Our Club Doesn't Have To File Any Forms, why should we buy the tax printer?
There were two reasons for this reversal by BetterInvesting. First of all, if you elect not to be treated as a partnership, each of your members is a co-owner of each security owned. That means each member has to report his or her share of dividends for each company owned by the club, not just the total dividends of the club. The same would be true for each expense. Worse, when a member withdraws and is paid in stock, each member would realize gain or loss on each of the stocks so transferred.
The second reason is that the IRS subsequently said, privately, that the 761 election was never meant for investment clubs. This was a change on its part albeit never acknowledged as such. Up until 1998, Federal Publication 550 on investments had instructions for investment clubs on electing not to be treated as a partnership. This was dropped in 1998, and thereafter clubs applying for permission to drop the 761 election were told that this election never applied to them in the first place.
So what does this all mean Technically, it means that the IRS could assert penalties for non-filing. This is unlikely because of its inconsistent position. However, they could take the position that if you don't consider yourself a partnership for tax purposes, you are filing inaccurate returns for the reasons given above.
BetterInvesting has advised all clubs that have previously not filed returns to start filing in the current year. If the IRS questions why prior years' returns were not filed, the club should answer that it had filed a 761 election.