Exempt function income of tax-exempt social clubs: Set-asides

Section 512(a)(3) of the Internal Revenue Code provides for special unrelated business taxable income rules for organizations that are tax-exempt under section 501(c)(7). Exempt function income includes income that is set aside for qualified purposes. The investment income of social clubs generally is not taxed if it is set aside to be used for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. Income derived from an unrelated trade or business regularly carried on by the organization may not be set aside and therefore cannot be exempt function income. In addition, any income set aside and later spent for purposes other than those specified must be included in unrelated business taxable income.