Private Letter Ruling 201515035 might not seem to have anything to do with the interminable IRS scandal (According to the TaxProf we are on Day 716 as I write this. And look who is featured on Day 716). It's not as if there are people accusing the IRS of targeting drunkards, although the status of drunkards would probably rise in some circles if they were to start such a campaign, much as Churchill indicated that he would have a favorable remark about the devil, if Hitler ever invaded hell. The connection to the scandal comes from its reflection of our overreliance on the IRS for determining matters that have nothing to do with federal taxation.
You explained that you formed as a nonprofit because the state of P required it in order to serve beer and wine at N's restaurant.
Your President-Treasurer signed and agreed to the terms of the management contract on behalf of both you and N. Your President-Treasurer is also the owner of N. Your Secretary endorsed the management contract on behalf of N as a member-manager. This contract states you will pay N E% of gross receipts from the service of alcohol each month.
The Club shall operate under the pool system and establish an alcoholic beverage replacement account. The initial replacement percentage shall be Q percent of service charges for alcoholic beverages.
An organization cannot be recognized as exempt under section 501(c)(7) unless it shows that it is both organized and operated substantially for pleasure, recreation or other nonprofitable purpose. Your Articles of Incorporation state you are a private club that performs social, fraternal, and hospitality activities. Your facts indicate N operates a restaurant. Your primary activity consists of offering memberships where anyone paying your annual membership dues can purchase alcohol to be served with their food ordered at N restaurant. Currently, your annual membership is free. You are operated by the same people who own and operate N restaurant. Your sale of beer and wine demonstrates you are not operated for the purposes declared under section 501(c)(7). Rather, you were formed primarily to permit N to serve alcoholic beverages.