Thus my native-born Texan descendants describe the activity that o’ercrowed the “pleasure, recreation, and other nonprofitable purposes” that gave Section 501(c)(7) exemption to Consolidated Sportsmen of Lycoming County, T. C. Memo. 2026-109, filed 10/2/26.
The Consols own 230 acres of meadowland and forests in the county aforesaid, whereon “members meet and conduct the club’s activities on this property. Facilities for member activities include rifle ranges, shotgun areas for trap and skeet shooting, ball fields, camping sites, picnic areas, and playground areas for children. Activities also include hunting, raising game, fishing, canoeing, kayaking, and swimming. Members also use the club for Civil Air Patrol training and participate in free safety training for police and environmental protection groups.” T. C. Memo. 2026-109, at pp. 3-4. Everybody agrees the members spend the great majority of their time leading that sportin’ life.
Except.
That meadowland and forest sit atop the Marcellus Shale. This is a natural gas tank that covers parts of NY, PA, and a couple other States (hi, Judge Holmes). So the Consols entered into an oil and gas lease, which over the seven (count ’em, seven) years at issue yielded better than $300K per annum on average.
Judge David Gustafson takes the practical approach.
“In these years CSLC’s members spent virtually zero hours on mineral activities, and CSLC’s officers spent de minimis hours. But minerals do not extract themselves, and in the absence of evidence about the amount of time spent by [lessee’s] personnel (and in view of CSLC’s burden of proof), we must assume that [lessee’s] personnel spent substantial amounts of time each year on the mineral extraction activity.” T. C. Memo. 2026-109, at p. 6.
Exemption revocations are record-rulers only if the parties agree, and here they do, so Rule 217(a) sends the Consols to a Rule 121 stipulated facts review. Going back to 1916 for the ancestor of the social club exemption now embodied in Section 501(c)(7), Judge Gustafson examines the key issue.
“Not at issue in this case is the amount of CSLC’s tax liability on the mineral royalties, or whether those royalties are taxed as UBTI (either passive investment income or business income) if CSLC qualifies as an otherwise tax-exempt social club or instead are taxed as regular income if CSLC reverts to taxable status. We therefore need not resolve here an amount of tax liability. For present purposes, it is sufficient to observe that, one way or another, CSLC owes tax on its mineral royalties. The question pending in this case is whether those royalties affect CSLC’s entitlement to tax-exempt status.” T. C. Memo. 2026-109, at p. 11.
The 1976 amendment to the IRC that removed exclusivity of exempt activities and substituted “substantially all” didn’t define “substantially all” and IRS never issued regs; they used a 35% outside unrelated income allowance as a guideline, like the infamous Primoli Rule of façade easements, with no basis in law or reg.
First, the statute considers what the club does, not the members. Restricting the test, whatever the percentage of whatever is tested, is too restrictive. The club is the exempt entity.
Second, using an unrelated party to perform activities generating money for the club is an activity of the club. Hiring an outside fundraiser, for example, has been held to be an activity of the club.
Third, BoP is on petitioner even in a record-ruler. If hours are the test, the Consols never showed how many hours the lessee put in on the drillsite as against how many hours the Consols put in on the sportin’ life. And if dollars are the test, the Consols never showed how much they collected from membership as against how much they got from th’ awl bidniz.
“To argue that ‘substantially all’ its activities were recreation, CSLC made a showing of its members’ recreation hours in a virtual vacuum, with no comparison to mineral extraction hours, and with the insistence that the Court ignore the mineral extraction dollars.” T. C. Memo. 2026-109, at p. 16.
As for the 35% free kick, Judge Gustafson needn’t go there, because more than half the Consols’ take comes from th’ awl bidniz. Anyway, the legislative history indicates that a club might be exempt even above the 35% barrier given facts and circumstances. But all the Consols offer on that point is the harm loss of exemption would do. Not enough.
But IRS generously concedes all but the last year at issue.
