Rev. Rul. 59-147

The Internal Revenue Service has been asked whether an organization which has been granted an exemption from Federal income tax under the provisions of section 501(c)(7) of the Internal Revenue Code of 1954 can qualify for the exemption from the excise tax on club dues as a fraternal organization under the provisions of section 4243 of the Code.

The organization consists of a national chapter and local chapters in various cities. Under the organization's constitution, the national chapter is empowered to grant dispensation and charters to the local chapters and for good cause to suspend, annul, or revoke the same. The constitutions and bylaws of the local chapters are drafted along the lines of the national constitution and bylaws. It is also required that each member of a local chapter be initiated according to the ritual of the national chapter. However, each local chapter makes its own decisions concerning the matter of dues. The national chapter and some of its local chapters have been granted an exemption from Federal income tax under section 501(c)(7) of the Code as clubs organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes.

Under the provisions of section 4241(a)(1) and (2) of the Code, a tax is imposed upon the amounts paid as dues or membership fees and initiation fees to any social, athletic, or sporting club or organization. Revenue Ruling 56-334, C.B. 1956-2, 831, holds that an organization which has been held exempt from Federal income tax under section 501(c)(7) of the Code, as a club organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net earnings of which inures to the benefit of any private shareholder, is considered to be a social, athletic, or sporting club or organization for the purpose of the excise tax on club dues imposed by section 4241 of the Code. Accordingly, the dues, membership, and initiation fees paid to the instant organization fall within the scope of section 4241 of the Code.

However, section 4243 of the Code exempts from the provisions of section 4241 of the Code all amounts paid as dues or fees to a fraternal society, order, or association, operating under the lodge system. Section 101.25 of Regulations 43, made applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954-2, 47, states, in part, that most fraternal organizations are in effect social clubs, but if they are operating under the lodge system, payments to them are expressly exempt from the tax. Section 101.30 of the regulations defines the term `operating under the lodge system' as carrying on activities under a form of organization that comprises local branches, chartered by a parent organization and largely self-governing, called `lodges,' `chapters,' or the like. Accordingly, it is held that the organization in the instant case qualifies as a fraternal organization within the scope of section 4243 of the Code and, therefore, that all amounts paid to such organization as dues and fees are exempt from the tax on club dues under section 4243 of the Code.

Revenue Ruling 56-334, supra , is amplified.