Are Clubs Overlooking A Technology Advance For Club Reciprocals?

By Mitchell L. Stump, CPA

This author is accustomed writing about tax issues specific to clubs.  While analyzing the tax ramifications of club transactions, other club issues invariably come to light and should be written about.  Thus, it is time to address an accounting issue that I became a part of this past fall.  Is there a better way to handle club reciprocal accounting? 

Club reciprocal arrangements come in a variety of sizes and shapes with no two clubs having the same opinion on promoting them.  Many clubs claim that they have a policy of not entering into reciprocal arrangements.  Some clubs pursue reciprocals on a limited basis, while others welcome the arrangements gladly.  This article will attempt to address a potential technology breakthrough to cost effectively account for all types of reciprocal arrangements if a club chooses to accept them.

Formal Reciprocals

There are clubs that enter into formal reciprocal arrangements with a limited list of clubs.  The reason for establishing a reciprocal arrangement with another club is most often as a convenience to club members.  For example in Florida, especially during the summer months, clubs engage in extensive renovation projects, which inconvenience their year-round resident members.  As a convenience to those club members, a formal reciprocal arrangement may be entered into, allowing members another private club to frequent for a short period of time until their home club is once again available.  Yacht clubs have historically had reciprocal arrangements with other yacht clubs in their region, again as a convenience to the existing membership, while enjoying their sport.  Club Corp of America has used reciprocals as an effective marketing tool for their managed clubs, making other clubs in the organization around the country, available to a member when out of town.  International Club Network may be the latest entry into the reciprocal arrangement, attempting to enhance the value of membership in a private club.

The tax consequences regarding reciprocals are relatively simple to understand.  The income received from a person that is not a member of your club should be recorded as nonmember income, according to the IRS's interpretation.  The accounting departments responsibility regarding formal reciprocal arrangements is that they must maintain a list of reciprocal clubs and the reciprocal club's member names using the host club.  The accounting departments on both sides of the reciprocal transaction must deal with this added paper work to account for both their member and nonmember activities.  More will be said later about the accounting dilemma reciprocals can present.

Informal "Accommodation" Reciprocals

As this author found out this past fall, there is often an informal reciprocal arrangement between private clubs across the country.  These informal reciprocal arrangements may be better defined as "accommodation" arrangements.  If an honest looking person is visiting a private club in a city away from their home club, it is often possible for charges to be made at the host club, asking that club to please bill their home club.

The tax issue for this informal "accommodation" reciprocal is the same as that of formal reciprocal arrangements.  The income is to be classified as nonmember income and should be recorded as such.  The accounting for these accommodation arrangements could become an accounting headache for the respective accounting departments.

The Accounting Issue

The accounting department of a host club of a formal reciprocal arrangement is relatively assured of a relatively accurate list of visiting club member names and respective club affiliations (although it has been reported that member lists do change at a rapid pace).  Because formal reciprocal arrangements are generally documented in writing, the host and home club accounting departments are expecting the visiting club member charges and set up procedures for gathering the necessary information to bill and collect fees for the transactions.  Upon talking to a number of club controllers, handling reciprocals is found to be a time consuming, but is deemed just part of the daily routine.  I did not find one controller that would venture to place a dollar cost on this portion of their departments' responsibility.  As you would expect, it was noted that if a club were on the receiving end of the transaction, it often helped increase the bottom line and cash flow for the club on the receiving end.

The accounting department's responsibilities, due to accepting a charge from a visiting club member as an "accommodation", become more cumbersome.  Below is a summary of an actual transaction that took place in November 2000:

• A private club member from Florida visits a private club in Texas.
• The visiting club member wants to charge breakfast, lunch and drinks to his account at his home club in Florida.
• The dining room manager is asked if this was possible and the "accommodating" answer was yes.
• Without the ability to confirm any information with his accounting department, since it was a Saturday outing, the host club without question accepted the charge.
• It is assumed that on Monday morning, the host club controller found that an "accommodation" charge was made at the host club and obviously had to take the following steps over the next few days.  Search for the "accommodation" club members home club mailing address, or make a telephone call to confirm that the member existed.  Set up an account for this one time club transaction.  Issue an invoice to bill for the charges incurred, and hope that the visiting club member would pay the charges.
• Three weeks later, the visitor's home club in Florida received an invoice from an unknown club in Texas for charges by one of its members.  The home club of this member had to set up a new vendor name to record the payable and proceeded to charge the club member's account.  The controller noted that the person charging in Texas was this author, shook her head, and did not challenge the transaction as being anything other than a legitimate charge.
• The accounting departments of both clubs are obviously in the business of recording member transactions and apparently do not become vocal about the administrative time involved to handle one more unusual transaction.  I would suggest that your analysis of this transaction continue and consider some of the additional time and efforts involved.  Who reviews paid invoices and asks questions about unusual transaction?  Who approves the payment of invoices and what questions do they ask about unusual transactions?  What happens if the host club controller cannot easily find the visiting club members' home club?  What if there are three clubs with the same or similar name in the country, state or region?  What if the charge is challenged?  The list of potential issues can go on and on and on.

A Possible Solution In Technology

If the above scenario sounds familiar, or if a club is looking to streamline these types of transactions, there could be a solution being offered by way of technology.  What if there were a way to immediately confirm the existence and location of a visitors home club, the visiting club members' name and account number and even a way to charge the home club over the Internet immediately?  Would it be worth it to seek such an alternative way to conduct business?

Many clubs will immediately pass on this idea, as this author initially did, believing that reciprocals, either formal or "accommodation", are not that big of an accounting problem.  Some clubs will shy away from this solution from a 501(c)(7) tax standpoint, being concerned that they should not be formalizing the receiving reciprocal income due to their nonmember income limitations.  Others will be concerned about their privacy issues and conclude not accept charges from individuals other than their own club members.  The fact of the matter is that the transactions are taking place around the country now on a somewhat regular basis and must be recorded accordingly. 

There may be a number of companies offering solutions to this accounting issue or are giving consideration to developing something.  I had the opportunity to visit with one such company named RECIPNET.  Not intending to endorse one company over another, it was RECIPNET that convinced this author these transactions are occurring on regularly and that the accounting for reciprocals can be so troublesome.  Once I became a party to the transaction, it was clear that a lot of time and paper work was necessary for my simple transaction.  It is my belief that this technology deserves further review by clubs.  Clubs should evaluate their policy regarding formal reciprocals and "accommodation" arrangements, determining whether they have a place in their club.  If reciprocals are going to be allowed, clubs should search for viable solutions to the accounting for these transactions provided by technology. 

Finding a better way to do business is something we can all benefit from.  This author learned two important things in researching this issue.  The first was a discovery of another technology advance to improve the flow and timeliness of accounting information.  The second lesson learned was to keep his big mouth shut about picking up the tab when visiting a club away from his home club.  The accounting problem would have been eliminated if he had only let someone else pick up the tab.

Mitchell L. Stump, CPA, author of Club Tax Book, An Accumulation Of Tax Issues Specific To Clubs, is the recipient of the "2000 Outstanding Article Submission" and second place finisher in the "2000 Golf Tax Consultant of the Year" awards by BoardRoom Magazine.  Clubs are advised to maintain their annual subscription to Club Tax Book for the latest developments in tax law as it applies to clubs.