A federal court recently upheld a lower court’s decision against a club regarding its tax reporting.
For several years, Losantiville Country Club in Cincinnati used losses from numerous nonmember events to offset its tax liability on investment income. Referencing a previous case involving Portland Golf Club, the court ruled that Losantiville was in violation of tax law when it failed to conduct nonmember events with the “intention” of generating a profit and used losses from those events to reduce its tax burden. According to the court, Losantiville did not produce evidence that it attempted to stop the losses or even that it would expect a profit from the events. The court referenced nine factors that could determine whether the club was operating from a profit motive:
- Manner in which the taxpayer carries on the activity
- The expertise of the taxpayer or his advisors
- The time and effort expended by the taxpayer in carrying on the activity
- Expectation that assets used in activity may appreciate in value
- The success of the taxpayer in carrying on other similar or dissimilar activities
- The taxpayer’s history of income or losses with respect to the activity
- The amount of occasional profits, if any, which are earned
- The financial status of the taxpayer
- Elements of personal pleasure or recreation
It is important to note that the club maintained its tax-exempt status during this time. As a truly private, 501(c)7 entity, a club can receive up to 35 percent of its gross receipts, including investment income, from sources outside of its membership without losing its tax-exempt status. It is also intended that within this 35 percent amount, not more than 15 percent of the gross receipts should be derived from the use of a social club’s facilities or services by the general public. Losantiville did, in fact, remain inside of the 35/15 percent threshold, however, the court ruled that the club did not intend to make nonmember events profitable and therefore is subject to penalty.
This case is a cautionary reminder of how private clubs can best comply with tax law. Clubs that engage in nonmember events should be able to show that they intended to turn a profit (even if the event results in a loss), especially when using losses to offset tax liability.
If you have any questions regarding this issue, please contact NCA Vice President of Government Relations & General Counsel Brad Steele at [email protected].