A social club can qualify for federal tax exemption under Section 501(c)(7). To do so, it must be organized for "pleasure, recreation and other similar nonprofitable purposes." As with any 501(c) organization, it must be organized as a non-profit entity, meaning no part of its net earnings can be transferred to its owners, members, shareholders, or partners. It's activities must primarily engage with its stated social or recreational purposes.
According to Internal Revenue Service (IRS) rules for 501(c)(7) organizations, a social club must be composed of limited membership. The established members of the club must engage in face-to-face interaction that is not incidental, but pursues a common social or recreational goal--a requirement that effectively excludes groups interacting solely on-line. Members must commingle through regular meetings, gatherings, or use of shared facilities.
To qualify for federal tax exemption, a social club must derive its income from dues paid by the members. No more than 15 percent of the club's income can come from services rendered to the general public or other activities unrelated to the club's stated recreational purpose. The IRS is very dubious of sham clubs designed to obtain tax-exempt status as a cover for doing regular business with the public.
A social club that wants to keep its 501(c)(7) status cannot discriminate or exclude members on the basis of race, color or religion. The only exception to this requirement is for clubs organized for the express purpose of teaching a particular religion and furthering its principles. Such a group is permitted to allow only members of that particular religion.
Passed in the wake of Enron and other corporate accounting scandals, Sarbannes-Oxley is a federal law that establishes several auditing and reporting responsibilities for corporations. These requirements generally do not apply to tax-exempt organizations, including 501(c)(7) social clubs. This could change with respect to at least some of the requirements set forth by the law, however. Rules for internal controls and auditing could eventually be applied to tax-exempt organizations, especially with regard to monitoring inurement of club profits to owners, directors, officers, or employees through loans or other means. The whistleblower protections of Sarbannes-Oxley could also be extended to employees of social clubs who report such illegal activity.