Whether your riding club can obtain tax-exempt status will impact its characteristics and finances. Many riding clubs may qualify for federal tax-exemption as social clubs organized for pleasure, recreation, and other non-profitable purposes. Social clubs are intended to be membership organizations. The logic underlying the tax-exemption of social clubs is that members should be allowed to pool their funds for recreational purposes, rather than for a compelling public benefit. In order for your riding club to qualify as a tax-exempt social club, however, certain specific requirements must be met.
First, it must be a “club”. Characteristics of a “club” include membership of individuals, the existence of personal contact, commingling and fellowship among members, sharing of active interests amongst members, and sharing of goals by members justifying the existence of the organization. Commingling of members should be a material part in the life of the riding club.
Second, it must be organized for pleasure, recreation, and other non-profitable purposes, substantially all of the activities of which are for such purposes. The club may not be a vehicle for carrying on an active business with the public, or for circumventing any type of federal, state and local laws and regulations. In general, a tax-exempt club can receive no more than 35% of its gross receipts, including investment income from sources outside of its membership. Within that 35%, no more than 15% of gross receipts can be derived from the use of a club’s facilities or services to the public without risking loss of tax-exemption. For example, in Private Letter Ruling 201830018, the IRS revoked the tax-exempt status of a social club organized to promote interests in horses and horsemanship because it exceeded these thresholds on a regular basis. On the other hand, in Revenue Ruling Rul. 68-119, the IRS ruled that a club organized to promote the enjoyment of equestrian sports did not jeopardize its tax-exempt status under Section 501(c)(7) by charging the public an admission fee to its annual steeple chase where the fees charged were used to defray the cost of the event and all excess revenue was donated to a public charity.
Third, no part of the riding club’s net earnings may inure to the benefit of any private shareholder. For example, paying members excessive salaries or entering into transactions with members that aren’t arms length might constitute prohibited private inurement. If the club has tiered memberships, the level of benefits provided each membership class should correspond to the class’s membership rates.
Finally, the club may not have a written policy that discriminates against individuals seeking membership on the basis of race, color, or religion (with certain limited exceptions).
© Deborah Buyer Law PLLC 2018 These materials do not constitute legal advice or create an attorney-client relationship. The reader is advised to consult with an attorney to obtain legal advice.