Golf membership fees are refundable deposits.

In CCA 200245010, the Serviceheld that golf club membership fees were refundable deposits and, thus, not includible in income in the year of receipt.

In the ruling, a taxpayer owns and manages public and private golf courses and collects a one-time flat membership fee from each new member, paid in addition to monthly fees and other dues. According to the membership contract, the club promises to pay to the member--on receipt of the full amount of the initial membership fee and approval of the membership application--the original principal amount of the fee, specified in a number of years from the application's approval date. It further states that the club will not refund a membership fee in whole or part if it terminates membership as a result of a violation of club rules and regulations, or if the member voluntarily terminates membership before a specified anniversary date.

Definition of Gross Income

Sec. 61 defines gross income as all income from whatever source derived. Regs. Sec. 1.61-1(a) provides that gross income includes income realized in any form, whether in money, property or services. According to Glenshaw Glass, 348 US 426 (1955), gross income also encompasses "an undeniable accession to wealth, clearly realized, over which a taxpayer has complete dominion." In Indianapolis Power & Light, 493 US 203 (1990) (IPL), a taxpayer did not have, in general, an accession to wealth, nor complete dominion over an item received subject to a repayment obligation (e.g., a refundable deposit or loan). However, a financial arrangement that purportedly requires repayment may actually serve to compensate the recipient in advance for services, goods or both.

In IPL, customers with suspect credit paid deposits to a utility company to secure future payment of electric bills. The company was obligated to refund the deposit once the customer either terminated service or proved its creditworthiness. Although the money could eventually be used to pay for electricity by virtue of customer default or choice, the customer was not obligated to purchase any electricity at the time of the deposit. In considering the tax treatment of deposits, the Supreme Court stated:

Whether these payments constitute income when received, however, depends on the parties' rights and obligations at the time the payments are made ... Whether these customer deposits are the economic equivalents of advance payments, and therefore taxable upon receipt, must be determined by examining the relationship between the parties at the time of the deposit. The individual who makes an advance payment retains no right to insist upon the return of the funds; so long as the recipient fulfills the term of the bargain, the money is its to keep. The customer who submits a deposit to the [taxpayer] ... retains the right to insist upon repayment ... and the taxpayer therefore acquires no unfettered "dominion" over the money at the time of receipt.

"The key," wrote the Supreme Court in IPL, "is whether the taxpayer has some guarantee that he will be allowed to keep the money." The Court ultimately held that the utility customers' deposits were not advance payments, because the customers were under no obligation to purchase goods or services, and their behavior controlled the refund amounts. Thus, the customers' deposits were not income taxable to the utility.

Conclusion

The Service held in CCA 200245010 that the membership fees were refundable deposits not includible in income in the year of receipt. The taxpayer received an initial membership fee, without any guarantee that it would be allowed to keep the money, within the meaning of IPL.

FROM SAMANTHA TIMMONS, WASHINGTON, DC