Rev. Rul. 63-3

Advice has been requested whether the organizations described below are `social, athletic, or sporting clubs or organizations' for purposes of the excise tax on club dues. Each of the organizations described is privately owned and is operated for profit. Each organization operates social, athletic, or sporting facilities.

M club offers its members a wide selection of facilities, such as a golf course, a swimming pool, tennis courts, and a clubhouse. The clubhouse has a dining room, a bar, locker rooms, and a golf shop. The members pay annual dues, and only the members and their guests are entitled to use the facilities of the club. Applications for membership must be approved by a board of directors appointed by the club owners. Each applicant for membership agrees to be bound by all of the rules and regulations of the club. Several classes of memberships are offered. There is a limitation upon the number of members who are entitled to golfing privileges. Membership is renewed automatically as long as dues are paid and as long as the member abides by the rules and regulations of the club. The members have no right to serve on committees, no property rights, and no voice in the management of any activities provided by the organization. They are not assessable in case of an operating loss.

N operates a golf course. The golf course and all its related facilities, such as a golf equipment shop, dressing rooms, and a refreshment bar, are open to the general public. Any person is permitted to use the golf course and all its facilities upon the payment of a greens fee of one dollar each time he uses the golf course. However, any person who pays $25 a year is designated as a `greens fee member' and is permitted to use the golf course and its facilities an unlimited number of times during the year without payment of an additional amount. Otherwise, no special privileges are conferred upon these persons, and they have no right to vote, to hold office or to participate in the management of the organization.

Section 4241 of the Internal Revenue Code of 1954 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 member are in excess of ten dollars per year. That section also imposes a tax on 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 49.4241-1(e) of the Facilities and Services Excise Tax Regulations provides that the purposes and activities of a club or organization, and not its name, determine its character for purposes of the tax. That section further provides that every club or organization which has a membership of individuals or family units and which has social, athletic, or sporting features is presumed to be a social, athletic or sporting club or organization, until the club or organization has satisfied the district director of Internal Revenue that it is not in fact a social, athletic, or sporting club or organization within the meaning of the regulations.

Early in the history of the tax on initiation fees and dues or membership fees paid to a social, athletic, or sporting club or organization, the Internal Revenue Service set forth its position that the applicability of the tax to an amount paid to such a club or organization is not affected by the fact that the club or organization is operated for profit or that the member making the payment may not participate in its management. See S.T. 457, C.B. IV-1, 296 (1925).

The members of the M club form a distinct class with special privileges not available to the general public; they stand in a distinct relationship to each other and subject themselves to rules and regulations in their conduct and use of facilities; and they are actually associated together for common social, athletic, or sporting purposes and look upon themselves as a select group. In addition, there is a limitation upon the number of members, and membership continues from year to year unless terminated for cause.

The foregoing factors applicable to the M club establish, in their entirety, the nature of the organization as an `exclusive club or organization,' such as that referred to by the United States Court of Claims in the case of Bunker Hill Country Club v. United States , 9 Fed. Supp. 52, CT. D. 942, C.B. XIV-1, 421 (1935), certiorari denied, 296 U.S. 583. Under these circumstances, neither the character of the organization nor the excise tax liability of its members is affected by the fact that the members have no property rights in the organization and have no voice in the management of M's activities and operations. Accordingly, it is held that M is a `social, athletic, or sporting club or organization' within the meaning of section 4241 of the Code. Therefore, amounts paid as dues or membership fees to M are subject to the excise tax on club dues imposed by that section.

With respect to N , there are not present enough factors to characterize the business venture as `an exclusive club or organization.' N's facilities are open to the general public, and no distinction is made between the so-called `members' and those members of the public who pay greens fees each time they play golf. This is true with respect to both the clubhouse and the golf course facilities. Thus, there is a lack of special privileges conferred upon the so-called `members.' Accordingly, it is held that N is not a `social, athletic, or sporting club or organization' within the meaning of section 4241 of the Code. Therefore, amounts paid to N are not subject to the tax imposed by that section.