Social clubs – Requirements for exemption – Inurement prohibited

Internal Revenue Code section 501(c)(7) prohibits exemption if any part of the organization’s net earnings inures to the benefit of any person having a personal and private interest in the organization’s activities. Inurement is not limited to overt distributions; even undistributed earnings may benefit members by decreasing membership dues or increasing the services the club makes available to its members without a corresponding increase in dues or other fees paid for club support. Fixed fee payments to members who bring new members into the club are not an inurement of the club’s net earnings, if the payments are reasonable compensation for performing necessary administrative service. Also, a club may pay cash prizes to winners of a club bowling tournament without violating this prohibition.