Country Club GiftsDoug H. Moy
June 27, 2008 — 2,271 views
Gifts that qualify for the gift tax annual exclusion (currently, $12,000 per donee per calendar year) are nontaxable gifts. A private club, doing business as an IRC Section 501(c)(7) organization exempt from federal income taxation, operated a clubhouse, restaurant, swimming pool and golf course for the exclusive use of its members. Apparently, taxpayers (presumably, members of the club), along with others, wanted to donate funds to the club to be used exclusively for the immediate construction of a new clubhouse. In this regard, taxpayers wanted the IRS to rule that (1) a pro rata portion of a taxpayer’s contribution would be a gift by the taxpayer to each of the other members of the club under IRC Section 2511; and (2) taxpayers would be entitled to as many gift tax annual exclusions under IRC Section 2503(b) as there are members of the club.
In its ruling, the IRS acknowledged that the club was not a private business corporation dealing with the public on behalf of its shareholders. The club did not provide goods and services to the general public; rather, it existed exclusively for the benefit of its member-owners. The facilities and services provided by the club were equally available to the entire membership as would be the new clubhouse. Moreover, each club member held an equal number of shares of transferable corporate stock "subject to the approval of the Board of Directors." As of the date of the Service’s ruling, the Board of Directors had not established any rules or restrictions on transferability of members’ shares. If the Club were to liquidate, the then current members of the Club would share equally in the proceeds by reason of their equal stockholdings.
Thus, with reference to issue (1), the IRS concluded that taxpayer’s gratuitous transfer of property to the club would be a pro rata direct gift to each of the other shareholders of the club. With respect to issue (2), because the entire use, benefit and enjoyment of the transferred property would be immediately available for the benefit of the shareholders, IRS further concluded that the transfers by taxpayers would be gifts of a present interest in such property. Thus, each gift to a shareholder-donee qualified for the gift tax annual exclusion under IRC Section 2503(b). It is interesting to observe that the Service’s ruling was predicated on the assumption that the property transferred by taxpayers would be used exclusively for the immediate construction of the new clubhouse. [Ltr. Rul. 9104024 (Oct. 29, 1990); Doug H. Moy, A Practitioner’s Guide to Estate Planning: Guidance and Planning Strategies, 2 vols., Aspen Publishers, Inc., New York, NY 2002, § 23.05[C], at 23-31; Cf. Rev. Rul. 71-443, 1971-2 C.B. 337; Ltr. Rul. 9818042 (Jan. 28, 1998) (Club was organized as a nonstock corporation and does not issue stock to its members. Accordingly, the IRS concluded that taxpayer’s transfer to the Club would be a gift to the Club as a single entity.)]
In a similar private golf club case, the IRS held just the opposite of its position in Letter Ruling 9104024. In this case, Article XVII, Section 3, of the Club bylaws provides, in part, that gifts of cash and liquidated gifts of assets may be used by the Club only for capital improvements, replacement of capital items or the repayment of debt incurred for capital projects. Gifts may not be used for Club operations. The Club had incurred indebtedness to fund capital improvements, such as a new club house, locker rooms, dining facilities and a fitness center. The Club was also planning additional capital improvement projects, such as an irrigation system for the golf course.
The IRS acknowledged that (1) Club qualified as an organization eligible for tax exempt status under IRC Section 501(c)(7); and (2) Club is a nonprofit organization, and none of the earnings of Club inure to the benefit of any individual. In view of the nature and operation of Club, including the fact that Club is operated solely for nonprofitable purposes (the recreation, enjoyment, education and entertainment of its members) and not for the economic benefit of its members, the IRS concluded that the Club came within the exception to the general rule of Treasury Regulation Section 25.2511-1(h)(1) "for charitable, public, political or similar organizations." Accordingly, the IRS concluded that taxpayer’s transfer to the Club was a gift to the Club as a single entity—not to each of the club members. Further, since the Club, the donee of the gift, received the immediate and unrestricted use of taxpayer’s gift, the gift constituted a gift of a present interest; and, to the extent the value of the gift did not exceed the gift tax annual exclusion under IRC Section 2503(b), it qualified for the gift tax annual exclusion [Ltr. Rul. 200608011 (Nov. 15, 2005)].
In Letter Ruling 9104024, each Club member held an equal number of transferable shares of corporate stock; and, if the Club were to liquidate, the then current members of the Club would share equally in the proceeds by reason of their equal stockholdings. In Letter Ruling 9818042, the Club was organized as a nonstock corporation and did not issue stock to its members. Similarly, in Letter Ruling 200608011, it may fairly be stated that, since the members of the Club did not have an economic interest in the Club in the form of stock ownership, gifts made to the Club would be to the Club as a single entity and not to its individual members. Thus, when a taxpayer contemplates making gifts to a private country club, if the donor wants such gifts to qualify as present interest gifts to each member of the Club, reference to the Club’s by-laws should be made to determine the "ownership" status of the Club members.
Copyright © 2008 by Doug H. Moy. All rights reserved
Doug H. Moy
Doug H. Moy is a nationally recognized author, consulting specialist, seminar instructor and educator. He has an undergraduate degree from Willamette University and a Masters degree from Washington State University. Since 1979, Mr. Moy has consulted to attorneys, tax practitioners and their clients, as well as assisted practitioners representing clients before the IRS Conference of Right and Appeals Division and Settlement Conference Negotiations. He is noted for his ability to communicate his unparalleled knowledge and experience to practitioners at all levels in his field of expertise; namely, estate/gift taxation and planning, with special expertise in living trusts; community property; lottery prize winnings; structured settlement trusts; extricating clients from abusive trust tax shelters; designing effective estate plans; and preparation of Form 706 Estate Tax Returns and 709 Gift Tax Returns. He offers particular assistance and exceptional skill designing creative, practical solutions to challenging and difficult estate planning situations.