Question

2. A social club that was classified as being tax exempt under Code Section 501(c)(7) had taxable unrelated business income derived from dividends on investments. Can the social club claim the dividends received deduction allowed by Code Sec. 243 against the income? § 243; §512

Answer 1

However, the income from nontraditional businesses of the organizations must be taken into account in computing the organization's unrelated business taxable income under IRC 512 because it is not exempt function income within the meaning of IRC 512(a)(3). Furthermore, it must be included in the calculation of whether the organization has exceeded the 15 and 35 percent limits on non-member income.

Code Sec. 243

The social club can't claim the dividends received deduction allowed by Code Sec.243 against the income because , Qualifying dividends

(1)In general For purposes of this section, the term “qualifying dividend” means any dividend received by a corporation—(A)

if at the close of the day on which such dividend is received, such corporation is a member of the same affiliated group as the corporation distributing such dividend, and

(B)

if such dividend is distributed out of the earnings and profits of a taxable year of the distributing corporation which ends after December 31, 1963, and on each day of which the distributing corporation and the corporation receiving the dividend were members of such affiliated group.

y, the exemption for social clubs operates properly only if the club's income is derived exclusively from members. For many years, however, income derived by clubs from outside of their membership (e.g., investment income), operated to subsidize the recreational facilities or activities for the members with revenue that was taxed neither to the members nor to the club. To prevent club members from receiving benefits not contemplated by IRC 501(c)(7), Congress extended the unrelated business income tax to social clubs in the 1969 Tax Reform Act. In doing so, however, Congress decided that, unlike most other types of exempt organizations, which were exempted because they provide some sort of community service or public benefit, clubs should be taxed on all income derived from outside their membership, including investment income. Special rules were provided for nonrecognition of gain from certain sales of club property when the proceeds are reinvested by the club for exempt purposes.