Rev. Rul. 66-347

Advice has been requested regarding the taxable year of inclusion in gross income of membership fees received by a swimming club under the circumstances described below.

A swimming club was organized for the purpose of constructing, owning, and managing a swimming pool and related facilities for profit. Each member of the club is required to pay a membership fee upon admission to membership and, in addition, monthly dues. The membership fee is refundable only if the member moves out of the locality of the club within 5 years, in which case he is entitled to receive a declining portion of his fee based upon the length of his membership in the club. After 5 or more years, he is not entitled to any refund.

Section 451(a) of the Internal Revenue Code of 1954 provides, in general, that the amount of any item of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period.

Where a taxpayer receives income without restriction as to its disposition, use or enjoyment, he is required to report such income in the taxable year of receipt even though it has been received subject to a contingent liability to return some part of it. Arthur M. Brown v. Helvering , 291 U.S. 193, Ct.D. 786, C.B. XIII-1, 223 (1934). See also Rev. Rul. 58-101, C.B. 1958-1, 233. If the taxpayer is required to return part or all of such income in some later year, he is entitled to a deduction for the amount of his repayment for the taxable year in which repaid, or, in the case of an accrual basis taxpayer, in the taxable year in which the obligation to repay becomes fixed and definite. See section 1.461-1 of the Income Tax Regulations.

In the instant case the taxpayer earns the membership fee when it admits a member to its club. While it is true that for a period of 5 years the taxpayer remains under a duty to refund part of the membership fee, its obligation to do so is contingent and its liability is not fixed.

Accordingly, the membership fees received by the taxpayer are income for the taxable year in which received or accrued, depending upon its method of accounting, even though the taxpayer subsequently may be required to refund portions of such fees. Where the taxpayer makes a refund, it is entitled to a deduction for the amount of its payment for the taxable year in which repaid, or for the taxable year in which the liability to repay accrues, depending upon its method of accounting.

The facts in this case are distinguishable from those involved in Revenue Ruling 58-17, C.B. 1958-1, 11, which holds that the amount of membership dues received from members by a swimming club, under a continuing obligation to refund the entire amount, is in the nature of a loan.