Legal Happenings

May 27, 2005

Repurchase of Memberships Directors Beware

Non-profit clubs often have charter or by-law provisions for repurchase of the memberships of resigned members. The repurchase is sometimes characterized as a full or partial return of equity or refund of initiation fees paid when the member joined the club. Boards of directors should be aware that both the Missouri and Illinois not-for-profit statutory codes impose certain restrictions on repurchase of memberships.

The Missouri code provides that a corporation may purchase its memberships if after the purchase is completed:

1. The corporation would be able to pay its debts as they become due in the usual course of its activities; and
2. The corporation's total assets would at least equal the sum of its total liabilities.

The Illinois code provides that no distribution (repurchase) may be made if, after giving it effect:

1. The corporation would be insolvent; or
2. The net assets of the corporation would be less than zero; or
3. The corporation would be rendered unable to carry on its corporate purposes.

While both state codes include a two-part test (insolvency and net worth), the operation of the two codes is substantially different. By use of the word "and," the Missouri code appears to require that both tests be met; whereas, by use of the word "or," the Illinois code appears to indicate that only one of the three tests need be met.

The Missouri code merely states that the time of measuring the effect of a distribution is "after the purchase is completed;" whereas the Illinois code measures the time as the earlier of (i) the date money or other property is transferred or debt incurred by the corporation or (ii) the date the membership rights of the member cease.

The Illinois code provides that the board of directors may base a determination that a distribution may be made either on financial statements prepared on the basis of accounting practices and principles that are reasonable in the circumstances or on a fair valuation or other method that is reasonable in the circumstances. The Missouri code contains similar language but goes on to make every director who votes for an unlawful distribution personally liable to the corporation for the amount of the distribution that exceeds what could have been distributed without violating the code unless he in good faith relied on competent information.

These codes appear to require the directors of a non-profit corporation to satisfy their respective tests at each time a membership comes up for repurchase. Non-profit clubs should consult with their legal counsel in the event of any questions concerning repurchase of memberships.

August 12, 2003

FCC Issues New Unsolicited Fax Rules:

Prior Written Consent Now Required for Most Faxes Sent to Members and Others

For more information, click here.

July 20, 2004

Missouri Department of Revenue Proposes New Sale Tax Regulation

For more information, click here.

August 12, 2003

FCC Issues New Unsolicited Fax Rules:

Prior Written Consent Now Required for Most Faxes Sent to Members and Others

For more information, click here.

June 17, 2003

Missouri clubs continue to be hit with higher real property tax bills as county assessors strive to find more revenue. Typically assessors will assess country club buildings using a cost less depreciation approach to value. Golf course improvements (greens, tees, bunkers and the like) are typically assessed by the same approach but adjusted according to a nation-wide manual which attempts to grade a golf course according to several listed factors.

The land underlying the buildings and golf course improvements is the one area where assessors are becoming most aggressive, often adopting a position that the land's highest and best use is for residential or commercial development and then using comparable sales data of land sold for development.

In many cases, particularly with income producing properties, the best indicator of value is the income capitalization approach which is rarely used by assessors who do not have available the taxpayer's income and expense data. This approach involves an economic analysis of the property based on its potential to provide future benefits stated in terms of annual net income. The estimated net operating income is then capitalized at a market-based capitalization rate to derive a value for the property.

If a club decides to appeal its property tax valuation, an appraisal is usually necessary to support the club's asserted valuation. A club would be prudent to evaluate its property tax liability and conduct a cost/benefit analysis to determine whether any tax appeal would likely produce a successful result.

With many clubs facing revenue shortfalls and increased expenses, the income capitalization approach may produce a more realistic valuation for property tax purposes.

Source: David L. Welsh, Welsh & Hubble, P.C., 7321 S. Lindbergh Blvd., Suite 400, St. Louis, Missouri 63125, 314-845-2211

Missouri clubs have been in an ongoing battle for several years with county assessors over property taxes - specifically, whether land and improvements are to be classified at the 32% commercial rate or the 19% residential rate. This issue was principally resolved by the Missouri Court of Appeals in the Missouri Bluffs vs. Zimmerman case which ruled that the phrase "land used as a golf course" in the residential classification statute means that only land and improvements necessarily incidental to the operation of a golf course are entitled to the lower residential classification. The Missouri Bluffs decision specifically excluded clubhouses, parking lots, swimming pools and pro shops from the lower residential classification. The court also ruled that the eight factor test in the "private club statute" cannot be used to determine a residential classification of golf course improvements because the improvements are the same as found in a public golf course.

Several clubs are currently in litigation with the St. Louis County Assessor as to whether each club is entitled to an individual evaluation of the eight factors in the "private club statute" to determine whether their land and improvements are entitled to a residential classification.

At this point in time, each club may wish to obtain a list from its assessor showing how each improvement was classified to determine whether an improvement classified as commercial may well be necessarily incidental to operation of a golf course and hence entitled to a residential classification.

2003 is a reassessment year. Whether valuation will be increased significantly is dependant upon each club's property. Of utmost importance, any club desiring to challenge a reassessment by virtue of increased valuation or reclassification must file its appeal to the local Board of Equalization by the third Monday in June.

Source: David L. Welsh, Welsh & Hubble, P.C., 314-845-2211