The Law of Tax-Exempt Organizations, 12th Edition

CHAPTER FIFTEENSocial Clubs

• § 15.1 Social Clubs in General
  • (a) Rationale for Tax Exemption
  • (b) Club Functions
  • (c) Other Tax Law Matters
• § 15.2 Public Use Limitation
• § 15.3 Investment Income Limitation
• § 15.4 Exceptions to Limitations
• § 15.5 Taxation of Social Clubs
• § 15.6 Sale of Club Assets

Tax-exempt social clubs have as the essential requirement of their exemption the provision of pleasure and recreation to their members.

§ 15.1 SOCIAL CLUBS IN GENERAL

The federal tax law provides tax exemption for qualified social clubs, which are “organized for pleasure, recreation, and other nonprofitable purposes, substantially all of the activities of which are for such purposes and no part of the net earnings of which inures to the benefit of any private shareholder.”¹ Generally, this exemption extends to social and recreation clubs that are supported primarily by membership fees, dues, and assessments.² An organization that otherwise qualifies as an exempt social club will not, however, be denied exemption solely because it adopts a method of raising revenue from members by means other than fees, dues, and assessments.³

(a) Rationale for Tax Exemption

Social clubs are tax-exempt because Congress recognized that these organizations are generally not appropriate subjects of taxation: that is, that the operation of a social club does not involve the requisite shifting of income.⁴ Thus, a court wrote that “Congress has determined that in a situation where individuals have banded ...