By Kerri Rawcliffe, CPA, Partner
Key Takeaways
- Member donations to a 501(c)(7) private club do not generate unrelated business taxable income and will not jeopardize the club’s tax-exempt status.
- Income earned from donated assets, such as dividends or capital gains, is taxable and must be tracked to ensure compliance with IRS thresholds for non-member income.
- Donations of appreciated securities require careful planning, as the tax burden may fall on either the donor or the club depending on how the gift is structured.
If your private member-owned club is in the fortunate position where a generous member desires to donate cash or appreciated stock, you may be wondering if you can accept such sporadic gifts without running afoul of your tax-exempt status.
This article explores the tax considerations of these donations, with a focus on unrelated business taxable income (UBTI) and the mechanics of accepting appreciated securities. We also include a couple of important reminders to share with your member donors.
The Taxable (or Not) Status of Member Donations to Your Club
Assuming your private club operates under Internal Revenue Service (IRS) Section 501(c)(7), it will be tax-exempt as long as: 1) it is organized and operated for pleasure, recreation or other non-profitable purposes and 2) no part of its net earnings inures to the benefit of any private shareholder.
Further, to avoid jeopardizing its tax-exempt status, your private club must also closely monitor its unrelated business income to ensure it does not exceed IRS thresholds — another common concern of the private club clients we serve. To help provide clarity over what is or isn’t UBTI:
- Member Donations: Whether made during the member’s lifetime or as a bequest, member donations are not considered unrelated business income. As such, these contributions do not count against the thresholds set by the IRS for unrelated income and do not generate a tax liability for your club.
- These gifts can be accepted without risking your club’s tax-exempt status under Section 501(c)(7).
- Donated Assets in Club Investment Portfolio: However, if a donated asset remains in your club’s investment portfolio, any income it generates (such as dividends or interest) is taxable and must be included in your club’s gross receipts.
- The IRS requires that no more than 35% of a 501(c)(7) club’s gross receipts, excluding initiation fees, come from non-member sources such as investment income. Exceeding this threshold can jeopardize your club’s tax-exempt status.
Nuances Regarding Donations of Appreciated Securities
When a member chooses to donate appreciated securities (e.g., stocks), both your club and the donor must make an important decision before the gift takes place:
- Accept the Securities Directly: If your member donates the appreciated securities directly, your club assumes the donor’s cost basis in the securities. When your club later sells these securities, it will be responsible for paying any capital gains taxes.
- This method is often mutually beneficial to both the member and the club. The member escapes the tax on the gain. The club ends up with cash after the sale and payment of tax, which would be considered a contribution.
- Receive Cash from a Pre-Sale: More generously, your member could sell the securities and donate the resulting cash to your club. The member in this scenario will be responsible for the capital gains taxes on the sale and your club would get a contribution of cash from the member, which is not taxable.
- Often, the donor is looking to minimize their own tax liability. So while this approach is less common, it would create less tax complexity for your club.
Important Reminders for Your Member Donors
In the spirit of transparency and becoming true partners with your members, we think it helpful to provide a couple of reminders to share with them:
- Donations to 501(c)(7)s: Donations to a private club are not tax-deductible for your donors, as 501(c)(7) organizations do not qualify as charitable entities under IRS rules.
- Transparency and Collaboration: Your members should work with both their tax advisors and your club to determine the best method that would align with their own personal financial goals and the tax situation of your club.
We Can Help
While donations from your members to your 501(c)(7) club do not pose a tax risk to your exempt status, your club should implement clear policies for accepting such gifts — especially appreciated securities — to ensure compliance and maintain transparency.
Members should seek advice from their tax professional to determine the most tax-efficient method of giving. If the transaction is carefully planned, the gift can be mutually beneficial to both your club and its members.
Contact Us
We welcome the opportunity to answer any questions you may have related to this topic or any other accounting, audit, tax or advisory matters for private clubs. Please reach out to your PKF O’Connor Davies client service team or any of the following:
Kerri Rawcliffe, CPA
Partner
krawcliffe@pkfod.com
Stephen Noyes, CPA
Partner
snoyes@pkfod.com
Brooke Rossi, CPA
Director
brossi@pkfod.com
Amber Stone, CPA
Director
astone@pkfod.com