Federal Update - Is Giving Up Your Tax Exemption … · Federal Update - Is Giving Up Your Tax...

1

Federal Update - Is Giving Up Your Tax Exemption a Viable Option?

James J. Reilly, CPA, JDPartner

Condon O'Meara McGinty & Donnelly LLP

Union League Club of Philadelphia

Sponsored by the National Club Association

2

Disclaimer Page

James J. Reilly, a partner at Condon O'Meara McGinty & Donnelly LLP, is licensed as a CPA in New York, New Jersey and Connecticut.

Disclaimer: Condon O'Meara McGinty & Donnelly LLP, and its partners, makes no representation concerning the views expressed, and does not guarantee the source, originality, accuracy, completeness or reliability of any statement, information, data, finding, interpretation, advice, opinion, or view presented.

IRS Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

3

May You Live in Interesting Times

interesting and rewarding challenge us, test us, and can even bring out the best in us

4

Interesting Times for Social Clubs

Woodcrest Club Goes Bankrupt12/14/2009 -- Long Island Business News (libn.com)

golf club bankruptcylost dozens of membersincurred large debt

5


Proposed Mergers CollapseFinger pointing - Merger

Brookridge & Meadowbrook CCs Collapses 9/15/09 – The Kansas City Star (Missouri)

Roanoke CC and Hunting Hills CCs - Merger Called Off 9/25/09 – morefront.blogspot.com

6


Club Holds Meeting with Homeowners

Hard Times Hit Ormond CC 12/3/09 - The Time-Picayune

declining membership - high debtpublic meeting with Ormond Estatesproperty values could drop > 20%

7


Club Closes

Hard Times Close the Blinds on Makos Beach Club(a for-profit club) 11/6/09 – Ocala.com

8


Provocative Headlines/Quotes"I’m willing to bet that in 10 years, 50 percent of clubs that are currently tax-exempt will not be anymore.”

Quote from March 2009 – The Private Club AdvisorQuote from March 2009 – The Private Club Advisor

9

Chicken Little--The Sky is Falling!

10


Provocative Headlines/Quotes

“FIN 48: The Death of 501(c)(7) Tax-Exempt Clubs”?

The Club Tax Book – Club Book Series 6/12/07The Club Tax Book – Club Book Series 6/12/07

11

Report of the Death of Tax-Exempt Clubs is Premature

“The report of my death was an exaggeration.”Mark Twain (11/30/1835 – 4/ 21/1910)

(honorary member of the Bohemian Club in San Francisco)

12


Golf Clubs Feel Pinch of Economy 3/17/09 – New York Times

Joe Beditz of the National Golf Foundation “[T]he private club isn’t going away. In 10 years, there will be about 4,000 private clubs and about 12,000 other golf facilities, just like we have now.”

13


Tycoon Saves Club( 11/23/2009 -- New York Post)

North Shore CC - brink of bankruptcyClub is out of the rough Zucker told Newsday: "I just want to

be able to access a golf course whenever I want."

14


Public Course to Become Private Club

LaFayette Hills to Become Private Club 12/17/09 – The Post-Standard & 2/6/09 – Syracuse.com

private club est. 1922 - thrived 8 decades

became a public course

to become private club again in 2010

Reason: “There’s a difference between a golf course and a golf club, and they want a golf club.”

15


Mergers of City Clubs with Country Clubs

Brynwood "Merger" - Sign of Times(12/14/09 - The Wisconsin Jewish Chronicle)

DAC and Forest Lake Country Club to Vote on a "Merger"(10/26/09 – Crain’s Detroit Business)

16

DAC and Forest Lake Merger Makes Longest First Hole

Mergers – Some Work, Some Don’t

mergers that worked – synergies2 city clubs joined 2 country

clubs – the 2 city clubs were in good fiscal shape – the 2 country clubs were in need of a strong merger partnerOther mergers have not worked

– why?17

Top Nine Reasons Club A Will Not Merge with Club B

9. If we keep both clubs open, we can save money by only having one GM, Chef and Superintendent -- to service Club B, let’s hire a strong Assistant GM, a really good Ass’t Chef and Ass’t Superintendent. Let’s buy a van or two & hire drivers to shuttle members between both courses.

“Oh, after all that cost cutting, the savings are just not enough to make the merger work”?

18


8. Keeping two clubs open is not a viable option so selling one property is needed.

If Club A merged with Club B and then Club A’s valuable asset was sold, the proceeds would benefit the merged membership.

Club A members were against it. Club A members preferred to sell their club, take the net proceeds and join a club of their choice.

19

Top Nine Reasons Club A Will Not Merge with Club B7. Our club property is worth

more than Club B’s. If we merge, our members’ ownership interest would be diluted.6. Club’s B debt is higher than

the worth of its property.5. Club B has environmental

problems.20


4. If we close Club B and have all members utilize Club A, it will be impossible to golf on Saturday and Sunday mornings.

3. We have a different type of membership. Over the years, we’ve had joint golf competitions. Club B members are rough around the edges.

2. There is no way Club B members will run our club.

21


1. Club B really, really sucks.

22

23

Reflections : Importance of Maintaining Tax-Exempt Status

since the recession began, many clubs reflected on importance of maintaining tax-exempt statusconsequences of abandoning a

tax-exempt statuspotential impact on club's private

status

24

Salient Questions - Private to Public

BusinessHow much more of facilities can be

devoted to non-member business?Sufficient demand in the community

to support substantial non-member use of the club's facilities?

Will members tolerate the physical presence of more non-members?

25


Taxation

Would the club’s capital assessments and initiation fees be subject to income taxation if a club changed its status from member tax-exempt to member taxable?See generally, I.R.S. P.L.R. 199952085; I.R.S. P.L.R. 200411028.

Would club’s property tax base, net worth calculations or income taxes for state/local taxes be affected by a change in status?

26


Taxation If taxable over last three years,

would annual statement show taxable net profit? years ahead? What might it have to pay in tax

in light of anticipated operations and the application of IRC Section 277?

27


Taxation Is the club contemplating sale of

property in foreseeable future? Non-recognition of gain

provision unavailable because of change in status from private tax-exempt to taxable?

28


TaxationIf club changes in status from

member tax-exempt to member taxable - tax implications if club changes back to tax-exempt status?

29


TaxationAre business opportunities (such as

long-term rental properties) available that are problematic for exempt club?

Does club have property it would like to develop (e.g., golf course condominiums) over a period of time, or any other project, inconsistent with its exempt status?

30


TaxationAt liquidation, would the

club recognize gain on liquidation if the club changed its status from member tax-exempt to member taxable?

31

Salient Questions - Private to Public consult with club’s legal counsel prior to reliance hereon

Regulatory

Would state’s public accommodation laws be implicated by change in status?

If a private tax-exempt club becomes a taxable in an attempt to capture unlimited income from the public, will it be subject to additional scrutiny under the Americans with Disabilities Act?See 42 U.S.C. § 12187

32

Salient Questions - Private to Public consult with club’s legal counsel prior to reliance hereon

RegulatoryWill club employment practices be

subject to additional scrutiny or regulation by the EEOC?

Would the club's liquor license be affected by a change in status from member tax-exempt to member taxable? See, e.g., N.Y. Alcohol Bev. Control L., Art. 8, § 106.8.

33

Three Tax Status Options Available to Clubs

1.For-profit taxable2.Not-for-profit tax-

exempt3.Not-for-profit taxable

1. Features of For-Profit Taxable Club

for-profit club taxable - investor- owners intend to earn profitfor-profit taxable club (which is

not a nonprofit membership club) is subject to same IRC provisions that apply to business enterprises

34

2. Features of Not-for-Profit Tax- Exempt

tax-exempt clubs not-for-profit and member-owned subject to income taxation on

income from non-members and investmentstax-exempt clubs not subject to

income taxation on exempt- function income

35

36

Exempt Social Clubs — Limits on Non- Member Income - Con

clubs only allowed to receive up to 35% of gross receipts (as defined) from non-members and investment income not more than 15% of gross

receipts from non-members for use of club facilities or services

37

Exempt Social Clubs — Limits on Non-Member Income - Con

Limits on Advertisingtax considerationsprivacy considerations

38

Pros and Cons of Club’s IRC Section 501(c)(7) Status - Pro

“exempt function income” not subject to income taxation initiation fees and capital

assessmentsemployer paymentsunaccompanied guests

39

Pros and Cons of Club’s IRC Section 501(c)(7) Status - Pro

Set-Aside Gain on Sale of AssetsSale of LandSale of Clubhouse Sale of Artwork

LiquidationProtection - Private Status

3. Features of Not-for-Profit Taxable Club

Taxable club may be not-for-profit and member-owned

Not-for-profit taxable club is subject to income taxation on income from non-members and investments

Not-for-profit taxable club is subject to taxes on revenues from members

40

41

Not-for-Profit Taxable Status - Pro

unlimited non-member revenue advertising restrictions

not applicable

42

Not-for-Profit Taxable Status - con

member revenues subject to income taxIRS -- initiation fees and

capital assessments subject to income tax?

Not-for-Profit Taxable Status - con

IRC Section 337IRC Section 277

43

Change in Tax Status Exempt to Taxable

relinquish exemption - print "Final Return" on Form 990

statement disclosing club intends to change tax status & not ceasing operations but will continue to function as a non-exempt club

copy of the board resolution initial Form 1120 marked "Initial Year"

44

Change in Tax Status Fly in Ointment - IRS

In a July 24, 2009 letter, IRS advised club that it could not “merely stop being exempt”

“exemption based upon a voluntary application”

“1) dissolve and dispose of [its] assets as required by law or 2) activities change and exempt functions are no longer conducted and a revocation process is completed through an examination”

45

46

Private Status must consult with club’s legal counsel prior to reliance hereon

Civil Rights Act of 1964 and EEOC (EEOC's mandate - Civil Rights Act of 1964 )

Americans with Disabilities ActState’s Public

Accommodation Law

47

Public Accommodation Law and PA must consult with club’s legal counsel prior to reliance hereon

PA Law: public accommodation is open to, accepts or solicits patronage of, general public

PA Law: Public accommodation shall not include any accommodation which is distinctly privateSource: Public Accommodation Provisions - PA Human Relations Act (as of October 27, 1955, P.L. 744, as amended)

48


Anti-Discrimination Laws Applicable to Private Clubs or Not, by Saul Ewing LLP –

Meadowlands Country Club of Blue Bell, PA, private club, sued by former female member, who alleged club treated her in a discriminatory manner by giving preferential treatment to men over women

49


club barred women from men- only dining facilitywomen - club voting rightswomen denied access to the

golf course at certain times(Source: Saul Ewing LLP Golf Practice Group)http://library.findlaw.com/2000/Oct/1/130527.html

http://library.findlaw.com/2000/Oct/1/130527.html

50

“Public" Versus “Distinctly Private" Accommodation Distinction

must consult with club’s legal counsel prior to reliance hereon

Factors Courts May Consider 1.genuine selectivity in the admission of members;2.the membership's control over the operations of establishment;3.the history of the organization;

4.the use of the facilities by nonmembers;5.the purpose of the club's existence;6.whether the club advertises;7.whether the club is profit or nonprofit; and8.formalities observed by club (e.g. bylaws, meetings, etc.).

(Source: Saul Ewing LLP Golf Practice Group Publication) http://library.findlaw.com/2000/Oct/1/130527.html)

http://library.findlaw.com/2000/Oct/1/130527.html

Public Accommodation Claims

Haverhill Golf & Country Club- MABear Hill Golf Club-MASouthern Trace Country Club-

LouisianaDruid Hills Golf Club-Atlanta,

Georgia

51

Example of Successful Merger

Merger on Mayfield March 2009 – Club & Resort Business

Mayfield & Sand Ridge Clubs mergeMayfield financially viableSands Point not sustainable 30 miles apartSaves $350,000 per year, per article

52

Pre-Merger Excess <Deficit>

Pre – MergerMayfield $150,500 (y/e 3/31/06)

no merger expenses or depreciation

Sand Ridge ($ 551,077) (y/e 12/31/05)no merger expensesdepreciation $1,051,699

53

Post Merger Excess <Deficit>

Mayfield Sand Ridge Club

<$785,417> (y/e 3/31/07)$327,462 merger exp. & $794,825 depr.

<$285,984> (y/e 3/31/08)18,311 - merger exp. & $811,660 depr.

54

Merger Cost?

Sand Ridge - $53,391 - (1/1/06 – 4/30/06)MayfieldSand Ridge - $327,462

- (y/e 3/31/07)MayfieldSand Ridge - $18,311

- (y/e 3/31/08)

55

Federal Update - Is Giving Up Your Tax Exemption … · Federal Update - Is Giving Up Your Tax...

Documents

Transcript of Federal Update - Is Giving Up Your Tax Exemption … · Federal Update - Is Giving Up Your Tax...