INFORMATION ON TRANSITION FROM NONPROFIT TO FOR PROFIT STATUS

[Alan Etheredge]

David -

I'm obviously not a member of the BOD nor a tax expert, but based on info gained when I was involved in club administration, I'll offer two tidbits about IRS constraints on revenue and expenses for 501(c)(7) organizations which may bear on your questions / comments:

No more than 35% of a 501(c)(7) organization's gross receipts can come from non-member sources

Revenue from non-member sources includes sales of food, beverages, swag, spectator admissions, etc. to non-members. Some might envision that lacking this constraint a for-profit racing organization might derive a greater % of its operating revenue from these 'non-member' sources, thereby improving its financial viability in support of racing activities.

Advertising expenses

Less clear in IRS code (lacking explicit $ / % constraint guidance in tax code), but several IRS cases have determined that while advertising expenses related to gaining new members is OK, advertising expenses related to generating non-member revenue may not be allowed (may jeopardize the 501(c)(7) organization status). IOW, IRS seems to have an expectation that advertising expenses must relate directly (or at least predominantly) to the 501(c)(7) organization's core member-focused mission. Some might envision that lacking this constraint, a for-profit organization might benefit its racing mission by unfettered advertising aimed at generating non-member revenue.

As a general comment, some might posit that lacking the IRS scrutiny / constraints attached to 501(c)(7) revenue and expenses, a for-profit racing organization would enjoy much greater flexibility to support its racing activities in a financially viable manner.

I'm being careful to not speculate about whether or not any of this would make a for-profit version of the CMRA more 'successful' or financially healthy, nor am I 'weighing in' on any of the scenarios being considered by the BOD. I do appreciate the BOD's efforts to ensure the continuation of the CMRA, including consideration of the many risks that may entail.