Were country-club membership contributions taxable admissions when members received preferred stock and a vested ownership interest?

Subject

Purchases of Equitable Ownership in Equity Memberships

Plain-English summary

The country club's membership contributions were not taxable admissions because they purchased vested equitable ownership rather than merely access to club facilities. Members received preferred stock and rights tied to their contributions. On liquidation, they were entitled to payment to the extent of the contribution, and resigning members could receive 90% of the then-current price for the same membership category when the club repurchased it.

Florida distinguished that ownership payment from annual dues. Members still had to pay dues to use the golf, tennis, swimming, fitness, dining, and other facilities. The ownership contribution therefore was not paid entirely for recreational access.

The membership plan warned that memberships should not be viewed as investments, partly to address securities-registration concerns. The Department looked past that label to the transaction's substance: the governing documents described ownership, members had liquidation rights, and membership repurchases often returned more than the original payment. It concluded the contributions were capital from owners, not taxable dues or fees.

What this means for you

Calling a club payment “stock,” a “membership contribution,” or “equity” is not enough by itself. Florida said the determination is case-specific and depends on the rights created by the articles, bylaws, membership plan, refund or redemption terms, and separation between ownership payments and facility-use dues.

Common questions

Q: Did preferred stock need ordinary voting rights or dividends to qualify? Not on these facts. Some classes had only potential voting rights and none participated in dividends, but the vested liquidation and redemption-related rights supported equitable ownership.

Q: Did securities-law treatment decide the sales-tax result? No. The ruling said a membership's failure to qualify as a security did not necessarily make its price a taxable admission.

Q: Were the annual club dues also exempt? No. The taxpayer acknowledged that annual dues were taxable; the ruling addressed the separate membership contribution.

Citations and references

• Fla. Stat. §§ 212.02(1), 212.04 — club dues and fees included in taxable admissions
• Fla. Admin. Code r. 12A-1.005(5) — dues, equity memberships, capital contributions, and assessments
• Florida Department of Revenue v. John's Island Club, Inc., 680 So. 2d 475 (Fla. 1st DCA 1996)
• Oklahoma City Golf & Country Club v. Oklahoma Tax Commission, 825 P.2d 267 (Okla. 1992)
• United States v. Evans, 375 F.2d 730 (9th Cir. 1967)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98A-066

Original ruling text

SUMMARY

Membership contributions paid to a country club upon joining which are refundable in full, or appreciate in value, or are an investment in substance are not dues and fees, and are not a taxable admission. Membership contributions which may not be a security according to Securities and Exchange Commission regulations are not necessary taxable admissions.

Aug 24, 1998

Re: Technical Assistance Advisement - TAA-98A-066 Sales and Use Tax; Purchases of Equitable Ownership in Equity Memberships Section 212.04, F.S., Section 212.02(1), F.S. Rule 12A-1.005, F.A.C. XXX("Taxpayer")

Dear :

This is in response to the letter dated XXX, requesting an advisement regarding the purchase of country club memberships certificates.

FACTS

The Taxpayer is a country club whose facilities include three 18-hole golf courses, a driving range and practice green, six tennis courts, a swimming pool, a fitness facility, a tennis and swim clubhouse, and a 60,000 square foot clubhouse containing dining facilities, men's and women's locker facilities, and a pro shop. The Taxpayer is organized under section 607, F.S., as a business corporation. The Taxpayer offers Resident Golf, Resident Social, Nonresident Golf, and temporary Nonresident Social Memberships which correlate directly to Class A, B, C, and D preferred stock ownership.

Upon repurchase of a resigning member's Equity Membership, the resigning Equity Member will be paid an amount equal to 90% of the Membership Contribution being charged by the Taxpayer for the same category of membership at the time of repurchase. In most cases, the resigning members received more money than they paid in. The Articles of Incorporation provide that in the case of liquidation, the members are entitled to receive payment to the extent paid for their membership contribution.

Resident members purchased lots from a developer, a related company to the Taxpayer. The developer's intent in building the country club facilities was to enhance the purchase of the lots. A lot buyer who would not become a country club member might lose as much as $100,000 on the fair market value of their lot if the lot buyer did not have the availability of becoming a member in the Taxpayer. It is the goal of the developer to primarily sell the lots, with the club as an enhancement to the value of the lot. It was the goal of the developer to have only Resident Members once the lots are entirely sold.

According to the Taxpayer's "Reservation of Membership" document, the terms and conditions of membership with the Taxpayer are set forth only in the "Membership Plan" document. That document contains the following statements, in part:

... No person is authorized to make any representations or to provide any information with regard to the Club or the memberships in the Club that is contrary or in addition to the information contained in this Membership Plan and the attached exhibits....

MEMBERSHIPS ARE OFFERED EXCLUSIVELY TO PERMIT PERSONS ACQUIRING A MEMBERSHIP TO OBTAIN RECREATIONAL USE OF THE CLUB FACILITIES. MEMBERSHIP SHOULD NOT BE VIEWED OR ACQUIRED AS AN INVESTMENT AND NO PERSON PURCHASING A MEMBERSHIP SHOULD EXPECT TO DERIVE ANY ECONOMIC BENEFITS OR PROFITS FROM THE MEMBERSHIP. THIS MEMBERSHIP PLAN HAS NOT BEEN REVIEWED OR ENDORSED BY ANY FEDERAL OR STATE AUTHORITY.

In addition to the above provision, the Membership Plan as

amended July 1, 1994, also provides:

This Membership Plan with its exhibits offers you an opportunity to acquire an Equity or Non-Resident Membership.... As an Equity or Non-Resident Member, you will be entitled to use the recreational and social facilities of the Club and will have an ownership interest in the Club.

The By-laws provide that preferred stock certificates will be issued to members upon acceptance and payment of the full Membership Contribution. A member may pledge his membership to collateralize a loan from a financial institution that will also be secured by a mortgage on such member's property. Any such pledge will be subject to the Taxpayer's By-laws and rules, including the requirements that dues be paid at all times, and that all members must receive an invitation, apply, and be approved, for membership. In the event that the financial institution obtains possession of the membership, such membership may be transferred only in accordance with the Taxpayer's By-laws.

There are no guarantees that the Taxpayer will repurchase a resigned membership or that the resigning member will recover the purchase price for the membership. The Taxpayer's repurchase is dependent upon the willingness of approved persons to acquire memberships in the Taxpayer. With respect to Class A and Class B memberships, a member may arrange for the Taxpayer to repurchase his or her membership and issue a membership of the same class to the purchaser of the resigning member's residence who meets all criteria for membership. In all other cases, the Taxpayer is obligated to repurchase, for a certain time period, resigned memberships only on a "one-for-three" basis, which means that the proceeds from the sale of every fourth membership of each category will be used to repurchase a resigned membership of the same category from the waiting list. The Taxpayer is not obligated to repurchase a resigned membership under any other circumstances; however, the Taxpayer may still elect to do so, in its own discretion, if the majority of members of its Board of Directors give their approval.

If a member resigns or is expelled, the member is supposed to surrender his or her stock certificate. However, the By-laws provide that failure to surrender the certificate will not affect the resignation or expulsion of the member.

The Membership Plan also provides for the issuance of "stock" to the members. This "stock" cannot be sold or traded on the open market. Such "stock" may be transferred only to the Taxpayer. The Articles provide for common and preferred stock, with four classes of preferred stock denominated Class A, B, C, and D. Class A and class B of preferred stock potentially are entitled to vote, but only if the number of outstanding shares of common stock drops below a certain number. Class C and class D shares will not have any voting rights. Also, none of the preferred stockholders participate in dividends.

TAXPAYER'S POSITION

The original letter, dated October 13, 1997, states:

Section 212.04, F.S., imposes a tax on admissions. Admissions are "all dues and fees paid to private clubs and membership clubs providing recreational or physical fitness facilities, including, but not limited to, golf, tennis,
[and] swimming...." ... [T]he annual dues... are subject to sales tax. The rule, however, distinguishes between dues for use and contributions to capital. It states that the "[p]urchase of equitable ownership in a corporation (stock or certificates of membership in nonprofit clubs organized under the provisions of Chapter 617, F.S., or stock in a for-profit club organized under the provisions of Chapter 607, F.S.)" is not a fee subject to tax on admission. [sic]

The preferred stock of the Club is "stock in a for-profit club organized under the provisions of Chapter 607, F.S." Chapter 607 contains the business corporation statutes for Florida for-profit businesses. The Club is organized under Chapter 607 as a for-profit corporation, or in the terminology of the rule, a for-profit club. The rule clearly exempts the preferred stock of the Club from tax on

an admission.

Not only is it stock of a corporation organized under Chapter 607, but standing alone, it has the qualities which make it "stock." Generally, stock embodies three qualities: the right to vote, the right to dividends, and the right to assets upon liquidation. These qualities are not absolute; corporate designers are fairly free to tailor stock to meet a corporation's needs. A proper determination of whether an ownership interest is "stock" requires review of the Articles of Incorporation and ByLaws as they are the legally operative documents creating the interests.

Although the Club's Class A and B preferred stockholders are not initially entitled to vote, they will obtain voting rights upon turnover of control by the common stockholders. Class C and D stockholders are not entitled to vote because control is purposefully reserved to the residents of the Club community. Also, preferred stockholders do not participate in dividends.

The preferred liquidation right is the most significant attribute of the preferred stock. The nature of an equity interest is represented by the right to collect money in the event of a sale. This right represents ownership of the underlying assets of the Club. Club's balance sheet, attached as Exhibit C, carries the preferred stockholder's cash contributions as stockholder's equity. These contributions range from $37,500 to $52,500 for Golf Memberships and from $9,000 to $9,400 for Social Memberships, totaling $14,162,500 in stockholder's equity. These contributions are not lost expenses like the annual membership dues which are not refundable. In addition, it should be noted that a member who fails to pay annual dues will be expelled. Nevertheless, he is entitled to receive the return of his equity contribution in accordance with the Club's By-Laws.

Furthermore, in Department of Revenue v. John's Island Club, Inc., the Department of Revenue apparently conceded

that the member's capital contributions were not taxable. The facts in that case are indistinguishable from the instant facts, and the court stated: "Each member must purchase a membership. The cost of the membership is not subject to sales tax." The court went on to hold that the capital assessments contested in that case were also not subject to sales tax. By a stronger argument, the memberships in this case are not taxable.

The Department of Revenue has previously ruled in Technical Assistance Advisement No. 92A-004, under essentially identical facts, that membership certificates, which are the stock component for a not-for-profit-club, were equity ownership rather than admissions. T.A.A. 92A-004 involved a not-for-profit club which owned and operated an exclusive country club. The members were required to purchase equity memberships. This alone did not permit free use of the facilities because the members were required to pay dues and fees. The advisement concluded that the purchases of the membership certificates were equity ownership and not admissions.

The Taxpayer's factual situation is very similar to that of T.A.A. 92A-004. As in the T.A.A., the Club is a business corporation organized under Florida business corporation statutes. Also, ownership of stock alone does not entitle a member to free use of the facilities; annual membership dues must be paid. Therefore, the preferred stock of the Club should be similarly treated as equitable ownership and not an admission subject to tax....

The Taxpayer explained during the conference that the language of the disclaimer that an investment was not being purchased was required by the Securities and Exchange Commission to avoid being characterized as a "security" for registration purposes. It was explained that the sale of lots combined with the sale of memberships were attempting to satisfy an SEC safe harbor which provided for membership repurchases at only 80% of the current existing price. Here, it was at 90% and considered to more closely resembling a "security." The Taxpayer also explained that TAA 92A-004 was designed to meet this safe

harbor.

RELEVANT AUTHORITY AND ANALYSIS

Section 212.04, F.S, provides in part:

212.04 Admissions tax; rate, procedure, enforcement.--

(1)(a) It is hereby declared to be the legislative intent that every person is exercising a taxable privilege who sells or receives anything of value by way of admissions.

(b) For the exercise of such privilege, a tax is levied at the rate of 6 percent of sales price, or the actual value received from such admissions, which 6 percent shall be added to and collected with all such admissions from the purchaser thereof, and such tax shall be paid for the exercise of the privilege as defined in the preceding paragraph....

The term "Admissions" is defined, in part, under s. 212.02(1), F.S., as follows:

212.02 Definitions.
The following terms and phrases when used in this chapter have the meanings ascribed to them in this section, except where the context clearly indicates a different meaning:

(1) The term "admissions" means and includes ... all dues and fees paid to private clubs and membership clubs providing recreational or physical fitness facilities, including, but not limited to, golf, tennis, swimming, yachting, boating, athletic, exercise, and fitness facilities, except physical fitness facilities owned or operated by any hospital licensed under chapter 395.

Rule 12A-1.005(5)(a) and (d)2.c., F.A.C., provides:

(5) DUES AND INITIATION FEES, EQUITY AND NONEQUITY MEMBERSHIPS, CAPITAL CONTRIBUTIONS AND ASSESSMENTS, REFUNDABLE AND NONREFUNDABLE DEPOSITS, AND USER FEES.

(a)1. Dues paid to any organization, including athletic clubs, health spas, civic, fraternal, and religious clubs, and organizations which provide physical fitness facilities or recreational facilities such as golf courses, tennis courts, swimming pools, yachting, boating, athletic, exercise, and fitness facilities, are taxable....

(d) ...

2. The following payments made to private clubs or
   membership clubs are not "fees" which are subject to tax on admissions....

c. Purchase of equitable ownership in a corporation (stock or certificates of membership in nonprofit clubs organized under the provisions of Chapter 617, F.S., or stock in a for-profit club organized under the provisions of Chapter 607, F.S.).

Section 212.04, F.S., taxes all "dues" and "fees" paid to private and membership clubs providing recreational or physical fitness facilities, including, but not limited to golf, tennis, swimming..., unless specifically exempt. Rule 12A1.005(5)(d)2.c., F.A.C., provides that payments made for the purchase of equitable ownerships in a corporation (stock or certificates of membership in nonprofit clubs organized under the provisions of Chapter 617, F.S., or stock in a for-profit club organized under the provisions of Chapter 607, F.S.) are not taxable "fees" under section 212.04, F.S.

"Dues" and "fees" are not defined in Chapter 212, F.S., or in Rule 12A-1.005, F.A.C.; therefore, we must look to the ordinary usage of the terms, as was done in Oklahoma City Golf and Country Club v. Oklahoma Tax Commission, 825 P.2d 267 (Okl. 1992). In that case, the court used the definition of "dues" as found in Black's Law Dictionary 450 (5th ed. 1979)("Black's") and Webster's Third New International Dictionary 699 (1963) ("Webster's"). Black's defines "dues," as applied to clubs, as "sums paid toward support and maintenance of same and as a requisite to retain membership." "Dues" are defined by Webster's as "the fee or charge required for membership, affiliation,

initiation, use, subscription."

For the term "fees" it is appropriate to look to the dictionary definition for the common meaning of the term in the same manner as the court in the above cited case. "Fees" are defined in The American Heritage Dictionary (2nd Collegiate ed. 1991) as "a fixed charge."

It is a well established fact that "stock" in a corporation represents a proportional ownership interest in the corporation. The characteristics of stock are a right to participate proportionately in all profits, and in management, and in the distribution of net assets on liquidation. U.S. v. Evans, 375 F.2d 730, 731 (9th Cir. 1967). In further support of these characteristics of stock, I.R.S. Revenue Ruling 87-130, 1987 2CB, 69, identifies the critical entitlements as "valuation, voting, and distribution rights."

Another characteristic of equity is that the payment therefor is either fully refundable for the term of the membership as a matter of right on the cessation of that membership, is given in exchange for an interest that may be transferred (or redeemed) in an amount that reflects either the appreciation or depreciation in the value of the corporation between the initial date of payment and the date of transfer or redemption. To the extent that any payment is irrevocably paid to the corporation without any opportunity to recoup the payment upon sale or redemption of the member's ownership interest, it is not deemed a payment for the purchase of an equitable ownership.

It is necessary to distinguish between those amounts that are paid to Clubs for taxable dues or fees and those that are paid in for the non-taxable equitable ownership interest in the Club. Because each country club has such variable provisions in its bylaws and membership agreements regarding the rights and obligations that arise from payment of various portions of the required membership fee, such determination must be made on a case by case basis. In making each determination as to the components of the particular total membership cost that are taxable under Section 212.04, F.S., the Department will consider

the intent or motive of the parties, as evidenced by the documents relevant to membership. See Oakland Hills Country Club v. Commissioner, 74 USTC 35, 39 (1980).

In Florida Department of Revenue v. John's Island Club, Inc., 680 So.2d 475 (Fla 1st DCA 1996), the subject club filed a petition challenging the validity of Rule 12A-1.005(5)(d)1.b., F.A.C. John's Island Club, Inc. argued that the rule exceeded the Department's grant of rulemaking authority, and modified, enlarged, and contravened the law implemented. The court determined that additional paid in capital does not fall within the generally understood definition of "dues" or "fees" as applied to a club, that the terms "dues" and "fees" are not defined by statute, and the statute did not specifically authorize an admissions tax on all paid in capital. The court determined, that in the absence of clearer legislative consideration of what was meant by the terms "capitalization fees" and "capital facility fees," the rule was inconsistent with the provisions of chapter 212, F.S.

Capital contribution is defined in Black's Law Dictionary (5th edition) as, "Cash, property, or services contributed by partners to partnership. Various means by which a shareholder makes additional funds available to the corporation (i.e., placed at the risk of the business) without the receipt of additional stock. Such contributions are added to the basis of the shareholder's existing stock investment and do not generate income to the corporation." Contribution to capital is defined in Black's Law Dictionary (5th edition) as, "A fund or property contributed by shareowners as financial basis for operation of corporation's business, and signifies resources whose dedication to users of the corporation is made the foundation for issuance of capital stock and which became irrevocably devoted to satisfaction of all obligations of the corporation." Black's Law Dictionary (5th edition) defines capital as, "In accounting, the amount invested in a business." Black's Law Dictionary (5th edition) defines capital expenditure as "Expenditure for long term betterment or additions. Expenditure in nature of an investment for the future chargeable to capital asset account. An expenditure which should be added to the basis of the property involved." Note that to be a capital contribution or

contribution of capital the payments must have been made by someone with an ownership interest.

In the instant situation, it is the case that the membership documents state that the membership contribution is paid exclusively to gain use of the Club's recreational facilities and not for investment purposes. However, this was done solely to comply with Securities and Exchange Commission regulations so that the taxpayer could avoid additional costly registration requirements. The primary motive of the developer was to sell real estate lots, not sell securities, even though the members may have had investment motives for purchasing the memberships. The individual members could and did find willing buyers, and were able to sell their lots and memberships upon the Taxpayer's approval. In most cases, this was done at a profit to the member. The membership documents do provide that an equitable ownership is purchased. This interest is vested by rights granted in the Articles of Incorporation to the extent of the amount paid for the memberships. Since the refundable portions must be paid by the Taxpayer to members in event of liquidation, the members have a vested right to recovery of invested amounts. Therefore, Membership Contribution constitutes an amount paid for an equitable ownership in the club, or a capital contribution, and cannot be considered as an amount paid totally for the right to use the club facilities. Thus, is not a taxable admission.

DETERMINATION

Since the members have a vested ownership interest in the club upon payment of the membership contribution, the payments would be considered capital contributions from an owner, and not a taxable admission.

This response constitutes a Technical Assistance Advisement under Section 213.22, F.S., which is binding on the Department only under the facts and circumstances described in the request for this advise as specified in Section 213.22, F.S. Our response is predicated on those facts and the specific situation summarized above. You are advised that subsequent statutory or administrative rule changes, or judicial interpretations of the

statutes or rules, upon which this advise is based, may subject similar future transactions to a different treatment than expressed in this response.

You are further advised that this response and your request are public records under Chapter 119, F.S., which are subject to disclosure to the public under the conditions of Section 213.22, F.S. Your name, address, and any other details which might lead to identification of the taxpayer must be deleted by the Department before disclosure. In an effort to protect the confidentiality of such information, we request you notify the undersigned in writing within 15 days of any deletions you wish made to the request or response.

Sincerely,

Charles Wallace
Senior Tax Specialist
Technical Assistance and Dispute Resolution

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