IRC 501(c)(7) Social Clubs

Veterans’ organizations whose activities are social and recreational, such as operating a bar, restaurant, canteen or casino for members, may be recognized as tax exempt under IRC 501(c)(7). These clubs are often operated in conjunction with IRC 501(c)(4) veterans’ organizations. Social clubs may have different categories of members and are not required to have a specific percentage of veteran members. Contributions to a social club are not deductible. This chapter discusses the requirements for tax-exempt status under IRC 501(c)(7).

Exempt Status

IRC 501(c)(7) exempts from tax social clubs that are organized and operated primarily for pleasure, recreation and similar nonprofitable purposes. The exemption is based on the logic of allowing members to pool their funds for recreational purposes without being subject to tax, rather than by any compelling public benefit conferred by social clubs. In keeping with this purpose, nonmember income from all sources is limited and taxed as unrelated business income.

To satisfy the organizational requirements for exemption, a club’s charter, bylaws or other governing instrument must not include purposes that are not directed toward pleasure and recreation. In addition, an organization will not qualify for exemption if its creating documents or any written policy statement contains a provision which provides for discrimination on the basis of race, color or religion.

A club’s members must share common goals and interests that are furthered through its social and recreational activities. The fellowship among members that grows through such participation is considered a key component of a social club. For example, by operating a bar, restaurant, bingo nights and similar recreational facilities and activities for its members and bona fide guests, a veterans’ organization is promoting the fellowship and common interests of its members. Clubs that do not engage in activities where its members meet, such as automobile clubs or discount buying clubs, do not have this essential element and do not qualify for exemption.

A bona fide guest is one who is invited by a member to participate in an activity and whose expenses are paid for by the member. If the guest pays for his own recreation or food, the guest is not a bona fide guest. Income generated by nonmember participation in the organization’s activities is considered unrelated business income and is ordinarily taxable under IRC 511.

A club is not exempt under IRC 501(c)(7) if it provides commercial services, such as the sale of package liquor or carry out food. These activities are not traditionally engaged in by social clubs.

May an IRC 501(c)(7) veterans’ organization have several types of memberships?

Yes. Clubs may establish several types of memberships, such as veterans, auxiliary and friends. The club may specify voting and non-voting members and may choose to limit member benefits, such as the use of the club facilities, based on membership categories. Eligibility requirements, formal admittance procedures and a dues structure are internal matters to be decided in accordance with the club’s charter and bylaws. IRC 501(c)(7) does not require that a specific percentage of members be veterans. However, the membership must have shared goals and interests or it may fail to qualify for exemption. A club whose membership categories serve as a way to permit the general public to use the facilities will fail to qualify for this reason.

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To determine whether an organization is a club or a business open to the general public, the IRS considers all the facts and circumstances. Questions may be raised when:

a. Membership requirements are broad or vaguely stated;

b. The initiation charges or dues are so low that onetime or transient use of the facilities by the

general public is encouraged;

c. There is an unlimited second category of members who have no voice in the management, pay

minimal annual dues and whose only rights are to use the club’s facilities upon payment for the services;

d. Management is strenuously engaged in expanding club membership; or

e. Managers have close physical and financial ties to club activities or facilities that allow them to

retain control.

May an IRC 501(c)(7) veterans’ organization be composed of a number of veterans’ organizations?

No. The word “club” applies only to individuals, not to associations composed of artificial persons or member clubs.

May a home association be recognized as tax exempt?

Yes. A home association has a membership structure that provides for veteran members and a second category of “friends” that is related to the post. This is permissible under IRC 501(c)(7).

May an IRC 501(c)(7) veterans’ organization provide its members sickness, death and similar benefits?

No. These types of benefits are not considered social or recreational in nature and are not permitted under IRC 501(c)(7).

Will the receipt of a substantial amount of nonmember income adversely affect exemption?

Yes. As a general rule, an IRC 501(c)(7) club may receive up to 35 percent of its gross receipts from sources outside its membership. This includes investment income. Within the 35 percent limitation, no more than 15 percent of the gross receipts may be derived from the use of a club’s facilities or services by the general public. Gross receipts are the total amounts the organization received from all sources during its annual accounting period, without subtracting any costs or expenses.

Are membership dues and assessments tax deductible?

No. In fact, any solicitation for membership dues and assessments should include a disclaimer statement that the dues are not tax deductible.

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Exempt Activities

Will conducting joint activities with local veterans’ posts jeopardize exemption?

It might if the income received by the IRC 501(c)(7) club from nonmembers would be subject to UBIT. In the event these amounts exceed 15 percent of gross income, exemption could be jeopardized.

If a member hosts a luncheon for his garden club at the IRC 501(c)(7) club, would the garden club members be considered bona fide guests?

Amounts paid to a social club by visiting members of another social club, such as the garden club, are usually considered amounts from nonmembers.

Income paid by members for bona fide guests, however, is treated as member income. There are some circumstances under which nonmembers who use a club’s facility will be assumed to be bona fide guests. For instance, when there is a group of eight or fewer persons, at least one of whom is a member who pays the entire bill, the nonmembers are generally considered bona fide guests. In larger groups where 75 percent or more of the group are members and payment is from the members, the nonmembers are considered bona fide guests. There are instances, however, where the use of the club facilities is so divorced from any member purpose that it would be highly improbable that the member incurred the cost of the use of the facilities for personal reasons.

Example: If an outside group arranges for the use of the facilities through a club member and agrees to reimburse the member for the cost, the IRS would question whether those individuals were bona fide guests.

Is sponsoring bingo games, casino nights and other types of games of chance, for members and their bona fide guests, a permissible activity?

Yes. Club members may engage in any number of recreational activities including bingo nights, casino nights and other games of chance without jeopardizing the exempt status of the club. Income from these activities is considered member income and is not taxable under IRC 511.

Opening the activities of the club to nonmembers is not an exempt purpose. Income generated from gaming from nonmembers is subject to UBIT and may jeopardize exemption if the amount exceeds 15 percent of the club’s gross income.

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