CCA 200851058: Follow the memorandum opinion and let the club allocate readership costs

Plain-English summary

One sentence, answering a question about a social club and its magazine.

A club exempt under section 501(c)(7) pays no tax on the dues and fees its members contribute, because those amounts are members paying for their own shared facilities rather than income earned from outsiders. Money the club earns from non-members is a different matter, and it is taxed as unrelated business taxable income. A club publication is a common place for that to arise: the club sells advertising space to businesses, the advertising revenue comes from outside the membership, and it is taxable.

The dispute is about what may be subtracted from that revenue. Producing a publication costs money on two fronts. There are the costs of selling and printing the advertising itself, which plainly offset the advertising income. Then there are readership costs, the cost of producing and distributing the editorial content that members actually read, which exists for the members and would exist whether or not anyone bought an advertisement. Whether a club may charge any part of those readership costs against its advertising income is worth real money, because the readership side of a member publication is usually the expensive side, and allowing the allocation can absorb the advertising profit entirely.

The writer's answer is that the Tax Court has decided the point and the Service should follow it: the club can allocate readership expenses towards computing its unrelated business taxable income. The instruction is to follow the opinion rather than to litigate against it.

What the release does not contain is as striking as what it does. The Tax Court memorandum opinion is not named, no citation is given, no Code section or regulation is cited, and there is no reasoning, no description of the facts, and no explanation of how the allocation should be made. The opinion cannot be identified from the document, and in any event the citation-checking tool was unavailable in this session, so nothing here has been verified against a reported decision. Anyone relying on this release needs to find the underlying case first.

This is a clean digital release rather than a scan, so no OCR correction was needed. Kept as released: the shift from the singular club to "they can allocate"; "towards" rather than toward; and "Tax Court Memorandum opinion" with its mid-phrase capital.

Ruling snapshot

• Question: May a section 501(c)(7) club allocate readership expenses in computing its unrelated business taxable income?
• Outcome: Advice given, in a single sentence. Yes. The writer instructs that the Tax Court memorandum opinion on this issue should be followed, which means the club can allocate readership expenses towards computing its unrelated business taxable income.
• Key authorities: An unnamed Tax Court memorandum opinion, given without a citation and not identifiable from the document. No Code section or regulation is cited; the sections shown come from the release's UILC classification and its subject line.

Full text (IRS public release)

ID: CCA_2008101410580453 Number: 200851058
Office: ----------------------------- Release Date: 12/19/2008

UILC: 512.09-03

From: -------------------------
Sent: Tuesday, October 14, 2008 10:58:06 AM
To: -----------------
Cc: ---------------------------------------
Subject: RE: 501(c)(7) question

You should follow the Tax Court Memorandum opinion on this issue which means they can allocate
readership expenses towards computing their unrelated business taxable income.