Your club as a nonprofit
By Keith Sessions, Chief Financial Officer
At Joe Nall this year, I had the opportunity to talk with a number of members from across the country. One conversation over lunch with a group from West Virginia led to this month's article.
Why place club property in a nonprofit?
When a club moves property out of the hands of individuals and into the club's ownership, it is often done so the field will remain available past the lifetimes of the members. An attorney can help create the governing document for the land, specify how it will be used, and provide instructions for what happens if the group ultimately disbands. It is important to make sure the written document truly reflects the club's intent.
Drafting the governing document
With my day job I sometimes see trusts that do not provide as the grantor intended. In some cases the document does exactly what the grantor intended but the heirs do not like it. I often hear, "If Mom and Dad understood me, they would not have put this in trust." I respond, "No, Mom and Dad did understand you. That is why they put it in trust."
A common provision I have seen is a "no last man standing" clause. The intent is that if the club shrinks to the point of disbanding, the remaining members do not gain financially from the sale of the land. The clause states that the land cannot be sold and must be donated as a park or green space. This is great if a club disbands, but what happens if urban sprawl engulfs what was once farmland and the club needs to move? Make sure the governing document covers the ability for a club to sell the land in order to purchase a new location.
Tax status matters
Most clubs are set up as nonprofit organizations. When moving land from individuals to a club, or when people are contributing money for the purchase of land, the club’s tax category becomes very important. Section 501(c) of the IRS code deals with tax-exempt nonprofit organizations. There are 29 types; here we will deal with two common options: 501(c)(3) and 501(c)(7).
501(c)(3)
A 501(c)(3) is a nonprofit organization whose exempt purposes include religious, educational, charitable, scientific, literary, and testing for public safety, as well as fostering amateur sports competition and preventing cruelty to children or animals. Examples include the AMA, the AMA Foundation, and the Triple Tree Aerodrome.
The process to become a 501(c)(3) is lengthy. The AMA Foundation and Triple Tree both took approximately two years from concept to approval. I will not go into detail about the process here, but I suggest you consult www.irs.gov and a tax professional.
501(c)(7)
A 501(c)(7) is defined as a social or recreational club. The process to become a 501(c)(7) is easier. Although a 501(c)(7) organization can claim tax-exempt status on its own (a "self-proclaimed" exemption), it is recommended to file IRS Form 1024. It is relatively straightforward to complete and helps ensure the club is covered.
There are several minute differences between the two designations. In simple terms, the key advantage of a 501(c)(3) over a 501(c)(7) is that donations to a 501(c)(3) from individuals are generally tax-deductible. This is important when previously held shares or property are being donated to a club instead of being purchased with club funds.
Tax-exempt status does not mean an organization is free from tax or filing requirements. It means certain types of income are exempt from tax. A 501(c)(3) has a broader range of exempt income sources compared with a 501(c)(7). This becomes important if the club hosts fundraisers to purchase land.
Next steps
It is impossible to thoroughly discuss legal or tax matters within a magazine article. If your club wishes to pursue owning its field within the entity of the club, consult legal and tax professionals in your area before moving forward.
Transcribed from original scans by AI. Minor OCR errors may remain.
