The Internet and 501(c)(7) Clubs
By Mitchell Stump
Are clubs prepared to venture into the untested tax waters of cyberspace?
Is your club prepared to venture online with a web page? Possibly your club has already gone virtual. If the most recent PGA Show in Orlando and the Club Managers Association of America Convention in Atlanta are any indication, vendors are lining up, prepared to assist in designing and hosting your club's web sites. Currently, there are many questions being asked about the content of club web pages and they are being asked more frequently. If your club has elected to be tax exempt under Section 501(c)(7) of the Internal Revenue Code, this article will be of particular interest to you.
When it comes time to ask the piercing tax questions regarding a 501(c)(7) tax-exempt club web page, a person needs to think like an IRS agent. A Revenue Agent would view a web site by specifically looking for evidence of clubs generating nonmember income. Nonmember income often leads to potential tax liabilities being assessed by the IRS. Terminating the 501(c)(7) tax-exempt status by an agent could lead to big dollars for the Treasury. This article is as much about raising questions in the minds of Club Managers, Club Controllers and Club Board Members, as it is an attempt to dissect any particular tax law that applies to a 501(c)(7) club. As the reader, you may come away with changed thoughts about your own club's web page. Some of the comments made here will surely be controversial, and these issues will perhaps be debated by club professionals for years to come, as the IRS attempts to sort out the acceptable from the unacceptable.
Are you prepared to venture into these untested tax waters of cyberspace?
Basic Premise and Philosophy
For a 501(c)(7) tax-exempt club, the rules will be very different from those applying to developer controlled clubs and for-profit clubs. Taxable clubs will not have tax related restrictions in the content of their web page. If your club is 501(c)(7) tax exempt, however, it is suggested that you consider the following basic premise and philosophy when dealing with web sites:
- Clubs should not do something on the Internet that would not be done in their own clubhouse.
- Clubs should not do something on the Internet that would not be done in printed form, such as in flyers and newsletters.
- If establishing a club web site, do so for your members' benefit, not for the benefit of the general public.
- A web site should become a forum for attracting members to join together, as in the use of the club's facilities.
- Linking to any commercial sites may be dangerous to the club's tax health.
The IRS
It is important to know that the IRS has not published clear guidelines for 501(c)(7) tax-exempt organizations when dealing with the Internet. Actually, they have not published definitive information for any tax-exempt organization to date. Thus, the opinions being expressed here are only those of the author. The IRS has informed the tax-exempt industry that it is concerned about some of the activities found on the Internet and have asked for input from professionals on how to deal with this new medium of communication. Tax concerns have been expressed in both private meetings and at public forums where Treasury officials are present. Much of their concern has been directed toward 501(c)(3) tax-exempt charitable organizations. Charities have been, and will continue to be, prime targets of IRS audits and rulings.
The IRS will be looking at tax-exempt organization's web sites. One official has disclosed that the Internet will play a central role in future IRS audits in order to gather pertinent information. The Internet was said to provide access to such useful information for IRS examiners, that an internal memorandum has been issued authorizing employees to use the Internet for their research. One IRS Branch Chief went so far as to state that an Internet search could provide valuable information about a particular industry under examination. The IRS knows there is a wealth of information to be found on the Internet and that this information may generate additional tax dollars for the Treasury.
Take solace in the fact that there does not appear to be any special attention directed at clubs electing to be 501(c)(7) tax-exempt. Even though the IRS has not expressed a written opinion on 501(c)(7) tax-exempt organization web sites, this should not be interpreted to mean that clubs should ignore potentially damaging information found in their web pages until they're caught.
Why does your club want a web site?
This is a basic question for any organization, yet it does not appear to be given the attention that is necessary. The Internet is definitely the new and possibly preferable medium of communication with club members. It is extremely exciting and is a timely and cost effective means of communication, if used properly. E-mail, in conjunction with information on a club web site, can attract the attention of members. One club survey suggests that many in club management believe that the use of the club facilities can be increased with a proper marketing approach on the Internet. It is possible that participation can be increased when member events are well advertised and cuisines are presented on the Internet in an appealing fashion.
There is a question that begs to be asked. With unlimited resources, would you publish this same information in the local newspaper, for the general public, or even in the Wall Street Journal for the world to view and read? The answer to this question may be debatable, but I suggest that the answer is probably not. Posting information that is generally directed to members on an unprotected web page for the world to view does not appear to serve member needs.
Your club may be in a position where it believes it necessary to have a club web site to attract prospective new members or to maintain your place in the local market. Marketing your club in the proper fashion can include the Internet. Be sure that you direct your marketing efforts properly with adequate disclosures, etc. Soliciting membership in the club is obviously as important in times of declining membership; however, making too much information available to any curious person may not be appropriate.
Whatever your club's reason for wanting a web site to be viewed by the world at large, this author's opinion is that your club should, first and foremost, design your web site to further your stated tax-exempt purpose.
What tax-exempt purpose does the web site meet?
Once your club has designed a web site, it is time to determine whether its design promotes your club's stated tax-exempt purpose. Each and every page of your web site should be viewed with this particular question in mind. Every word, every picture, and every link to another web site should be analyzed to ensure your club is not moving away from your tax-exempt purpose. If there is information found in the web site that does not meet the stated purpose set for your club, it is suggested this item does not belong on your club page.
Can your club get along without a web site?
I am not convinced that this question has been asked often enough. If there were a possibility that something on a web site could harm the club's federal tax-exempt status, why would a club take the chance of experiencing a problem with the IRS?
Are your members so attuned to the Internet that this is the preferable way of communication? Many clubs members are beginning to use the club's web page to make dinner reservations, golf tee times, court times, etc. Can your members function without a site? Can a majority of your members make use of your site? You may find that having a web site is now required. If so, you must stay in compliance with your 501(c)(7) tax-exempt status.
Your club may decide that it can not get along without a web site. If this is a fact, have you considered that some members do not have access to a computer or not accustomed to this form of communication. Is there some form of discrimination being practiced for the computer illiterate Are you making accommodations to these members?
What does your club want to accomplish with a web site?
Set goals and objectives of what your club wants to accomplish by having a web site. Set up a means of measuring your success and lack thereof. Is your club web site increasing usage of the club or is it simply promoting members staying at home surfing the net? Are members making more timely reservations to club functions or is it causing confusion? If the web site is not accomplishing its stated goals and objectives, should it be adjusted or a particular section eliminated?
If you are making your web site accessible to nonmembers, is it increasing the amount of traffic to the club's membership door? Are you asking prospective members how they heard about your club and has it been documented that they came by way of the Internet? As with any activity of your club, review, analyze and adjust your actions to meet the needs of the organization and its members.
Who should review and approve your club web site?
Very similar to print material, club management should approve the content of information being posted on a web page. Do not defer this responsibility to a web site designer having motives other than serving the members for your club and the stated tax-exempt purpose.
As part of the annual audit process, your outside accountants will undoubtedly want to view the web site and to document changes made to it during the year. They will be looking for activities of the club not previously disclosed in your club books and records. Not unlike what an IRS agent would do, the auditors are looking for a reference to something causing the club some type of financial risk. Occasionally, new activities may place your club at some type of tax risk. An example would be new advertising for "nontraditional" activities that could jeopardize your 501(c)(7) tax-exempt status. It is suggested that your club keep a hard copy and/or a retrievable computer copy of each and every page of your web site during a particular year. The outside auditor, as well as the IRS, will want to view your documentation, just as they want to see copies of your print material. Clubs that update pages on a regular basis need to keep a complete list of the changes.
What are some of the more unusual items found on club web sites?
During a session of surfing the Internet for unusual items on club web sites, several strange and unusual items were found. Any person from any part of the world, including telemarketers, newspaper reporters and the IRS, have the same access to club web sites as I did on this particular day.
If you are interested in seeing what other clubs are doing with their sites, you too can surf the web. One convenient place to begin your search is to go to the Home Page of Club Managers of America that lists member sites in alphabetical order. I had a definite advantage in my search in that I was given privy to knowing which clubs were 501(c)(7) tax exempt and which were not. This leads to a possible suggestion to 501(c)(7) clubs to clearly disclose on your front page that the club is a private membership organization with federal tax-exempt. This will give the viewer a clue as to why they may not be allowed past the front page of the site.
The comments below apply only to those clubs that are 501(c)(7) tax-exempt clubs.
I was extremely curious as to why most clubs found it necessary to allow access to almost everything on their site. I am pleased to report that one club, left to be unnamed, would not allow me past their home page without a member password. This is probably a club that would not have allowed one past the front gate guardhouse without an invitation. For this, I applaud the club in being consistent in its mode of operations.
I was able to review a proposed amendment to the by laws of one club and was asked to voice my opinion and vote on the matter. As a complete outsider to the club, I was able to vote "on-line" and to submit my opinion of the amendment. I am not certain how the vote turned out but I am sure that I had significant influence over the matter.
After clicking on a number of web page links within another club site, I was provided a list of club member's birthdays for the month of February. Had I wanted to obtain a list of the club's membership roster, I could have visited this particular club's web page monthly and had a relatively complete list of member names. I had no use for the list; however, others may have.
One club provided magnificent pictures of real estate available for sale and for rent in the club community. Although the pictures were absolutely breathtaking, I questioned why I was being marketed for housing by the club? Does the club have a real estate division? Does the club benefit in some fashion from real estate sales, which would be recorded as nonmember income?
Pictures of club members were abundant on many of the web sites. I was curious as to whether all of the individuals pictured were asked prior approval. Some hyperlinks did not appear to be consistent with the purpose of the club. How does a link to a site selling automobiles promote a country club's stated purpose? What about links to travel tours and much of the other commercial sites to buy from? There appears to be money to be made on commissions generated from links beginning from a club's web site. If the club is the benefactor of this type of commission income, it appears to be nonmember related. Even when members are doing the clicking, it may be deemed nontraditional, thus also classified as nonmember income.
Golf professionals appear to have influenced several of the sites viewed. There are links to Internet golf stores where the user can purchase merchandise online. I assume that the golf professional has an opportunity to reap a commission from any sale generated from the club web page link. My concern is whether these sales will be deemed classified as member or nonmember income.
If a club-owned golf shop is not attracting members to the club for social and athletic activities, is it competing with other commercial entities? Should the golf shop web sales be considered nonmember income? If the golf pro owns their own shop, why are they using a 501(c)(7) tax-exempt organization's web site to generate their outside sales? While on the subject of golf shop sales, clubs have historically relied upon vendor catalogues to sell products that could not realistically be kept in stock. Linking to vendor sites from a club web page may become a convenience to the golf and tennis professional and could expand product lines that they can offer with the convenience of overnight delivery. If done from the golf or tennis shop with the professional's assistance in selection, billed to a member's account, and delivered to the club, any income appears to be member related. I do question whether exempt organizations are risking their tax status by offering sales of items from their web pages like every other commercial entity.
My mouth watered when viewing the list of baked goods and other cuisines available for takeout from one club. As a former IRS agent myself, I could just imagine how a current agent would savor the opportunity to call this income "nontraditional" and attempt to disallow the club's tax-exempt status.
Although I did not see it in a 501(c)(7) tax-exempt club web site, club members are being offered club e-mail addresses. I wonder if it is possible for a telemarketer to use the club's "clubname.com" extension to find a list of club members using this e-mail address? My concern is that commercial entities are very interested in club member's as they tend to be the more affluent individuals in the community. Marketers would love to gather your member's e-mail address in which to target.
Finally, there was nothing found on club web sites that should automatically terminate tax-exempt status. There were only questions as to why clubs are doing what they do. It did not appear that club management was the primary motivator in many of the links found, as they take viewers outside of the club web page to commercial sites. Linking to as many different non-club sites as possible appears to have become a trend in the industry. As alluded to previously, there is money to be made by acquiring market share from web site hits. 501(c)(7) clubs, if generating income from these items, must give consideration to what type of income this is.
Other Comments
Most clubs have the general purpose of bringing members together for social and athletic activities. Stated in a variety of ways in their organizational documents, a club would be wise to review their stated purpose on a regular basis. When developing an Internet presence, reviewing the purpose of the club is essential. Most clubs will not make many mistakes as long as they remain focused on their stated purpose. Here are some questions to ponder:
What image does the club want to present? How does the club's web page compare to the club's image? When allowing web site designers to create a web page for the club, many inappropriate banners, sounds and images invariably find their way onto the page.
Is the club's purpose to promote real estate sales in the community? Should web pages promote real estate sales? Property owner and community associations may have an interest in the marketing of the real estate surrounding a club. These associations may even have formed a realty division to assist in the buying and selling of association member's residences. It is extremely important that clubs do not find themselves caught up in the marketing of member's residences. An argument is made that the selling of residential real estate may directly impact an increase in club membership, especially where membership comes primarily or exclusively from property owners. Caution is given to 501(c)(7) organizations to stay away from any sort of implied relationship between the entities.
Property Owner Associations that want to develop their own web presence, should not be using the clubs' name and logo as the marketing tool to attract potential buyers. Clubs should protect their name and logo, insuring that unauthorized usage does not lead to queries from the IRS.
Does the club publish member's names, addresses or birthdays in the local newspaper? Why should clubs publish this information on a web page that can be accessed by the general public? Does your club sell golf related merchandise in its pro shop? Why should a club link to commercial sites for members to buy golf related merchandise from the web?
Does your club promote members conducting business in your club? If not, why should your club promote business activities on your web page?
Do you mail your newsletter to persons who are not your members? Why would you post your newsletter information on the web site for the general population to see?
Would you provide the IRS a list of all of your nonmember income without their asking? Why would you refer to this list on your web page?
Would you make your exempt organization's tax return available to the general public? One of these days you may be required to do so, thus using your web page. Do you know that others are publishing exempt organization Form 990's on the web? Are you prepared for an unrelated organization to publish your IRS Form 990 on the Internet without your knowledge? This could happen in the future. Currently Form 990-PF images are available at www.guidestat.org. Although there is not an organization suggesting that they will be posting club tax returns soon, your club should begin looking at their tax return with this in mind. It may be appropriate for a club to post its exempt tax return on the club's web site.
Do you let any stranger into your club to look around, pick up menus, newsletters, etc? If not, why would you allow this to occur on your web page?
Would the club sell its member's list to outsiders as persons with significant disposable income? Why allow web site a designer access to your members via links from your site to commercial sites? This is an issue that may not be obvious at first glance; however, it appears to be common in the industry.
Do you want members to come to the club for numerous activities? Why would you promote members staying home to search the web? Much of what appears on many club web pages does not appear to be promoting members coming to the club.
Travel links appear to be taking members away from the club for pleasure. Is this promoting your club?
Stock quotes on a site may be seen as promoting business in a social club. Is there a risk to your club by linking to one of these sites?
Conclusion
How would I design a prototype web page for a 501(c)(7) tax-exempt club? The home page would be available for viewing by the general public while the remainder is member protected, attempting to bring members to the club for social and athletic activities. Good luck in making use of this new vehicle, and remember, think like a Revenue Agent to insure your club is 501(c)(7) tax-exempt compliant. BR
The Internet and 501(c)(7) Clubs, by Mitchel Stump, as seen in the April/May 2000 issue of The Boardroom Magazine. Reprinted with permission of the publisher. Contact the Author: www.ClubTax.com Mitchell L. Stump CPA, 26 Princewood Lane, Palm Beach Gardens, FL 33410-1493, phone 561-776-0454 Mitch@ClubTax.com.
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