Consolidated Sportsmen: Gas Royalties That Often Topped Half Its Income Cost a Hunting Club Its Tax-Exempt Status

A hunting and fishing club exempt as a social club under section 501(c)(7) can lose its tax-exempt status when royalties from leasing its land for gas drilling make up more than half its income, even if its members spend almost no time on the drilling. In Consolidated Sportsmen of Lycoming County v. Commissioner, T.C. Memo. 2026-109 (Oct. 29, 2026), the Tax Court sustained the IRS’s revocation, effective January 1, 2023. The court did not need the IRS’s 35% guideline to decide the case and did not decide whether even 35% is too large a share to count as insubstantial.

Judge Gustafson issued this memorandum opinion in a declaratory judgment case under section 7428, decided without trial on the administrative record and a joint stipulation of facts. On October 30, 2026 (as corrected November 3), the court entered an order and decision granting the Commissioner’s motion for judgment and denying the club’s. Absent a stipulation, an appeal would presumptively go to the Third Circuit.

A sportsmen’s club on the Marcellus Shale

Consolidated Sportsmen of Lycoming County is a Pennsylvania nonprofit incorporated in 1936. It owns about 230 acres of forest and meadow atop the Marcellus Shale, where members use rifle ranges and trap and skeet areas, camp, hunt, fish and kayak. The Commissioner did not dispute that these activities qualify as “pleasure, recreation, and other nonprofitable purposes”. The IRS recognized the club’s exemption in 1981.

In March 2011, the board approved an oil and gas lease giving Rice Drilling B, LLC exclusive rights to the minerals under the club’s land. The club received a signing bonus of about $921,800. Royalties began after extraction started in December 2016:

Counting the club’s other investment income, nonmember income exceeded 50% of gross revenue every year from 2017 through 2023, including 58% in 2021. Members spent “virtually zero hours” on the mineral activity and officers spent de minimis time.

From a 30-day letter to the Tax Court

After examining the 2016–2019 returns, an IRS agent issued an October 2021 letter proposing revocation effective January 1, 2017, concluding that the lease income caused the club “to consistently exceed the 35-percent non-member income limit”. The club protested, arguing that the test should measure members’ time, not revenue. On September 27, 2023, the IRS Office of Appeals issued a final adverse determination, “effective 01/01/2023”, because gas leasing was a substantial nonexempt activity.

The club petitioned under section 7428. The Commissioner’s answer sought a January 1, 2017 date, but on August 19, 2026, he conceded that point “so that revocation shall be prospective.”

Reviewing de novo, the court required the club to prove by a preponderance of the evidence that it qualified; the stipulated submission did not change that burden.

The tax on the royalties was not the question

Under section 512(a)(3), an exempt social club’s unrelated business taxable income includes its investment and other nonmember income, so the royalties were taxable whether or not the club stayed exempt. The only question was whether the royalties cost the club its exemption.

Why the members’ hours did not save the club

The club argued that only its members’ activities count, and those were almost entirely recreational. The court called that view “too narrow.” The word “members” does not appear in section 501(c)(7); the statute exempts clubs. Just as fundraising by hired employees is an activity of a club, mineral extraction by a contractor on the club’s land is an activity of the club. Agreeing with a federal district court decision on an investment-funded family reunion fund, the court held that a club’s status turns on all its activities, “whether conducted by members, trustees, employees, or contractors.”

The court also rejected the club’s insistence that hours, not dollars, measure activity. If hours were the test, the club needed to show Rice’s hours on extraction for comparison; it showed only its members’ recreation hours. The court concluded that investment can be a nonexempt activity of a social club and that its earnings “can be an important metric of that activity.”

More than half is not “substantially all”

No 35% test has ever been enacted. It comes from a 1976 Senate Finance Committee report, and the Commissioner acknowledged that no regulation or revenue ruling adopts it. The court assumed, without deciding, that the IRS may use 35% as a safe harbor, and it did not need to decide whether 35% is too large: when royalties often exceed half of gross income, “under any reasonable standard” substantially all of a club’s activities are not recreational.

The court illustrated with ten kayakers who fund their club with dues. They could not keep the exemption by having contractors run a substantial business, by building an endowment that takes none of their time, or by leasing mineral rights and using royalties instead of dues to fund half the budget.

The legislative history allows a club over the guideline to rely on “all the facts and circumstances.” The club offered no specific facts about its activities that would change the outcome. Its listed hardships concerned retroactive revocation, which was no longer at issue, and the court added that reporting nonexempt activity on returns “does not somehow preserve” exempt status.

The result and what it means

The court held that the club’s mineral leasing arrangement was a substantial part of its activities and sustained the revocation effective January 1, 2023.

In our reading, a social club with drilling, timber, rental or investment income should measure that income against gross receipts each year, not count members’ hours. A club under 35% has an IRS safe harbor, not a court-approved one, and this decision does not tell a club between 35% and 50% where it stands. Our guide to how much nonmember and investment income a social club can have covers the IRS guidelines and the revocation process.