2024 Annual Report

This report to the general membership summarizes the year-to-date performance of Lakeport Yacht Club (LYC). While there is improvement in some areas, cash flow is down and potentially serious tax liability has been discovered spanning years if not decades. (See “Tax-exempt status” below.) Deferred building maintenance and high overhead weigh down LYC’s bottom line.

Three proposals appear at the end of this report. They were presented at the Nov. 15 membership meeting, where members voted to file past-due tax returns and notify the city of the club’s intent to vacate the clubhouse building by March 31, 2025. A special meeting is set for Dec. 20, 2024, with at least seventeen (17) members needed to establish a quorum and take formal action.

The agenda will include election of a five-person Board of Directors, so please start thinking about candidates to nominate. Each proposed action requires a functioning Board of Directors.

Respectfully submitted,

Michael S. Green, LYC Commodore

Last revised: Dec. 15, 2024

Board of Directors

The club has lacked a full Board of Directors since mid-2023. Acting Commodore Michael Green was elected by the general membership in November 2023 along with Vice Commodore Terry Knight. However, Vice Comm. Knight is physically unable to perform because of a recent accident and chronic health concerns. Comm. Green’s authority to act without board direction is limited, and the board’s governance role as stated in the bylaws is not being fulfilled. Grade: F.

Boats and mooring buoys

A 2022 board resolution to create a Boating Fund was implemented this year, taking the form of a savings account linked to the club’s main checking account at Savings Bank of Mendocino County. The main purpose was to repair or replace damaged mooring buoys using rental income. This year saw the purchase of two new buoys, repairs of two more, and installation of one mooring pendant.

Rental contracts (and liability insurance) require all mooring customers to be registered and insured. Two boats left their moorings this spring, leaving three boats paid up and insured and two boats non-compliant.

In past years, mooring customers were asked to move their boats to safe harbor for the winter. The commodore soon will request all boats — paid or unpaid — to vacate their moorings by year’s end. No timeline is set for rentals to resume. Grade: B.

Budgeting and cost control

With no board or budget in place, the focus for 2024 has been reducing costs and liability exposure. The results have been mixed, but there have been some highlights:

  • Improved financial tracking with QuickBooks and Rena Grove Tax Services.
  • Sale of Birthday Girl, the club’s Capri 18 sailboat, netted about $3,500.
  • Reduced usage of janitorial services and pest control have saved up to $2,000.
  • Clubhouse rentals rebounded in Q2-Q3 and remain the club’s top source of income.
  • Improved (but incomplete) compliance with health, safety and fire regulations.

Below are some reports generated in QuickBooks. The “sales” and “service” categories include clubhouse rentals. Latest bank statements also shown. Grade: C.

Building and grounds

The 50-year-old clubhouse building has several known deferred maintenance issues. While members are familiar with the building as it is used during private functions, public rentals comprise the more frequent and intense use of the facility. Environmental testing was conducted to rule out the presence of lead or asbestos after one general contractor refused to submit a repair bid.

Two repair projects were completed in Q1-Q2, including installation of a 36-inch range fan and anchoring of the heater’s propane supply line. One dishwasher was removed for sanitary reasons and not replaced. New fire extinguishers and a first-aid kit were installed.

Some club members have expressed their belief that the club owns the building because it was built by members. The latter statement is true, but the former statement is not. The 2022 city lease covers “land, moorings and building,” and LYC is tenant and lessor of all three things. The original 1972 lease made clear the building would revert to the city if the lease was terminated.

Two aspects of the city lease deserve close attention:

  • Lakeport Yacht Club is 100% responsible for all building maintenance, including the foundation, walls, roof and windows; plus heating, cooling, electrical, plumbing and sewage within the building. By design, the city has zero responsibility for building maintenance and repairs. Because LYC doesn’t own the building, it has no equity that can be used to secure loans.
  • Even though it’s a private club, LYC must make the building available for use by the public, and it cannot “unreasonably deny” such access. Providing access for a rental fee generates overhead costs and taxable non-member income. Providing access for free is not affordable.

Projects and estimates

Electrical wiring and outlets — Estimate ($1,935)

Firewall/Knox box/propane tank storage

Floor replacement

Kitchen cabinets, mop sink, exterior/interior doors — Estimate ($17,551)

Remove/repair/replace bar

Retail kitchen license (optional) – Project checklist

Roof repairs — Estimate pending

Windows replacement — Estimate 1 ($17,784), Estimate 2 ($25,763)

Grade: D.

Business status, type of nonprofit corporation

Lakeport Yacht Club was born as Empire Sailing Club on Aug. 6, 1959, when its articles of incorporation were filed. The purposes for which the corporation were formed include:

  • “To provide recreation, to promote, maintain, foster and encourage yachting, sailing and rowing.”
  • “To encourage and promote the operation of all boats in a safe manner and in strict accord with the laws of the State of California.”
  • “To improve the boating and sailing skills and techniques of all persons”; and
  • To acquire, hold and dispose of real and personal property; borrow money, secure payment of its obligations; make contracts; and “to do all the other acts necessary or expedient for the administration of the affairs and the attainment of the purposes of the corporation.”

Empire Sailing Club was founded under a section of the Corporations Code then known as the “General Non-Profit Corporation Law,” but the articles of incorporation do not cite any code section or specific type of nonprofit corporation. The club’s initial bylaws, passed in 1960, don’t describe the club as being a nonprofit organization, nor do any of the amended bylaws adopted since then. Still, the articles of incorporation show clear intent to start a nonprofit business under whose umbrella the club’s private activities could occur and the club’s members could mutually benefit.

The Corporations Code was substantially amended in 1980 to distinguish between nonprofit types. Since then, the club has been subject to the Nonprofit Mutual Benefit Corporation Law, even if it was not notified of that fact then or in later years. Unfortunately, the record indicates past directors were either unaware of the club’s nonprofit type or wrongly assumed the club to be a public charity.

LYC was never organized as, and has never been eligible to operate as, a public charity subject to the Nonprofit Public Benefit Corporation Law. Donations to LYC are NOT tax-deductible.

While LYC is not a public benefit charity (501(c)(3)), it is still considered a charitable organization subject to annual state and federal filing requirements. These reporting requirements are intended to provide the general public with information regarding all nonprofits that may receive donations. Lakeport Yacht Club has not provided renewals to the Office of the Attorney General’s Registry of Charitable Trusts since its initial filing in 1990. There is no record of any federal filing, which explains why LYC does not appear in the IRS tax-exempt organization search tool. Grade: F.

Facility rentals and food service

Food service and food safety became instant concerns for the commodore following a spring deep cleaning that uncovered evidence of a rodent infestation in the kitchen along with mold, dry rot, grease and other unsanitary conditions. This led to removal of a dishwasher; partial removal of a kitchen cabinet; disposal of old rodenticide; and fresh consideration of food handling practices.

In our 2024 rental contracts, renters now acknowledge by their signature their agreement that the rental does not include kitchen privileges because the clubhouse is not a licensed retail food facility. This is a substantial change from past practice, but it has been well received by virtually all renters. (Our website features a food vendors page to help with event planning and budgeting.)

As for the club dinners, no food facility license is needed for a private club when it serves food to its members and invited guests no more than three times every 90 days, whether paid or unpaid. That small exemption from the state Retail Food Code fits perfectly with our monthly dinner schedule, giving us flexibility to offer member-prepared dinners, catering or ready-to-eat options. Grade: B.

Intellectual property

This year saw expanded use of technology, including several software applications.

  • Email, front end: The club’s public-facing email address is info@lakeportyachtclub.org. The website’s contact form sends notifications to this address.
  • Email, back end: The club’s secondary email is lakeportsails@gmail.com. This account is used to receive website alerts and notifications, and to store digital assets on Google Drive. This account is used for administrative/web functions and to access Google applications.
  • Email campaigns: LYC has a MailChimp account used to send e-newsletters to clpub members and other subscribers. The website has a landing page where people can subscribe.
  • PayPal: LYC’s account is linked to our checking account at Savings Bank at Mendocino County. Keeping a minimum balance in PayPal helps to facilitate monthly payments to DreamHost.
  • Phone: The club cell phone is 707-263-5078. The carrier is AT&T. Auto-payments are enabled. This phone is the focal point of clubhouse rental inquiries. Increasingly, it is used for identification purposes when accessing sites or programs using two-factor authorization.
  • Social media: LYC’s Facebook page has been inactive since 2020 and we don’t have login access. The business profile on Google’s search engine is managed through lakeportsails@gmail.com.
  • QuickBooks: Monthly subscription for accounting software. Increasingly helpful for invoicing and payment processing, but the main attractions are balance sheets, profit-and-loss reports, and electronic data-sharing with our bookkeeper, Rena Grove Tax Services. QuickBooks payments are deposited into our checking account at Savings Bank at Mendocino County.
  • Website content: LYC’s website uses the WordPress content-management system to organize and display text and images. E-commerce and other functions can be added using plugins.
  • Website domain: The club’s registered domain name is www.lakeportyachtclub.org. This registration is managed under an LYC GoDaddy account. Auto-renewals are not enabled.
  • Website hosting: LYC has a DreamHost account that hosts the website database and files. Auto-payments are enabled, but the PayPal account must have a working balance for them to work.

Building out the website and adding rental information have greatly eased handling rental inquiries. Cross-training a future webmaster, and/or hiring external help, is a future goal. Grade: A.

Liability insurance

Insurance is among the club’s largest expenses. We pay nearly $1,000 to insure the Board of Directors against personal liability, and about twice that to insure building, grounds and moorings. Both policies require the club and its directors to operate responsibly and lawfully; if not, claims made against the club may not be covered. Grade lowered due to lack of Board of Directors. Grade: B.

Membership

Total membership is 45 people, including 37 annual members (13 couples, 11 individuals) and eight lifetime members who pay no dues. This represents a slight increase over 2023.

The majority of members renewed (or signed up) at the January dinner. Seven new members joined; one member reinstated in October. The members page has a link to the membership roll (Password: LYC2024). Grade: B.

Program activities

Historically, Lakeport Yacht Club has offered a wide variety of events and services, both to its dues-paying members and to the general public. It also has sponsored or co-sponsored community events. LYC relies on its members to plan and execute program activities.

That hasn’t been easy in 2024, or any time in recent memory. Good programming boosts member attendance and engagement. Poor or infrequent programming does the opposite. Grade: D.

Reasonable compensation

Nonprofit social clubs can offer reasonable compensation to its members for services rendered, but there are some common-sense rules to follow. As relevant examples, LYC has provided reasonable compensation (or reimbursement) for club members who handle facility rentals, repairs or cleaning. Club members should not participate in any board discussion regarding whether any reasonable compensation may be offered to them or to an immediate family member for services rendered. Many club-related tasks may be performed by means of independent contractors, and any such contracts should be obtained from both members and non-members only with board approval.

Likewise, social clubs may offer stipends to members of the Board of Directors for their attendance at board meetings and/or for other tasks related to managing the affairs of the corporation. Sitting directors and director candidates should recuse themselves from any discussion or actions by the general membership as to whether club directors should receive stipends as partial compensation for their time and effort spent conducting the club’s business.

By law, nonprofits may not operate in a manner that financially benefits any single member. There is an exception for reasonable compensation paid to club members for services rendered. A written employment contract is advisable, and the person being compensated (and any family members) should not participate in the hiring decision. A W-4 form should be filled out by all independent contractors when their employment contract is signed, whether they are club members or not. Payments of $600 or more per year should be reported on Form 1099. Grade: Incomplete.

Statement of Information

Club directors last filed a Statement of Information with the Secretary of State in 2021. An updated statement was due in 2023. The form discloses to the state — and to the public via its search portal — the name and address of the chief executive officer, secretary, and chief financial officer, roughly equivalent to the offices of commodore, secretary and treasurer on the LYC Board of Directors.

Should the Board of Directors fail to appoint corporate officers (CEO, Sec., CFO) to file an updated statement of information, the Secretary of State may suspend the corporation. Suspension could interrupt access to banking services, and it could impede filing of state and federal tax returns. Statements of information are public record and are signed under penalty of perjury. Grade: D.

Tax-exempt status, tax liability

State

LYC records show directors have filed tax returns with the state Franchise Tax Board (FTB) dating back to the 1970s, all describing the club as a tax-exempt nonprofit organization. For a dozen years or so before then, the club filed no tax returns at all.

None of the tax returns reviewed to date correctly identified LYC as a social club organized under RTC Section 237101g (discussed below). None of those returns calculated whether any state income tax was due on LYC’s non-member income. LYC last filed a Form 199N in 2021 for the 2020 tax year. Statements for tax years 2021 and 2022 are long past due. No state tax filings for 2003-2010 were located. The deadline to file a Form 199N or other return for tax year 2023 is Nov. 15, 2024.

Sales tax liability: There is no record LYC has ever transmitted any sales tax on any transactions for which such taxes may be due. As recent examples, state sales tax may be due on the recent sale of the club sailboat, and state and city sales/use tax may be payable on clubhouse rentals by non-members. Sales and use tax is regulated by the California Dept. of Tax and Fee Administration (not FTB).

Business income tax liability: Because LYC was first established in 1959, its tax-exempt status under state law appears to be authorized by Revenue and Taxation Code Section 23701:

(a) Organizations which are organized and operated for nonprofit purposes within the provisions of a specific section of this article … are exempt from taxes imposed under this part, except as provided in this article or in Article 2 … of this chapter if both of the following occur:

(1) An application for exemption is submitted in the form prescribed by the Franchise Tax Board.

(2) The Franchise Tax Board issues a determination exempting the organization from tax.

LYC had its tax-exempt status revoked by the Franchise Tax Board in 2013, with instructions to submit returns back to 2008. The state renewed LYC’s tax-exempt status as a social club later the same year, though no correspondence beyond the determination letter has been found.

Protecting state tax-exempt status is important. Without it, subdivision (b) of RTC 23701 requires LYC to obtain federal tax-exempt status before any new state tax exemption is obtained. For reasons discussed below, any LYC application for federal tax-exempt status is likely to be denied.

State tax law treats social and recreational clubs the same as federal law. See FTB Publication 1077 regarding social clubs governed by California Revenue and Taxation Code (RTC) Section 237101g. Here, the exemption from paying state income tax only applies to member-derived income. Income from non-member sources is taxable and cannot exceed 15% of the the club’s gross revenues.

If there was any doubt regarding the club’s tax-exempt status under state law, it was removed by the 2013 determination letter by FTB. LYC is a nonprofit mutual benefit corporation organized under Section 237101g of the Revenue and Taxation Code. It must fully comply with all laws governing such nonprofits, including reporting of taxable income, or risk losing its tax-exempt status again. Further, LYC’s receipt of unrelated business taxable income triggers mandatory payments of estimated tax.

Federal

There is no record of any club director applying for federal tax-exempt status. No federal tax returns have been located. In 1985, the club was issued an Employer Identification Number (EIN) by IRS, but there is no record the EIN has ever been used. Our bookkeeper has been unable to confirm the club’s EIN as active, raising questions about how any first filing will be processed.

It’s very possible that past directors believed the club was tax-exempt under Section 501(c)(3) of the Internal Revenue Code, which applies to organizations organized exclusively for charitable purposes. Any such beliefs were mistaken. Lakeport Yacht Club is a nonprofit mutual benefit corporation, not a charity or religious organization, but it still has to follow strict rules keep its tax-exempt status.

Here’s the deal:

1. LYC never applied to receive federal tax-exempt status, and so…

2. LYC has never filed a federal tax return or statement, which means…

3. LYC’s federal tax filings have not been publicly disclosed as required.

None of those things are good.

Discussion

Under federal tax law, social and recreational clubs may qualify as tax-exempt under Internal Revenue Code Section 501(c)(7). The exemption from paying federal income tax only applies to member-derived business income. Revenues from non-member sources are considered Unrelated Business Taxable Income (UBTI), which cannot exceed 15% of gross revenues.

To determine LYC’s tax-exempt status, consider the club’s two income streams:

  • Member income includes annual dues; paid dinners for a club member and their invited guests (provided the member pays for those dinners); member rentals of the club’s mooring buoys; and income from sales of merchandise or services to members.
  • Non-member income includes dinner guests who pay their own way; clubhouse rentals made to members of the public; and income from sales of merchandise or services to non-members.

Both IRS and FTB require “substantially all” of a social club’s income to come from its members. For LYC to keep its state tax-exempt status, two things need to happen consistently:

  • Diligent record-keeping of member and non-member income to calculate and report any state/federal tax due on the latter.
  • Constant monitoring to ensure non-member use of club facilities and services doesn’t total more than 15% of gross revenues.

By both measures, Lakeport Yacht Club has no clear path to claim or defend its state tax-exempt status. It would be hard to belatedly calculate and report LYC’s member and non-member income, although sufficient records exist to pursue this path with a bookkeeper or accountant.

Applying to the IRS to determine the club’s federal tax-exempt status carries its own risks, as does filing an initial and/or final federal tax return. Per the IRS, “failure to keep records that distinguish the types and sources of income and expenses will result in a presumption that all income is unrelated to your exempt purpose and therefore subject to unrelated business income tax.” In that context, past and current failure to track member vs. non-member income could prove costly.

As you may recall, our city lease requires the clubhouse to be made available to the public. That virtually guarantees non-member income from clubhouse rentals will exceed 15% of gross revenues. For Q3 ending Sept. 30, non-member income greatly exceeds 50% of LYC’s gross revenues. Here are some estimates from recent years: 2022: 81%; 2021: 92%.

Failure to file federal tax returns is a very bad thing, regardless of a company’s tax-exempt status. Past-due taxes for any given tax year may not be large, but penalties and interest add up quickly.

As for its state income tax returns, none identifies LYC as being organized under RTC Section 237101g, namely, “A social organization described in Section 501(c)(7) of the Internal Revenue Code.” As a result, no non-member income, nor any state tax due upon such income, was reported.

Despite the uncertainty that comes with filing late tax returns, the greater risk to club directors and members comes from not filing them at all and/or filing them without reporting taxable income. Because this same pattern has been observed since at least 1991, the corporation’s potential tax liability is tough to gauge or predict, but the cumulative total is likely substantial.

Likewise, it is difficult to predict any potential tax liability that could be imposed upon members themselves if the corporation continues to operate without a Board of Directors or financial officers. When there is no board, or when a board fails to exercise reasonable care, bad things can happen.

Grade: F.

Nov. 15: Options for discussion and possible vote

Option 1: Decommission ship; disband crew. Give notice to city to terminate the lease by Dec. 31; conduct nominations and election for the final Board of Directors on Nov. 15; appoint board officers to file final Statement of Information; file final state tax return as recommended; consult tax advisor re federal tax return; and appoint officers to distribute any assets in accordance with the LYC bylaws. By majority vote, give member direction to Board of Directors to dissolve the corporation.

  • Pros: Possibly the best option to protect club members and directors from incurring future club debts and possible personal tax liability. Best option to distribute assets to local organization(s). Allows city to repurpose, repair and refurbish the building at its own cost and timeline.
  • Cons: Club is permanently closed as a business entity, although it could continue to operate as an unincorporated association. Loss to community of scenic rental venue downtown. Potential impacts on mooring buoy operations, up to and including removal. Unknown but potentially substantial costs for professional advice, past-due taxes, penalties and interest. For more info, view the brief dissolution webinar of the California Office of the Attorney General.

Option 2: Abandon ship! Reboot and rebrand. Give notice to the city to terminate lease by Dec. 31; conduct nominations and election for the 2025 Board of Directors on Nov. 15; appoint board officers to file Statement of Information with Secretary of State; file 2023 state tax return as recommended; consult tax advisor re federal tax return.

  • Pros: This option instantly eliminates building rent, utilities and deferred maintenance costs; time, effort and money spent on clubhouse rentals; and future property taxes. Lowers club insurance costs. Enables future relocation to private property. Without club rentals, unrelated business taxable income may shrink to <15% as is needed to support future applications for tax-exempt status. Possible member direction to seek continued city lease for mooring buoys only.
  • Cons: It’s hard, but not impossible, to hold events or grow membership without a meeting place. (Early iterations of the club met in homes, in a Nice-area clubhouse and at the fairgrounds.) Renting private property may cost more than the city lease. Possible impacts on mooring buoys, up to and including removal of all moorings if negotiations to amend the city lease fail. Potentially substantial costs for professional advice, past-due taxes, penalties and interest.

Option 3: Shelter in place. Grow big or go home. Conduct election for the Board of Directors on Nov. 15; appoint board officers to file Statement of Information with Secretary of State; appoint board officers to file and sign 2023 state tax return as recommended; consult tax advisor re federal tax return. Continue to operate under city lease while exploring merchandise sales, licensed alcohol sales, permitted temporary food events and service offerings. Apply for seller’s permit and begin collecting and transmitting state sales/use taxes. Build reserves to address any past-due taxes, capital costs and deferred building maintenance.

  • Pros: Gives time for members and directors to refine, expand and improve business operations and to strengthen alliances with other clubs and organizations. Preserves community access to the building. Preserves club mooring buoy operations. Creates options for merchandise sales and service offerings to strengthen and diversify the club’s bottom line. Supports club founders’ stated mission to promote boating as a sport that can be enjoyed by persons of all ages.
  • Cons: Unproven ability and/or willingness to own and operate a for-profit business. Reliance on non-member income disqualifies club from filing future applications for state or federal tax-exempt status. Potentially substantial costs for professional advice, past-due taxes, penalties and interest. Social clubs and service organizations don’t attract younger adults, families and youth, hindering growth options. Deferred maintenance costs make this option highly improbable.

At the Nov. 15 meeting, we’ll start by discussing the options above. Whether board elections follow, and whether any members stand for nomination, may depend on which option is chosen. The duties of a board chosen to dissolve the corporation will differ from those of a board elected to keep it going.