Welcome to the Club “TRACK” Why this special series of sessions ? The Non-Profit Shoe How do you GROW your Club’s future? Club Insurance – Mixing and Matching a plan that’s right for you LUNCHEON – Club meeting round table Clubs don’t Plan – they React! Planning for Club Growth in a Shrinking Market – 2 sessions Why this special series of sessions ? The Non-Profit Shoe How do you GROW your Club’s future? Club Insurance – Mixing and Matching a plan that’s right for you LUNCHEON – Club meeting round table Clubs don’t Plan – they React! Planning for Club Growth in a Shrinking Market – 2 sessions

Let’s Get Started! The Non-Profit Shoe How do you GROW your Club’s future? Club Insurance – Mixing and Matching a plan that’s right for you LUNCHEON – Club meeting round table Clubs don’t Plan – they React! Planning for Club Growth in a Shrinking Market – 2 sessions The Non-Profit Shoe How do you GROW your Club’s future? Club Insurance – Mixing and Matching a plan that’s right for you LUNCHEON – Club meeting round table Clubs don’t Plan – they React! Planning for Club Growth in a Shrinking Market – 2 sessions

Focus on Clubs A Track for SSA Club leaders and Members Session 1 The Non-Profit Shoe – does it fit? Dave Newill Frank Whiteley Session 1 The Non-Profit Shoe – does it fit? Dave Newill Frank Whiteley

IANAL, nor a CPA, neither is he ! You are hereby warned that the presenters are NOT Internal Revenue Experts, nor are we CPA’s or lawyers. Hence, all of the following must be taken with some amount of caution. If you are to proceed toward declaring your club a 501 c3 or c7 non-profit, getting competent legal and accounting assistance is highly advised! You are hereby warned that the presenters are NOT Internal Revenue Experts, nor are we CPA’s or lawyers. Hence, all of the following must be taken with some amount of caution. If you are to proceed toward declaring your club a 501 c3 or c7 non-profit, getting competent legal and accounting assistance is highly advised! Is there an IRS agent / tax lawyer in the house?

Welcome to IRS 101 for Clubs ! What is a 501 c(3) or c(7) organization? How do you get such a title Others have done it! Questions & Answers –Do you need to be a charitable organization? –Are you Ready? –What’s in it for the club? What is a 501 c(3) or c(7) organization? How do you get such a title Others have done it! Questions & Answers –Do you need to be a charitable organization? –Are you Ready? –What’s in it for the club?

Funding of Non-Profit Organizations 501c(3) Donations – yes! Must Document, immediate Grants – more likely to get grant funds Dues – if you are charging for flying (use charges) then “dues” may be operating donation funds Sale of assets - Commercial or special loans (member loans are likely not an option) Savings/Investments (sinking, escrow, or reserve funds) Consideration of buying a new glider (40% 1 st year depreciation!) to lease back 501c(3) Donations – yes! Must Document, immediate Grants – more likely to get grant funds Dues – if you are charging for flying (use charges) then “dues” may be operating donation funds Sale of assets - Commercial or special loans (member loans are likely not an option) Savings/Investments (sinking, escrow, or reserve funds) Consideration of buying a new glider (40% 1 st year depreciation!) to lease back

Funding of Non-Profit Organizations 501c(7) Member loans/notes Member assessments Commercial loans Sale of assets Donations (subject to 501c(7) gross receipts limits) and but may not benefit member. Savings/Investments (sinking, escrow, or reserve funds) 501c(7) Member loans/notes Member assessments Commercial loans Sale of assets Donations (subject to 501c(7) gross receipts limits) and but may not benefit member. Savings/Investments (sinking, escrow, or reserve funds)

Much of the following is taken from the IRS web site – go to search for “charitable organization” – go to search for “charitable organization”

Exemption Requirements 501 c(3) To be tax-exempt as an organization described in IRC Section 501(c)(3) of the Code, an organization must be organized and operated exclusively for one or more of the purposes set forth in IRC Section 501(c)(3) and …none of the earnings of the organization may inure to any private shareholder or individual. In addition, it may not attempt to influence legislation as a substantial part of its activities and it may not participate at all in campaign activity for or against political candidates. The organizations described in IRC Section 501(c)(3) are commonly referred to under the general heading of "charitable organizations." Organizations described in IRC Section 501(c)(3), other than testing for public safety organizations, are eligible to receive tax-deductible contributions in accordance with IRC Section 170. The exempt purposes set forth in IRC Section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and the prevention of cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public buildings, monuments, or works; lessening the burdens of government; lessening of neighborhood tensions; elimination of prejudice and discrimination; defense of human and civil rights secured by law; and combating community deterioration and juvenile delinquency. To be tax-exempt as an organization described in IRC Section 501(c)(3) of the Code, an organization must be organized and operated exclusively for one or more of the purposes set forth in IRC Section 501(c)(3) and …none of the earnings of the organization may inure to any private shareholder or individual. In addition, it may not attempt to influence legislation as a substantial part of its activities and it may not participate at all in campaign activity for or against political candidates. The organizations described in IRC Section 501(c)(3) are commonly referred to under the general heading of "charitable organizations." Organizations described in IRC Section 501(c)(3), other than testing for public safety organizations, are eligible to receive tax-deductible contributions in accordance with IRC Section 170. The exempt purposes set forth in IRC Section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and the prevention of cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public buildings, monuments, or works; lessening the burdens of government; lessening of neighborhood tensions; elimination of prejudice and discrimination; defense of human and civil rights secured by law; and combating community deterioration and juvenile delinquency.

Publication 557Publication 557, Tax-Exempt Status for Your Organization. Publication 557 Publication 557Publication 557, Tax-Exempt Status for Your Organization. Publication 557 In addition, assets of an organization must be permanently dedicated to an exempt purpose. This means that should an organization dissolve, its assets must be distributed for an exempt purpose described in this chapter, or to the federal government or to a state or local government for a public purpose. To establish that an organization's assets will be permanently dedicated to an exempt purpose, the articles of organization should contain a provision insuring their distribution for an exempt purpose in the event of dissolution. Publication 557 Publication 557 For examples of provisions that meet these requirements, download Publication 557, Tax-Exempt Status for Your OrganizationPublication 557 In addition, assets of an organization must be permanently dedicated to an exempt purpose. This means that should an organization dissolve, its assets must be distributed for an exempt purpose described in this chapter, or to the federal government or to a state or local government for a public purpose. To establish that an organization's assets will be permanently dedicated to an exempt purpose, the articles of organization should contain a provision insuring their distribution for an exempt purpose in the event of dissolution. Publication 557 Publication 557 For examples of provisions that meet these requirements, download Publication 557, Tax-Exempt Status for Your OrganizationPublication 557

Social/Recreational and Hobby Clubs To be exempt under Internal Revenue Code (IRC) section 501(c)(7), a social club must be organized for pleasure, recreation, and other similar non-profitable purposes and substantially all of its activities must be for these purposes. ……. Members must be bound together by a common objective directed toward pleasure, recreation, and other non-profitable purposes. …. The membership in a social club must be limited. In general, a club should be supported solely by membership fees, dues, and assessments. A section 501(c)(7) organization may receive up to 35% of its gross receipts, including investment income, from sources outside of its membership without losing its tax-exempt status. Of the 35%, not more than 15% of the gross receipts may be derived from the use of the club's facilities or services by the general public or from other activities not furthering social or recreational purposes for members. …… To be exempt under Internal Revenue Code (IRC) section 501(c)(7), a social club must be organized for pleasure, recreation, and other similar non-profitable purposes and substantially all of its activities must be for these purposes. ……. Members must be bound together by a common objective directed toward pleasure, recreation, and other non-profitable purposes. …. The membership in a social club must be limited. In general, a club should be supported solely by membership fees, dues, and assessments. A section 501(c)(7) organization may receive up to 35% of its gross receipts, including investment income, from sources outside of its membership without losing its tax-exempt status. Of the 35%, not more than 15% of the gross receipts may be derived from the use of the club's facilities or services by the general public or from other activities not furthering social or recreational purposes for members. ……

Life Cycle of a Public Charity - Starting Out The first stage in the life cycle of any organization is its creation. A nonprofit organization may be created as a: Corporation A trust Or an unincorporated association Any of these entities may qualify for exemption. Note, however, that a partnership generally may not qualify. To qualify for exemption under section 501(c)(3), an organization must be organized exclusively for purposes described in that section. This means, among other things, that the organization’s articles of organization must contain certain provisions. articles of organizationarticles of organization The IRS provides sample articles of organization that contain the required provisions. Most organizations also adopt by-laws. sample articles of organizationby-lawssample articles of organizationby-laws You should also apply for an employer identification number, even if you do not have employees. employer identification numberemployer identification number The first stage in the life cycle of any organization is its creation. A nonprofit organization may be created as a: Corporation A trust Or an unincorporated association Any of these entities may qualify for exemption. Note, however, that a partnership generally may not qualify. To qualify for exemption under section 501(c)(3), an organization must be organized exclusively for purposes described in that section. This means, among other things, that the organization’s articles of organization must contain certain provisions. articles of organizationarticles of organization The IRS provides sample articles of organization that contain the required provisions. Most organizations also adopt by-laws. sample articles of organizationby-lawssample articles of organizationby-laws You should also apply for an employer identification number, even if you do not have employees. employer identification numberemployer identification number

State Rules Articles of Organization The trust instrument, corporate charter, articles of association, or other written instrument by which the organization is created under state law. By-Laws Secretary of State’s office Secretary of State’s office State law may require nonprofit corporations to have by-laws, and nonprofit organizations generally find it advisable to have internal operating rules. For additional information, you may want to contact your Secretary of State’s office.Secretary of State’s office Employer Identification Number Every organization must have an employer identification number, even if it will not have employees. Please note that the employer identification number is not your “tax- exempt number”. That term generally refers to a number assigned by a state agency that identifies organizations as exempt from state sales and use taxes. state revenue department state revenue department You should contact your state revenue department for additional information about “tax exempt numbers”.state revenue department Articles of Organization The trust instrument, corporate charter, articles of association, or other written instrument by which the organization is created under state law. By-Laws Secretary of State’s office Secretary of State’s office State law may require nonprofit corporations to have by-laws, and nonprofit organizations generally find it advisable to have internal operating rules. For additional information, you may want to contact your Secretary of State’s office.Secretary of State’s office Employer Identification Number Every organization must have an employer identification number, even if it will not have employees. Please note that the employer identification number is not your “tax- exempt number”. That term generally refers to a number assigned by a state agency that identifies organizations as exempt from state sales and use taxes. state revenue department state revenue department You should contact your state revenue department for additional information about “tax exempt numbers”.state revenue department

Contributions & Disclosures Charitable Contributions A benefit of having 501(c)(3) status is eligibility to receive tax- deductible charitable contributions. Note that the Internal Revenue Code applies substantiation requirements for donors, and disclosure requirements for charitable organizations, in connection with such contributions. For a detailed discussion of the substantiation and disclosure requirements for charitable contributions, see Publication 1771, Charitable Contributions: Substantiation and Disclosure Requirements. charitable contributionssubstantiation requirements for donors, and disclosure requirements for charitable organizationsPublication 1771charitable contributionssubstantiation requirements for donors, and disclosure requirements for charitable organizationsPublication 1771 Public Disclosure Requirements In addition to these disclosure requirements for charitable contributions, the law requires tax-exempt organizations to make key documents publicly available. The IRS also makes these documents available. For more information, see Public Disclosure Public DisclosurePublic Disclosure Charitable Contributions A benefit of having 501(c)(3) status is eligibility to receive tax- deductible charitable contributions. Note that the Internal Revenue Code applies substantiation requirements for donors, and disclosure requirements for charitable organizations, in connection with such contributions. For a detailed discussion of the substantiation and disclosure requirements for charitable contributions, see Publication 1771, Charitable Contributions: Substantiation and Disclosure Requirements. charitable contributionssubstantiation requirements for donors, and disclosure requirements for charitable organizationsPublication 1771charitable contributionssubstantiation requirements for donors, and disclosure requirements for charitable organizationsPublication 1771 Public Disclosure Requirements In addition to these disclosure requirements for charitable contributions, the law requires tax-exempt organizations to make key documents publicly available. The IRS also makes these documents available. For more information, see Public Disclosure Public DisclosurePublic Disclosure

Others have done it – so can you!

Migration from 501c(7) to 501c(3)? Modified vision of club and operations Amended or restated articles, or separate entity –Soaring Club of Houston Soaring Club of HoustonSoaring Club of Houston Modified vision of club and operations Amended or restated articles, or separate entity –Soaring Club of Houston Soaring Club of HoustonSoaring Club of Houston

Ancillary 501c(3) May operate in parallel with existing club or commercial operation –Mile High Youth Gliding Association Articles & AmendmentsArticles & AmendmentsArticles & AmendmentsArticles & Amendments Filing for exemptionFiling for exemptionFiling for exemptionFiling for exemption Form 1023Form 1023Form 1023Form 1023 Form 1023 continuation sheetsForm 1023 continuation sheetsForm 1023 continuation sheetsForm 1023 continuation sheets Follow-up oneFollow-up oneFollow-up oneFollow-up one Follow-up twoFollow-up twoFollow-up twoFollow-up two May operate in parallel with existing club or commercial operation –Mile High Youth Gliding Association Articles & AmendmentsArticles & AmendmentsArticles & AmendmentsArticles & Amendments Filing for exemptionFiling for exemptionFiling for exemptionFiling for exemption Form 1023Form 1023Form 1023Form 1023 Form 1023 continuation sheetsForm 1023 continuation sheetsForm 1023 continuation sheetsForm 1023 continuation sheets Follow-up oneFollow-up oneFollow-up oneFollow-up one Follow-up twoFollow-up twoFollow-up twoFollow-up two

New in 2004 Form 1023 was revised in October 2004 (making the example herein somewhat dated). Form 8718 is now in Part XI of Form There is now a requirement for annually reviewing a Conflict of Interest policy statement, signed by all board members. Electronic filing of Form 990/990EZ (currently supported by 37 states) Form 1023 was revised in October 2004 (making the example herein somewhat dated). Form 8718 is now in Part XI of Form There is now a requirement for annually reviewing a Conflict of Interest policy statement, signed by all board members. Electronic filing of Form 990/990EZ (currently supported by 37 states)

501c(7) Walk the walk, talk the talk Limitations The membership in a social club must be limited. A club that issues corporate memberships is dealing with the general public in the form of the corporation's employees. Evidence that a club's facilities will be open to the general public (persons other than members or their dependents or guests) may cause denial of exemption. This does not mean, however, that any dealing with outsiders will automatically deprive a club of exemption. ¹ Limitations The membership in a social club must be limited. A club that issues corporate memberships is dealing with the general public in the form of the corporation's employees. Evidence that a club's facilities will be open to the general public (persons other than members or their dependents or guests) may cause denial of exemption. This does not mean, however, that any dealing with outsiders will automatically deprive a club of exemption. ¹

501c(7) Walk the walk, talk the talk Gross receipts limitations In general, a club should be supported solely by membership fees, dues, and assessments. A section 501(c)(7) organization may receive up to 35% of its gross receipts, including investment income, from sources outside of its membership without losing its tax- exempt status. Of the 35%, not more than 15% of the gross receipts may be derived from the use of the club's facilities or services by the general public or from other activities not furthering social or recreational purposes for members. If an organization has non- member income that exceeds these limits, all the facts and circumstances will be taken into account in determining whether the organization qualifies for exempt status. ¹ Gross receipts limitations In general, a club should be supported solely by membership fees, dues, and assessments. A section 501(c)(7) organization may receive up to 35% of its gross receipts, including investment income, from sources outside of its membership without losing its tax- exempt status. Of the 35%, not more than 15% of the gross receipts may be derived from the use of the club's facilities or services by the general public or from other activities not furthering social or recreational purposes for members. If an organization has non- member income that exceeds these limits, all the facts and circumstances will be taken into account in determining whether the organization qualifies for exempt status. ¹

501c(7) Walk the walk, talk the talk Activities 38. Flying club—A flying club providing economical flying facilities for its members but having no organized social and recreation program does not qualify for exemption under IRC 501(c)(7). Rev. Rul. 70–32, 1970–1 C.B Dues and fees; active and associate members—A social club whose active members pay substantially lower dues and initiation fees than associate members, although both classes enjoy the same rights and privileges in the club facilities, does not qualify for exemption under IRC 501(c)(7). Rev. Rul. 70–48, 1970–1 C.B Flying club—A flying club of limited membership that provides flying privileges solely for its members, assesses dues based on the club’s fixed operating costs and charges fees based on variable operating expenses, and whose members are interested in flying for a hobby, constantly commingle in informal meetings, maintain and repair aircraft owned by the club, and fly together in small groups, qualifies for exemption under section 501(c)(7) of the Code. Rev. Rul. 74–30, 1974–1 C.B ² Activities 38. Flying club—A flying club providing economical flying facilities for its members but having no organized social and recreation program does not qualify for exemption under IRC 501(c)(7). Rev. Rul. 70–32, 1970–1 C.B Dues and fees; active and associate members—A social club whose active members pay substantially lower dues and initiation fees than associate members, although both classes enjoy the same rights and privileges in the club facilities, does not qualify for exemption under IRC 501(c)(7). Rev. Rul. 70–48, 1970–1 C.B Flying club—A flying club of limited membership that provides flying privileges solely for its members, assesses dues based on the club’s fixed operating costs and charges fees based on variable operating expenses, and whose members are interested in flying for a hobby, constantly commingle in informal meetings, maintain and repair aircraft owned by the club, and fly together in small groups, qualifies for exemption under section 501(c)(7) of the Code. Rev. Rul. 74–30, 1974–1 C.B ²

501c(7) Example Bay Area Soaring Associates (BASA)Bay Area Soaring Associates (BASA)Bay Area Soaring Associates (BASA)Bay Area Soaring Associates (BASA) –No basic training –No tow services –No public rides –No competing –Regular monthly member meetings at restaurant or barbeque –Two member levels Sponsor Associate Bay Area Soaring Associates (BASA)Bay Area Soaring Associates (BASA)Bay Area Soaring Associates (BASA)Bay Area Soaring Associates (BASA) –No basic training –No tow services –No public rides –No competing –Regular monthly member meetings at restaurant or barbeque –Two member levels Sponsor Associate

Audit Don’t panic Unless you are hiding unqualified income. –IOW, not making 200 non-member tows and scenic flights against an equal number of member flights. See gross receipts limits. As long as you are doing substantially what you are incorporated to do, the IRS is not out to get you. Keep good books. Albuquerque Soaring Club 2003 Audit –Red flag was $2400 in unreported dividend income on proceeds from 2000 SSA Convention (over $1000 unrelated income limit.) –Initial reaction was to consider hiring tax attorney, however cooler heads prevailed, to see what the IRS wanted –IRS auditor pointed out deficiencies in 1099 reporting and verified that club was not in direct competition with commercial operation at the same airport. Taxes paid on unreported dividend income. Don’t panic Unless you are hiding unqualified income. –IOW, not making 200 non-member tows and scenic flights against an equal number of member flights. See gross receipts limits. As long as you are doing substantially what you are incorporated to do, the IRS is not out to get you. Keep good books. Albuquerque Soaring Club 2003 Audit –Red flag was $2400 in unreported dividend income on proceeds from 2000 SSA Convention (over $1000 unrelated income limit.) –Initial reaction was to consider hiring tax attorney, however cooler heads prevailed, to see what the IRS wanted –IRS auditor pointed out deficiencies in 1099 reporting and verified that club was not in direct competition with commercial operation at the same airport. Taxes paid on unreported dividend income.

Questions / Answers / Stories? How hard is this? Is it ( was it ) worth it? What does it cost? How big do you have to be to do this? How hard is this? Is it ( was it ) worth it? What does it cost? How big do you have to be to do this?

Footnotes