If I were responsible for a club's management, however, any material amount of such use would be a matter of concern to me. In attacks on private clubs, I expect the Unruh Act to be invoked with greater frequency in the future.
Federal tax exemption. Revenue Ruling 71-17 provides, in effect, that the Federal tax exemption of a social club under Section50 1 (c) (7) of the Internal Revenue Code may be revoked if more than 15% of the club's operating income is directly or indirectly derived from nonmembers. Receipt by a host member of reimbursement of green fees or other club charges of an unaccompanied guest or for any party where the number of nonmembers exceeds that of members by a multiple of 8 to 1 (the "rule of nine") is treated as nonmember income. Clubs are required to keep accurate records of the amount of nonmember income received. It would appear that the practices you mentioned may generate substantial amounts of nonmember income. The 15% limit cannot be exceeded without jeopardizing the club's Federal tax exemption. .
About twenty years ago the Treasury Department took the position that for a tax-exempt club to engage at all in an enterprise for profit is inconsistent with the statutory requirement that a tax-exempt organization must be "organized for pleasure, recreation, and other nonprofitable purposes, substantially all of the activities of which are for such purposes. . .." (Note that in principle this is entirely distinct from the above-mentioned 15% limitation on nonmember income and is an absolute prohibition.) For example, this prohibition was applied to engaging in an
unrelated commercial enterprise (the manufacture and marketing of macaroni), the operation of a spirits shop (which affected many clubs), and the wholesale offering by Eastern yacht clubs of over-night moorings for a charge. If the profit motive of offering a club's facilities for nonmember use could be shown, would not this prohibition encountered head-on?
The rule just mentioned does not seem to have been applied consistently and uniformly. The renting of guest accommodations to members on a long-term basis has been questioned, but, as far as I know, has not occasioned the revocation of any club's tax exemption. In principle, it would seem that the practice of renting private dining rooms and offering restaurant service to nonmembers (such as members' employers) should fall under the rule, since it is a commercial
activity undertaken for profit, but as far as I know this has not been questioned by the IRS. And so, whether any given practice will in fact be challenged by the IRS as in violation of the rule may, as a practical matter, depend upon how blatant a violation it is.
Loss of Federal tax exemption could have significant adverse financial consequences, since all income of the club, including admission fees, would then become taxable, and it could possibly also have other collateral civil rights consequences. For example, loss of federal or State
tax exemption might be urged as evidence that the club is a "business establishment" under the Unruh Act.
Constitutional guarantees. The First and Fourteenth Amendments of the U.S. Constitution guarantee freedom of association, and Section 1 of Article I of the California Constitution guarantees the right of privacy. The courts have not as yet identified and quantified the characteristics that a club must have to enjoy the protection of either of these constitutional guarantees. It is clear, however, that in deciding whether or not a given club enjoys the protection of the guarantees the courts will consider, among other factors, its size, mode of operation, purpose, degree of privacy, and degree of selectivity of membership. Increasingly, presence or absence of business use and business purpose are also being mentioned as a relevant and important consideration. In this connectipn, receipt by members of employer reimbursement and deduction of dues and club charges as business expense for tax purposes are noted as evidence of business purpose and use.
The protection of a constitutional guarantee may secure immunity from the Unruh Act and other anti-discrimination legislation, such as the Los Angeles, San Francisco, and Sacramento ordinances - but this is not assured in all cases, since the constitutional guarantees are not absolute and "compelling" state interests may in some cases, in the discretion of the courts, prevail over the guarantees. Consequently, anticipating more trouble down the road, prudence suggests the advisability of attempting to fit witIlln what is believed may be the criteria for protection of the guarantees. A high degree of selectivity in membership admission, a high degree of privacy, a low degree of nonmember use of dub facilities, if any, and non-involvement in profitmaking activities will certainly be among those criteria.
Although some of the considerations (such as selectivity of membership and presence or absence of business use and purpose) are involved in more than one or in all of the subjects discussed above, each subject must be analyzed separately. Each has its own tests and its own consequences. These must be dearly sorted out in one's mind if one is to understand the overall problem.
The revenue-raising practices you mentioned are commonly employed to some degree by many clubs - to date without any untoward consequences, as far as I know. If employed with moderation, it is possible, or perhaps even probable, that, as a practical matter, no harm will come of them. But the germ of risk is there - to be asserted by any adversary of the club. Whether or not to take the risk is simply a calculated gamble. I should strongly recommend, however, that no payment in any case be accepted by the club from nonmembers - only from members.
I know that I have been labelled an alarmist by some. But unfairly, I contend, for all I normally do is to point out the areas of risk without attempting to identifY the critical limits where any greater load will be too much. I can say privately, however, that I expect that the allowable levels of these determining factors, when they are finally established, will probably be disappointingly low.
Do call me if I can be of any further help.
ROBERT CHARLES HUNTLEY POST OFFICE BOX 1823 CARMEL-BY-THE-SEA, CALIFORNIA 93921
March 2, 1990
Mr. John M. Robinson P.O. Box 1459
Pebble Beach, CA 93953
Dear John,
I want to thank you for your letter of February 7, 1990 and the most comprehensive opinion you set forth.
My letter to the President of M. P. C. C. was certainly bolstered with the ammunition that you provided me.
All best wishes,
Robert C. Huntley