Nonprofit Law/Non-profit Club

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QUESTION: I am currently president of a ladies golf club at a private club.  The club was formed in 1985 and a bank account was opened.  The club was not incorporated.  Dues are collected from members and used to benefit the membership.  A surplus is available for expenses prior to annual collection of dues.  It has come up recently that we may be liable for taxation because we have never filed for non-profit status with the IRS.  Is this true, or are we "grandfathered" in to some change in the law from 1985?

ANSWER: It appears that your group is an unincorporated association.  You do not have income other than dues from members and, therefore, you are not required to file federal income tax returns as you only use your bank account (which I am assuming has a EIN (Employer Identification Number, also known as the taxpayer identification number), not of a member but of the club. See the right column of page 5 of the IRS Instructions for Form SS-4
http://www.irs.gov/pub/irs-pdf/iss4.pdf
where the IRS explains that, when applying for the Employer Identification Number, the club may check a box for "Banking purpose"... "if you are requesting an EIN for banking purposes only,
and enter the banking purpose (for example, a bowling league for depositing dues or an investment club for dividend and interest reporting)."  The word "only" means that you would not need to file income tax returns.

Other examples are given by the IRS for "Banking Purposes"...
"In order to open a bank account to deposit funds from a
fundraising event, memorial fund, bowling league, or other non-
business purpose, the bank may request an EIN be assigned for
identification purposes."
https://sa2.www4.irs.gov/modiein/individual/help/glossary.jsp#B

If you don't have organizational documents, I suggest that you contact me to work on those. I would be willing to work on your matter, but I would need to spend a substantial amount of time and that would be beyond the scope of my offer of free services.  If you want to inquire about hiring me for such work, please contact me directly to the email address below.

The IRS writes about the 501(c)(7) recreational or social organizations at
http://www.irs.gov/irm/part7/irm_07-025-007.html
Please note that donations to such organizations are not deductible by the donors. http://www.irs.gov/pub/irs-pdf/p557.pdf on page 72 - last column "Contributions Deductible" - No

Also such an organization may be granted and be able to maintain exempt status easily only if it does not receive more than 35% of its gross receipts from outside its membership and receives no more than 15% of its gross receipts from nonmember use of club facilities. http://www.irs.gov/irm/part7/irm_07-025-007.html#d0e461

In McGlotten v. Connally, 338 F. Supp. 448 (D.D.C. 1972), the three judge Court stated:
--- Start of Excerpt ---
Congress has determined that in a situation where individuals have banded together to provide recreational facilities on a mutual basis, it would be conceptually erroneous to impose a tax on the organization as a separate entity. The funds exempted are received only from the members and any "profit" which results from overcharging for the use of the facilities still belongs to the
same members. No income of the sort usually taxed has been generated; the money has simply been shifted from one pocket to another, both within the same pair of pants. Thus the exclusion of
member generated revenue reflects a determination that as to these funds the organization does not operate as a separate entity.

Later, in 1986, a Federal Appeals court in  Knights of Columbus Council No. 3660 v. US, 783 F. 2d 69 (7th Cir.1986) cited to that McGlotten decision and also to another Federal Appeals Court:
--- Start of Excerpt ---
where participation in the revenue-raising activity is limited to members of the tax exempt organization, the financial resources generated by the activity and used to support the  organization "are merely shifted between members of such a group, and no tax consequences attach to that shifting."
---End of Excerpt---
Pittsburgh Press Club v. United States, 579 F.2d 751, 761 (3rd Cir.
1978)

If your dues total more than $50,000, I also suggest that you contact me for further analysis.

Harvey Mechanic, Attorney at Law -
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.    

---------- FOLLOW-UP ----------

QUESTION: I appreciate your reply.  Since the club was started in 1985 and the bank account was established at that time without an EIN, are we ok to operate without an EIN today?

ANSWER: Please check with your bank as most banks have to list every account with a taxpayer id (either Social Security number or EIN).  If you confirm that the account is not associated with either by the bank, let me know, and I will reply again. If there is a taxpayer id associated with the account, whose is it?

Harvey Mechanic, Attorney at Law -
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.    



---------- FOLLOW-UP ----------

QUESTION: The account has neither a social security number or a EIN.  Thank you.

Answer
Well, that's good that it is not running under an individual's Social Security number or another entities EIN, so it should be treated like an unincorporated social club, and, as you did not indicate that you have dues totaling more than $50,000 annually, and it appears from what you wrote that your only money comes from dues, you should not be treated like a taxable entity (as the courts ruled in other such cases).

The IRS has stated:
--- Start of Excerpt ---
Certain joint undertakings give rise to entities for federal
tax purposes. A joint venture or other contractual arrangement may
create a separate entity for federal tax purposes if the
participants carry on a trade, business, financial operation, or
venture and divide the profits therefrom...  a joint undertaking
merely to share expenses does not create a separate entity for
federal tax purposes. For example, if two or more persons jointly
construct a ditch merely to drain surface water from their
properties, they have not created a separate entity for federal tax
purposes.
---End of Excerpt---
Regs 301.7701-1 which is available at
http://goo.gl/rGzwO

Harvey Mechanic, Attorney at Law -
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.  

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Harvey Mechanic

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I am an attorney and I volunteer time to answer general questions about U.S. Federal income tax issues of nonprofit 501(c)(3) public charities only. Those questions could be about establishing and maintaining legal requirements for such non-profit organizations in the United States, including Internal Revenue service filings and requirements. I will not be working on this free forum to answer questions about Nonprofit's possible unrelated or for-profit businesses or how to fill out forms. This forum is only for general questions about federal tax law, not as the law applies to your specific situation. If you do not make your question public then I will not be spending much of my donated time on answers that would not benefit the public. If you have other questions, please contact me at Harvey108@hotmail.com I will reply from my email. In any case, do not reveal confidential information to me until after I have contracted with you to provide personal legal services. My responses on this forum are intended to be general statements of law, should not be relied upon as legal advice, and do not create an attorney/client relationship. For me to consider your individual situation and how the law applies, I would need to gather extensive information about the situation. To search my previous answers you can do a Google search by "site:allexperts.com/q/nonprofit" without the quotes and then add your search terms before hitting enter.

Experience

I have been practicing law and especially the law of nonprofit organizations since 1990 when I was admitted to the New York Bar and I have maintained my status with the Bar since that time.

Education/Credentials

B.S. Columbia University in New York City, 1970

J.D. (Law Degree) Brooklyn Law School, 1990 -- Cum Laude.


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