club_cafe: member withdraw

Rip West on

am familiar with 721, but in this case the penalty is not a capital contribution, it is merely a fee.

The word 'fee' has many connotations. If you mean 'fee' as defined by the bivio accounting program, it would be a capital contribution.

If our dues are $500 a month but due to rules in the operating agreement I am forced to $600 this month, why should I now own a larger percentage of the partnership because I was forced to pay a fee?

You don't own a larger percentage, because your ownership units haven't changed. Your tax basis has increased because you made a contribution to capital.

This extra $100 is money the partnership has generated through operations.

No! Absolutely not! That $100 has been generated through a transaction between the club and one of its members. It certainly has not been generated by operations. What sense does it make to have the offending member report a share of this as 'income'.

The penalties for our club were not designed to be friendly, I guess our point was don't be late on your dues.

That's fine, but has noting to do with the characterization of the item as income or contribution to capital.

I think reporting it to income is the conservative route and would never be argued by the IRS.

No, they will never argue against treating contributions to capital as reportable income. <g>

However, reporting a penalty as a capital contribution that is being allocated equally to all members could have gift tax ramifications if the dollar values were high enough (not that ours are but I know there are some large clubs out there).

In the first place, amounts treated as 'fees' are not allocated equally to all members. Members' values will go up in proportion to ownership. Secondly, I can't visualize a club that would impose a penalty larger than the annual gift exclusion.

I suggest that you take a look at the accounting treatment for 'fees' in bivio, and decide if you really want to show them all as income or rather treat them as the accounting program does - as contributions to capital.

Rip West

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