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How has the Tax Cuts and Jobs Act affected tax-exempt clubs?

COMPUTING the unrelated business income tax of tax-exempt organizations, including social clubs, has become increasingly complex. Simply stated, among other things, the recently enacted Tax Cuts and Jobs Act (Public Law 115-97) (the Act) provides that losses from one unrelated trade or business may not be used to offset income derived from another unrelated trade or business for tax years beginning after December 31, 2017.

The Act added § 512(a)(6) to the Internal Revenue Code (IRC). Prior to its enactment, Treasury Regulations provided that, with respect to an exempt organization that derives gross income from the regular conduct of two or more unrelated trades or businesses, Unrelated Business Taxable Income (UBTI) was the aggregate gross income from all such unrelated trades or businesses less the aggregate deductions allowed with respect to all such unrelated trades or businesses. However, IRC § 512(a)(6) changes this calculation for exempt social clubs, with more than one unrelated trade or business.

The new rule, as a general matter, thwarts tax-exempt organizations, including social clubs, from offsetting UBTI generated by a profitable unrelated trade or business with a loss from an unprofitable one. Unfortunately, the statute left uncertain the scope of the activities that could be grouped together as a single unrelated trade or business. Gains and losses have to be calculated and applied separately. This requirement is generally known as the UBTI Silo Rule.

The Internal Revenue Service (IRS) has provided interim guidance discussing the application of IRC § 512(a)(6) to exempt social clubs.

  • That unrelated business taxable income . . . shall be computed separately with respect to each such trade or business.

Simply stated, the IRC provides special rules applicable to 501(c)(7)
clubs with respect to the computation of UBTI. For exempt social clubs, the IRC provides that the UBTI means the gross income (excluding any exempt function income) less the allowable deductions that are directly connected with the production of the gross income (excluding exempt function income). Thus, social clubs are taxed on their non-exempt function income, which generally includes investment income and income derived from an unrelated trade or business.

In particular, the IRC defines “exempt function income” as the gross income from dues, fees, charges, or similar amounts paid by members of the organization as consideration for providing such members or their dependents or guests goods, facilities, or services in furtherance of the purposes constituting the basis for the social club’s tax-exempt status. However, the code specifically excludes from the definition of “exempt function income” gross income derived from any unrelated trade or business regularly carried on by such organization.


A social club’s nonmember income is treated as gross income from an unrelated trade or business. Accordingly, even though IRC §512(a) (3) uses terminology different from IRC §512(a)(1), IRC §512(a)(6) applies to an organization subject to IRC §512(a)(3) if such organization has more than one unrelated trade or business.


A social club that receives nonmember income from multiple sources, such as from a dining facility and from a retail store, may have more than one unrelated trade or business and therefore be subject to the requirements of IRC §512(a)(6). If so, gains and losses would have to be calculated separately.

The IRS example is informative, and we can imagine issues arising about rental income (sources: room rental and cell tower rental). For example, in a city club or other club with room rentals, it may be reasonable to include room rental and food and beverage revenues and expenses in connection with a social affair being held at the club in a single silo because the room rentals are an essential part of hosting guests for the social affair. It may be reasonable to conclude that all nonmember activities should be in a single silo. Until final regulations are issued by the IRS, we suspect that there will be more questions than definitive answers. Until then, social clubs should exercise reasonableness with respect to the silo issue regarding unrelated business income determinations.

As noted earlier, the computation of the UBTI of tax-exempt organizations has become increasingly complex. The determination of the various silos that must be considered will likely evolve over time, but the IRS example distinguishing between revenues from a dining room and retail store discloses the initial thoughts of the IRS. The IRS has invited comments regarding this matter. We would recommend that any comments that club officials would like to submit be reviewed by their tax advisors.

James J. Reilly, CPA, JD, is a partner at Condon O’Meara McGinty & Donnelly LLP, which is a premier accounting firm serving more than 340 private membership clubs in 16 states. He can be reached at 646-438-6203 or [email protected].