Rev. Rul. 60-315

Advice has been requested concerning the applicability of the exemption from the club dues tax, provided by section 4243(b) of the Internal Revenue Code of 1954, to amounts paid by members of a country club under the circumstances described below.

In January 1960, the members of a country club authorized the club's boards of directors to contract for the construction of certain additions to the club buildings and to purchase the furniture and equipment necessary for the new building additions. To raise the funds necessary to pay for these capital improvements, the club has provided that, beginning in January 1960, (1) each new member will be required to pay, in addition to the usual initiation fee, a specified amount to be used only for these improvements and (2) there will be made against each club member a monthly assessment in a specified amount, in addition to the regular membership dues, to be used only for these improvements.

A period of several years will be required for the funds obtained in this manner to equal the total amount necessary to cover the cost of the capital improvements. However, in order to proceed expeditiously with the planned improvements, arrangements have been made to pay the costs of the building construction and furnishings acquisition, as they arise, from funds obtained from two sources, as follows: (1) a reserve fund accumulated by the club in prior years and (2) a loan obtained from a bank. The members' payments described above will then be used to repay the bank loan and to restore the reserve fund to its former amount.

The specific question is whether the exemption provided by section 4243(b) of the Code applies to the amounts which are paid by the club members for this repayment and restoration.

Section 4241(a)(1) of the Code imposes a tax upon any amount paid as dues or membership fees to any social, athletic, or sporting club or organization, if the dues or fees of an active resident annual member are in excess of ten dollars per year. Section 4241(a)(2) of the Code imposes a tax upon any amount paid as initiation fees to such a club or organization, if such fees amount to more than ten dollars, or if the dues or membership fees, not including initiation fees, of an active resident annual member are in excess of ten dollars per year.

Section 4243(b) of the Code, added by the Excise Tax Technical Changes Act of 1958, Public Law 85-859, C.B. 1958-3, 92, effective January 1, 1959, as amended by Public Law 86-344, C.B. 1959-2, 700, effective November 1, 1959, provides as follows:

PAYMENTS FOR CAPITAL IMPROVEMENTS.-Notwithstanding any other provision of this part, there shall be exempted from the provisions of section 4241 any amount paid as dues or membership fees or as initiation fees-

(1) for the construction or reconstruction of any social, athletic, or sporting facility, or

(2) For the construction or reconstruction of any capital addition to, or capital improvement of, any such facility, or

(3) for furnishings or fixtures (including installation charges) for any such facility, to the extent that such furnishings or fixtures are required, by reason of the construction or reconstruction described in paragraph (1) or (2), for the use of such facility upon completion of such construction or reconstruction; except that, in the case of any such amount which is not expended for such construction, reconstruction, furnishings or fixtures (including installation charges) within three years after the date of payment of such amount, the exemption provided by this subsection shall cease to apply upon the expiration of such three-year period, and the club or organization, rather than the person who made such payment, shall be liable for any tax imposed by section 4241 in respect of such payment, as if such payment had been made on the first day following the expiration of such three-year period.

In general, this exemption applies to all amounts paid by club members on and after November 1, 1959, for the construction or reconstruction of any social, athletic, or sporting facility (or any capital addition to, or capital improvement of, any such facility) begun on or after January 1, 1959, or for furnishing and fixtures required for the use of such facility upon the completion of such construction or reconstruction begun on or after that date, provided those amounts are expended for such pruposes within three years after the date of payment by the members of the club.

Since in the instant case the construction was not begun and the amounts involved in this ruling were not paid by members until 1960, the controlling factor is the purpose for which the original funds were expended. Where funds obtained by means of the bank loan or from the club's reserve fund have been expended, as in this case, for capital improvements of the type covered by section 4243(b) of the Code, the amounts paid by the club members for the repayment of the bank loan or for the restoration of the reserve fund are considered as being paid for those capital improvements.

Accordingly, it is held that under the circumstances described the exemption provided by section 4243(b) of the Code applies to the amounts paid by club members for the repayment of the bank loan, including the interest thereon, or for the resoration of the club's reserve fund. This conclusion applies to the specified amounts required to be paid by new members as well as the special monthly assessments against all members. However, the exemption would not apply to any portion of such payments used for the repayment or restoration of funds used for the payment of current operating expenses or for the purchase of land rather than for the financing of the capital improvements. Therefore, to assure the proper application of the exemption, the club must maintain adequate records to show the actual disposition of the funds being repaid or restored.