Untangling a sec. 501(c) (7) club's Web pages.

• Author: Stump, Mitchell L.
• Position: Internal Revenue Code

Advising on the design of (or reviewing) a Website for a Sec. 501(c)(7) club? This article outlines the tax and nontax issues to consider when examining a club client's Web pages, such as furtherance of exempt purpose, unrelated business taxable income and loss of exempt status.

More and more Sec. 501(c)(7) exempt organizations(1) (clubs) are venturing online with a Website. Vendors are lining up to assist such clubs in designing and hosting a Website. The content of club Web pages is all important issue that raises questions of unrelated business taxable income (UBTI) and potential loss of exempt status.

A tax practitioner advising a Sec. 501(c)(7) club about the contents of its Website needs to think like an IRS agent. The Service would examine a club's Website for evidence it is generating Sec. 512 UBTI taxable under Sec. 511. If there is evidence of substantial UBTI (i.e., nonmember income), the IRS could revoke the club's exempt status. This article alerts tax practitioners to the tax and nontax questions to be asked when designing/ advising on a Sec. 501(c)(7) club's Website, to avoid UBTI and potential revocation of exempt status.

General Considerations

The rules applying to Sec 501(c)(7/ exempt clubs differ from those applying to developer-controlled clubs and for-profit clubs. Taxable clubs do not have tax-related restrictions on the content of their Websites. For a Sec. 501(c)(7) club, however, the following considerations apply:

* A club should not do anything on the Internet that would not be done in its clubhouse.

* A club should not do anything on the Internet that it would not do in print (e.g., via flyers and newsletters).

* A club should establish a Website for its members' benefit, not for the benefit of the general public.

* A club Website should become a forum or community for attracting members to join together, similar to use of the club's facilities.

* A club's Website links to commercial sites should not endanger the club's tax health.

The IRS's Position

Although the Service has not published clear guidelines for Sec. 501(c)(7) clubs' presence on the Internet, it has informed the tax-exempt industry that it is concerned about some activities found on the Internet and has asked for practitioner input on dealing with the new medium.(2) Tax concerns have been expressed in both private meetings and at public forums attended by Treasury officials. Much of their concern has been directed toward Sec. 501(c)(3) charitable organizations. Charities have been (and will continue to be) prime targets of IRS audits and rulings.

The IRS will be looking at exempt organizations' Websites; the Internet will play a central information-gathering role in future IRS audits. IRS examiners have been authorized to use the Internet for research. The IRS believes that the Internet can provide valuable information about a particular industry under examination and knows there is a wealth of information to be found there that may generate additional dollars for Treasury.

At present, there does not appear to be any special attention directed at Sec. 501(c)(7) clubs. Although the IRS has not expressed a written opinion about. such clubs' Websites, clubs should not ignore potentially damaging information found on their Websites. The discussion that follows is equally applicable to clubs with existing Websites as to...