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May dissolving social club give assets to charity or another club?

Your Legal Questions Answered

May dissolving social club give assets to charity or another club?

May a 501(c)(7) social club put in its bylaws that, upon dissolution, the net remaining assets will go to a specific charity or to a specific other social club?  We are trying to avoid members coming out of the woodwork to make a profit. I realize that the law says the assets could be distributed to the active members, but we are in the process of rewriting bylaws and entertaining this option to avoid later fighting.

You are correct that for federal tax purposes social clubs may give their assets upon dissolution to their members, unlike charities that are required by federal and generally state law to give their net remaining assets only for another charitable purpose.  You are also correct that many friendships have been jeopardized because of club fights over who is a member eligible to receive the booty.

You could reduce the likelihood of that kind of fight by giving the Board the authority to give the remaining assets to one or more charities or one or more social clubs.  There is no federal prohibition on that resolution and I am not aware of any state nonprofit law that would prevent it.  You should probably give the board the right to select the recipients at the time of dissolution.  The charities that will be most appropriate when you dissolve may be different from the ones you would select today and a social club named now might be concerned that receipt of your money could jeopardize its own exemption because a social club can only have a limited portion of its revenue from non-member sources.  Your members are less likely to be passionately involved in disputing the recipients than in deciding who is actually a member eligible for a piece of the distribution.

You could also reduce the friction by reducing the payout, perhaps to the amount of their initiation fees, with the rest going to charities or clubs.

You may also be able to reduce the likelihood of a member fight by setting a very clear definition in your bylaws of a “member” eligible for a distribution of the proceeds and prohibiting a change in the definition without the approval of a super majority.  You would have to decide what class or classes of members are eligible and, if they have to have been a member for a while, whether they still qualify if they switch classes during the relevant time.  If you don’t want to include everyone as a member at the time of dissolution, you will want to determine precisely the period of time in which the members have had to be eligible, and whether it could have been years ago or only at the time of the dissolution.  You will have to define good standing if you want only members in good standing to qualify.

If you said something like an eligible member is only “a person who has been a Golfing or Social Member (in either or a combination of such classes) continuously in good standing for the entire period of seven years immediately before the date of the membership’s vote to dissolve,” you would reduce the risk of fights over the definition.  If you define good standing to exclude anyone delinquent in paying dues for more than 30 days beyond the due date, you might even improve your dues collection rate.

Ultimately, your issue is more political than legal.  It will be a lot more difficult if dissolution is anticipated in the near future than if it is a theoretical exercise for a distant time.  Good luck in resolving it.

Monday, December 16, 2024

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