What Is a 501 C 7 Corporation?

by Elizabeth Rayne

Provided the Internal Revenue Service guidelines for exempt status are met, individuals that choose to organize around a shared social interest may operate as exempt social clubs. This IRS designation is available for people who share a particular purpose, so long as the organization is supported by member fees and dues. In addition, some contact among members is required, and no club may discriminate against certain protected classes.

501(c)(7) Overview

The IRS grants 501(c)(7) to certain social clubs that demonstrate an exempt purpose. Social clubs pursue 501(c)(7) status because it enables them to avoid federal taxes. Organizations under this section include those that are organized for the purpose of pleasure or recreation, including academic fraternities and sororities, sports clubs, country clubs, hobby clubs, and dinner clubs that provide facilities. Generally, the social clubs are supported only by membership fees and dues, and the facilities are only open to members of the club.

Exempt Purpose

The IRS will only grant 501(c)(7) status to clubs that have demonstrated an exempt purpose. Clubs that are organized for pleasure, recreational or other related nonprofit purpose may be considered exempt. The club must exist to benefit the members of the club, as opposed to the general public. The club must demonstrate that the members are bound by the exempt purpose and substantially all of its activities further the recreational or pleasurable purpose. Further, the membership fees collected by the club may not go to benefit any individual member, apart from reasonable compensation for services performed.

Personal Contact

501(c)(7) organizations must include personal contact as a "material part" of the club. The members must commingle face-to-face with shared interest in the recreational or pleasurable purpose of the club. Although every member is not required to spend time with every other member, fellowship and meetings must be a common place for the club. A 501(c)(7) organization may be a national club, so long as there are local chapters and commingling occurs at the local level.

Discrimination Prohibited

The IRS prohibits 501(c)(7) organizations from discriminating on the basis of color, race or religion. If the IRS finds evidence of discrimination in the club's bylaws, charter or any other written policy, it likely will not grant exempt status to the organization. However, the IRS makes an exception for religious discrimination, but not race or color discrimination, in certain situations. If the club exists to further the teachings of a particular religion, or the club is an auxiliary of a fraternity beneficiary society, it may discriminate on the basis of religion.