## Facts

- The IRS received requests for guidance on whether certain organizations qualified as tax-exempt social clubs under I.R.C. § 501(c)(7).
- The organizations were organized to provide social or recreational facilities and claimed to operate for pleasure, recreation, or other nonprofitable purposes.
- The organizations’ operations raised questions because they earned income beyond member dues, including revenue associated with nonmember use of facilities or other business-type activities.
- Some situations involved substantial nonmember use or significant receipts from nonmembers, suggesting public patronage rather than primarily member support.
- Certain fact patterns also raised concerns about prohibited inurement of net earnings to insiders.

## Issues

1. Under what conditions does an organization qualify for exemption as a social club under I.R.C. § 501(c)(7)?
2. Whether substantial nonmember income, public use of facilities, or business-type operations are inconsistent with being “organized and operated exclusively” for pleasure, recreation, and other nonprofitable purposes.
3. Whether any inurement of net earnings to insiders disqualifies an organization from § 501(c)(7) exemption.

## Decision

- The IRS concluded that a qualifying § 501(c)(7) social club must be organized and operated exclusively for members’ pleasure, recreation, and other nonprofitable purposes.
- The IRS concluded that a club should be supported substantially by membership fees, dues, and assessments, not by public patronage.
- The IRS determined that material business activities or substantial nonmember receipts (including regular nonmember use of facilities) are inconsistent with § 501(c)(7) and defeat exemption.
- The IRS determined that any inurement of net earnings to insiders disqualifies the organization from exemption.
- The IRS applied a facts-and-circumstances approach, treating incidental nonmember activity as potentially permissible, but denying exemption where nonmember/business activity was substantial.

## Legal Principles

- § 501(c)(7) requires both organizational and operational conformity: the club must be organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes for members.
- Predominant member support is central; substantial dependence on nonmember income indicates operation as a business rather than as a social club.
- Regularly making facilities available to the general public, or conducting significant ongoing commercial activity, is inconsistent with § 501(c)(7).
- No part of net earnings may inure to the benefit of any private shareholder or individual; insider benefit is a categorical bar to exemption.
- Exemption determinations turn on the overall pattern of activities and finances, including the sources of income and extent of nonmember use.

## Conclusion

Revenue Ruling 59-589 explains that § 501(c)(7) exemption is reserved for member-oriented social and recreational clubs funded chiefly by members, and that substantial nonmember business activity or any inurement to insiders prevents qualification.


Rev. Rul. 59-589, 1958-2 C.B. 266 (1958)