Alumni groups and fraternal societies are two examples of social clubs that can receive special tax treatment by the IRS. If these organizations are incorporated under the laws of a state and meet federal requirements, they can receive 501(c)(7) corporation status, which conveys tax-exempt, nonprofit status.
A 501(c)(7) corporation is a social club that's granted nonprofit status by the IRS, a special designation that exempts it from some federal taxes. By law, a 501(c)(7) social club must be organized for “pleasure, recreation and other similar nonprofitable purposes.”
An essential feature of a 501(c)(7) corporation is face-to-face interaction. This requirement of personal contact encourages social groups -- such as fraternal societies, country clubs and alumni organizations -- but excludes groups that interact only online.
Another crucial consideration is limited membership. An organization whose membership is open to the public is not allowed tax-exempt status, and no more than 35 percent of its gross income can be derived from sources outside the membership and within that 35 percent, no more than 15 percent can be derived from public use of the organization's facilities.
As with all 501(c) corporations, a 501(c)(7) social club cannot generate profits for its owners. The club must derive at least 65 percent of its gross income from membership dues.
The dues paid by members of a 501(c)(7) corporation are tax-deductible. This does not apply, however, to any portion of dues that are used for lobbying or political campaign activities.
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