club_cafe: Re: Time Based Accounting

Joe D'Agostino on

We always tried to avoid having new members buy in with a large lump sum.

I would think buying in with equal monthly funding would avoid the severe problem of buying
a large amount of unrealized gain and put the new member at the same disadvantage of all the current partners.
Do you agree?

Joe D'Agostino

----- Original Message ----
From: Rip West <ripwest@comcast.net>
To: The Club Cafe <club_cafe@bivio.com>
Sent: Monday, January 29, 2007 5:53:59 PM
Subject: Re: club_cafe: Re: Time Based Accounting

And not to sound repetitive (and a novice), but will the Bivio service allocate these unrealized gains properly once it is realized? ie. the new member who bought into the fund on June 30 does not get saddled with previous unrealized gains, but only from that point on.

Yes, bivio will allocate these unrealized gains 'properly', but probably not to your liking. Remember that the club had $5,000 of unrealized gains on 6/30 when the new member joined. On 7/1, the club sells the stock and realizes $5,000 of gains. The new member, being a member at the time the gain is 'realized' [as opposed to earned], will be taxed on a portion of that gain. This is similar to the situation of buying into mutual funds. You buy in on the basis of the value of appreciated stocks, and have to report a share when those stocks are sold. In a mutual fund, the effect will be spread out over many more people, so the effect is not so severe.

There really is no way to get around the problem. Time-based or Snapshot method will yield the same, seemingly unfair result. Eventually, the member will recoop, since his basis will go up by the amount of the gain, and he will have an offsetting loss when he withdraws. I have always thought that to be of small comfort, since the day of withdrawal could be years down the line, and, in the meantime, the member has reported more income than he has realized.

Rip West
Saint Paul, MN

Rip West on

Joe,

I would think buying in with equal monthly funding would avoid the severe problem of buying
a large amount of unrealized gain and put the new member at the same disadvantage of all the current partners.
Do you agree?

Rip West
Saint Paul, MN

Gene Rooks on

Some of these unfavorable scenarios that have been offered are extremely unlikely to come about in the first place. In my opinion ;-) using the time based choice is likely to result in the most fair outcome in most situations, and I would definitely recommend it over the 'snapshot' method, which would also penalize members joining late in the year with a larger initial investment.

As for seeking to enroll new members who could come up with a large amount to put them on a par with longtime members, that is not an option that is going to help longstanding clubs gain new members, and it puts those new members at a disadvantage because their funds buy units at a much higher price than the others bought over time, when values were much lower. Equality of membership long time is neither possible, nor necessary.

Members joining a long standing club with a small initial investment aren't going to have a very big percentage of any huge capital gain made soon after they joined, anyhow, so that argument doesn't have legs. Gene Rooks, Orlando

Rip West on

Some of these unfavorable scenarios that have been offered are extremely unlikely to come about in the first place.

I disagree. The fact remains that when a person buys in, that person is taking on a share of unrealized gains that were earned before that person joined. Whether that factor is going to be material or not will be determined by the facts in each particular case.

In my opinion ;-) using the time based choice is likely to result in the most fair outcome in most situations, and I would definitely recommend it over the 'snapshot' method, which would also penalize members joining late in the year with a larger initial investment

Absolutely!!!

I'm not sure that there is an argument, at least not from me, and the above statement is true, since it stressed 'soon after they join'. However, when a member joins a club, even for a miminum amount, and stays with a club for a period of time, he/she could have taxable income at a later date that was earned before becoming a member. That amount could be material or not, depending on the circumstances.

Rip West
Saint Paul, MN

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