs
    • Amateur hunting, fishing, tennis, swimming and other sport clubs.
    • Dinner clubs which provide a meeting place, library, and dining room for members.
    • Variety clubs
    • Hobby clubs (See Rev. Rul. 66–179, 1966–1 C.B. 139).
    • Community associations (See Rev. Rul. 69–281, 1969–1 C.B. 155, and Rev. Rul. 80–63, 1980–1 C.B. 116).

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