United States

Are you classifying your reciprocal income properly for tax purposes?


Before addressing the tax treatment of reciprocal income, it is important to understand how this income is generated. Reciprocal income is derived from an agreement between private clubs to allow the clubs’ respective members to pay a fee to enjoy amenities such as golf, tennis and dining at each other’s private clubs.  Because the income is not generated from a member of the club, it does not meet the definition of member-related income. 

Member-related income is defined by section 512(a)(3)(B) as “gross 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 goods, facilities, or services.” Income received by members is classified as exempt function income and, therefore, is not taxable to a club exempt under section 501(c)(7).

In general, income received by a member for a guest would qualify as member-related income as defined in IRS General Counsel Memorandum (G.C.M.) 39343 as long as the member is not reimbursed.  However, income received under a reciprocal arrangement does not meet this definition since the individual who is paying is not a member of the club. In G.C.M. 39343, the IRS states that “[a]mounts paid to a social club by visiting members of another social club are amounts paid by nonmembers, even though both clubs are of like nature and the amounts paid are for goods, facilities or services provided by such social club under a reciprocal arrangement with such other social club.” The IRS has also taken this position in various private letter rulings. Thus, because reciprocal income doesn’t qualify as member-related income, it must be classified as nonmember income.

Clubs should be treating reciprocal income as nonmember income subject to the 15 percent safe harbor on nonmember income.