What Is a 501 C 7 Corporation?

By Stephanie Kurose, J.D.

What Is a 501 C 7 Corporation?

By Stephanie Kurose, J.D.

Any corporation organized under Section 501(c) of the Internal Revenue Service (IRS) code is considered a nonprofit organization. There are 29 different types of nonprofits under this section that are exempt from some federal income taxes. A 501(c)(7) corporation governs organizations that are considered social clubs.

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Social Clubs

These associations are exempt from federal income tax under Section 501(c)(7) if they are organized for pleasure, recreation, and other nonprofitable purposes. The primary purpose of it is to provide benefits to its members, including access to social and recreational facilities like club houses, golf courses, and swimming pools. They are mostly supported by fees and dues.

To qualify for exempt status, they must exist to provide advantages those in the group, as opposed to the general public. Thus, allowing people to join must be limited in some way. It must also provide opportunities for personal contact among attendees as a material part of its activities. Personal contact means face-to-face interactions, and although every person is not required to spend time with every other member, fellowship and meetings must be a common place.

Nonmember Income Effect on Exempt Status

As stated above, these associations and the benefits they provide are primarily funded by those who are part of the group. When such advantages are paid for through dues, the tax exemption has been justified on the theory that they are in the same position as if they had paid for the benefits directly. The organization's earnings may not provide a financial advantage to one person over another.

They may receive up to 35 percent of its gross receipts from nonmember sources, including investment income. If the levels of such income are exceeded, the IRS may consider whether or not the club continues to qualify for a tax exemption. Thus, it is critical that if it wants to maintain its tax-exempt status, it cannot exceed these safe harbor guidelines for nonmember income.

Although generally exempt from federal income tax, they are subject to tax on their unrelated business profits, generally all income from nonmembers who are not bona fide guests of members. This is considered income from an unrelated activity and must be reported to the IRS for tax purposes.

Discrimination is Prohibited

The IRS prohibits a 501(c)(7) organization from discriminating on the basis of race, color, or religion. If there is any evidence of this in the club's bylaws, charter, or any other policy, the IRS will likely not grant exemption status to the entity.

In certain situations, the IRS will make an exemption for religious discrimination, but it does not do so for prejudice based on race or color. If the primary purpose is to further the teachings of a particular religion, or the club is an auxiliary of a fraternity beneficiary society, it may discriminate based on religious preference.

Discrimination on the basis of sex is permitted to some extent. For example, sororities and fraternities can limit membership to men or women. Additionally, some associations can deny people on the basis of age.

If you want to learn more about the characteristics, rules, and exemptions for a 501(c)(7) organization, you can visit your state's website. You'll want to understand the basis for creation, the required purpose, and all other details relating to your entity's operations.

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