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GWarren Customer Advocate
GWarren Customer Advocate, Attorney
Category: Legal
Satisfied Customers: 355
Experience:  30 yrs Counsel, claims, corp governance Fortune 100 financial insurance co., law firm. OH NJ license
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Please allow GWarren to respond. Here is the final question

Resolved Question:

Please allow GWarren to respond. Here is the final question I have in regards XXXXX XXXXX 501(c)(7) in Illinois you've been helping me with. Based on the responses I've received from JustAnswer experts, the reasons the club placed the property in trust are twofold. First, to separate the ownership of the property from the membership to avoid tax on passive income, thereby cementing the tax-exempt status of the corp in the event of changes to the 1916 Revenue Act, which granted tax-exempt status to 501(c)(7)s. However, this strategy has since been diminished due to the Tax Reform Act of 1969, which now taxes passive income generated by 501(c)(7)s. The second reason is to shield the club from liability and seizure of the property due to lawsuits from people getting hurt on the property or from creditors, for example. That being said, is it still a worhtwhile strategy for the property to be held in trust, and if so, is there anything further we need to know with respect to existing laws?
Submitted: 4 years ago.
Category: Legal
Expert:  GWarren Customer Advocate replied 4 years ago.
Thank you for your further question. I will do my best to honor your confidence based on my prior responses.

Typically once property, real or otherwise, is held in a certain form any deviation from that form of ownership can be a taxable event. A change in the club's strategy of ownership in any other manner than the trust should not be undertaXXXXX XXXXXghtly and both tax and real estate expertise may be appropriate. There may be concern that if the 501(c)(7) effects a change in the ownership of the property it could trigger a taxable event impacting the club's status.

Since the real property is in Illinois you have the advantage of the Illinois land trust laws that may benefit the current ownership arrangement, although technically a land trust may not need to be in the form of the current trust arrangement if the property is held by a proper non-profit organization such as your 501(c)(7) (see for example, land development trusts in Illinois, community land trusts and conservation trusts).

All the above being stated, the trust strategy, despite the change in passive income taxation, my be appropriate to carefully consider maintaining, absent a compelling reason to deviate from that strategy.

I hope this is responsive to your question. As always, if you would like further clarification, please let me know.
Customer: replied 4 years ago.

Based on the language I used to draft my above question, do you agree I now understand the reasons the property was originally placed in trust back in 1955.

Expert:  GWarren Customer Advocate replied 4 years ago.
Thank you for your reply. Yes, I believe the two reasons you cite appear to be a basis for the placement of the property of the social club in a trust in 1955. I suspect the club members/trustees received what at the time would have been fairly conservative advice to protect the real property and the members of the social club by instituting a trust relationship with the land asset. Fortunately it appears Illinois law is supportive of such arrangements even if the land is not formally in trust but is owned by a non-profit organization, however, it appears the trust may have been undertaken to ensure and formalize that arrangement.

I am also providing a link to a further history and detail of the development of the 501(c)(7) organization for your reading:

http://www.irs.gov/pub/irs-tege/eotopicc96.pdf

Please let me know if you need further detail that I may be able to provide.
GWarren Customer Advocate, Attorney
Category: Legal
Satisfied Customers: 355
Experience: 30 yrs Counsel, claims, corp governance Fortune 100 financial insurance co., law firm. OH NJ license
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