Was a golf club's $45,000 initiation fee exempt as a written refundable fee when the eventual refund amount was uncertain?

Plain-English summary

A private golf club charged a $45,000 initiation fee, with bylaws setting a $25,000 minimum. A departing member generally received what a new purchaser paid, reduced by debts and a $6,000 transfer fee. A member could instead transfer membership to a son or grandson for $500, with no refund of the original fee.

Rule 3.298(b) exempted initiation fees that were refundable under a written agreement. The Comptroller could not decide the tax treatment of the full fee because neither the member nor club knew at payment how much, if anything, would later be returned. Depending on the new purchaser's price, a member might receive less or more than the original $45,000, or nothing on a family transfer.

The letter did reach one definite result: at least $6,000 was taxable because the club retained that amount as a transfer fee. The Comptroller requested the full bylaws, membership contract, and other documents before ruling on the balance.

What this means for you

Private clubs

An initiation fee is not necessarily “refundable” merely because some future payment may go to a departing member. The written agreement must make the refund obligation and amount sufficiently determinable for Rule 3.298(b).

Accountants and tax professionals

Do not turn this letter into a full-fee holding. It decided only the minimum taxable transfer-fee portion and expressly deferred the rest pending documents.

Common questions

Was the entire $45,000 initiation fee held exempt? No. The Comptroller did not decide the balance.

What amount was definitely taxable? At least the $6,000 retained transfer fee.

Why was more documentation needed? The eventual refund varied with the new purchaser's payment and could disappear entirely on a transfer to a son or grandson.

What rule governed? Rule 3.298(b), covering initiation fees refundable under a written agreement.

Citations and references

• 34 Tex. Admin. Code Rule 3.298(b) (written refundable initiation fees)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9202L1161G09

Original ruling text

February 18, 1992

Dear **:

Your letter concerning the taxability of refundable initiation
fees has been assigned to me for review and response. I
appreciate your patience and apologize for the delay in responding.

Under the fact situation present in your letter, a private golf
club ("Golf Club") charges an initiation fee to individuals
selected and approved to become members of the Golf Club.
Thereafter, the Golf Club charges monthly dues and various fees,
for use of the Golf Club facilities. The Golf Club charges and
collects sales tax on the monthly dues and fees.

Club membership is limited to 350 members under the bylaws of the
club. Upon approval of a member of the Golf Club, the new member
must pay an initiation fee. The fee is set by the Board of
Directors and is currently $45,000. Under the bylaws of the Golf
Club, the fee can not be less than $25,000. The initiation fee
is refundable to members who terminate membership in the Golf
Club. Section 6 of Article III of the Bylaws provides for the
following:

Upon the transfer of shares in the manner hereinafter provided,
the Corporation shall pay to the former shareholder, to the
executor or the administrator, legal representatives or heirs
of a deceased shareholder the proceeds so paid by the purchaser,
less any indebtedness owing to the Corporation, less the applicable
transfer fee.

The applicable transfer fee as set by the Board of Directors is
currently $6,000.

Section l0 of Article III of The Bylaws also allows the transfer
of membership to a son or a grandson for a $500 transfer fee.
Under such circumstances, the son or grandson pays on initiation
fee and the original initiation fee of the member is not refunded
in whole or in part.

Your question is whether the initiation fee is a refundable fee
which is exempted from sales tax pursuant to Rule 3.298(b)?

Section (b) of Rule 3.298, provides for the exemption form tax of
initiation fees which are refundable, as evidenced by a written
agreement.

We have previously allowed as being exempt, initiation fees where
club bylaws provided for a l00% refund of the initiation fee
after 30 years and a second situation where 50% of the initiation
fee paid was refundable upon transfer of membership to a new
member.

In the excerpts that you provided from the bylaws of the Golf
Club, the shareholder is entitled to receive the proceeds paid
by the purchaser (new member), less the $6000 transfer fee.
Conceivably if a shareholder paid $45,000 as his initiation fee,
he would only receive a $24,000 refund (if the purchaser paid
$30,0000) or $54,000 (if the purchaser paid $60,000). The
shareholder would receive nothing if he chose to transfer his
membership to his son or grandson, under Section l0 of Article
III.

The situation that you describe differs from those that we have
previously allowed in that at the time a member tenders his
initiation fee, neither the member nor the club knows how much of
a refund is any, the member will receive. Of the fee paid, at
least $6,000 would be taxable (i.e., the portion to be retained
by the club as a transfer fee).

However, to rule on the taxability of the balance of the
initiation fee paid, I will need to review additional
documentation, i.e., the bylaws of the Golf Club, the membership
contract, etc. You may edit out the name of the club if you wish
for the club to remain anonymous.

Opinion expressed are based on the facts presented. Other facts
though similar may provide a different result.

If you have other questions or need more information, you may
call 512/463-4600, or 1-800-252-5555 from outside Austin. You
may write to Tax Administration Division.

Sincerely,

Gilbert Zamora
Tax Administration Division