Exempt Club Held Liable for UBI Tax on Investment Income; Offsetting Losses Disallowed

• DOI: http://doi.org/10.1002/npc.30375
• Published date: 01 October 2017
• Date: 01 October 2017

Bruce R. Hopkins’ NONPROFIT COUNSEL

3

October 2017

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc

Law and Analysis

The court observed that a contemporaneous written

acknowledgment (required by IRC § 170(f)(8)) “need not

take any particular form.” Here, the issue was whether

the deed constituted the acknowledgment. The court

held that it does, with this acknowledgment including an

“affirmative indication that the donee did not provide any

goods or services to the donor in exchange for its gift.”

The deed’s merger clause, the court stated, “thus

negated the provision or receipt of any consideration

not stated therein.” There was this small problem: The

deed recited “consideration” of $1.00 “and other good

and valuable consideration.” The court dismissed that

language, however, as mere “boilerplate, reflecting an

unfortunate (if centuries-old) habit of lawyers to state a

‘peppercorn’ of consideration even in contracts for the

conveyance of a charitable gift.”

The court noted that neither party in this case con-

tended that the donee furnished the donor with any goods

or services. With the “boilerplate language” having “no

legal effect” for this purpose, the court ruled that the deed

of easement includes the “required affirmative indication”

that this substantiation requirement was met. [21.3(a)]

Commentary: It is good to see legitimate charitable

deductions preserved, in the face of strict technical require-

ments, by the leavening effect of equitable interpretations

of the law, as evidenced by the foregoing two opinions. ◆

EXEMPT CLUB HELD LIABLE

FOR UBI TAX ON INVESTMENT

INCOME; OFFSETTING LOSSES

DISALLOWED

The US Tax Court, on August 14, ruled that a tax-exempt

country club could not offset its taxable investment income

with losses from nonmember sales because the sales activity

was not entered into for profit, due to losses in each of the

years at issue (Losantiville Country Club v. Commissioner).

Facts

For every year since it was founded in 2002, a tax-

exempt country club has filed an exempt organization

business income tax return (Form 990-T). The returns

have been filed in connection with surcharges paid

by nonmembers to use the club’s facilities. On these

returns, the club reported the gross receipts and direct

and indirect expenses relating to its nonmember sales

activities. The club also reported investment income.

This club computed the indirect expenses relating to

its nonmember sales using the gross-to-gross allocation

method. Pursuant to this method, the club used the

ratio of nonmember sales to total sales to determine

the portion of indirect expenses that was attributable to

nonmember sales. For the three years at issue, the club

reported net losses relating to nonmember sales.

The club filed an amended Form 990-T for the first of

the years at issue. On this return and on the subsequent

two original returns, the club offset its investment income

with losses attributable to its nonmember sales, reporting

that it did not have unrelated business taxable income.

Law

For tax-exempt social clubs, unrelated business income

includes investment income (IRC § 512(a)(3)). Losses from

nonmember sales may offset investment income only if the

sales were entered into for profit (Portland Golf Club v. Com-

missioner (1990) (summarized in the January 1991 issue)).

Analysis

The court stated that, to prove its intent to profit, the

club must establish that its gross receipts from nonmem-

ber sales exceeded the direct and indirect costs relating

to these sales, citing Portland Golf Club. Pursuant to the

gross-to-gross method, the clubs sustained losses relat-

ing to nonmember sales during the years at issue. The

court concluded that, because the club “did not intend

to profit from its nonmember sales, it may not offset its

investment income with losses relating to these sales.”

The court also determined that the club is liable for

accuracy-related penalties pertaining to the years at

issue, finding that the club “failed to exercise due care

in the preparation of its returns.” It was noted that the

club and its accountants stipulated their awareness of

the Portland Golf Club “precedent.” [15.5]

Commentary: When this case was previewed in the

June 2017 issue, this comment was made: “Surely the

IRS is incorrect in this case.” Well, the IRS prevailed in this

case. I thought the key issue was whether the Portland

Golf Club rule applied where the losses pertaining to the

unrelated activity are merely paper losses as opposed to

operational losses. It seemed from here, and still does,

that paper losses should not detract from profit motiva-

tion. The club, it appeared, made a good case that this

activity was profit-motivated. The Tax Court, however,

did not discuss this distinction. ◆

DONORS OF EASEMENT

RULED TO NOT BE QUALIFIED

FARMERS, THUS NO HIGHER

CHARITABLE DEDUCTION

The US Tax Court, on August 7, ruled that donors to

a charity of a conservation easement are not qualified

farmers and thus not entitled to the highest charitable

contribution deduction available for easement gifts (Rut-

koske v. Commissioner).