The Internal Revenue Code recognizes special types of entities that are exempt from taxes. These organizations fall under Section 501(c) of the Code. Each type of tax-exempt organization is identified by a number that comes after the "(c)" in its legal designation. Section 501(c)(7) provides an exemption from tax for certain social and recreation clubs that meet specific requirements.
What Is a Social and Recreation Club?
A social and recreation club may be granted tax-exempt status by the Internal Revenue Service if the purpose of the organization is for “pleasure, recreation and other similar nonprofitable purposes and substantially all of its activities are for these purposes.” Common examples of a social and recreational club include a country club, garden club, college alumni association, and college fraternity or sorority.
Limited Membership Without Discrimination
To qualify for tax-exempt status, an organization may not discriminate on the basis of race, color or religion. This does not mean that a social and recreational organization must have open membership; in fact, it is required that membership be limited. The limits to the membership must be consistent with the purpose of the organization. For example, membership in a college alumni association would be limited to alumni and their significant others.
Support for Organization
To comply with tax-exempt requirements, the club may not engage in activities for profit. Instead, the club must be supported by dues and fees paid from members. A social and recreational organization may also earn money through its facilities and activities. An example of an acceptable facilities charge would be a country club charging a fee for a member to host a golf tournament or a room rental charge.
How to Obtain 501(c)(7) Status
An organization cannot simply declare itself tax-exempt – it must apply to the IRS for the designation. IRS Form 1024 is the application form used for this purpose. In addition to the application, the IRS requires submission of Form 8718, User Fee for Exempt Organization Determination Letter Request. The instructions for these forms must be precisely executed, and the club must provide documentation about its membership and purpose so that the IRS can determine whether it is entitled to tax-exempt status. The application process is not a speedy one, and the IRS may take several months to a year to respond with a decision.