## Facts

- The Internal Revenue Service issued an administrative procedure addressing social clubs seeking or maintaining exemption under I.R.C. § 501(c)(7).
- The guidance responded to statutory changes that subjected social clubs to unrelated business income tax (UBIT) and added I.R.C. § 512(a)(3) rules for exempt-function income.
- The IRS identified recurring examination questions when clubs permit use of facilities by nonmembers, particularly the “general public.”
- The procedure defines “general public” as persons other than members or their dependents or guests; a member’s spouse is treated as a member.
- The IRS viewed substantial public use as potentially showing a nonexempt commercial purpose and, even if not disqualifying, as potentially generating UBIT.
- The procedure set expectations for recognizing member–guest (host–guest) relationships when classifying receipts as member-related or public/nonmember.
- The procedure imposed recordkeeping expectations so clubs can distinguish member, guest, and public use and compute exempt-function income and taxable income.
- The IRS stated the guidelines would be used in examinations of Forms 990 and 990-T filed by social clubs.

## Issues

1. Under what circumstances do gross receipts from general-public (nonmember) use of a social club’s facilities indicate a nonexempt purpose inconsistent with § 501(c)(7), risking loss of exemption?
2. When do receipts from nonmember/public use constitute unrelated business taxable income under §§ 511(a) and 512(a)(3)?
3. What records must a § 501(c)(7) social club maintain to permit proper classification of receipts and evaluation of exemption and UBIT liability?

## Decision

- The IRS announced that substantial general-public use of a club’s facilities is significant evidence of a nonexempt commercial purpose and may jeopardize § 501(c)(7) status.
- The IRS stated that even when nonmember/public use is not substantial enough to cause loss of exemption, related receipts may still be subject to UBIT under §§ 511(a) and 512(a)(3).
- The IRS defined “general public” and provided administrative assumptions for when a host–guest relationship will be recognized for classification of receipts.
- The IRS required clubs to maintain adequate records of facility use and receipts sufficient to distinguish member, guest, and public usage and to compute exempt-function income and taxable income.
- The IRS superseded prior administrative guidance on this topic and directed that the procedures be applied in return examinations of social clubs.

## Legal Principles

- A § 501(c)(7) social club must be primarily member-oriented; substantial facility use by the general public indicates a nonexempt commercial purpose inconsistent with exempt status.
- Dealings with nonmembers are not automatically disqualifying; the consequences depend on the extent and character of public use and related receipts.
- UBIT analysis is distinct from exemption analysis: nonmember/public receipts can be taxable under §§ 511(a) and 512(a)(3) even if the club remains exempt.
- “General public” excludes members, their dependents, and their guests; spouses are treated as members for these classifications.
- Host–guest assumptions serve as an administrative tool for determining whether certain receipts should be treated as member-related (exempt-function) or as nonmember/public receipts.
- Adequate recordkeeping is required to substantiate exempt status and to support proper computation and reporting of exempt-function income and unrelated business taxable income.

## Conclusion

This revenue procedure provides IRS examination guidelines for social clubs under § 501(c)(7), explaining how public (nonmember) facility use can evidence a nonexempt commercial purpose and how related receipts may be taxable under the UBIT rules, while requiring records sufficient to distinguish member, guest, and public use and to compute exempt-function and taxable income.


Rev. Proc. 71-17, 1971-1 C.B. 683 (1971)