Rev. Rul. 65-45

The Internal Revenue Service has been requested to determine the applicability of the club dues tax exemption provided by section 4243(b) of the Internal Revenue Code of 1954 with respect to amounts paid as dues to cover various expenditures in connection with a club's facilities.

A club, which qualifies as a social, athletic, or sporting club or organization within the meaning of section 4241 of the Code, owns a large lake which is surrounded by cabins owned by its members. In order to provide ample fishing facilities for the enjoyment of its members, the club periodically restocks the lake with fish. The waters of the lake are contained by a dam, with the fresh water necessary for the propagation of the fish being supplied by means of a ditch some four miles in length. In addition to maintaining the dam and the ditch, clearing the lake of aquatic growths, and providing a picnic area, the club maintains a road around the lake to afford members access to the club facilities and their cabins.

Specifically, the question is whether the exemption applies to amounts paid by the club members to cover the expenditures made in connection with the projects and activities set forth below.

Item 1 .-The routine addition of fill dirt to replace dirt washed on eroded from the face of the dam, the mending of small breaks, and the replacement of defective valves and other mechanical parts. This work is essential to proper maintenance of the dam and is performed periodically as need demands.

Item 2 .-Routine dredging to remove accumulations of silt from the ditch, and the restoring of eroded banks.

Item 3 .-The routine patching of the road surrounding the lake where it has become unserviceable, including regrading of the shoulders of the road where necessary.

Item 4 .-The major overhaul of a bulldozer purchased for and regularly utilized by the club in its general maintenance porgram, but also used extensively in connection with some of the projects referred to herein.

Item 5 .-Purchase of a floating machine designed to pull weeds by th roots from the bottom of the lake and rake them to the shore line.

Item 6 .-Payment of the salary of a man who is regularly employed as caretaker, but whose services are also utilized in some of the projects referred to herein.

Item 7 .-The construction or replacement of a flume for the ditch and control head gates for the dam.

Item 8 .-The installation or replacement of culverts and bridges on the road to provide easier access to the club's facilities and the members' cabins.

Item 9 .-The installation of an aerator and a system of tubing, laid on the bottom of the lake, through which air is pumped by means of compressors to aerate the water beneath the ice when the lake is frozen over.

Item 10 .-The construction of an outdoor grill and the purchase of outdoor furniture for use in connection with the grill.

Item 11 .-The construction or reconstruction of the quarters furnished the caretaker.

Section 4241(a)(1) of the Code imposes a tax on 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 $10 per year.

Section 4243(b) of the Code 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.

Section 49.4243-2(b)(1) of the Facilities and Services Excise Tax Regulations provides, in part, that amounts paid for the purchase of land or for the purchase of existing facilities do not come within the exemption. Neither do amounts paid for ordinary maintenance or repair of club facilities come within the exemption. Moreover, amounts paid are not within the exemption unless they are earmarked by the club or organization at the time of receipt for use as provided in this paragraph.

The activities described in items 1, 2, 3 , are day-to-day operations necessary for the upkeep of the club's facilities. The expenditures involved do not result in the construction or reconstruction of identificable facilities, and they are incurred solely for the purpose of keeping existing facilities in good working condition.

The machinery referred to in items 4 and 5 is regularly employed by the club in its maintenance program. Even though the bulldozer may, on occasion, be used in connection with a construction or reconstruction project, such use does not provide a basis for classifying amounts paid to cover the cost of its overhauling as amounts paid for the reconstruction or capital improvement of a `social, athletic, or sporting facility.'

The floating machine is regarded as having no connection with any construction or reconstruction of a facility, since it was purchased specifically for maintenance purposes.

Likewise, the salary of the man regularly employed as caretaker in item 6 does not come within the scope of the exemption.

Accordingly, it is held that the exemption provided by section 4243(b) of the Code does not apply to amounts paid as dues for use in the operations and activities described in items 1 through 6 .

On the other hand, all of the operations and activities described in items 7, 8, 9, 10 , and 11 are deemed to come within the scope of section 4243(b) of the Code. Therefore, it is further held that the exemption applies to amounts paid by the club members as dues specifically for use in the construction or reconstruction of the facilities described.

See Revenue Ruling 63-215, C.B. 1963-2, 548, for requirements regarding the action a club must take to establish a definite project of construction or reconstruction in order for the exmeption to apply.