Identifying And Recording Nonmember Income
By Mitchell L. Stump, CPA
Clubs, whether they are 501(c)(7) Federally tax exempt or a club taxable under Section 277 of the Internal Revenue Code, must identify and properly record nonmember income in their accounting books and records, separate and apart from member income. This article will address the reasons why this information is important to be gathered. It will also identify various unusual types of nonmember income found in clubs.
Why segregate member and nonmember income?
From a tax and operations perspective, the use of a club's facilities by the nonmembers (or as the IRS states "general public") is significant:
1) It may indicate the existence of nonexempt purposes if a club is tax exempt under Section 501(c)(7) of the Internal Revenue Code;
2) It may make the club liable for Federal and/or State income tax on the net income generated from general public usage;
3) As a management tool for the operation of a club, segregating member and nonmember income can specifically identify how the club assets are being used and what additional services may need to be provided to meet users' demands. Clubs that have moved, or plan to move, toward having more nonmember activities may need to both reevaluate its tax status and to market the club in a different fashion;
4) Having nommember income from the "general public" opens the club to questions about its private status and the related host of issues ranging from discrimination to disability access.
Tax definition of "nonmember"
From a tax prospective, nonmember or "general public" means persons other than "members" of a club or their dependents or guests. A member's spouse is treated as a member for this purpose, even though not listed as such in Club documents. This general definition comes from Revenue Procedure 71-17, the primary IRS document providing guidelines for determining the effect of gross receipts derived from nonmember use of a social club's facilities.
Revenue Ruling 79-145 provides additional assistance in the definition of nonmember as it defines a guest of a social club as "an individual who is a guest of a member of the club and who ordinarily does not reimburse the member for the guest's expenses." Additionally, the ruling states "amounts paid to a social club by visiting members of another social club are amounts paid by nonmembers, even though both clubs are of like nature and the amounts paid are for goods, facilities, or services provided by such social club under a reciprocal arrangement with such other social club." Thus, persons that are invited guests and that pay for their own activities and usage are to be identified as nonmembers of the club.
It should not be difficult for most employees to identify a nonmember at most clubs. Many clubs require that members charge their expenses directly to their member account. Any person paying for their expenses directly, by credit card or cash, or through another club will be potentially a nonmember. Caution is suggested in taking this position unilaterally because, occasionally, members pay for expenses directly to keep a spouse from knowing something like another new set of golf clubs was purchased.
Where will clubs ordinarily generate nonmember income?
Nonmember income will be generated in just about every area of club operations. From the club owned pro shop to the dining room, where there is income to be generated, there is the possibility of receiving nonmember income. Clubs most often recognize the obvious places of generating nonmember income. There are usually good accountings for nonmember income from such activities as nonmember food and beverage sales and golf and tennis outings paid by nonmembers.
Clubs often overlook the not so obvious but as important areas of nonmember activities. Below is a list of items of nonmember income.
1) Pro shop sales to guests of members, paid directly by the nonmember where the club is the owner of the shop. Is there a key on the pro shop register to identify a sale as nonmember and is it used by the staff?
2) Catering income to members' residences, away from a 501(c)(7) tax exempt club is another source of nonmember income. Classified as nontraditional income, sales of products to members for consumption off club premises is, according to the IRS, to be classified as nonmember income. It is interesting that Section 277 taxable clubs do not appear to be required to classify nontraditional income as nonmember income. Nontraditional classification only applies to tax exempt clubs electing under Section 501(c)(7). Food gift packages sold by the club to members to be consumed off club property, including wine, holiday turkeys, hams and baked goods from a 501(c)(7) club is to be classified as nonmember income.
3) A percentage of rent income received from a golf or tennis pro for the usage of space in the club, where the pro shop activities belong to the professional. (Percentage of rent income to be classified as nonmember income would be based upon nonmember/member activities in the pro shop).
4) All income from a corporate member of a 501(c)(7) club. This is not to be confused with corporate sponsored members of a club. The IRS has disclosed that Congress did not intend for 501(c)(7) tax exempt membership organizations to have members other than individuals. Thus, all fees collected from corporate members will be required to be classified as nonmember income.
5) Sale of club assets not qualifying for income exclusion as a like kind exchange or where there is timely and proper reinvestment of the proceeds by a 501(c)(7) Club.
6) Reciprocal club income of all types will be classified as nonmember income.
7) Club web pages and web sites are creating an additional source of nonmember income to clubs. For example, clubs may be generating bartering income to be classified as nonmember income if web pages are developed and maintained at no charge to the club in exchange for the web page developers opportunity to create and keep advertising or referral income.
8) Clubs are attempting to create sales of merchandise via web sites that may be classified as nonmember income depending on who purchases and what the usage of the product is.
9) Selling web page links to other organizations also should be generating nonmember income. Web sites are a very new medium of communication and it is not totally clear how this whole area will be interpreted in the tax laws. Watch for more information on this topic this next year.
Revenue Ruling 71-17
The scope and purpose of Revenue Procedure 71-17 sets forth guidelines for determining the effect of gross receipts derived from use of a social club's facilities by the general public have on a club's exemption from Federal income tax under section 501(c)(7) of the Internal Revenue Code. This document is must reading for any and all 501(c)(7) tax exempt club Managers, Controllers and Treasurers, and should be followed. Having been issued in 1971, most clubs now have this ruling memorized as "the parties of more than eight rule." The IRS states that the guidelines set forth in this Procedure will be used in connection with the examination of annual returns on Forms 990 and 990-T filed by social clubs. It describes the records required when nonmembers use a club's facilities and the circumstances under which a host-guest relationship will be assumed.
Although not specifically stated in this Procedure, it is assumed a club that has not filed for tax exempt status under 501(c)(7) can also use the same assumptions as to the status of nonmembers if they abide by the same record keeping guidelines. Clubs that choose not to comply with the nine recording requirements of Section 4 of Revenue Ruling 71-17 will be precluded from using the minimum gross receipts standard and audit assumptions set forth in the Revenue Procedure. In other words, all guest related income could be classified as nonmember income with the associated tax ramifications that come with too much nonmember income.
Conclusion
The identification and recording of nonmember income is a fundamental tax requirement of a membership organization, whether it is taxable under Section 277 or tax exempt under Section 501(c)(7). Utilizing one of several acceptable methods of expense allocation generally eliminates any Federal or State income tax liability from nonmember activities. Gathering the necessary information regarding nonmember income is often as simple as coding entries in the accounting system properly and having members sign a form regarding payment of expenses for parties of more than eight. Clubs may need to provide some additional education to club personnel on the importance of the recording keeping for nonmember activities and the recording of such activity at the time of a sale. The information gathered from a club's accounting system regarding nonmember income can assist management in identifying the direction the club is headed and opportunities for the future. Insure that your club knows and records from where its income is coming and acts accordingly.
Mitchell L. Stump is the author of Club Tax Book, An Accumulation of Tax Issues Specific to Clubs. With over 800 copies in circulation, this monthly updated manual is extremely valuable to club Managers, Treasurers and Controllers.
