501 c8 Sale of Property

[GodFather]

I was asked for my opinion but have little experience with this and would appreciate any thoughts:

A 501 C8 sells their building in April 2023, but leases back half.  They are a fiscal year ending May 31.  The portion they did not lease back was the ballroom.  They held all their meetings in the ballroom prior to the sale.  They also rented the ballroom to organizations and individuals for private events.  Those rentals resulted in rental income, not to a significant degree.  

They have not rented the ballroom since pre-Covid.  Their CPA feels the sale of the ballroom is taxable at 50% rate, for the portion they rented it privately.  Proceeds 1,250,000.  Basis 250,000.  CPA feels they should be taxed on $500,000 capital gain. .  

In reading publication 598, page 11 lists an paragraph indicated a possible exclusion for the sale.
Does anyone have any experience / knowledge?  Would appreciate your thoughts on whether this is a taxable transaction to any degree or can it be excluded on the 990 based on publication 598 exclusion. 

I am specifically relying on sections 512(b)(3)(i) and 512(b) 5, in my opinion that the rental income and gain on the sale of real property is excluded:

Thank you

[qbteachmt]

This is what we refer to as "the horned animal clubs" such as Elk, Eagles, Moose, Mason local chapter? Not church associated?

I would start out by looking back to those older 990 filings to see if hall rental was reported as UBTI. You state it is not to a significant degree, but it's not program related (outsiders, not beneficiary members) or was it only to members? Also, did they cater events for their renter (provided services)? Is this one of the buildings with small rental rooms available at low rent for low income members?

(just released that's a lot of question marks)

[GodFather]

Thanks very much for the reply.  This organization is not churched related, it is a local horned animal club.

The ballroom was rented to members and to non-members.  The non-member rentals were not program related, they were personal in nature, baptisms, birthdays, and other events.  These private events were catered by private vendors, not by the organization...but the private vendors used the halls kitchen.  The rental fee allowed that.  I was only given last years 990 and there was no rental income reported as UBIT.  The ballroom has not been rented since 2019.

There are smaller rooms available at low rent for low income members but they are rarely used.  

Assuming the sale of the ballroom does result in taxable income, how far back does the organization need to go to determine what portion of the rental income was for members / program related...and what portion was for private / unrelated?  

Appreciate any information you can provide and if the exclusions I provided in the post apply to this scenario or not...I'm assuming they do not, but appreciate your thoughts.  

[qbteachmt]

It should help to see older 990s to see how the income for this rental activity compares to dues, premiums, and member-related income. Look at the business meeting schedule as compared to outsider events, for a few years of these activities, and can that be applied for how long they owned the property as a general experience? Is that CPA making a blanket 50% for gain or non-program activity-related as 50% or on a space ratio or what? You state they had meetings there, perhaps it was rented 6 times a year max, but otherwise used by member and organizational activities 95%. The rental income reporting should help reveal this, and were any rental expense reported, or none of the rental activity was reported?

Significance requires quantification.

Under 501(c)(8), this is in essence a pooled insurance and benefits program. I found you these two resources that look helpful:

https://www.irs.gov/pub/irs-tege/eotopicf04.pdf

https://www.reddit.com/r/freemasonry/comments/cfhvbe/looking_for_answers_on_501c8_fraternal_society/...

[sjrcpa]

Did the building have a mortgage on it when the horned animal group sold it? And when they rented it in prior years?

[sjrcpa]

You should be able to get more than last year's 990s from Guidestar and/or irs.gov

[GodFather]

Thanks very much for your feedback and the information you provided.  Much appreciated.  

[GodFather]

No mortgage when sold.  There was a mortgage that was paid off at some point prior to the sale in 2023.  I'm told it was paid off in 2020.

[PATAX]

If you are aware of another similar type of entity with a similar type of transaction, then maybe you can view their 990 online. Also you may want to research how IRS views excess ubti and how it relates to tax exempt status, I'm not saying that this applies to your client, I'm just saying this in general terms.

[GodFather]

Thanks for the reply.  I have reviewed Publication 598, Tax on Unrelated Business Income of Exempt Organizations. 

Publication 598 (Rev. March 2021) (irs.gov)

Within that publication is information on the exclusions I site above.  That is kind of what the organization is hanging it's hat on.  For some reason, their CPA seems to ignore the exclusions and continues to feel tax is owed...but does not provide a sound reason as to why.  I advised them, at a minimum, their CPA should provide substantiation for the position he is taking.  He very well could be correct, but he has to provide his basis as to why he is taking that stance.  He also should provide his reasoning as to why the exclusions do not apply.  

[PATAX]

You're welcome.

[IRonMaN]

I can't say that I have dealt with the issue in recent memory, but there does appear to be an out from being taxable based on the information that you have provided that the rental activity wasn't significant.  But my question is, what kind of CPA are we dealing with?  Is it someone with a good reputation and has a fair amount of experience in the area or is it someone that has a questionable reputation and really doesn't deal in this area much?  Could be a really sharp guy that gets pissed when someone questions his knowledge 😁

[qbteachmt]

Guidestar is free, and it's great. I've had an account there since before the merger with Candid. They're a not for profit, too.

I would think that if the IRS cared to look at found rental activity reported, then they would be able to do rough math as to how significant that is. Whether it is 50/50 seems to be the question, and that also seems a significant enough question to pursue being informed. Doesn't the organization have their tax filings, say from 2018 and 2019?