Under the Internal Revenue Code, certain organizations and programs are exempt from income taxation. One type of organization that frequently seeks tax-exempt status is the social club.
In order to qualify for tax-exempt status under the Internal Revenue Code, a social club must be organized for pleasure, recreation, or other similar nonprofitable purpose, and substantially all of its activities must be for this purpose. Personal contact, commingling, and fellowship must exist among members, who must be bound together by a common objective directed toward pleasure, recreation, or other nonprofitable purpose.
There does not have to be fellowship between every member of the club so long as fellowship makes up a material part of the club. A state or national organization that consists of individual members but is divided into local groups satisfies the fellowship requirement so long as fellowship is a material part of the life of each group.
In order to be tax-exempt, a social club must have limited membership. Evidence that a club’s facilities will be open to the general public may cause denial of the exempt status, but any dealing with outsiders does not automatically deprive a club of exemption.
A social club that provides for discrimination based on race, color, or religion in any governing instrument or written policy statement does not qualify for tax-exempt status. However, if a club in good faith limits its membership to those of a particular religion to further the teachings of that religion and not to exclude individuals of particular race or color, it is not improperly discriminating.
In order to be tax-exempt, a social club should be supported solely by membership fees, dues, and assessments. It may, however, receive up to 35 percent of its gross receipts, including investment income, from sources outside of its membership without losing its tax-exempt status. Of that 35 percent from outside sources, not more than 15 percent of the gross receipts may be obtained for the use of the club’s facilities by the general public or from other activities not furthering the social or recreational purpose of the club. The Internal Revenue Service will take into account all facts and circumstances if a club has non-member income that exceeds the statutory limits.
No part of a club’s net earning may benefit any individual having a personal or private interest in the club’s activities. Not only is the distribution of net earning prohibited, but the earnings cannot be used to decrease membership dues or to increase services without a corresponding increase in dues or fees. However, the IRS has concluded that fixed fee payments to members who bring new members into the club do not constitute an improper inurement of the club’s net earnings so long as the payments are reasonable compensation for performing necessary administrative functions.
Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.