Country Club Seeks Clarification of UBTI Guidance

November 8, 2018

Mr. Charles Rettig
Commissioner
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20024

Mr. David Kautter
Assistant Secretary (Tax Policy)
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Dear Messrs. Rettig and Kautter:

Oakmont Country Club ("Oakmont") is writing in response to Notice 2018-67 to offer recommendations on how the Department of the Treasury ("Treasury") and the Internal Revenue Service ("IRS") can implement Internal Revenue Code Section 512(a)(6), which was enacted as part of Public Law Number 115-97 (commonly referred to as the Tax Cuts and Jobs Act or "TCJA") in a manner that is consistent with the TCJA's intent, that is administrable for the IRS, and that minimizes burdens on affected entities.

Oakmont is a social club described in Section 501(c)(7). A social club's unrelated business taxable income ("UBTI") has historically been determined separately from other Section 501(c) organizations under the special rules of Section 512(a)(3). Under Section 512(a)(3), a Section 501(c)(7) organization is subject to the unrelated business income tax ("UBIT") on all income except the income from dues, fees, charges, or similar amounts paid by members of the organization as consideration for providing such members or their dependents or guests with goods, facilities, or services. Oakmont's primary activity is the operation of a country club for its members and as such, its UBTI under Section 512(a)(3) and other guidance can be grouped into three general categories: (i) nonmember use of Oakmont facilities and services for purposes connected with the traditional function of a country club ("nonmember country club activity"), (ii) passive investments, and (iii) other nonrecurring activities such as hosting special events ("nonrecurring activities").

New Section 512(a)(6) generally requires exempt organizations with more than one unrelated trade or business to calculate UBTI separately for each unrelated trade or business. Oakmont is respectfully requesting that consistent with Section 501(c)(7) organizations' historic separate treatment under Section 512(a)(3), as well as the intent communicated in Notice 2018-67, specific guidance be issued on the application of Section 512(a)(6) to Section 501(c)(7) organizations. More specifically, Oakmont is requesting that Treasury and the IRS issue guidance clarifying that:

• Activities conducted by a Section 501(c}(7) organization without a profit motive and a Section 501(c)(7) organization's passive investments are not trades or businesses subject to Section 512(a)(6);

• If activities conducted without a profit motive or passive investments are determined by the IRS and Treasury to be trades or businesses for the purposes of Section 512(a)(6), nonmember use of facilities and services for purposes connected with a Section 501(c)(7) organization's operation of a country club is a single trade or business and a Section 501(c)(7) organization's passive investments is a single trade or business; and

• The Section 512(a)(6) treatment of a Section 501(c)(7) organization's other nonrecurring activities are to be determined on a facts and circumstances basis.

Treasury and the IRS should issue guidance clarifying that activities conducted by a Section 501(c)(7) organization without a profit motive and a Section 501(c)(7) organization's passive investments are not trades or businesses subject to Section 512(a)(6).

Although Notice 2018-67 generally suggests that a Section 501(c)(7) organization's nonmember and investment activities should be considered trades or businesses for the purposes of Section 512(a)(6), it is Oakmont's contention that Section 512(a)(6) should not apply where the Section 501(c)(7) organization's nonmember activities are conducted without a profit motive and its investment activities are passive in nature.

Oakmont has not historically conducted its nonmember country club activity with a profit motive within the meaning of Sections 162 and 183 and, accordingly, this activity has historically produced a net operating loss after deductions for direct and indirect expenses. Based on this, as well as court decisions¹ ruling that a Section 501(c)(7) organization may not use losses generated by a nonmember activity conducted without a profit motive to reduce the gains generated by other unrelated business income sources, Oakmont has not used its nonmember country club net operating losses to offset its investment income and other unrelated business income sources. Therefore, because Oakmont lacks a profit motive with respect to its nonmember country club activity, such activity should not be treated as a trade or business subject to Section 512(a)(6). Furthermore, because Oakmont is not permitted to use net operating losses from its nonmember country club activity to offset income generated by other activities, such as passive investments, the goal of Section 512(a)(6) would still be accomplished if such activity is excluded from Section 512(a)(6) treatment.

Oakmont's passive investments include income that has consistently been recognized as passive for unrelated business income tax purposes — royalties, dividends, interest, and capital gains.² Since Oakmont does not engage in substantial trading, dealing or similar activities, and because the IRS and courts have ruled that managing securities investments and collecting the income therefrom is not a trade or business,³ it would not be accurate to characterize Oakmont's passive investment activity as a trade or business.

If activities conducted without a profit motive or passive investments are viewed as trades or businesses for the purposes of Section 512(a)(6), Treasury and the IRS should issue guidance clarifying that nonmember use of facilities and services for purposes connected with a Section 501(c)(7) organization's operation of a country club is a single trade or business and that a Section 501(c)(7) organization's passive investment activity is a single trade or business.

Oakmont's nonmember country club activity generally generates income from green fees (i.e., nonmember use of the golf course on the club's property), the operation of a golf pro shop located on Oakmont property, food and beverage sales for on-premises consumption, and country club facility rental,all of which are activities that the IRS has recognized as traditionally associated with the business of operating a country club.⁴ Furthermore, a single NAICS code, which the IRS suggests in Notice 2018-68 may serve as a basis for identifying a single trade or business for the purposes of Section 512(a)(6), applies to Oakmont's country club activity: 713910 — "golf and country clubs".

Operation of the club, for both members and nonmembers, is conducted by a single Oakmont management team using the same Oakmont facilities and personnel. Because indirect expenses associated with these facilities and personnel relate to the operation of the club generally, such expenses are not allocated to any specific segment of the club's operations. As such, for the purposes of calculating its UBTI, Oakmont generally allocates these indirect expenses to nonmember activity based on a reasonable methodology. Therefore, if Oakmont were required to treat specific segments of its nonmember country club activity as separate trades or businesses for the purposes of Section 512(a)(6) and thus, directly allocate the club's indirect expenses to such separate trades or businesses for tax purposes only, it anticipates that its costs for the preparation of its Forms 990-T would substantially increase due to the additional time for analysis, workpaper preparation, and year-to-year tracking that would be required of Oakmont staff and Oakmont's outside tax advisors.

Similarly, Oakmont management oversees its passive investment portfolio centrally pursuant to a single investment policy and strategy and, as noted above, Oakmont's investment income (royalties, dividends, interest, and capital gains) is of the type that the IRS has treated collectively as passive for UBTI purposes. Oakmont does not exercise control over any of the partnerships or other investment entities in its portfolio. Therefore, Oakmont's passive investment activity should also be treated as a single trade or business for the purposes of Section 512(a)(6).

Treasury and the IRS should issue guidance, including examples, clarifying how a Section 501(c)(7) organization's nonrecurring events should be treated under Section 512(a)(6).

Treasury and the IRS should issue guidance, including examples, specific to Section 501(c)(7) organizations to assist in determining whether and how to treat nonrecurring events as separate trades or businesses, for purposes of Section 512(a)(6). One example of a nonrecurring event for country clubs like Oakmont is the hosting of professional golf tournaments. Income generated by a club related to these events is often governed by a single written agreement, or series of related agreements, with a third party. For a nonrecurring event with such facts, Oakmont would anticipate treatment as a single trade or business for the purposes of Section 512(a)(6).

In conclusion, Oakmont respectfully requests that Treasury and the IRS issue guidance clarifying that activities conducted by a Section 501(c)(7) organization without a profit motive and a Section 501(c)(7) organization's passive investments are not trades or businesses, and thus are not subject to Section 512(a)(6). If activities without a profit motive or passive investment activities are determined by the IRS to be trades or businesses, guidance should be issued clarifying that nonmember use of facilities and services for purposes connected with a Section 501(c)(7) organization's operation of a country club is a single trade or business and that a Section 501(c)(7) organization's passive investments is a single trade or business. Finally, Treasury and the IRS should issue guidance, including examples, clarifying how a Section 501{c)(7) organization's nonrecurring events should be treated under Section 512(a)(6).

Respectfully,

James F. Springborn
Oakmont Country Club
CFO/Controller
Oakmont, PA

Cc:
Sunita Lough, Commissioner, Tax Exempt & Government Entities Division, Internal Revenue Service
Victoria Judson, Associate Chief Counsel (Tax Exempt & Government Entities), Internal Revenue Service
Janine Cook, Deputy Associate Chief Counsel (Tax Exempt & Government Entities), Internal Revenue Service
Elinor Ramey, Attorney Advisor, Department of the Treasury
CC:PA:LPD:PR (Notice 2018-67), Room 5203