What Is a 501-C 7 Corporation?

By Kay Lee

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.

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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.

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The Purposes of a 501(c)(4)

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What is the Difference Between a 501C3 & 501C4?

Many nonprofit organizations are created for the purposes of providing some benefit to the public. Depending on the specific civic purpose of the organization and its anticipated level of involvement in politics, it may be eligible for a federal income tax exemption under subchapter 501(c)(3) or 501(c)(4) of the Internal Revenue Code. Knowing the eligibly requirements and costs and benefits to each classification will help you determine the best way to register your nonprofit.

Rules for 501(c)3 Corporations

Many charities pursue 501(c)(3) status because it allows organizations to avoid certain taxes and accept tax-deductible donations. The Internal Revenue Service grants 501(c)(3) status to charitable organizations that meet the requirements set forth in the Internal Revenue Code. While charities are first organized under state law, the IRC restricts the activities and profit distributions of 501(c)(3) organizations, also known as exempt organizations.

What Are the Benefits of a 501(c)(7) Tax-exempt Club?

Having fun with friends doesn’t necessarily have to generate a tax bill. Section 501(c)(7) of the Internal Revenue Code grants tax-exempt status to some clubs organized as not-for-profit entities and operated for the enjoyment or recreation of their members. These can include fraternities and sororities, country clubs, dinner clubs, amateur sport clubs, yacht clubs and hobby clubs. The chief benefit for a 501(c)(7) tax-exempt club is that it does not pay federal taxes on its day-to-day activities, but there are other advantages as well to the club having tax-exempt status.

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