Download 50 1 (c) (7)s

50 1 (c) (7)s
WHAT MARKETING
CAN WE DO?
by Mitchell Stump, CPA
A
s the author and publisher of
Club Tax Book, part of the annual
subscription price includes the
ability of a subscriber to call with quick
questions that a person cannot easily
find answers to in the publication. Two
questions account for many of the
telephone calls from clubs that have
elected to be federally tax-exempt
under Section 501(c)(7) of the Internal
Revenue Code. This article will address
the two questions most often asked, and
attempt to place some clarification to
the answers for a more complete
understanding of how a club should
proceed when marketing for new
members.
"My club has elected to be
tax-exempt for federal tax
purposes under Section
501(c)(7) of the Internal Revenue Code. Can my club place
an advertisement in a local or
national publication, whether
it is in a newspaper, magazine,
or web site on the Internet,
informing a reader that club
memberships are available to
be offered to interested and
qualified candidates?"
While the answer carries with it a
significant "non-tax" clarification, the
federal tax answer appears to be: Yes, a
501(c)(7) membership organization
should be able to advertise for prospective members. In an article published in
the June 2001 edition of The Boarciroom, I am quoted with the following
statement: "It is suggested that if the
IRS has a problem with advertising for
qualified members, it has not shared
this concern by way of rulings, regulations or court cases."
During this past summer, I informally raised this question with the
national office of the IRS Exempt
Organization Division representatives
M~tchellStump, CPA, is a frequent writer and spe'aker regilrding club tax issues. His self published and quarterly updated Club Tux Book has become a primary resource for
clubs and their representatives to find answers to their federal tax questions. Information on these books can be found at www.clubtax.com.
you, the professionals representing
clubs, see a potential problem with this
type of activity of a 501(c)(7) taxexempt club, that the IRS should be
concerned about? In other words, why
would, or should there be a tax problem
of letting the general public know
about club memberships being available to fill up a membefship category?
As a professional spending a
significant amount of his time advising
clubs on federal tax issues, I do not find
any federal 501(c)(7) tax reason for a
club not to pursue this type of activity,
if it is the club board's desire. So, the
answer to the specific question above is
again: Yes, 501(c)(7) tax-exempt clubs
should be able to advertise for interested individuals to inquire about
becoming a member of the club. With
the "tax" answer now given, there may
be a great number of "non-tax" reasons
why a club should not, or will not want
to even consider pursuing this type of
advertising for new members.
If a club has any intention of
restricting a person from being considered for membership, public advertising
may be the absolutely wrong action to
take. If an advertising campaign is
undertaken, adequate disclosure of any
limitations should be made in the
advertising piece. "Non-tax" considerations could include, but are not
limited to:
The bylaws of the club may require
membership "by invitation only."
0
Membership in the club may be
restricted to residents of the gated
community only.
Clubs may choose to exclude certain
individuals, for whatever reason, for
which they may not want to be
legally challenged.
0
Some clubs are only open to certain
groups or classes of individuals.
Examples could include: only
employees of a particular manufacturing company, only students,
graduates or parents of students
associated with a particular university, or possibly limited to members
of a particular religious affiliation.
the club. This would be an example of a
club that will probably pursue the
advertising avenue for prospective new
members. There is a company being
launched in the near future, attempting
to position itself to be the Internet
destination of individuals wanting to
know who has club memberships
available. Clubs without a full
compliment of members in all categories, that are not significantly restricted by their bylaws or other
non-tax factors, may find this source of
advertising interesting.
Where do you find your club on the
advertising question? Probably
someplace between these two noted
extremes, I would presume. Pursue
advertising for prospective members
with caution. Consult with your
professional advisors, both legal and
accounting, prior to taking any action,
to insure that you avoid potential
litigation, for any reason.
Clubs may also want to exclude
potential individuals for any number
of other reasons, such as convicted
felons, or possibly exclude all
individuals born in Stumptown,
W. Va, which would restrict disguised
rednecks like myself from your club.
There was a great example reported
in the media recently about the
membership process activity at a
somewhat restrictive club. Augusta
National Golf Club was reported to
have extended an invitation to possibly
only the second professional golfer in
the history of the club, to join its
member ranks. What was the official
response from the club representative?
Their general answer was that they d o
not respond to the media regarding
questions such as this. Here is a perfect
example of a club that would possibly
never consider advertising, looking for
potentially qualified members to apply.
On the other extreme of the spectrum, I have been informed that there
are clubs which are positioned in the
market place to have a policy similar to
the following: If you have cash in your
pocket and are willing to part with it,
you are invited to become a member of
"Our club is 501(c)(7)taxexempt for federal income tax
purposes. The board wants to
make our club available, on a
relatively restricted basis, to
prospective members, allowing them to get a feel for the
surroundings and to basically
check us out. Is this allowed
from a tax perspective, given
our election to be a 501(c)(7)
tax-exempt membership
organization? If so, is the
income collected directly from
these visiting individuals
doing the test drive of our
club, to be recorded as member or nonmember income in
our books and records, in
computing the 15 to 35 percent limitations?"
If the club's question is strictly a
50 1(c)(7) tax-exemption question,
clubs should be allowed to give
prospective members a chance to visit
and make limited use the club before
making the decision to join. However,
clubs must ponder other issues in depth
before embarking on this type of
program. The first part of Question 2
requires much more thought on the part
of a 50 1(c)(7) tax-exempt Club.
I
*
How are you extending your
invitations to these nonmembers? By
your actions, are you possibly opening
your club to the general public for their
usage? 50 1 (c)(7) clubs should generally not be open to the general public.
Opening itself to the general public
may open your club to various national, state and local tax and non-tax
issues. Some of the considerations can
include the accessibility rules under the
ADA, for which 501(c)(7)'s are not
currently required to comply.
Other issues include local liquor
laws in selling products to nonmembers, state privacy laws, etc. Non-tax
issues can include questions dealing
with whether your club has a written
policy for guests to only use your club
accompanied by an existing member?
The non-tax issue list is the most
difficult to analyze and the possibility
list could go on for paragraphs.
There is a very simple way to arrive
at the answer to the second part of
Question 2: Is the income received
from an individual that is a "member"
or a "nonmember"? Although some
feel they need to determine the
definition of these two words, it really
is not difficult to generally grasp the
differences. Is the person's name in the
club's membership directory? If so,
chances are you will probably record
the income as member related. If the
name is not in the directory, chances
are the income received directly from
the person is to be recorded as non-
member income. I hope the explanation placed in this fashion makes the
concept somewhat more understandable. I happen to work with tax law
daily and earn a living reading this
stuff and I often forget that the word
"tax" scares most people to death.
In order to get around some of the
income recording issues, several clubs
have gone on to ask whether they can
make the visitor a "member for a day,"
to record the green and cart fees as
member income? This is pushing the
envelope a bit too far in my opinion.
Without requiring a person to go
through a membership process, a
501(c)(7) tax-exempt club may find
that the club is open to the general
public and not truly tax-exempt.
Would a summer membership or a trial
membership meet the 501(c)(7)
membership test? Possibly if the
person goes through the club's
established process and meets the
club's membership criteria.
In conclusion, clubs should use
caution as they attempt to promote and
advertise for qualified individuals to
apply for memberships into their clubs.
If mistakes are made, make sure that the
club errs on the conservative side of
any question, and good luck in tilling
your club's membership roll. I
Nationwide &
International Debt Collection
Sewing Travel, Lodging,
and Hospitality
Los Angeles New York
Omaha Dallas Miami
WWW-andc.
corn
Allied National
440 Regency Parkway
Suite 134
Omaha, NE 68114
Phone: 402-393-3477 800-456-5770
FAX: 402-393-3541
T h e Bottomline
I
I
-.