Nonprofits, Beware: Marcellus Royalties Sink Club’s Tax Exemption

A Lycoming County sportsmen's club that has been around since 1936 just lost its federal tax-exempt status, and the reason is its Marcellus royalty checks. On Oct. 29, the U.S. Tax Court sided with the IRS, ruling that gas royalties made up so much of the club's income that it no longer qualified as a tax-exempt "social club." A lot of MDN readers run, or sit on the boards of, nonprofits that collect signing bonuses and royalty checks: churches, fire companies, land trusts, granges, hunting camps. So we read the full 20-page decision and looked into how the rules work for other types of nonprofits. Our conclusion: hunting and social clubs are most at risk, but every nonprofit with a lease should sit down with its tax attorney soon.

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