501 c 7 Rules and Requirements for Social Clubs

An organization granted tax-exempt status under Internal Revenue Code (IRC) Section 501(c)(7) is a social club created for pleasure, recreation, and other similar nonprofitable purposes. These entities are membership-based and supported primarily by their members. Common examples include college fraternities and sororities, country clubs, amateur sports groups, and hobby clubs. This exemption allows the organization to use its resources to further its social and recreational mission without the burden of federal income tax on its member-related income.

Core Requirements for Social Clubs

To qualify for 501(c)(7) status, an organization’s formation documents, such as its articles of incorporation or constitution, must clearly state its exempt purpose. The club must also adhere to several core principles.

• Exempt Purpose: The club’s activities must be substantially for “pleasure, recreation, and other nonprofitable purposes.” This means the primary focus must be social or recreational, not commercial or for-profit.
• Limited Membership: The club must have a limited membership structure that is not open to the general public. This framework should foster personal connections and fellowship among its members, distinguishing it from a public-facing business.
• No Private Inurement: The club’s net earnings cannot be used to benefit any private shareholder or individual. This rule prevents the distribution of profits to members and ensures all funds support the club’s exempt activities.
• Nondiscrimination Policy: A club’s governing documents cannot contain written policies that discriminate based on race, color, or religion. An exception exists for clubs that limit membership to a specific religion if the purpose is to further the principles of that religion, not to exclude individuals of a particular race or color.

Navigating Income Source Limitations

Maintaining 501(c)(7) status involves strict adherence to income source limitations, which are monitored through tests based on “gross receipts.” Gross receipts are the total income from a club’s normal activities, excluding unusual income like funds from selling a major asset, capital contributions, or initiation fees.

The primary rule is the “35% test,” which dictates that a club may receive no more than 35% of its gross receipts from sources outside its membership. This includes income from both the general public and investments.

Within that 35% allowance, a more restrictive “15% test” applies. This sub-limit states that no more than 15% of the club’s gross receipts can be derived from the use of club facilities or services by the general public. For example, if a club with $200,000 in gross receipts earned $30,000 (15%) from public use, it could only earn an additional $40,000 from other non-member sources like investments to stay within the 35% total limit.

Member income includes dues and fees paid to use club facilities, while non-member income is generated from the public or from investments like interest and dividends. Even if a club stays within these limits, income from non-members or investments is considered Unrelated Business Income (UBI). A club must pay Unrelated Business Income Tax (UBIT) on this income. If an organization has $1,000 or more in gross income from an unrelated business, it must file Form 990-T to report and pay the tax.

Preparing the Application for Tax-Exempt Status

Before applying for tax-exempt status, a club must prepare its foundational documents. These organizing instruments include its Articles of Incorporation and Bylaws, which must be finalized and legally adopted.

The application is filed using IRS Form 1024, Application for Recognition of Exemption. To complete this form, the club must provide a comprehensive narrative describing its past, present, and planned activities, demonstrating how they align with the exempt purpose of pleasure and recreation.

The club must also describe its membership requirements, different classes of membership, and the rights of each class. Information about its facilities, such as a clubhouse or sports courts, and how they are used by members and non-members is also required.

Financial data is another component of the application. The club will need to present its financial history through revenue and expense statements and provide projected financial data for future years. This gives the IRS a clear picture of the club’s funding sources and expenditures.

Filing for Tax-Exempt Status

Form 1024 and all supporting documents must be filed electronically through the Pay.gov portal, as the IRS no longer accepts paper submissions. Clubs must register on the site to complete the process.

At the time of submission, the club must pay a non-refundable user fee of $600. This payment is made through Pay.gov, and applicants should verify the current fee on the IRS website as it is subject to change.

After the application is submitted, the IRS will send an electronic acknowledgment and assign it to an agent for review. The process concludes when the IRS issues a formal determination letter that either grants or denies tax-exempt status.

Maintaining Tax-Exempt Status

After receiving a determination letter, a social club must fulfill ongoing obligations to maintain its tax-exempt status. The most significant of these is the annual filing of an information return from the Form 990 series. The specific form required depends on the club’s financial activity.

Clubs with gross receipts normally of $50,000 or less can file the simple Form 990-N e-Postcard. Those with gross receipts under $200,000 and total assets under $500,000 may file Form 990-EZ, while larger organizations must file the full Form 990. Failure to file for three consecutive years results in automatic revocation of exempt status.

A club must also maintain detailed financial records that clearly distinguish between member and non-member income to demonstrate compliance with the 35% and 15% income tests. For any event involving non-members, the club should document details such as the date, number of non-members, and total charges attributable to them. The club’s approved Form 1024 application and its annual Form 990 returns must also be made available for public inspection upon request.