IRS written determination 201428009

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
Number: 201428009
Release Date: 7/11/2014
Date: February 10, 2014
UIL: 501.07-00; 501.07-05
Legend:
M
.E
r
~
Dear
=
=
=
=
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
Contact Person:
Identification Number:
Telephone Number:
Employer Identification Number:
This responds to
your letter dated June 24, 2011, in which you request rulings with respect to
certain transactions between M and
...E. and their effect on M's status as an organization
described in I.R.C. § 501(c)(7).
M is organized as a not-for-profit corporation under state law. It is recognized as a social club
described
in § 501 (c)(?). M has actively fostered interest in amateur r by organizing and
conducting regional, national, and international
r that were open or by invitation to both its
members and nonmembers. These events were
in addition to those organized solely for M's
members .
.E is organized as a not-for-profit corporation under state law. It is recognized as a social
welfare
organization described
in§ 501 (c)(4). It was established to conduct the amateur open
and by invitation
r events previously conducted by M for members and nonmembers.
E. has no members. Its activities are managed by a six-member board of directors. All of its
directors and officers are presently members
of M, though there is no requirement that they be
so.
Two directors are appointed by M, while the rest are presently neither trustees nor directors
of M. E.'s bylaws provide that a majority of E.'s directors must at all times consist of persons who
are not concurrently either a trustee
or an officer of M, and that E.'s president must be a director
who is not concurrently a trustee
or officer of M.
E. will conduct those open and by invitation r agreed with M. E. will utilize volunteers and
contractors to conduct its events; it does not expect to have employees
of its own. In carrying

2
out its responsibilities, .E will utilize certain facilities, equipment, intellectual property and website
facilities made available by M without cost. M will provide office space and record storage
facilities to
.E without cost, and .E will reimburse M for services provided by M's §Office and
certain administrative
employees (based on an allocable share
of their compensation and
benefits and their time devoted to
.E activities) . .E may either pay M for catering services and
accommodations (based on member pricing rates)
or obtain them from third parties.
More specifically, M and
.E have entered into an Administration Agreement, among the provision
of which are the following-
S Office Personnel. During the Term [of the Agreement] M agrees to make available to .E
the services of its § Office personnel ... for use in planning and conducting [r] Events &
Programs, provided that .E shall reimburse M for its allocable share of the compensation
and benefits provided to such personnel based on the time that such employees devote to
.E activities.
Administrative Services. During the Term, M agrees to provide to
.E such administrative
services (including bookkeeping, clerical, secretarial, annual filings) relating to conducting
Events & Programs and maintaining
.E's annual reporting requirements as .E may request,
and
.E agrees to reimburse M for its allocable share of the compensation and benefits
provided to such personnel based on the time that such employees devote to
.E activities.
Insurance. During the Term, M agrees to include
.E as a named insured under its current
personal injury and property damage insurance coverage so as to cover
.E's activities in
conducting its Events & Programs.
.E agrees to reimburse M for .E's allocable share of the
premiums
for such coverage as determined by the insurer(s), provided that M may in its
discretion waive all
or part of such reimbursement. .E shall obtain, at its own cost, directors
and officers liability insurance for
.E's directors and officers at the same level as that
provided currently by M to its trustees and officers.
M and
.E maintain separate books and records on which their respective revenues and
disbursements are recorded. They also maintain separate bank accounts into which their
respective revenues are deposited and from which their respective expenses are paid.
For
accounting purposes, they will have separate audited financial statements, and they will file
separate annual information returns on Form 990.
For accounting and Form 990 reporting purposes, M does not include .E's allocable share of the
compensation and benefits provided to
§ Office and administrative personnel or .E's allocable
share
of insurance premiums in expenses when paid by M. Rather, such amounts are recorded
as advances to
.E. Conversely, M does not include reimbursements by .E in revenue, but,
instead, records them as the payment
of an advance.
Rulings Requested
M has requested the following rulings:

3
1. The gross receipts of.!: will not be attributed toM for purposes of determining M's
compliance with the 15 percent limit on nonmember gross receipts
under§ 501 (c)(?).
2. Payments made by .!: to M to reimburse M for shared services of§. Office and certain
administrative personnel, and for personal injury and property damage insurance
coverage,
will be regarded
as reimbursements for advances made for the benefit of.!: and
will not be deemed to be nonmember gross receipts to M.
3. M's exemption under§ 501 (c)(?) will not be adversely affected by its support of .!:'s r
program.
I.R.C. §
501 (a) exempts from federal income taxation organizations described in§ 501 (c).
I.R.C. §
501 (c)(?) describes clubs organized for pleasure, recreation, and other nonprofitable
purposes, substantially all of the activities of which are for such purposes and no part of the net
earnings of which inures to the benefit of any private shareholder.
Treas. Reg. § 1.501 (c)(7)-1 (a) provides that the exemption provided
by§ 501 (a) for
organizations described
in§ 501(c)(7) applies only to clubs which are organized and operated
exclusively for pleasure, recreation, and other nonprofitable purposes, but does not apply to any
club if any part of its earnings inures to the benefit of any private shareholder. In general, this
exemption extends to social and recreation clubs which are supported solely by membership
fees, dues, and assessments. However, a club otherwise entitled to exemption will not be
disqualified because it raises revenue from members through the use of club facilities or
in
connection with club activities.
Treas. Reg. § 1.501 (c)(7)-1 (b) provides that a club which engages
in business, such as making
its
social and recreational facilities available to the general public, is not organized and operated
exclusively for pleasure, recreation, and other nonprofitable purposes, and is not exempt under
§
501 (a).
In Moline Properties v. Comm'r, 319 U.S. 436 (1943}, the Supreme Court said that "[t]he
doctrine
of corporate entity fills a useful purpose in business life. Whether the purpose be to
gain an advantage under the
law of the state of incorporation or to avoid or to comply with the
demands of creditors or to serve the creator's personal or undisclosed convenience, so long as
that purpose is the
equivalent of a business activity or is followed by the carrying on
of business
by the corporation, the corporate remains a separate taxable entity .... In general,
in matters
relating to the revenue, the corporate form may be disregarded where it is a sham or unreal. /d.
at 438-39. In response to the argument that the corporation was a mere agent of its sole
stockholder, the Court said that "the mere fact of the existence of a corporation with one or
several stockholders, regardless of the corporation's business activities, does not make the
corporation the agent of its stockholders.
In National Carbide Corp. v. Comm'r, 336 U.S. 422, 437 (1949}, the Supreme Court said that a

4
finding of a "true agency" relationship turns on several factors. "Whether the corporation
operates
in the name and for the account of the principal, binds the principal by its actions,
transmits money received to the
principal, and whether
receipt of income
is attributable to the
services of employees of the principal and to assets belong to the principal are some of the
relevant considerations
in determining whether a true agency exists. If the corporation is a true
agent, its relations with the principal must not be dependent upon the fact that it is owned by the
principal, if such is the case. Its business purposes must
be the carrying on of the normal duties
of an agent."
In Krivo Indus. Supply Co. v. Nat'l Distillers & Chern. Corp., 483 F.2d 1098 (5th Cir. 1973) the
court examined the "instrumentality
doctrine," which allows the separate legal existence of a
corporation to be disregarded when that corporation is a mere instrumentality
of a dominant
entity. Specifically, the court was called upon to determine whether a creditor corporation
should be held liable for debts of its borrower, where the financial circumstances of the borrower
put the creditor
in a position to exert substantial influence over the operations of the borrower.
/d. at 1101. The corporate form is not lightly disregarded; however, a subservient corporation's
separate existence may be disregarded if the subservient corporation exists to further the
purposes of the parent/dominant corporation and the subservient corporation has no separate,
independent existence of its own.
/d. at 11 02. Direct and actual operative control of the
subservient corporation is required to apply the instrumentality doctrine. The court will look past
stock ownership to the specific facts to determine whether the dominant entity,
in fact,
possessed full control over the subservient corporation and whether, through its manipulation of
the subservient corporation, a third party was harmed.
/d. at 1104. The court held that the
"absence of an independent corporate purpose is most apparent in those cases in which the
dominant corporation, to further its own corporate purposes, either organized
or acquired the
subservient corporation."
/d. at 1105. The court found that the creditor lacked the level of
control over the borrower for the instrumentality doctrine to apply. /d. at 1114.
In United States
v. Fort Worth Club of Fort Worth. Texas, 345 F.2d 52, (5th Cir. 1965), a §
501 (c)(7) social club, through its wholly owned subsidiary, owned a 13 story building. The
building was used
in part by the club, and the remainder of the building was rented to
commercial tenants. Each month, the subsidiary corporation turned over its income less
expenses to the club. The club deposited these funds
in its general bank account and drew on
this account to pay expenses. The court held that the club was not organized and operated
exclusively for social purposes, because, through a wholly owned subsidiary, the club was in the
business of leasing office space to the public. The court said that the social club was attempting
to accomplish indirectly what it could not accomplish
directly-to derive income from dealings
with the general public.
Rev. Rul. 68-74, 1968-1 C.B. 267, concerns a social club that operates as a nonprofit
corporation to promote yachting and other activities for the pleasure and recreation
of its
members.
In addition to a clubhouse, the club owns yachting facilities, including a marina for
the mooring and servicing of boats. The
club formed a wholly
owned stock corporation to which
it
leases its marina facilities for a rental that is based on the value of the facilities so leased.
The subsidiary corporation operates the marina as a business for profit, and pays Federal
income taxes on its earnings. Facilities
in excess of membership usage are offered to the

5
general public at the same rental as that paid by club members. The ruling states that the club,
as sole owner of the subsidiary and the leased facilities,
is entitled to receive all profits of the
subsidiary and
all rental payments for the facilities. To the extent that the subsidiary's profits
and rental payments result from the business done with the general public, (1) nonmember
income inures to the members of the club within the meaning
of§ 501 ( c)(7), and (2) the club is
not supported solely by membership fees, dues, and assessments within the meaning of§
1.501 (c)(7)-1. Accordingly, the ruling holds that the activities and operations of the wholly
owned subsidiary are considered to be those of the club for purposes of determining whether
the club is engaging
in business with the general public for profit. The ruling cites United States
v. Fort Worth Club for the proposition that social clubs claiming exemption under§ 501 (c)(7)
may not do
indirectly what
they cannot do
directly. A club may not insulate itself from the effects
of business activities carried on with the
general public for profit by forming a subsidiary
corporation to carry out those activities.
In Rev. Rul. 84-138, 1984-2 C. B. 123, the taxpayer, a management investment company that
elected to be taxed as a regulated investment company under subchapter M (§§ 851-855),
established
S, a wholly-owned subsidiary, to operate as a small business investment company
under the Small Business Act of 1958. S also elected to be taxed as a regulated investment
company under subchapter
M. Because the taxpayer and S use the same facilities and some of
the same personnel, it was agreed that taxpayer would pay all the expenses for general and
administrative overhead, including personnel costs. S agreed to reimburse the taxpayer for its
pro rata share of these expenses on
an arms-length basis. The taxpayer was not engaged in
the business of receiving compensation for services of the type that were reimbursed. The
reimbursements were not included
in gross income and no deduction was taken by the taxpayer
for S's share of the expenses. The Service found that the amounts taxpayer received as
reimbursement for paying S's
general and administrative overhead expenses, including
personnel costs, represented advancements made on behalf of
S. Citing Rev. Rul. 80-348
(holding that amounts paid by a labor union to reimburse delegates from local chapters for
expenses of traveling from home to attend a convention are not includible
in gross income if the
delegates have a right or expectation of reimbursement), the Service ruled that the amounts
received
in reimbursement for advances are not includible in gross income under§ 61 (a).
Analysis
Issue 1: Whether the gross receipts of E. would be attributed toM for purposes of determining
M's tax-exempt status
under§ 501(c)(7).
Under the "separate-identity principle" annunciated in Moline Properties. Inc. v. Comm'r, the
activities of a subsidiary will not be attributed to its parent unless (1) the subsidiary lacks a
business purpose, or (2) the subsidiary is merely
an arm or an agent of the parent. Aside from
the fact that
.E is not a subsidiary of M, .E was organized and is operated for the valid business
purpose
of conducting r: events for M's members and for the general public, thus satisfying the
first prong .
.E also satisfies the second prong. Under the holding in National Carbide Corp. v. Comm'r, the
finding of a true agency relationship turns
on factors such as whether the corporation operates

6
in the name and for the account of the principal, binds the principal by its actions, transmits
money received to the principal, and whether receipt
of income is attributable to the services of
employees of the principal and to assets belonging to the principal. E is a separately
incorporated entity. E operates under its own name and for its own account, not under the
name
or for the account of M. E's board of directors is not controlled by M, and M is not
involved
in the day-to-day management of E. E cannot bind M by its actions. E does not
transmit the money it receives to
M, except to reimburse M for certain administrative, insurance,
and catering expenses. Although E will utilize some employees and assets
of M under the
Administrative Agreement, E will utilize volunteers and contractors to conduct the
[events. And
unlike the situation described in Krivo Indus. Supply Co., M does not have the direct and actual
operative control
of E that is required to apply the instrumentality doctrine. Therefore, under the
separate-identity principle
of Moline Properties v. Comm'r, the activities of E should not be
attributed
toM.
Nevertheless, United States v. Fort Worth Club of Fort Worth. Texas and Rev. Rul. 68-74
appear to hold that the activities and operations
of a wholly-owned subsidiary could be
considered those
of its § 501 ( c)(7) parent for purposes of determining whether the parent is
engaging
in a business with the general public for profit for purposes of§ 1.501 (c)(7)-1 (b),
regardless
of whether the subsidiary has a valid business purpose and is not a merely an arm,
agent,
or instrumentality of its parent. E. however, is not a wholly-owned subsidiary of M. Its
bylaws provide that a majority
of its directors must at all times consist of persons who are not
concurrently either a trustee
or an officer of M, and that .E's President must be a director who is
not concurrently a trustee or officer
of M.
Consequently, we hold that the gross receipts of E would not be attributed to M for purposes of
determining the percentage of M's gross receipts that M receives from sources outside its
membership
or that are derived from the use of M's facilities or services by the general public.
Issue 2.· Whether the payments made by e. to M under the Administration Agreement to
reimburse M for shared services of M's ~ Office and certain administrative personnel, and for
E.'s allocable share of the premiums for personal injury and property damage insurance
coverage, would be deemed to be nonmember gross receipts to M.
"Gross receipts" for purposes of determining tax-exempt status of§ 501 (c)(7) organizations are
the income from a club's usual activities, and include admissions, membership fees, dues,
assessments, investment income, and
normal recurring capital gains on investments. While M
will receive amounts from E in reimbursement for the expense
of providing E with the services
of its §. Office and certain administrative personnel, and for the cost of personal injury and
property damage insurance coverage allocable to
.E's [ Events & Programs, such amounts
cannot be considered income from M's usual activities. M is not engaged in the business
of
rendering the services of its §. Office and administrative personnel, or of providing personal
injury and property damage insurance coverage, to others for profit. Under the reasoning
of
Rev. Rul. 84-138, amounts paid by M for these expenses represent advancements made on
behalf
of .E. and amounts received in reimbursement for such advancements are not gross
income. Reflecting this reasoning, M does not include these amounts
in revenue for accounting
or Form 990 reporting purposes. Consequently, since the amounts are not "income" and are

7
not derived from M's usual activities, they do not constitute gross receipts for purposes of
determining M's tax-exempt status
under§ 501 (c)(7).
Issue 3: Whether M's exemption under§ 501(c)(7) would be adversely affected by its support of
E.'s [program.
M will support .E's r program by allowing .E to use a portion of its facilities, equipment, and
intellectual property without charge. As explained
in Issue 2, above, M will also make available
to .E its §. Office and administrative personnel in return for reimbursement.
When Congress amended §
501 ( c)(7) in 1976, it made clear that a social club should not lose
its tax-exempt status if it receives no more than 35 percent of its gross receipts from sources
outside its membership and, within that 35-percent amount, if no more than 15 percent
of its
gross receipts is derived from the use of its facilities or services by the general public.
See S.
Rep. No. 94-1318, at 4 (1976), reprinted in 1976 U.S.C.C.A.N. 6051, 6054.
You have asked us to assume that, for purposes of this ruling, such payments as M will receive
from
.E (except those amounts received as reimbursement under the Administration
Agreement), together with other nonmember payments, will make up no more than 15 percent
of your total gross receipts. In Issue
1, above, we determined that the activities of .E will not be
attributed to
M. Furthermore, in Issue 2, above, we determined that payments received from .E
under the Administration Agreement will not be considered gross receipts of M for purposes of
determining M's exempt status under §
501 ( c)(7). Therefore, under these circumstances, we
conclude that M's exemption under§ 501 (c)(7) will not be adversely affected by its support of
.E's r program.
Conclusion
In light of the foregoing, we rule as follows:
1. The gross receipts of .E will not be attributed toM for purposes of determining M's tax-
exempt status
under§ 501(c)(7).
2. The payments made by .E to M under the Administration Agreement to reimburse M for
shared services of M's
§. Office and certain administrative personnel, and for .E's allocable
share of the premiums for personal injury and property damage insurance
coverage,
will
not be deemed to be gross receipts to M for purposes of determining M's tax-exempt
status
under§ 501 (c)(7).
3. M's exemption under§ 501 (c)(7) will not be adversely affected by its support of .E's r
program.

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This ruling will be made available for public inspection under section 6110 of the Code after
certain
deletions of identifying information are made. For details, see enclosed Notice 437,
Notice
of Intention to Disclose. A copy of this ruling with deletions that we intend to make
available for public inspection
is attached to Notice 437. If you disagree with our proposed
deletions, you should follow the instructions
in Notice 437.
This
ruling is directed only to the organization that requested
it. Section 611 O(k)(3) of the Code
provides that it may not
be used or cited by others as precedent.
This ruling is based
on the facts as they were presented and on the understanding that there will
be no material changes
in these facts. This ruling does not address the applicability of any
section of the Code or
regulations to the facts submitted other than with respect to the sections
described. Because it could help resolve questions concerning your federal income tax status,
this ruling should be kept
in your permanent records.
If you have any questions about this ruling, please contact the person whose name and
telephone number are shown
in the heading of this letter.
In
accordance with the Power of Attorney currently
on file with the Internal Revenue Service, we
are sending a copy of this letter to your authorized representative.
Enclosure
Notice 437
Sincerely,
Steven
B. Grodnitzky
Manager, Exempt Organizations
Technical Group 1