Rev. Rul. 58-493

Advice has been requested whether the payments described below, which entitle a person to membership in, and the rights and privileges of, a social, athletic, or sporting club or organization, are considered to be dues or membership fees, or initiation fees, within the meaning of section 4242 of the Internal Revenue Code of 1954, and subject to the taxes imposed by section 4241.

A sporting club was organized to provide hunting, fishing, and boating privileges for its members and their guests. The club property includes approximately 300 acres of land, about 75 acres being covered by a lake. The club has constructed a ditch to bring fresh water into the lake and a dam to control the water level. The lake is kept stocked with an ample supply of trout at all times. Access roads, a reservoir to supply water for domestic consumption, a care-taker's cabin, and other necessary buildings have been erected and are maintained by the club. The land surrounding the lake has been divided into lots which are sold to prospective members. Most of the members have built summer homes or cottages on their property. The remainder of the land, the lake, and other constructions and installations are the property of the club.

Ownership of a lot within the club boundaries is the first condition which must be met for membership in the club. A lot may be purchased individually, or by two or more persons collectively, but where a lot is purchased by two or more unrelated persons collectively, the rights and privileges of a single owner only accrue from such a purchase, and the dues, fees, and assessments in such a case are the same as those paid by a single owner. An assessment of $60 per year is made against each lot. In order to become a voting member and to be eligible to hold office, a lot owner also must pay a fee of $300 and club dues of $150 per year. All members, both voting and nonvoting, are entitled to equal use of all club facilities.

Specifically stated, the questions with respect to which advice has been requested are (1) whether the amount paid for a lot is considered to be an initiation fee; (2) if the amount paid for a lot is considered to be an initiation fee, whether the coowner of a lot who buys the interest of his partner and thereby becomes a member of the club, is liable for the tax on initiation fees with respect to the amount paid for that additional interest; (3) if the price paid for a lot is taxable, whether the tax on initiation fees applies to the total amount paid to a retiring member by a new member for a lot on which a summer home or cottage has been erected; (4) whether liability for the tax on initiation fees is incurred where membership is obtained by inheritance of a lot, no membership fee being required of the new member; and (5) whether the annual assessments against the lots are taxable as dues or membership fees in those cases where the lot owners do not become voting members.

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 4241(a)(2) of the Code imposes a tax on any amount paid as initiation fees to such a club or organization, if such fees amount to more than $10, or if the dues or membership fees, not including initiation fees, of an active resident annual member are in excess of $10 per year.

The term `dues' as used in section 4241(a)(1) of the Code is defined in section 4242(a) of the Code to include any assessment, irrespective of the purpose for which made, and any charges for social privileges or facilities, or for golf, tennis, polo, swimming, or other athletics or sporting privileges or facilities, for any period of more than 6 days.

The term `initiation fees' as used in section 4241(a)(1) of the Code is defined in section 4242(b) of the Code to include any payment, contribution, or loan required as a condition precedent to membership, whether or not any such payment, contribution, or loan is evidenced by a certificate of interest or indebtedness, or share of stock, and irrespective of the person or organization to whom paid, contributed, or loaned.

In the instant case, it is held that, since the only way in which a person may become eligible for membership in the club and obtain the right to full use of the club facilities is by ownership of a lot within the club boundaries, such ownership is a condition precedent to membership, and the amount paid to obtain the lot, irrespective of the person or organization to whom paid, constitutes an initiation fee. Accordingly, the price paid for a lot, whether purchased directly from the club or from a retiring member is subject to the tax on initiation fees. Likewise, where a coowner buys his partner's interest in their lot, and thereby becomes entitled to membership in the club, the tax on initiation fees applies to the amount paid by the coowner for such additional interest.

Where a new member purchases from a retiring member a lot on which a summer home or cottage has been erected, the tax on initiation fees applies to the price of the lot, but does not apply to that portion of the total price paid to the retiring member which is attributable to any buildings erected thereon. Where membership is transferred by inheritance of a lot, and no assessment is made against the beneficiary, no liability for tax is incurred. In all cases, however, the tax on initiation fees applies to the amount paid to become a voting member, and the tax on dues or membership fees applies to the annual payment required to be paid by each voting member.

Since the owner of a lot is entitled to the use of the club facilities, even though he does not pay the amounts required to become a voting member of the club, it is further held that the annual assessment against his lot constitutes a charge for the privileges and facilities offered by the club within the meaning of section 4242(a) of the Code. Therefore, the tax on dues or membership fees applies to the payment of that assessment.