Friday, July 2, 2010


Friday, July 2, 2010
The Internal Revenue Code (IRC) exempts from federal income taxation organizations or “clubs” which are organized for pleasure, recreation, and other non-profitable purposes, as long as substantially all of the club’s activities are for such purposes. Examples of such organizations are country clubs, hobby clubs, garden clubs, and amateur hunting, fishing, tennis, swimming and other sports clubs. Therefore, your golf country club or family swim club has applied for and has been granted tax-exempt status under IRC Section 501(c)(7). Hopefully. If not, that’s a discussion for another time.

Over the last few years, we have seen an overall emphasis by the Internal Revenue Service (IRS) on increasing the examination of tax-exempt organizations. Social clubs will not be left out. With an electronic filing requirement for most Form 990’s, it is becoming easier for the IRS to determine which organizations may need a “further review”.

So what could your social club be doing, or not doing, to get it into trouble with the IRS? Well, for starters, and one that all tax-exempt organizations have to deal with, is whether the club is organized and still operating in accordance with the tax-exempt purpose under which it was formed. In other words, is your organization still doing what it is supposed to be doing, and what it told the IRS it was going to be doing, when the IRS granted the organization tax-exempt status? Other areas of IRS interest for clubs are unrelated business income (UBI), carrying on nontraditional activities and record keeping.

Now, with all this being said, please understand that the IRS is not “out to get” clubs and other tax exempt organizations. They just want to make sure that the organizations are following the rules. Another big area of concern for clubs is the amount of business the club does with the general public. A lot of the clubs have found themselves in hot water with the IRS because they exceeded the 15% limit on nonmember business, and the income from the nonmember sources benefited the club’s members.

As with most tax-exempt organizations, a club will still be taxed on, and the IRS will still be looking at, its unrelated business activities and income. Generally for a club, ALL income is considered UBI except for dues, fees, charges, or similar amounts paid by members for services provided them, their dependents, or their guests. Other UBI exceptions include investment income set aside for charitable purposes, and under specific circumstances, gain on the sale of club property.

Due to the nonmember income issue for clubs alluded to above, accurate record keeping is key. Clearly, in order to calculate the correct amount of UBI, a club must be well equipped for proper record keeping. If the club cannot prove that income or receipts are member income, the default position for the IRS is nonmember income. As mentioned above, in order to retain tax-exempt status, no more than 15% of a club’s gross receipts may be from the use of its facilities or services by nonmembers. Going further, to retain tax exempt status, a club must not receive investment and nonmember income exceeding 35% of its gross receipts. A club without good records will have a difficult time in an IRS audit proving that it has not exceeded these thresholds.

Another concern for clubs that could jeopardize their exempt status is engaging in nontraditional activity. The IRS has provided an unofficial 5% safe harbor for clubs in regard to nontraditional activity. An example of a nontraditional activity is the sale of alcoholic beverages by a club for off-premises consumption. The 5% will be included in the 15% mentioned above regardless if the service is provided to members.

In wrapping up, I think you can see that once a club has been granted tax-exempt status by the IRS, it’s not all fun and games after that. Maybe a good bit of fun and games for the members (remember the club was organized for pleasure and recreation), but the organization and the members have to remember that they are organized and operated as a tax exempt organization, and that means there are rules to be followed. So before you take that next lap in the pool or get ready to tee off, make sure someone is paying attention to the rules and what needs to be done to retain that tax exempt status.


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