501(c)(3) Questions and Answers
The EYC is fortunate to be qualified as a 501(c)(3) public charity. But with the advantages of that status come some responsibilities too. Here are some questions and answers about the EYC’s tax-advantaged status.
Q: What does it mean that the EYC has “501(c)(3)” status?
A: The EYC is qualified as a charity under Section 501(c)(3) of the Internal Revenue Code. Furthermore, the EYC has been granted “public charity” status by the IRS.
Q: What are the advantages to the EYC of 501(c)(3) public charity status?
A: The chief advantage is that donations to the EYC are tax-deductible. This is a tremendous help to the EYC when raising funds. EYC donors have many choices when deciding where to give, and can give more to the EYC because they can receive a corresponding deduction.
Q: How long has the EYC been a 501(c)(3) public charity?
A: As of March 31, 2004.
Q: Hasn’t the EYC always been a not-for-profit organization?
A: Since 1938, the EYC has been a Wisconsin “non-stock” corporation, which is legalese meaning “not-for-profit.” However, not all not-for-profit organizations are charities eligible for 501(c)(3) status.
Q: Why did the EYC apply for 501(c)(3) status?
A: In the late 1990s, some members of the EYC realized that the EYC had been operating for many decades in a way which met the requirements for 501(c)(3) status. The EYC’s board of directors approved seeking 501(c)(3) status, volunteers and professional advisors prepared a lengthy and complicated application, and the status was granted.
Q: Are many other yacht clubs qualified under section 501(c)(3)?
A: No, very few yacht clubs are eligible.
Q: What makes the EYC special, among yacht clubs?
A: EYC membership is non-exclusive (all applicants for membership are admitted). The EYC does not have non-charitable operations which are characteristic of other yacht clubs, such as a restaurant, bar, fuel, transient slips, swimming pool, etc. The EYC’s slips are available to boats which are part of the EYC’s racing classes, which furthers the EYC’s purpose of promoting racing. The EYC offers lesson scholarships to students with financial need. The EYC maintains a very large fleet of sailboats for all members to race and sail for free, and for use in lessons. Thus, the EYC’s purpose and operations are similar to community sailing centers such as the Milwaukee Community Sailing Center or Boston’s Community Boating, Inc., both of which are 501(c)(3) qualified.
Q: What is the EYC’s “purpose,” anyway?
A: See the first page of the EYC’s by-laws at www.eyc.org/member-info. In short, the EYC’s purpose is to provide sailing education and free use of sailing equipment; and to promote amateur sailing competition, safe water sports, good sportsmanship, and responsible uses of the marine environment.
Q: But the EYC also has a substantial social component. I don’t see that in the by-laws.
A: As with any membership organization, a major benefit of EYC membership is socializing with fellow members. The EYC’s social aspect is the essential glue which holds it together. However, only a tiny fraction of the EYC’s annual expenditures go towards social events. So long as those social events are net fundraisers, then those events are supporting the EYC’s charitable purpose, and should not jeopardize our 501(c)(3) status.
Q: Wait, what? The EYC’s social events are fundraisers?
A: Yes. The Commodore’s Party, the EYC’s biggest party of the year, raises thousands of dollars for the EYC. The Bratfest, funded and hosted by the Klein family, results in a major donation by the Kleins to the EYC every year. Even EYC events for which no admission is charged have a fundraising aspect. For example, at the 2012 Opening Social, members participated in an auction to name an EYC sailboat, and the winning bid was $575, far more than the expense of hosting the party.
Q: I was not aware the EYC did so much fund-raising.
A: The EYC receives many thousands of dollars every year in cash and in-kind donations. In 2006-2008, the EYC raised over a quarter million dollars to build the pier extension, improve the pier, and almost completely rebuild the clubhouse. Without 501(c)(3) status, raising that much money would have been much more difficult, or impossible. The EYC is raising funds right now to purchase a new fleet of eighteen 420-class dinghies. We will need to continue to raise funds in the future, to build the EYC’s endowment and to finance certain capital expenses. Without fundraising, the EYC’s membership fees and tuition fees would be higher, and the EYC’s membership numbers would be lower.
Q: Are there any drawbacks to the EYC’s 501(c)(3) status?
A: The drawbacks are minor compared to the fund-raising leverage which is afforded to the EYC. The EYC must be careful to continue to spend its money and serve its members in a way which complies with the requirements of section 501(c)(3), or else the EYC risks losing 501(c)(3) status.
Q: Is the EYC at risk of losing its 501(c)(3) status?
A: The EYC’s officers believe the EYC’s operations and finances comply with the requirements of Section 501(c)(3). However, the IRS could choose to challenge the EYC’s 501(c)(3) status at any time. The EYC files an annual Federal tax return which is subject to IRS scrutiny (although as a not-for-profit organization, the EYC does not pay Federal income taxes). Furthermore, the IRS periodically reviews the status of all 501(c)(3) charities.
Q: What do we need to do to keep our 501(c)(3) status?
A: We need to remember how valuable our 501(c)(3) status is to us, and make sure that our operations – especially our social events – continue to conform with, and support, our 501(c)(3) charitable purpose.