We are continuing our multi-article series on the other nonprofits…and by other I mean those that are not charitable in nature. So far we’ve explored social welfare nonprofits and business leagues. Today’s post examines the third most common type of non-charitable nonprofit, the 501(c)(7) social or recreation organization.
Section 501(c)(7) of the Internal Revenue Code describes organizations that exist for purposes that are either predominantly social or recreational in nature. Immediately, it sounds like there is potential for overlap with other Section 501 nonprofits, and that’s true to a point. Many, if not most, nonprofits have some degree of social interaction between participants and/or members. There is an entire category of 501(c)(3) for amateur sports promotion. But 501(c)(7) is specifically about nonprofits that are exclusively organized for social and/or purely recreational purposes.
In Publication 557, the IRS describes a 501(c)(7) nonprofit as a:
…club organized for pleasure, recreation, and other similar nonprofitable purposes and substantially all of its activities are for these purposes.
As you can see from the description, 501(c)(7) organizations are about pleasure and recreation, not competition or charity. We’ll get a little more into the idea of substantially all later in this post.
Just as in our article about 501(c)(4) social welfare nonprofits, 501(c)(7) social and recreational clubs can span the gamut of possibilities. Some of the nonprofits that can potentially qualify for this status have very little in common with each other at the ground level, but when you pull back to a 30,000-foot view, you see the thread of commonality based on the nature of the experience for those who participate: pleasure and recreation.
One of the most obvious examples of 501(c)(7) nonprofit is the social club. But, even within this subcategory, there is a lot of variety. Examples include:
- Country clubs
- Fraternal membership organizations dedicated primarily to social interaction
- Elks lodges
- Lions Club
- College fraternities and sororities
- Masonic lodges
Now, it is possible you will find examples of each of these that operate without IRS determination as a 501(c)(7). But by and large, most such organizations will be recognized as such.
Hobby club nonprofits typically include things like:
- Gardening clubs
- Book clubs
- Dinner clubs
Among this category, you’re most likely to find a significant majority that are unincorporated associations that have not actually applied for and received 501(c)(7) status. They tend to be small and loosely organized, and most do not formalize their structure. That said, most would qualify if they so chose to step things up a notch.
501(c)(7) recreational nonprofits don’t have to be exclusively sports-oriented, but most are at some level. Many also involve competition, though that’s not required. For those that are competitive, it is really about having fun, not rising to the level of amateur sports competition as in the 501(c)(3) version.
Examples of recreational clubs include:
- Local swimming clubs
- Church softball leagues
- Gun/shooting clubs
Obviously, there are many other examples we could include, but I think you get the point with this short list.
All Section 501 nonprofits have parameters set forth by the IRS that they have to abide by. 501(c)(7) groups in particular have several key requirements, the violation of which can be grounds for the IRS to revoke their tax-exempt status.
This is a big one. In the nonprofit world, there are countless organizations that do not have a formal membership, nor is it required of them. Not so for 501(c)(7) organizations. They must be organized with a formal, defined membership, with filters set forth to describe who qualifies. Now, this filter can be pretty expansive. For example, a gun club may accept anyone into membership who enjoys the shooting sports and wants to join. Other groups may have very distinct parameters around membership, such as Masonic lodges.
It’s not enough that a 501(c)(7) have a membership. The IRS expects that the vast majority of a 501(c)(7)’s activities are exclusively reserved for members. It’s not that guests are not allowed. How else would anyone want to join if they haven’t had a chance to peek under the hood? That said, a 501(c)(7) should restrict its activities to the exclusive benefit of members. There should not be any public accommodation.
Income Is Restricted to Member Activity
This a big one also. A 501(c)(7) should not have a stream of revenue coming in from any source other than its membership. Member revenue can include anything from dues to assessments, or participation and/or admission fees for certain events. There can even be merchandise, food, and drink sales to members. You see all of this with country clubs and some fraternal clubs. You could conceivably have donations from members, as well, though they are not tax-deductible to the donor.
The key here is essentially no outside (non-member) income. Next, I want to share an example of a nonprofit that lost its 501(c)(7) status for violating the members-only requirement for both activities and income.
About 10 years ago, we had a 501(c)(7) gun club reach out to us for help. They had been established back in the 1990s and had immediately obtained 501(c)(7) status from the IRS. This organization built a shooting sports facility on property it purchased, and over time their nonprofit developed into a first-class facility. Their growth and expansion as an organization was impressive, but they eventually got into some things that were definitely not 501(c)(7) in nature. By the time they called us, the IRS had revoked their tax-exempt status. They wanted our help in getting it back.
Problem #1: The property the club purchased was much larger in size than what it needed for its shooting ranges and clubhouse. In fact, most of the acreage wasn’t being actively used in the conduct of their programs. By itself, that wasn’t a problem. The problems arose when it was discovered that the property contained oil and gas. The club saw the opportunity to profit from this, so it eventually signed a mineral lease with a petroleum company. That activity generated a significant stream of revenue to the nonprofit. However, that revenue-generating activity had nothing to do with the organization’s purpose nor membership.
Problem #2: The club decided it would be great for member recruitment and financial gain to open the facilities to the public on weekends. Nonmembers could pay an entrance fee on Saturdays and Sundays to shoot on the ranges. Over time, that non-member activity generated a substantial amount of revenue.
The IRS became aware of these things because of the club’s Form 990 filings (see our article on Form 990 audit triggers). As they should have, they listed out these activities and their corresponding income and expenses. It should be obvious from our discussion about member exclusivity that both the oil and gas exploration and the non-member programs were disallowed activities. Both were substantial enough, and had persisted for long enough, that the IRS revoked their 501(c)(7) status.
The good news is, we were able to help them get it back. In order for that to happen, they had to suspend all non-member programs. They also subdivided their property and established a for-profit company to manage the oil and gas exploration, removing that out from under the 501(c)(7). To this day, the club continues to operate in good standing with the IRS.
As with virtually all nonprofits that are not charitable, a 501(c)(7) will usually form a nonprofit corporation, followed by filing Form 1024 or 1024-A in order to apply for tax-exemption determination with the IRS.
501(c)(7) social and recreational clubs fill a unique role in America’s nonprofit landscape. You may have belonged to one of these organizations and not even realized how they were structured. Understanding what they are and what’s required of them to operate in good-standing is key to successfully accomplishing the mission that the founders desire.
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