Untangling a Sec. 501(c)(7) Club’s Web Pages

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.

Mitchell L. Stump, CPA
Partner
Goldberg Wagner Stump & Jacobs LLP
West Palm Beach, FL

For more information about this article, contact Mr. Stump at MLS@gwsjllp.com. Editor's note: Mr. Stump is a member of the AICPA's Exempt Organizations Taxation Technical Resource Panel, the AICPA's Exempt Organizations Electronic Commerce Task Force and author of Club Tax Book, An Accumulation Of Tax Issues Specific To Clubs.

Executive Summary

• The IRS knows there is a wealth of information to be found on the Internet that may generate additional dollars for Treasury.

• Every page of a club's Website should be designed to further the club's stated exempt purpose.

• Exempt status may be jeopardized if the club Website contains links to other sites.

More and more Sec. 501(c)(7) exempt organizations¹ (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 an 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 those merely contemplating one.

Specific Issues

Why Does the Club Want a Website?

Often, the question why a club wants a Website is not asked. The Internet is definitely a new (and possibly preferable) way to communicate with club members. Used properly, it is an extremely exciting, timely and cost-effective means of communication. E-mail and information on a club Website can attract members' attention. Many in club management believe that the use of a club's facilities can be increased with a proper Internet marketing approach. Participation may increase if member events are well advertised and menus are presented on the Internet in an appealing fashion.

But the real question is this—if a club had unlimited resources, would it publish the same information in a newspaper (i.e., for the general public)? The answer is probably "no." Posting information generally directed to members on an unprotected Web page for the world to see does not appear to serve member needs.

A club may believe it needs a Website to attract prospective members or to maintain its market share. Club marketing can include use of the Internet, if such efforts are directed properly (adequate disclosure, etc.) Soliciting club membership is important when membership is declining; however, making excess information available to the general public, via the Web, may not be appropriate.

Whatever a club's reason for want-ing its Website to be viewed by the world at large, primarily the Website should further the club's stated exempt purpose. After all, the desire to further its exempt purpose was the initial reason the club sought and was granted Sec. 501(c)(7) status.

Does the Website Meet the Exempt Purpose?

A club that already has a Website needs to determine if the site's design promotes the club's stated exempt purpose. Every page of a club's Website should be viewed with this in mind. Every word, picture and link should be analyzed to ensure the club is not moving away from its stated exempt purpose. Information found on the club's Website that does not meet the stated purpose does not belong on the Website.

Is a Website Critical?

Does the club really need a Website? Is it worth possible loss of exempt status? Many club members are beginning to use club Web pages to request dinner reservations, golf tee times, court times, etc. Can club members function without a club Website? Can a majority of the members make use of the site? How is the club communicating with its members without Web access? The club must ensure that its Website does not violate Sec. 501(c)(7).

Goals and Objectives

A club must set the goals and objectives it seeks to accomplish by having a Website; it also has to be able to measure its success in meeting those goals. Is the Website increasing club usage or simply encouraging members to surf the Net? Are members making more timely reservations for club functions or is the Website causing confusion? If the Website is not accomplishing its stated goals and objectives, should it be adjusted or a particular section eliminated?

If clubs are making Websites accessible to nonmembers, is such access increasing the traffic to the club's membership door? Are clubs asking prospective members how they heard about the club; has it been documented that they came via the Internet? As with any club activity, reviewing, analyzing and adjusting actions to meet the needs of the organization and its members are required.

Review and Approval of Content

As with print material, club management should approve the content of information being posted on a Web page. This responsibility should not be delegated to the Website designer, whose motives may be other than serving the members and the stated exempt purpose.

As part of the annual audit and tax compliance process, CPAs familiar with Sec. 501(c)(7) will undoubtedly want to view a club's Website and document changes made to it during the year. They should be looking for club activities not previously disclosed in the books and records, particularly activities that may cause UBTI or loss of exempt status. Occasionally, new activities may place a club at such risk (e.g., ability to order gifts from the Website).³ Reciprocal arrangements (i.e., arrangements with similar clubs) may be discussed on a Web page or there may be a link to the club with reciprocity. Income from such arrangements is nonmember income and has expense allocation ramifications.⁴ A club should keep hard copy (and/or retrievable computer copy) of every club Web page for a given year. The outside auditor, as well as the IRS, will want to view the documentation, just like copies of the club's print material. Clubs that update their Web pages on a regular basis need to keep a complete list of the changes.

Recommendations

A club should disclose on its Web homepage that it is a private membership organization with a Sec. 501(c)(7) Federal tax exemption, so that nonmembers will understand why they may be denied access to certain areas of the site. The following observations stem from the author's review of various Sec. 501(c)(7) organization Websites.

• Many clubs allow total access to almost everything on their site; very few require a member password before granting access. A member password should be required to gain access past the homepage.
• A club should not permit nonmembers to comment and vote, via the Website, on proposed amendments to the club bylaws.
• A club should not allow nonmembers access to member personal information, such as names and birthdates.
• Clubs should not post pictures on their Websites showing members imbibing.
• Hyperlinks from the club Website to automobile dealers, travel agents, etc., do not further exempt purpose and may trigger UBTI.
• Links to activity-related stores (e.g., golf shops on a country club's Website) may generate UBTI and threaten exempt status.
• Lists and pictures of foods available for take-out at the club may threaten exempt status.⁵
• While exempt status will not automatically terminate if any of the items discussed above are found on a club Website, it still must be asked why the item is on the site and how it relates to exempt purpose. Income generated from the Website, whether from links to commercial sites or sales from the club cafe, may well be UBTI.

Other Comments

Most Sec. 501(c)(7) clubs have the general purpose of bringing members together for social and/or athletic activities. A club should periodically review its stated purpose (as set forth in its organizational documents). Keeping the club's purpose in mind is essential when designing/reviewing its Website. Most clubs will not make many Website mistakes if they stay focused on their exempt purpose. Some additional issues worth considering are:

• What image does the club want to present?
• How does the club's Web page enhance that image?
• Does the site contain inappropriate banners, sounds and images?
• Are the club's name and logo protected from unauthorized use by other entities?
• Does the club publish members' names, addresses or birthdays in the newspaper? If not, does it post such information on its Website? Why?
• Does a club sell golf-related merchandise in its pro shop? If yes, does its Website link to commercial golf sites? Why?
• Does the club promote members conducting business in the club? If not, does it promote members conducting business on the Web? Why?
• Does the club mail its newsletter to nonmembers? If not, does it post newsletter information on the Web? Why?
• Would a club provide the IRS with a list of all of its sources of nonmember income without a request? Why provide such a list via its Website?
• Currently, a Sec. 501(c)(7) exempt organization is not required to make its tax returns available to the general public. Return preparers for such organizations should be aware that, at www.guidestar.org., information from Form 990, Return of Organization Exempt from Income Tax, is available for more than 620,000 exempt organizations. Thus, it may now be appropriate for a club to post its returns on its Website.
• Does the club let nonmembers look around, pick up menus, newsletters, etc.? If not, why allow unlimited nonmember access to its Website?
• Does the club want members to come to the club for numerous activities? Why encourage members to surf the Web?
• Travel links appear to be taking members away from the club for pleasure and social enjoyment. Does this further the club's exempt purpose?

Exhibit 1 below suggests a lay out and content for a club Website.

Conclusion

In advising/reviewing Website design for a Sec. 501(c)(7) club, the home page should be available for viewing by the general public; the remainder of the site should be accessible by member password only. As a whole, the site should encourage members to come to the club, not to surf the Web.