Q: I am on the board of a nonprofit that has its 501(c)(3) status. There is a social club, designated as 501(c)(7), that would like to donate money to our organization. Can we receive donations from a 501(c)(7)?

A:  Yes, a 501(c)(3) may receive a donation from a 501(c)(7). In fact, this is something that occurs frequently, since social clubs often like contributing to their community. They may designate a portion of dues, take up a collection at each meeting or hold special events specifically to support what they see as good works enhancing the quality of life around them.

The underlying issue you may actually be asking about is deductibility. Your organization – the 501(c)(3) – only has to worry about acknowledging the gift as any other – e.g., send a thank you and a receipt which spells out any goods or services that may have been provided in exchange for the contribution. (If you have any questions about the IRS requirements for acknowledging donations go to http://www.irs.gov/pub/irs-pdf/p1771.pdf.) It is the social club’s responsibility to report its contribution properly if it wishes to take a deduction for its donation.

Assuming that deductibility is of interest to the social club, I will offer a few thoughts. Though, as usual, these should not be taken as legal advice. Instead, members of the social club should speak with the organization’s tax advisor in order to ensure that it is acting in full accordance with the law.

Because the social club is, itself, tax exempt, the deduction that it can take for its contribution can only offset any taxable income it receives during the course of the year. This is income generated outside the club’s exempt function to provide pleasure and recreation to its members. For instance, if the club has a social hall that it rents out to non-members, the rental income would be considered as unrelated business income on which it would have to pay tax – i.e., Unrelated Business Income Tax or UBIT.

Here is where it gets tricky. First, the amount of unrelated business income a social club can earn is limited by law. Second, by making a charitable contribution the club can reduce its tax liability on the UBIT by up to 10% if it is structured as a corporate entity. However, according to Code Section 642(c), if the club is structured as a trust, its organizing documents would have to specify that it can even make charitable contributions. The good news is that if such contributions are specifically allowed, there is no limit on deductibility. So, depending on the amount of the donation, the amount of income the club brings in through its non-exempt function(s) and its structure – whether it was set up as a corporation or trust – deductibility may or may not be feasible.

Thanks to Mark Weinberg of Weinberg & Jacobs LLP for his input on this answer.