Public Use vs. Member Use: When Opening the Doors Puts 501(c)(7) Status at Risk

In the first two posts in this series, we explained why recreational clubs like pickleball clubs are often a better fit for 501(c)(7) social club status than 501(c)(3), and we explored how nonmember income limits can affect a club’s exemption. A natural next question follows: how much can a 501(c)(7) club open its facilities or programs to the public without putting its tax-exempt status at risk?

The short answer is: some public use is allowed, but too much can cause real problems. The challenge is that the IRS does not draw a bright line. Instead, it looks at facts and circumstances, including how frequently the public uses the club, how the activity is structured, and whether the club’s primary purpose remains serving its members.

The Core Rule: Members Come First

A 501(c)(7) social club must be organized and operated primarily for the pleasure, recreation, and social enjoyment of its members. That principle governs everything else. Public access is permitted only to the extent it is incidental to that primary purpose.

When public use begins to resemble a regular program or revenue stream, especially one that competes with for-profit businesses, the IRS may view the club as drifting away from its exempt purpose.

For more detail on how the IRS evaluates nonmember use of club facilities, including the circumstances under which nonmembers may be treated as guests and the recordkeeping required, see IRS Rev. Proc. 71-17

Guests of Members vs. the General Public

One of the most common points of confusion is the difference between member guests and true public use.

• Guests of members are generally acceptable. However, the IRS rules in this area are highly technical and include numerous exceptions, as well as exceptions to those exceptions. In general, occasional guest fees, guest play, or guest attendance at member events usually aligns with a social club’s purpose, as long as members remain meaningfully involved and the activity does not resemble use by the general public. For example, under IRS guidance in Rev. Proc. 71-17, when a group of eight or fewer individuals uses club facilities and at least one person is a member, the nonmembers may be treated as bona fide guests of the member, rather than as nonmembers or public use, provided the member is genuinely hosting the activity. These guest-use rules can quickly become fact-specific, and small changes in group size, payment arrangements, or frequency can change the tax treatment.
  

• General public access, by contrast, raises more scrutiny. If nonmembers can independently sign up, pay, and participate, without a member connection, the activity starts to look less like a club function and more like a commercial operation. For example, Rev. Proc. 71‑17 notes that if a group of nonmembers uses club facilities without any member connection or sponsorship, the activity is treated as nonmember use, even if the club collects fees. Repeated or substantial activity of this type can push a club over the IRS’s 35% nonmember income threshold, or, worse, be seen as unrelated business activity. The key distinction is whether members remain meaningfully involved in hosting or participating in the activity.
  

For example, a pickleball club allowing members to bring friends for open play is very different from advertising open court time to the public every weekend.

Public Events and Tournaments

Public-facing events are another gray area.

A club may host:

• Occasional public tournaments

• Community events

• Introductory clinics

These activities are not automatically prohibited. However, the IRS will look at:

• Frequency (one-off vs. recurring)

• Scale (incidental vs. central to operations)

• Revenue significance (minor vs. material portion of gross receipts)

A single annual public tournament is unlikely to threaten exemption. A year-round schedule of public leagues, clinics, or paid programs may. The IRS considers frequency, scale, and revenue significance when evaluating these activities (See Rev. Rul. 58-589, 1958-2 C.B. 266).

Youth Programs and Community Outreach

Youth programming is especially tricky for recreational clubs.

Clubs often view youth clinics or camps as community-oriented and beneficial, and they probably are. However, for 501(c)(7) purposes, the question is not whether the activity is worthwhile; it’s whether the activity serves the members’ recreational interests or primarily benefits nonmembers.

If youth programs are:

• Limited in scope

• Closely tied to member involvement

• Incidental to member activities…

they may be permissible.

If they become a standalone program serving the broader community, the club may generate unrelated business income or, in more extreme cases, undermine its exempt purpose altogether.

When Public Use Becomes a Tax Issue (and When It’s Worse)

Public use can trigger two different problems:

1. Unrelated Business Income (UBI)
   Income from public use may be taxable if it constitutes a trade or business that is regularly carried on and not substantially related to the club’s exempt purpose.

2. Loss of Exemption
   If public use becomes substantial enough that the club no longer operates primarily for its members, the IRS may conclude the organization no longer qualifies under 501(c)(7) at all. Nonmember income that exceeds 35% of gross receipts, or repeated public activities that dominate the club’s operations, are the most common triggers.

Not every public activity threatens exemption, but unchecked public access or high-revenue public events can jeopardize both tax exemption and compliance.

Practical Takeaways for Social Clubs

Clubs should regularly ask:

• Are members the primary users of our facilities and programs?

• Is public access occasional or routine?

• Does public participation meaningfully support member enjoyment, or has it become its own program?

• Are we tracking public use and related income carefully?

Clear policies, consistent recordkeeping, and periodic reviews of programming can go a long way toward avoiding trouble.

Final Thought

501(c)(7) social clubs don’t have to operate behind locked gates, but they do need to keep their center of gravity with their members. Public use can be a helpful supplement, but when it becomes the main event, tax-exempt status is at risk.