Rev. Rul. 55-70

Advice has been requested whether membership fees paid to a charitable organization, and goods donated to the organization, constitute contributions toward the support of the organization within the meaning of section 1701(a)(1)(A)(iii) of the Internal Revenue Code of 1939.

Section 1701(a)(1)(A)(iii) of the Code provides for exemption from tax on admissions with respect to any admissions all the proceeds of which inure to a corporation or any community chest, fund, or foundation organized and operated exclusively for charitable purposes, exempt under section 101(6) of the Code, if such corporation or organization is primarily supported by contributions from the general public.

The use of the term `organization' in the statute implies a group or body with a more or less definite structure, operating under some form of rules and regulations, and having members. Membership in such an organization normally carries with it certain rights and privileges, such as the right to vote, hold office, etc. A determination as to how an amount may be characterized when paid to an organization for membership therein, that is, whether as dues or as a contribution, depends upon the facts involved. The basic factors to be considered are the character and objectives of the organization, the activities conducted by it, and the nature of the rights and privileges conferred on the members.

Where membership in an organization of the type contemplated by section 1701(a)(1)(A)(iii) of the Code is merely nominal and carries no rights or privileges, the fee paid for such membership is held to be a contribution toward the support of the organization. Where membership in such an organization carries with it some rights and privileges, a determination whether the fees paid by members are for services, privileges, or facilities to be enjoyed by them, or whether such fees are in reality contributions, must be based, as indicated above, upon a consideration of all the facts.

If the rights and privileges of membership are incidental to making the organization function according to its charitable purposes, and the benefit to be derived by a member is the personal satisfaction of being of service to others and furthering the charitable cause in which the members share an interest in common, then the membership fee is considered a contribution toward the support of the organization.

As an illustration of the foregoing, a children's convalescent home provides free nursing care and rest-home facilities for children recuperating cuperating from serious illnesses. Memberships from the general public are solicited and, based upon the amounts paid, are called contributing, associate, donor, or patron memberships. All members have the right to attend the annual meeting and vote for officers of the organization. The officers select a board of directors in whose hands are lodged the actual control and responsibility for running the home. Members are requested, but are not required, to put in a number of hours of service at the home serving as nurses aides, feeding children, reading to them, etc. All members are expected to help in the fund-raising activities of the organization and in securing members. Twice a year the organization holds a social function to which the members and their guests are invited. These social functions have a threefold purpose; first, they serve as an expression of gratitude to the members from the organization; secondly, they serve to attract new members; and thirdly, they tend to weld the members in a more tightly-knit group for better service and heightened morale.

For a period of 1 month each year the organization conducts a rummage sale of clothing, books, odds and ends, etc. The articles sold are donated by members, friends, or others interested in the charitable purposes and activities of the organization. The members run the store during the time the sale is being conducted, caring for the stock and handling all transactions. All the proceeds after expenses are turned over to the organization.

In another situation an organization may have the same general purposes and activities as the one just described, the only difference being that the rights to vote and hold office are restricted to the donor and patron members (those paying the highest amounts of membership fees).

Upon consideration of the facts as recited above, it is held that the amounts paid as membership fees to either of the foregoing described organizations constitute contributions to the support of the organizations within the meaning of section 1701(a)(1)(A)(iii) of the Code. It is further held that goods donated to the organizations are contributions toward their support for purposes of that section. The amount of the contributions will be measured by the fair market values of the donated goods. In the case of the rummage sale, the selling price of an article may, for such purpose, be accepted as representing its fair market value.

On the other hand, membership fees are considered to be paid as dues, rather than as membership fees, where the organization is one which holds itself out as furnishing certain facilities and services to its members for their own benefit, and membership in the organization is acquired in order to secure the right to enjoy the facilities and services offered. In such event, the amount paid is held not to be a contribution for purposes of section 1701(a)(1)(A)(iii) of the Code.

Accordingly, those membership fees which are considered to be contributions, as well as the fair market value of donated goods, may be considered as contributions in determining whether a charitable organization, which otherwise qualifies for exemption from the tax on admissions, is primarily supported by contributions from the general public within the meaning of section 1701(a)(1)(A)(iii) of the Code