What Even Is a Private Golf Club and Why Are Most So Difficult to Play?
How the IRS is driving a wedge between the golfing world. Part one of a series on private clubs and their impact on golf
Exclusive private clubs dominate the world of golf: Augusta National, Pine Valley, Oakmont, Cypress Point, Winged Foot, Shinnecock, San Francisco GC, Chicago GC, LACC, Bel-Air, National GL… the list goes on, and on, and on. I would love to play at these courses; you would love to play at these courses. Unfortunately, except for the extremely well-connected, it’s members only, sorry. Augusta National, with its Masters tournament, has become the archetype of private American golf. It exists as the center of the golf world while at the same time remaining hidden behind the closed gates at Magnolia Lane.
This paradigm simply doesn’t exist in the UK. Scotland’s archetype is the Old Course at St Andrews, a municipal course. Private clubs like Muirfield exist, but they allow visitors to play on Tuesdays and Thursdays. North Berwick allows visitors for a few tee times most days, Carnoustie will accommodate visitors, and any exclusionary courses are the exception. One such rarity is Muirfield’s neighbor, the Renaissance Club, which does follow the American model of members only.
So why is there such a huge difference between nations? Almost everyone will say it’s just cultural. Well, as someone who has lived in both countries, I find this theory thoroughly unconvincing. I did some research, and I think what’s happening is a lot more mundane. That is, unless you find accounting interesting, as I do.
If you do, what follows is a short intro to the difference between the two countries’ tax systems. Everyone else, maybe top off that cup of coffee and come back to this, because the world of not-for-profit income tax exemptions is actually quite interesting. I can’t promise it’ll be exciting, but I’ll try to keep it as focused as I can. The more substantive ideas on what changes, if any, could improve things will come in subsequent writings.
Disclaimer: I’m not a tax expert, and what follows should NOT be considered tax advice. I will probably get many of the details here wrong, and will make regular updates if/when I get corrections. Lots of the info regarding private courses is, not shockingly, private. In some cases the tax code is inscrutable. I’m extremely susceptible to errors of omission and the tax codes change from year to year. It’s difficult for me to do anything but speak in generalizations of what I believe I understand. Don’t take action on anything I’ve presented here without consulting a tax professional.
501(c)(7) vs BIM24215: Same Language, Different Tax Codes
The tax code at the heart of all the private golf clubs in America is U.S. Code 501(c)(7).1 Breaking this code down: 501 is tax exemptions, (c) lists exempt organizations, (7) is for social clubs. The purpose of 501(c)(7) organizations specifically mentions golf club amenities as ideal cases for tax-exempt status:
The central purpose of social clubs is to provide benefits to members, including access to social and recreational facilities such as club houses, golf courses, and swimming pools. When such benefits are funded by members, exemption has been justified by Congress on the theory that the members will be in the same position as if they had paid for the benefits directly. The practical effect of the exemption is to allow individuals to join together to provide themselves with recreational or social opportunities on a mutual basis without further tax consequences. The individual member is in substantially the same position as if he or she had spent his or her after-tax income on pleasure or recreation without the intervening organization.2
The following are the specific rules that American social clubs must follow to maintain this tax-exempt status:
The club must be organized for exempt purposes.
The club must provide an opportunity for personal contact among members and membership must be limited.
The club must be supported by membership fees, dues, and assessments.
The organization’s net earnings may not inure to the benefit of any person having a personal and private interest in its activities.
If the club exceeds safe harbor guidelines for nonmember and investment income, the facts and circumstances must show that it is organized substantially for exempt purposes…
The club may receive de minimis income from nontraditional sources.
The club's governing instrument may not contain a provision that provides for discrimination against any person on the basis of race, color, or religion.3
It’s important to note that these rules create an all-or-nothing exemption system. If a club is found in violation, it will lose its tax-exempt status altogether, not just for the problematic income in question. It’s also important to note here that membership dues and fees must be the source of club funding.
The code for golf clubs in the United Kingdom is BIM24215, from the Business Income Manual.4 The basis for tax-exempt status in the UK is similar, but much more general than the American system. Their code is based on the mutuality doctrine:
The mutuality doctrine is one that has been developed by the courts over a long period. Its origin has been ascribed to the principle that one cannot make a taxable profit out of oneself.
For mutuality to apply there must be a class of contributors to a common fund who are also entitled, as a class, to share in the surpluses of that fund. By this we mean that arrangements must be in place whereby surpluses always come back to the class of contributors/participators. Individuals may continually be joining and leaving such a class without prejudicing this requirement but there must be a reasonable relationship between the contributions a participator makes and what he or she is entitled to receive both during the course of the business and on a winding up. Direct ownership of the common fund by such a class is not required. For example, a separate legal person may own the fund, typically a company limited by guarantee and having no share capital, so long as the class indirectly owns the fund through its control of the company.5
The UK rules say that if a group of people share ownership of a common fund, the money is treated as if they are just passing money back and forth, and not actually buying and selling anything from each other. Both the US and UK codes are based on similar concepts, but the American rules are much more restrictive. Most notably, the American system has many more restrictions regarding visitors.
How clubs may interact with nonmembers is where I believe the two systems really diverge. In the United Kingdom, visitors are essentially treated as customers of a business and tax is paid on that business income (the language here is convoluted, but the meaning will end up being pretty simple):
Calculating taxable profit
Having determined that there is a trade and whether or not mutuality is in point so far as a class of contributors/participators in club surpluses are concerned it is finally necessary to calculate what part of the profit from a club’s activities is taxable.
Only non-mutual trading profits are chargeable to tax [as trade profits]. Hence, where a club carries on a trade that is wholly non-mutual it will be necessary to exclude any surplus attributable to non-trading transactions with members.6
The simplest way to think of this is to assume the club has two cash registers. Whenever a member pays, it goes into the untaxed members cash register; whenever a visitor pays, it goes into the taxed visitors cash register. In more detail, when a club in the UK has “trade” between members and the club, the mutuality doctrine is in place, so the trade is not taxable. If the club has a visitor there is no mutuality, so any income from doing business with the visitor goes into the visitors cash register and is taxable. However, if a member hosts a guest, and the member pays, that payment goes into the members cash register and is not taxable.7 This taxable income seems to only be relevant if it's over £50,000, so there's a bit of room for a club to do business with the public if they aren't making too much money.8
Here, there is plenty of incentive for the clubs to allow visitors. The additional income may be taxed, but it’s income nonetheless, which will benefit the clubs and can offset dues and the costs of course improvements.
American private clubs are extremely different in this respect. US private clubs must not act like businesses. In fact, if a club starts behaving like a business, it will lose its tax-exempt status. Specifically, clubs cannot advertise services to the general public:
[T]o qualify for income tax exemption, a social club should not advertise its facilities for nonmember patronage since this would be prima facie evidence it was engaging in business. Likewise a social club should not engage in any type of business activity for profit which is designed to increase or which could result in an increase in net earnings inuring to the benefit of any shareholder or individual.9
American clubs are supposed to be a place for people to share common interests, like golf. This is why clubs “must provide an opportunity for personal contact among members.” These clubs are genuinely supposed to be actual social institutions. Interestingly, this is why corporations cannot be members of clubs.10 They aren’t actually people, so they can’t socialize with the other members (yes, executives can be members and have their memberships paid for, but we’ll get to that later).
While American private clubs can't provide any public accommodation, members can host guests. And while it’s almost always discouraged, guests can spend money at the club (for example, at the pro shop, restaurant, tee times, etc.). Generally, a club can obtain up to 15% of gross receipts from nonmember income before risking its exempt status. However, hosting a one-off event, like a large professional tournament, is an allowed exception to this income limit.11 For example, if a private club hosts the US Open, non-members can pay to attend, and that income should still be exempt.
As with British golf clubs, members at American clubs can pay for guests. Because of US income limits, club members in the States will almost always officially pay for guests. And, to facilitate that, members can host a lot of guests:
Where a group of eight or fewer individuals, at least one of whom is a member, uses club facilities, it will be assumed for audit purposes that the nonmembers are the guests of the member, provided payment for such use is received by the club directly from the member or the member's employer.12
So, members can pay for seven guests at a time and it won’t affect that 15% of revenues limit. Now, whether or not that member genuinely paid or got reimbursed by their guests may be an issue for the member’s taxes, but it will not be an issue for the club.
Thus, American private clubs are largely restricted in providing visitor access. Clubs are not allowed to earn much money from guests, and they’re not allowed to advertise to visitors. Still, there are actually plenty of ways these private clubs could open their gates if they wanted to.
How US Clubs Can Serve Visitors
The easiest way US clubs welcome outsiders is by hosting events. So long as the event is in the spirit of the club (for our purposes, that’s golf), and the event is essentially just for fun (i.e. not designed for profit), everything should be fine.13 Clubs do not need to lose money by hosting events for outsiders. They are allowed to recoup the cost of operating events as if they had been for members.14 As long as any surplus profits beyond what members would pay are donated to a charitable organization, private clubs can let people in all they want.
These events typically take the form of rare and often exorbitantly expensive charity fundraisers, tournaments, or auctioned rounds. Unfortunately, many of the tournaments offered are four-man scrambles or other limited-access events. However, as it stands a few exclusive clubs do offer the occasional peek inside if outsiders are willing to give generously to charity.
However, it needn’t be this way. Private clubs could open up their doors to folks more regularly on their slowest days to genuinely foster the love of the sport. This could be especially effective on the hallowed grounds of many of these historic courses. Some might ask why exclusive private clubs would do such a thing. I would suggest that it is simply a kind way to give back to the greater golf community. It would certainly be a way to spark interest from potential new members. I think, most importantly, it would engender a more positive reputation for golf in each club’s region. Closed clubs do bring stigma to the game, but this kind of welcoming policy could help to avoid that.
ADA Title III
The frequency of events may require private clubs to conform to title III of the Americans with Disabilities Act:
The nature and frequency of such activities, however, may affect the organization’s status as a private club. The Department of Justice provides this example: If a fraternity hosts one event a year that is open to the public, a temporary ramp may be sufficient to make the area accessible. But, if the fraternity hosts several such events during the course of a year, it may be obligated to construct a permanent ramp.15
Some may balk at this, which is understandable due to the perceived costs. However, allowing the public some access to a course should not mean that all facilities are required to be updated: folks must be allowed and enabled to play the course itself, but access is not guaranteed to other on-site facilities aside from the course. This seems to be a solvable problem, as illustrated by the policy at walking-only Bandon Dunes:
Bandon Dunes is walking-only, however, riding golf carts are available to all guests with a permanent disability that prevents them from walking their round. Such a request must be arranged with documentation prior to arrival16
Any club without carts is likely to have caddie services and it should be fairly trivial to similarly provide a cart to comply with ADA concerns insofar as is needed. Some clubs may have issues with accommodating course access and compliant restroom facilities, but for the vast majority of elite clubs that most would like to play, it should only require minimal, if any, changes.
Some Other US Private Club Caveats
American private clubs do get paid for things like hosting tournaments, they just can’t do it on a regular basis while making too much money:
Money for hosting an event ranges widely. If you’re talking about a U.S. Open, the amount the USGA pays in facility fees is substantial — north of $2 million when it “rents” a club. But clubs also share in the event’s revenue and receive additional funds to prepare and restore its course. In the past decade, Erin Hills’ total take was on the low end: $3.9 million. Oakmont was at the top end with $9.3 million, a third of it from merch sales alone. PGA Tour fees vary more. Consider the courses on California’s Monterey Peninsula. Pebble Beach can command $2 million for tournament week, while Spyglass charges around $300,000.17
Many will note that most of the benefit comes from the prestige associated with hosting these events.
In general, the vast majority US private golf clubs operate in the way we would expect them to. You get a group of like-minded individuals pooling their money to operate a club at low cost. However, things tend to get a bit wonky when you start looking at specific clubs, especially exclusive or secretive clubs with prestigious histories. One such bizarre loophole is that, while you can’t have a corporation be a member of a club, a corporation can sponsor an individual’s club membership. These allowances for “corporate sponsored individuals” seem like a fairly overt tax dodge, where company executives can use pre-tax income to receive the benefit of club membership.18
Additionally, since all of this is supposed to be not for profit, it might surprise some to learn that individual members can sell their equity stake in a club for a capital gain. In fact, equity in clubs can effectively be bought and sold:
Those ownership rights might be sold or cashed in upon resignation, often at a higher value.19
Here we have a fairly blatant, if indirect, profit incentive for club members. While raising the profile of their club, limiting membership suddenly becomes significantly more valuable.
One Notable Exception
There is one notable exception to the world of 501(c)(7) clubs in the United States: Augusta National Golf Club. Ironically, Augusta National is a for-profit entity: Augusta National Inc.20 Even more confusing though is how the Masters tournament, itself, is somehow a 501(c)(3) charitable organization: Masters Tournament Foundation Inc.21 Obviously there may be concerns about how there is a for-profit company hosting a not-for-profit entity that puts on a tournament. Unfortunately there’s not a lot of publicly available information on where Augusta National Inc. ends and Masters Tournament Foundation Inc. begins. The oddest part is how the archetype of American private clubs breaks the pattern: the most exclusive private club isn’t actually a 501(c)(7) at all.
To Be Continued
Understanding the purpose and odd constraints on 501(c)(7) clubs is necessary to evaluate their benefits and to assess what, if anything, could be done to allow for more accessibility to the American system. In subsequent discussion of private clubs, I plan to discuss the impact of this system on golf in the United States and what, if anything, could be done to align the incentives of private clubs to that of the general golf enthusiast.
Once again, if any errors in this overview come to light, I plan to update the post accordingly.
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Langley, Jim and Conrad Rosenberg, C. SOCIAL CLUBS - IRC 501(c)(7), 1996 EO CPE Text, Internal Revenue Service, 1996.
IRS, 16 June 2022
The reference codes are BIM24350 for “golf clubs” and BIM24215 for “Members’ sports clubs.” Section BIM24215, about members’ clubs, seems to be the primary section of the code.
HM Revenue & Custom. Business Income Manual. “BIM24215 - Meaning of Trade: Mutual Trading and Members Clubs: Members' Clubs: Tax Bulletin Article.” HM Revenue & Custom, 22 November 2013.
HMRC, 22 November 2013
HM Revenue & Custom. Business Income Manual. “Work out taxable income for a CASC.” HM Revenue & Custom, 4 December 2014.
United States. Dept. of the Treasury. Internal Revenue Service. “Social Clubs – Requirements for Exemption – Support By Membership Dues.” Internal Revenue Service, 16 June 2022.
The steeplechase reference:
A social club does not under certain circumstances jeopardize its exemption from Federal income tax under section 501(c)(7) of the Internal Revenue Code of 1954 by charging the public admission to its annual steeplechase.
In this case, the holding of a steeplechase in which nonmembers participate is incidental to and in furtherance of the club's general purpose of promoting the enjoyment of equestrian sports. Although the club on occasion derives a small amount of income from nonmembers in excess of expenses attributable to their participation and attendance, the meet is not operated to make a profit, but for the pleasure and recreation of members of the club. If any profit results, it is turned over to charity. Therefore, the income from nonmembers does not inure to the club's members.
ADA National Network. “Private Clubs Under the Americans With Disabilities Act.” ADA National Network, 2018.
Sullivan, Paul. “Here’s how much money a golf course stands to make — or lose — by hosting a high-profile event.” GOLF.com, 20 October, 2021.
ProPublica. “Nonprofit Explorer: MASTERS TOURNAMENT FOUNDATION INC.” ProPublica.org, 2021.