Thinking of Forming a Tax-Exempt Social Organization?

What to Know About 501(c)(7) Tax-Exempt Social Organizations

Section 501(c)(7) of the Internal Revenue Code (“IRC”) grants tax-exempt status to some social clubs organized as nonprofit entities and operated for the enjoyment or recreation of their members.

The Franchise Tax Board (FTB) issues tax-exempt status to social and recreational organizations who meet the provisions under California Revenue and Taxation Code (R&TC) Section 237101g. R&TC Section 23701g is the same as IRC Section 501(c)(7). The FTB uses IRC Section 501(c)(7) interpretations, regulations, and rulings, to interpret Section 23701g.

Who Qualifies to be a 501(c)(7) Social Organization?

  • Organizations developed and operated for:

  • Pleasure.

  • Recreation.

  • Other nonprofit purposes, where substantially all of the activities are for pleasure and recreation, and no part of the net earnings support the benefit of any private shareholder.

Examples of 501(c)(7) Tax-Exempt Social Clubs

Fraternities and sororities, country clubs, hobby clubs and sports clubs all are examples of groups organized for social, recreational and similar nonprofit purposes that are tax exempt under Section 501(c)(7) of the Internal Revenue Code.

How to Get 501(c)(7) Tax-Exempt Status for Your Social Club

To obtain 501(c)(7) exempt status from the FTB, the organization must file one of the following forms:

Form 3500, Exemption Application, and received our determination letter that states the organization is tax-exempt from California franchise or income tax.

Form 3500A, Submission of Exemption Request, a copy of the federal determination letter issued by the IRS approving the organization’s tax-exempt status under IRC Section 501(c)(7) and received our acknowledgement letter that states the organization is tax-exempt from California franchise or income tax.

To obtain tax exempt status from the IRS, the organization must file IRS Form 1024, Application for Recognition of Exemption under Section 501(a), and complete Schedule D.

Membership Characteristics

These organizations must be supported almost entirely from dues, fees, and assessments paid by members. Normally there should be only one class of members with all members paying equal dues and having equal rights.

Some organizations may be two organizations, with some members paying less dues and having rights to use social facilities, while other members have rights to use all facilities.

When there is more than one class of members, Form 3500, Exemption Application, must clearly show that one class of members does not benefit from the different dues, or rights of another class of members.

Sample Purposes of 501(c)(7) Tax-Exempt Social and Recreational Organizations

Some purposes that qualify under R&TC Section 23701g are:

Operate a social organization for the use and enjoyment of members.

Operate social and recreational facilities for the use and enjoyment of members.

Operate a fraternity or sorority for the use and enjoyment of members.

Promote and enjoy (by the members) a specific sport, or hobby such as:

  • C.B. radios

  • Cars

  • Cooking

  • Dogs

  • Fishing

  • Flying airplanes

  • Four-wheel drive motoring

  • Golf

  • Horses

  • Hunting

  • Motorcycles

  • Quilting

  • Sewing

Cause for Denial or Revocation of 501(c)(7) Tax-Exempt Status

Member income funds social clubs. This can be in the form of membership fees, dues, or assessments.

The FTB may deny or revoke an organization’s 501(c)(7) tax-exempt status for the following reasons:

  • Income from non-members or guests that benefits members. IRS Revenue Procedure 71-17 provides more information on allowable nonmember use.

  • Income from a combination of investment income and receipts from the general public should not exceed 35% of gross receipts; however, general public income may not represent more than 15% of total receipts.

If an organization has nonmember income exceeding these limits, all the facts and circumstances will be considered in determining whether the club continues to qualify for exemption.

Revenue Procedure 71-17 details the recordkeeping requirements for social clubs that conduct activities with nonmembers. The records must distinguish one type of income from another (gambling income vs. food sales income) and one type of expense from another. The records should be retained for at least three years from the due date of the organization’s annual return.

Clubs that allow nonmembers to use their facilities must collect and maintain certain information. The information collected for an event should include:

  • Date

  • Total number in the party

  • Number of nonmembers in the party

  • Total charges

  • Charges attributable to nonmembers

  • Charges paid by nonmembers

  • Where a member pays all or part of the charges attributable to nonmembers, a statement signed by the member indicating whether he or she has been or will be reimbursed for such nonmember use and, if so, the amount of the reimbursement.

Failure to keep records that distinguish the types and sources of income and expenses will result in a presumption that all income is unrelated to the organization’s exempt purpose and therefore subject to unrelated business income tax.

General Public Participation

Occasional events where organizations receive income from the general public may be permissible so long as the members do not benefit from the nonmember participation and organizations donate any net profits from the nonmember participation to a charitable organization on an annual basis.

If your social and recreational organization may have nonmember income from one or two events annually to which the general public is invited, the organization should include the following paragraph in your creating document:

“If this organization holds any event(s) which members of the general public are invited to observe or participate in for a fee, the income from the general public, less a proportional share of the expenses which will not benefit members, will be given to an organization which is exempt from income tax under R&TC Section 23701d or IRC Section 501(c)(3) on an annual basis.”

Have more questions About 501(c)(7) social clubs? We can help.

While the law has wide-ranging implications, numerous provisions specifically affect tax-exempt organizations, including social and recreational organizations. If you have additional questions regarding a social and recreational organization, attorney Jonathan Grissom can help. Please contact Mr. Grissom via the contact button below.

501(c)(7)Jonathan Grissom, Attorney