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Saturday, August 30, 2014


Code §501(c)(7) provides an exemption from federal income tax for clubs organized substantially for pleasure, recreation, and other nonprofitable purposes if no part its net earnings inures to the benefit of a private shareholder. Thus, social clubs, sororities, and fraternities, for example, can often qualify for income tax exemption.

In a recent private letter ruling, the IRS was asked to rule that an "online sorority" qualified as an exempt social club.

The sorority was organized to operate a national online sorority for students of an online for-profit university. Its purpose was to encourage members to succeed academically and professionally. Its members communicate among each other over the Internet via email, blog posts, and online classes, and by telephone. When new members are added, there is an online ceremony for admission. Most of the activities of the sorority occur online, including meetings and seminars. However, members who live near each other may meet to perform activities for nonprofit organizations, and there is an annual meeting held each year at 3 locations throughout the U.S. where organizational activities are discussed and addressed.

The IRS concluded that the sorority did not qualify. The ruling stated that "[f]ace-to-face interaction is important for members of a social club. Organizations that do not afford opportunities for this personal contact among members are not entitled to exemption." The ruling also provided that the club operates "primarily to advance the individual interests of your members. You do not engage in meetings and gatherings as a primary activity that involves personal contact among or between your members." The lack of a fixed facility where members could meet to engage in fellowship was also found relevant, as was the lack of expenditure of funds for social or recreational purposes, and that the face-to-face annual meetings were not social meetings but organizational meetings.

It is true that prior precedent emphasizes face-to-face interaction. For example, Rev.Rul. 58-589 provides that there must be an established membership of individuals, personal contacts, and fellowship, and that a commingling of the members must play a material part in the life of the organization. However, such parameters were developed well before there were electronic methods of meeting that provided for immediate communication and feedback (including instant messaging and email), online group meetings, and online seminars. It is possible today to engage in extensive social activities and commingling online that were not possible even a few years ago. Thus, one can legitimately argue that an online social organization can have the same practical camaraderie and interaction as a more traditional organization that meets in person, and that perhaps the IRS should loosen (i.e., modernize) its standards in this regard.

It is also true that a social organization needs to focus on social and recreational activities, and not be an organization that is simply providing personal growth or other benefits to its members. Thus, for example, a flying club that provides economical flying facilities for its members but had no organized social or recreational program, was not recognized as exempt in Revenue Ruling 70-32. This was appropriately contrasted in the subject private letter ruling with another such club in Revenue Ruling 74-30, where the flying club members constantly commingled in informal meetings and had regular person-to-person association. The club in Revenue Ruling 70-32 was problematic because it was open to all persons interested in flying, the members did not participate as a group in the hobby for recreation, and the members had no expectation of a personal relationship with other members.

It may be that the subject sorority was more focused on providing a benefit to its members than providing a social interaction environment, in which case exempt status may be inappropriate. However, one can image other online organizations that are there just for social interaction purposes. Applying the explanations provided in this ruling, they would not qualify for exempt status. Is it appropriate that they be barred from social club status just because the contact and interaction is electronic and not in person?

PLR 201434022, August 22, 2014

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