SC Administrative Law Court Decisions

This matter is before me pursuant to the request of the Petitioner, Savannah Lakes Village Club, Inc. (Taxpayer), for a contested case hearing arising from a Final Agency Determination issued by the Respondent, South Carolina Department of Revenue (Department), on May 5, 1997. The Department seeks to impose an admissions tax upon a portion of the membership assessments paid by members of the Taxpayer. The imposition of this tax is based upon the Department's determination that Taxpayer is not operating as a nonprofit corporation, thus making the monthly dues subject to admissions tax. Taxpayer asserts that it is a nonprofit corporation and is thus exempt from the imposition of admissions tax pursuant to S.C. Code Ann. § 12-21-2420 (1976 & Supp. 1996). A hearing in this matter was held before the Administrative Law Judge Division on September 29, 1997. I find that Taxpayer is not operating as a nonprofit corporation and that it is thus subject to the imposition of admissions tax in the amount of $26,000.43, plus penalties and interest.

Having observed the witnesses and exhibits presented at the hearing and closely passed upon their credibility, taking into consideration the burden of persuasion by the parties, I make the following findings of fact by a preponderance of the evidence:

1. Legal notice of the time, date, place and subject matter of the hearing was given to the Petitioner and the Respondent.

2. Savannah Lakes Village, a residential retirement and recreational community located adjacent to the J. Strom Thurmond Reservoir in McCormick County, was undertaken in 1987 as a joint public-private partnership between the Savannah Valley Authority and Cooper Communities, Inc., of Bentonville, Arkansas (Cooper).

3. The development was undertaken pursuant to a 10-volume master plan for Savannah Lakes Village developed by Cooper. The master plan provided that Savannah Lakes Village would be governed by a nonprofit organization known as Savannah Lakes Village Club, Inc. (Taxpayer), a property owners' association for residents of Savannah Lakes Village.

4. On December 16, 1987, the Taxpayer was incorporated as a nonprofit corporation by certificate issued by the office of the Secretary of State of South Carolina. Taxpayer's Certificate of Incorporation states that the corporation is "not for profit" and that the corporation "does not contemplate pecuniary gain or profit, direct or indirect, to its members."

5. Incorporation as a nonprofit corporation is not conclusive evidence that the corporation is nonprofit. The South Carolina Secretary of State's office performs no investigation to determine whether a nonprofit status is appropriate.

6. Taxpayer's Certificate of Incorporation provides for four types of club membership: general, associate, developer, and Coopershare.

a. General memberships are for persons who own property within Savannah Lakes Village.

b. Associate memberships do not require lot ownership. Cooper sells associate memberships to the general public as a marketing tool to sell lots within Savannah Lakes Village. Associate members may apply the membership fee paid to Cooper to subsequent purchase of a lot. Cooper may sell 1,000 associate memberships.

c. Cooper holds a developer membership for each unsold lot remaining in its inventory, and remains a member of Taxpayer for as long as it is record owner of any lot within

Savannah Lakes. Pursuant to this membership, Cooper may also issue membership guest cards to assist in the sale and development of lots.

d. Coopershare memberships were never activated.

7. For all types of memberships, a membership fee is required to be paid to Cooper. The membership fee was initially $4,000 and was later raised to $5,000.

8. Deeds to property in Savannah Lakes Village originally included the membership fee in the purchase price of the lot. However, pursuant to a decision of the South Carolina Tax Commission involving the value of the lots for property tax assessment purposes, later deeds separately stated the membership fee.

9. If an associate member later purchases a lot, the membership fee previously paid is credited to the purchase price of the lot, which already included the membership fee. Cooper has the right to terminate an associate membership for failure to pay the purchase price for such membership, and can resell it without payment to the Taxpayer.

10. At the conclusion of 15 years or upon the completion of 4,000 living units, whichever is later, Taxpayer's members can vote on the issue of continuing the associate membership category. If it votes to discontinue such memberships, Taxpayer must repurchase all associate memberships from the owners at 100% of the purchase price originally paid to Cooper.

11. General and associate members pay monthly dues to Taxpayer. Cooper does not pay monthly dues to Taxpayer for its developer memberships or unsold associate memberships. Cooper does pay monthly dues on lots that were financed by it and subsequently repossessed.

12. The monthly dues paid by members to the Taxpayer are for the right to use and enjoy the clubhouse, pro shop, and golf course, and for the maintenance of all common property and road rights of way.

13. Members of the Taxpayer who fail to pay their monthly dues are prohibited from using the clubhouse, pro shop, and golf course. Other sanctions may also be imposed.

14. The Department conducted an admissions tax audit of the Taxpayer for the period March 1991 through May 1993.

15. During the period of this audit, the affairs of Taxpayer were governed by a Board of Directors composed of five persons. Of the five board members, one was a resident of Savannah Lakes Village, while the other four were employees of Cooper.

16. The Board of Directors is elected by the membership of Taxpayer. In any matters in which the membership is entitled to vote, Cooper is entitled to two votes for each lot, living unit, or associate membership in which it holds an interest, while general and associate members are entitled to only one vote. Only general or associate members who have paid Cooper in full for their lot or associate membership are entitled to vote. Under this scheme, Cooper's control over the Board of Directors will decrease as more lots are sold.

17. Savannah Lakes Village is composed of 5,100 individual lots on 4,000 acres. In addition, there are 1,000 potential associate memberships. Thus, there are 6,100 possible memberships. The number of memberships sold (associate and general) for the periods under audit are as follows:

December 1991 December 1992 May 1993

1,710 2,111 2,160

The remaining memberships (4,390 in December 1991; 3,989 in December 1992; and 3,940 in May 1993) are held by Cooper.

18. Taxpayer currently collects and remits admissions tax on greens fees.

19. The Department assessed dues paid for the use and enjoyment of the golf course and country club. Since the membership dues paid to Taxpayer also provide funding for nontaxable amenities, the Department calculated the portion subject to admissions tax in the following manner:

a. The Taxpayer provided cash flow statements for the years 1991 through 1993. The cash flow statements indicated no allocation of monthly dues to the various amenities. Taxpayer identified operating expenses on the cash flow statements attributable to the golf course and country club.

b. For each year under audit, the Department developed a percentage of the operating expenses attributable to the golf course and country club by dividing the operating expenses identified by Taxpayer as being attributable to the golf course and country club by the total amount of operating expenses of the Taxpayer.

c. The total amount of dues received for each respective year was then reduced by the applicable admissions tax. The percentage described above was then applied to this total to determine the portion of the dues paid for the use and enjoyment of the golf course and country club.

20. The Department has used this method of apportioning taxable membership dues consistently in other cases.

1. The Administrative Law Judge Division has jurisdiction to hear this matter pursuant to S.C. Code Ann. § 12-60-460 (Supp. 1997).

2. S.C. Code Ann. § 12-21-2420 (1976 & Supp. 1996) imposes a tax upon paid admissions to places of amusement. Section 12-21-2420 (4) (Supp. 1996) exempts from admissions tax ". . . any charge made to any member of a nonprofit organization or corporation for the use of the facilities of the organization or corporation of which he is a member."

3. Tax exemption statutes are strictly construed against the taxpayer. Owen Industrial Products, Inc. v. Sharpe, 274 S.C. 193, 262 S.E.2d 33 (1980); Hollingsworth on Wheels, Inc. v. Greenville County Treasurer, 276 S.C. 314, 278 S.E.2d 340 (1981). This rule of strict construction means that constitutional and statutory language will not be strained or liberally construed in the taxpayer's favor. York County Fair Assoc. v. S. C. Tax Comm'n, 249 S.C. 337, 154 S.E.2d 361 (1967).

4. The issue for determination in this case is whether Taxpayer is a nonprofit corporation not subject to admissions tax. The Department asserts that Cooper profits from the operation of Taxpayer and maintains control over its operations. Taxpayer argues that it was properly incorporated as a nonprofit corporation and that there is no evidence that Cooper exercised control over its operations. In order to determine whether a corporation is nonprofit, one must examine both the operational history and the organizational purposes of the corporation. Columbia Country Club

v. Livingston, 252 S.C. 490, 167 S.E.2d 300 (1969). In that case, the South Carolina Supreme Court noted:

The charter or other instrument by which an organization comes into being is not conclusive on the issue of the purposes for which it is organized, and the court may consider extrinsic evidence on the issue . . . . The purpose for which a corporation has been organized is a question of fact, to be determined from all the evidence, including statements in the charter and evidence concerning the circumstances surrounding its organization, the purposes and intentions of the incorporators, and the activities of the corporation and of any predecessor organization.

252 S.C. at 495, 167 S.E.2d at 303, quoting Annot., 69 A.L.R.2d 871, 879.

. The test to determine whether a corporation is for profit or nonprofit has also been described as follows:

Generally, the test to be applied to determine whether a given corporation is organized for profit is whether dividends or other pecuniary benefits are contemplated to be paid to its members. However, according to some cases, "profit" does not necessarily mean a direct return by way of dividends, interest, capital account, or salaries. For example, profit may be dispensed to members of a corporation in the form of a saving of expense or the obtaining of a service at a lower price than that which would otherwise be paid for . . . .

18 Am.Jur.2d Corporations § 32 (1985)(emphasis added). Accordingly, if Cooper, as a member of the Taxpayer, is receiving a benefit from Taxpayer, as determined from an examination of Taxpayer's organizational purpose and operational history, then Taxpayer is not a nonprofit corporation and must pay admissions tax.

5. The Taxpayer argues that it meets the criteria for classification as a nonprofit corporation, in that its charter and resolutions prohibit distribution of profits to members. In support of its position, the Taxpayer cites a South Carolina Attorney General's opinion which held that a country club is nonprofit if its charter prohibits distribution of profits to its members in the form of dividends, and if its profits are actually used for the purpose of providing, improving, and developing the club's facilities for the benefit and enjoyment of its membership. S.C. Op. Att'y Gen. No. 1900 (September 2, 1965). However, this opinion predates the South Carolina Supreme Court's opinion in Columbia Country Club v. Livingston, supra, which established a broader test for determining whether a corporation is nonprofit, and therefore is of limited use in deciding this matter.

6. A determination of the organizational purpose of the Taxpayer may be made by examining its Articles of Incorporation, By-Laws, and Restrictive Covenants. Paragraph Five of the Resolutions attached to the Certificate of Incorporation states that the Taxpayer is a "not for profit" corporation. Paragraph Twelve of the attachments further provides:

No part of the net earnings of the Corporation shall inure to the benefit of, or be distributable to, its members, trustees, officers, or other private persons, except that the Corporation shall be authorized and empowered to pay reasonable compensation for services rendered and to make payments and distributions in furtherance of the purposes set forth in Article Sixth . . . .

Based upon the above recitations, the corporation superficially appears to be nonprofit. However, other provisions within the Articles of Incorporation, By-Laws, and Restrictive Covenants reflect that Cooper controls the Taxpayer and that benefits are inuring to Cooper. Such provisions include :

a. With respect to membership voting rights, Cooper has two (2) votes for every lot or living unit it holds or has an interest in, while all other members (general and associate) have only one (1) vote.

b. Cooper is a member of the Taxpayer until it no longer has an interest in Savannah Lakes. While all general and associate members are required to pay monthly dues, Cooper is not required to do so except with respect to lots sold by it which are subsequently repossessed. Although it pays no dues, Cooper is entitled to use the club facilities and to bring guests.

c. Cooper can market 1,000 associate memberships as a marketing tool to sell lots in Savannah Lakes Village. Cooper receives the full purchase price of these memberships. After 15 years or the completion of 4,000 structures, associate memberships may be nullified by vote of the membership. If the associate membership classification is discontinued, Taxpayer must buy these memberships back at 100% of the price originally paid to Cooper.

7. The operational history of the Taxpayer likewise indicates that Cooper, as a member, is profiting from and maintains complete control over Taxpayer's operations. First, Cooper had full control of the Taxpayer's Board of Directors during the audit period. Four of the five board members were employees of Cooper who were appointed by Cooper. Second, the membership fee of $4,000 or $5,000 is paid directly to Cooper rather than to the Taxpayer. Finally, of 6,100 possible memberships, only 2,160 had been sold by May of 1993, leaving Cooper the holder of the remaining 3,940 memberships. This fact, coupled with the provision giving Cooper two votes for each membership it holds compared to one vote for other property owners and associate members (7,880 votes for Cooper versus 2,160 for other members in May 1993), gave Cooper effective control of the affairs of the Taxpayer for the entire audit period.

8. From all the evidence, it is apparent that Cooper has derived a benefit from the operations of the Taxpayer in the form of a saving of expense. It is able to use the facilities of the Taxpayer to market the Savannah Lakes Village without paying membership fees or monthly dues. It is further evident that Cooper maintains complete control over the composition of the Taxpayer's Board of Directors. Accordingly, I conclude that the Taxpayer is not a nonprofit corporation and is thus not entitled to the exemption from admissions tax provided in S.C. Code Ann. § 12-21-2420(4) (Supp. 1996). ⁽¹⁾

Based upon the foregoing Findings of Fact and Conclusions of Law, it is hereby:

ORDERED that the Department may assess admissions tax against the Taxpayer in the amount of $26,000.43, with interest and penalties. Payment of the full amount due shall be made within ten (10) days of the date of this Final Decision.

AND IT IS SO ORDERED.

___________________________________

Ralph King Anderson, III

Administrative Law Judge

Columbia, South Carolina

March 11, 1998

1. The Department also contends that Taxpayer is a for-profit corporation because it files its corporate tax returns on Form 1120 (the form used by for-profit corporations) rather than Form 1120H (the "nonprofit corporation" form). However, the Department's own witnesses confirmed that the choice of a tax form is simply a matter of accounting practice and that Form 1120 must be filed when a taxpayer wishes to preserve operating loss carry-overs to be utilized in future years (as is the case here). Therefore, this argument is of no consequence in determining Taxpayer's status. See McCall v. Finley, 294 S.C. 1, 4, 362 S.E.2d 26, 28 (Ct. App. 1987) ("[W]hatever doesn't make any difference, doesn't matter.")