Section 501(c)(7) organizations: Tax-exempt – to be or not to be?

Over the past decade and especially during these recessionary times, many tax-exempt social and golf clubs have entertained the idea of what the world would be like if they decided to become a fully taxable club or a hybrid club under section 277. Careful consideration must be made when considering relinquishing a club’s tax exemption under section 501(c)(7) of the Internal Revenue Code. A number of important tax benefits are not enjoyed outside section 501(c)(7), and other unintended consequences could come into play as well. There are numerous factors affecting this discussion, and we highlight a few of them below.

Sale of club assets. Most tax-exempt clubs enjoy the ability to sell club assets in a nontaxable transaction as long as the proceeds are properly reinvested in club use assets within the required time frame. However, this benefit may no longer apply if the club relinquishes its tax-exempt status.

Member assessments. Occasionally, clubs will levy special assessments against members for various reasons, such as major renovations or capital purchases, to help during times when the club may be struggling due to lower than usual membership or other various reasons. Although not taxable for 501(c)(7) clubs, taxable clubs must properly document the reason for this assessment or it may be taxable.

Membership certificate exchanges/transfers. Normally, tax-exempt clubs do not worry about these transfers being taxable. However, for taxable clubs, the IRS has been taking the position these transfers constitute income subject to tax if there are membership gains on the transfers.

Member/nonmember activities. Taxable clubs must record revenue and expenses for member and nonmember activities separately. Since overall net income would be taxable for either one of these groups, it is important to understand how allocations between these activities could result in either member or nonmember taxable income. Generally, tax-exempt clubs produce losses from nonmember activities and therefore do not worry about member/nonmember activities

Other considerations. Clubs should also think about the tax benefits provided to tax-exempt clubs by the various state and local authorities. Once a club turns public, is the club going to be subject to state franchise taxes? Does the club have a PILOT agreement for real estate taxes which could be at risk? Are there city or county licenses which could be affected? Could the club be subject to legal issues such as public accommodation or discrimination laws?

There are many more issues a club must consider when discussing relinquishing the club’s tax-exempt status. Some of these considerations may actually have nothing to do with taxable revenue activities. Clubs should not only consult their tax advisors but also with legal counsel.

For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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