Q: I belong to a social club formed as a tax-exempt organization. I recently took over as treasurer and have a few questions related to what we are allowed to do. We collect membership dues and use a local facility rent-free for meetings, including board meetings. We are considering a bingo night every month to raise additional money. The plan is to use the funds for our needs and, if we are very successful, to make donations to local charities. The bingo night would be open to members and the public. Since we have never done this before some board members have said they do not think we can raise money like this. What are your thoughts?
Your description sounds like a Section 501(c)(7) organization. This is a club in which substantially all of the activities are for pleasure or recreation.
The beneficiaries of activities should be members. The “substantially all” language was a change made to the legislation that allowed for some activities that do not benefit the membership.
Any activities that involve participation by members or their guests are generally acceptable. A guest is someone who accompanies a member and who does not pay for their participation. The member may pay the cost for any guest.
An activity is acceptable within the exempt purpose of the club if either (1) 75% or more of the participants are members or guests, or (2) eight or fewer individuals are using the facility and at least one is a member and the others are guests.
Remember that a “guest” does not pay for participation in the activity. If non-members pay, they are classified as part of the “general public.”
The relaxed “substantially all” language does allow the general public to participate in the activities of the club. But there are limits on how much revenue can come from the general public.
The exempt status requires that the club be funded by members. The law has a “safe harbor” that allows some non-member funding.
No more than 35% of gross receipts can come from non-members. No more than 15% of gross receipts should come from use of club facilities or services by the general public.
If these quantitative tests fail, the club may still argue that the overall facts and circumstances justify exempt status. Contribution of excess funds to a public charity is a factor weighing in the club’s favor.
You may also know that no benefit may “inure” to private individuals. The club cannot be used as a pocketbook for one or more member’s benefit and maintain exempt status.
Using member dues for member benefit is not an inurement concern. For example, a bowling club was allowed to pay prizes to members for a bowling tournament. Prize money came from member contributions rather than admission fees charged to the public.
Your bingo plan raises interesting issues. First, make sure that you get any required approvals for running the game.
If only members and guests participate you will be fine. But recall that guests do not pay and are limited to 25% of the overall participants.
If the general public participates, keep accurate records and limit overall gross receipts from the public. If profits are given to a public charity, that will strengthen your cause but you are then relying on a facts-and-circumstances exception that cannot be assured to protect you.
I suspect this is still confusing. That is why I suggest that you may want to engage a CPA to answer questions about specific planned activities.
Member-only functions for social fellowship are fine. The purpose of this exemption is to encourage social interaction among individuals with shared interests.
Carrying out this purpose means that funding comes from those members and funds are used for the benefit of the members. Guests may later become members and both should be, and are, allowed.
When you start raising funds from inviting (paying) members of the public, you run added risk and should seek some help.
Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at firstname.lastname@example.org.