Don’t Lose your 501 (c)(7) nonprofit status!!!
(Your Social club could be at risk)
I want to talk about a very important issue, protecting your social club 501(c) (7) nonprofit status. Please bear in mind that this is not always simple or straight forward with regards to the IRS. There are several factors that have led to clubs losing their nonprofit status. This article is going to deal with some of the most important issues that have led to clubs losing or endangering their nonprofit status. Please consult a tax professional familiar with social club 501 (c) (7) or the IRS for more information about your clubs situation.
The Internal Revenue Code (IRC) exempts from federal income taxation organizations or “clubs” which are organized for pleasure, recreation and other non-profitable purposes. Examples of such organizations are country clubs, yacht clubs, hobby clubs, garden clubs, hunting, fishing, tennis, swimming and other sports clubs.
If your club wants to maintain its tax exempt status, the club cannot receive investment and/or nonmember income exceeding 35 percent of the gross receipts. No more than 15 percent of total gross receipts may be derived from the use of the clubs facilities or services by the general public. Here are some examples of club income that would be considered normal and usual. Membership fees, these fees cannot be so low that one time or transient use of the facilities by the general public is encouraged. Normal member charges, the dues of the club, fees and assessments needed to operate or upgrade your club. The club’s investment income and normal capital gains from your investments would also be considered normal. However initiation fees and capital contributions are excluded.
All of a club’s income that is not considered exempt income is generally unrelated business taxable income (UBTI). Such income would include income from nontraditional or traditional activities, income from nonmembers, and passive investment income. Exceptions would include investment income that was set aside for a charitable, educational, or other exempt purpose.
Two safe harbors are provided:
- 1.If payment is made directly to the club by a member or the member’s employer, a host-guest relationship will be assumed: Where a group of eight or fewer individuals, at least one of which is a member, uses the club’s facilities. Where 75 percent or more of a group using club facilities are members. Adequate records must be maintained to substantiate that there was, in fact, a member in a group of eight or fewer or that 75 percent of a larger group were members and that payment was made directly by members or their employers. The club need not inquire about reimbursement where payment is made directly by the member.
- 2.The information that must be obtained in all situations involving groups of more than eight (even if a member pays the club directly) includes the date; total number and number of nonmembers in the party; total charges; charges attributable to and paid by nonmembers; as well as a statement signed by the member indicating agreement:
I cannot stress to YOU how important it is to keep proper accounting records. You must segregate your club member’s gross receipts from your nonmember gross receipts. Clubs are losing their tax-exempt status, the IRS will revoked the 501(c)(7) status of your club?
Recently the IRS revoked two more clubs exempt status the two principal reasons why according to the IRS:
- 1.Failure to keep records which distinguish between member and non-member income.
- 2.The availability of its dining facilities to the general public for functions and meals.
The following are some of the top reasons why your 501(c)(7) status could be revoked by the IRS.
The bylaws governing the club or any written policy statement contain a provision that discriminates against any person on the basis of race, color, or religion.
Members are not made aware of the non-deductible status of membership fees paid to the club
The content of the clubs web pages can raise questions to the IRS, and demonstrate the clubs intention with regards to nonmember income i.e.: unrelated business taxable income (UBTI) and potential loss of your exempt status.
A. The home page available to the public should have very basic information about your club
B. The remainder of the site should be accessible by member password only. C. Your club should establish a Website for its members' benefit only.
D. Your club Website should become a forum or community for attracting members to fellowship.
The IRS is looking at exempt organizations websites; the Internet and what you post on your club’s website will play a central role moving forward in the examination process. IRS examiners have been authorized to use the Internet for research. The IRS believes that the Internet can provide valuable information about social clubs.
Most member sponsored events are nonmember in nature and should be documented accordingly.
Club member need to be individuals not entities like corporations or other clubs. Payments made by corporations for members should be considered nonmember income.
Credit cards in many cases are used by nonmembers and imply nonmember income. It will need to be segregated into different accounts if this scenario applies to your club.
Broad and vaguely stated membership requirements in your club bylaws or policies can lead to trouble with the IRS.
Management that actively and aggressively pursues the expansion of club membership is not allowed.
A club’s tax-exemption may be revoked pursuant to the limitation when its facilities are regularly rented to nonmembers, or when its primary source of income comes from such nonmember rentals, functions and bar receipts.
Providing substantial services for food to be eaten off-premises or catering activities, even if sold solely to club members, may be treated as a nontraditional activity and should be watched closely by your club.
Your club should review its documents, it is a good idea to check to see that your governing documents do not specifically authorize the club to engage in activities beyond the permitted scope of a social club. If they do, you must remove them. Clubs with powers stated in their governing documents beyond what is allowed by the tax law stand to lose their tax exemption.
The club must ensure that no private benefit to any of the club’s shareholders or members has taken place. The scope of “private benefit” is quite encompassing and includes not only the monetary gains or benefit but the less direct forms of personal benefit as well. If any part of the club’s earnings benefit any club member the tax exemption could be at risk.
If income from nonmembers is used solely to reduce the cost of providing the club’s services to its members. You run the risk that the prohibition against private benefit is violated. The IRS has taken the position that when the club’s profits (from nonmember’s earnings) are used to reduce the costs of membership for the club. This reduction is essentially the same in its overall effect as a direct payment from the club to the club members. As such, it is likely to run afoul of the “private benefit” prohibition.
If a club has more than one class of membership, the club must ensure that each membership class has clearly defined with established policies and a standard formal admittance procedure. To show that your club maintains the characteristics of a “club” within the meaning of (c)(7), your club may be required to show that personal contact and fellowship are a material part in the overall life of the club. This “commingling of members” requirement exists because the IRS has determined that a lack of social interaction of club members reflects a purpose of providing services or facilities to the club’s membership in a manner more consistent with public and commercial business entities, rather than as a true social club. When a club is denied, or loses, its (c)(7) tax-exempt status, the result frequently is brought about by the fact that the club’s membership did not exhibit sufficient social “commingling.”
Reciprocal income from other clubs will be classified as nonmember income.
On a brighter note the IRS has ruled that members may be compensated for bringing new member to the club as long as the compensation is reasonable in nature.
I will post several more documents on the web site to help clarify or assist you in documenting your clubs compliance with the IRS. If you have any questions please feel free to email or call me at firstname.lastname@example.org or (508) 525-6522.
1994 EO CPE