But what does Amex do if you don't pay the annual fees?
They charge it to your card on each anniversary. If, within the 30-day grace period, you don’t want to pay it and you cancel card, then you have no use of your card. Thus, if you don’t pay the annual fee, you have no use of your card. (And it doesn’t matter that card cancellation is, we might say, voluntary). In effect, you have to pay the annual fee to continue the membership (or start the membership in the case of Year1). This necessarily means the initiation fee isn’t - all by itself - what grants you membership privileges. You can find the agreement here:
https://www.consumerfinance.gov/credit- ... onal-bank/ Note that it refers to the initiation fee as a finance charge.
Right, so it must not matter. The reg. is the reg.
I’m not so sure about that (the first part, about it not mattering). The Reg assumes that an amount is paid to obtain membership. The examples in the Reg, therefore, are predicated on that assumption/understanding. Thus, the Reg examples would not conte
mplate a situation wherein an amount is paid, which, all by itself, doesn’t grant membership privileges.
Yes, including the privilege of paying the annual fee, just like the country club near me.
It’s not a privilege to pay an obligation. It’s the payment of the obligation that grants the privilege. Thus, Year1 initiation fee of $10k PLUS Year1 annual fee gives you the benefits and privileges that the card offers.
When I buy real estate and pay for it in part with a mortgage loan that requires at least annual payments, the cost of geting that loan is capitalized, even though the lender will take away my property if I don't pay him or her or them or it. Yet I must capitalize that cost.
That’s because you have agreed to a 30-year term up front. Had there been thirty, 1-year agreements (like the AMEX card), that would be different.
And if you capitalize the Amex fee (I say you because I have little doubt that this is really about you, not your firm's client), where do you come down on the amortizable 197 intangible question?
15-year safe harbor amortization for my client.
Wouldn't that be comparable, and wouldn't that huge upfront fee be capitalized?
Could be. If it’s an equity membership, no. If it’s not an equity membership, yes.
I’ll admit when you have a sizeable up-front fee on something, the inclination is to think “long-term benefit.” But upon digging into it, as we are doing here, it seems that line of thinking might be inappropriate, if that big up-front fee is required to be coupled with something else to kick-in the privileges sought. In effect, the big up front fee makes the Year1 cost very high (compared to the other, future years), thereby acting as a deterrent to leave the program (and acting as a mechanism to lock in future revenue for the organization). And if you leave early, you have effectively paid a penalty.