501(c)(7) Nonmember Income: The 35% and 15% Tests

A private club exempt from federal income tax under section 501(c)(7) — a social club — must keep the income it earns from nonmembers within limits the IRS applies to decide whether the club still qualifies for exemption. Separately, most income from nonmembers is taxable as unrelated business income. For a golf and country club that hosts outside outings, weddings, reciprocal visitors and public events, tracking nonmember income is a year-round operational job, not a year-end calculation.

This guide explains the 35% and 15% limits, what counts as member and nonmember income, the guest presumptions and records the IRS expects, how unrelated business income is taxed, and how to capture the data at the point of sale. It is general information, not tax advice. The rules are detailed and fact-specific; the club's tax adviser should review its classifications, its records and its Form 990 and 990-T positions.

The limits

The IRS's social clubs page states the two limits plainly:

• A social club may receive up to 35% of its gross receipts from nonmember sources, including investment income.
• Within that 35%, no more than 15% of gross receipts may come from nonmember use of club facilities and services.

These limits trace to the legislative history of a 1976 amendment to section 501(c)(7). They are not a bright-line cliff: where they are exceeded, the IRS considers all the facts and circumstances in deciding whether the club still qualifies. But a club that exceeds them year after year invites that examination, and loss of exemption is a board-level risk.

Working through an example

Consider an illustrative club with the following annual gross receipts:

Nonmember use of facilities is $840,000, or 10.9% of gross receipts — under 15%. Total nonmember sources, including investment income, are $1,050,000, or 13.6% — under 35%. This club is within both limits, but if outside events doubled, it would approach the 15% line. Which receipts belong in "gross receipts" for these tests, and how items such as initiation fees are treated, is a question for the club's tax adviser.

Who counts as a member, a guest, and the general public

The IRS's long-standing guidance for social clubs, Rev. Proc. 71-17, defines the "general public" as persons other than members of a club or their dependents or guests, and treats a member's spouse as a member. The practical categories:

The guest presumptions

Rev. Proc. 71-17 gives two presumptions, for audit purposes, that nonmembers are guests of members:

1. A group of eight or fewer, at least one of whom is a member, where the club receives payment directly from the member or the member's employer.
2. A group of which 75% or more are members, where the club receives payment directly from one or more members or a member's employer.

Payment by a member's employer is assumed, for these two presumptions, to serve a direct business objective of the member. For both presumptions the club must still keep records that substantiate the group size or member share and who paid.

In all other situations, the host-guest relationship is not presumed and must be substantiated.

The records the IRS expects

For nonmember use outside the two presumptions, Rev. Proc. 71-17 requires the club to keep a record of each occasion, even where the member pays initially, showing:

• the date;
• the total number in the party and the number of nonmembers;
• the total charges, the charges attributable to nonmembers and the charges paid by nonmembers;
• where a member pays for nonmembers, a statement signed by the member saying whether they have been or will be reimbursed, and by how much;
• where a member's employer pays or reimburses, a signed statement naming the employer, the amount, the nonmembers and the purpose served;
• where a nonmember pays and the payment is claimed to be a gift to the member, a signed statement substantiating that.

Rev. Proc. 71-17 states that failing to keep these records, or make them available, precludes the club from relying on its audit presumptions. In practice, this is the part clubs most often struggle with: the information exists at the moment of the booking — who is hosting, how many people, who is paying — and is lost by the time anyone asks.

Unrelated business income

Social clubs are taxed differently from other exempt organizations. Under section 512(a)(3), a social club's unrelated business taxable income is generally all of its gross income other than exempt function income, less directly connected deductions. Exempt function income is, broadly, dues, fees and charges paid by members for goods, facilities and services provided to members, their dependents and their guests.

The consequences, per the IRS's social clubs page:

• Clubs are generally taxed on income from nonmembers who are not bona fide guests of members.
• Clubs are also generally taxed on investment income — interest, dividends, rents — unlike most other exempt organizations.
• A club with $1,000 or more of gross unrelated business income must file Form 990-T.

Two further points clubs and their advisers work through each year:

• Losses from nonmember activities cannot always offset other taxable income. The Supreme Court's 1990 decision in Portland Golf Club v. Commissioner limited a club's ability to use losses from nonmember sales against investment income where the nonmember activity was not undertaken with the intent to profit.
• Separate computation by activity. Since 2018, section 512(a)(6) has generally required unrelated business taxable income to be computed separately for each unrelated trade or business, which limits netting a loss from one nonmember activity against income from another.

This is why the club's adviser wants nonmember revenue and its directly connected expenses tracked by activity — outside banquets, outside golf outings, reciprocal play — not as one number.

Capturing the data where the money is taken

The limits and the tax are computed at year end, but the facts they depend on are created every day:

Two operational rules make the year-end report reliable:

1. Classify the payer at the moment of sale. A server choosing "member", "guest of member" or "public" on the check takes two seconds. Reconstructing it from receipts in January is weeks of work and guesswork.
2. Record the event facts at booking. For a member-hosted private event, the booking should capture the host member, the expected count, the member share and who is paying the invoice. If a nonmember pays, the event is nonmember use regardless of who booked it — unless the records support another treatment.

Review a nonmember report monthly during the season. A club that sees in June that outside weddings are running ahead of plan can manage its calendar; a club that learns it in March of the following year cannot.

Governance

• Board awareness. The finance committee should see the nonmember percentages at least quarterly, alongside the plan for outside events.
• Written policy on outside events, public play and reciprocal access, with the tax implications understood.
• Annual review of classifications and records with the club's tax adviser before Form 990 and 990-T are prepared.
• Retention of the event and guest records for as long as the adviser recommends.

How Bubs handles nonmember income

Bubs records who paid on every check and invoice — member, dependent, guest of member, reciprocal, the public, staff or house — at the register, the tee sheet, the events desk and on outside invoices, and carries it into the general ledger as a dimension on each revenue line.

• The unrelated-business-income report groups gross receipts into member, member-sponsored guest and nonmember revenue — overall, by department and by event — and shows the nonmember share against the 35% limit and the public-use share against the 15% limit, with both a strict figure and one applying the guest assumptions, and the rule applied named. Investment income is included from the ledger.
• Coverage is visible. The report shows what share of revenue lines carry a recorded payer, so the club knows how much to trust it.
• Events carry the host, guest count and payer from booking through the invoice. See events and banquets.
• Reciprocal visitors are tagged as their own payer kind. See the reciprocal club privileges guide.

Bubs produces the numbers; the club's tax adviser decides the positions. See also the glossary entry for unrelated business income and the point of sale.