Rev. Rul. 54-37

Advice is requested regarding the application of the tax on initiation fees imposed by section 1710(a)(2) of the Internal Revenue Code to fees paid to a club by withdrawing and incoming members with respect to the transfer of stock.

Under the Internal Revenue Code, the term `initiation fees' includes any payment, contribution, or loan, required as a condition precedent to membership, whether or not 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.

Rev. Rul. 137, C.B. 1953-2, 343, holds that a transfer fee required by a club to be paid by a withdrawing member with respect to his sale of stock is not paid as a condition precedent to membership in the club and the amount of such transfer fee is not subject to tax on initiation fees imposed by section 1710(a)(2) of the Code.

Section 101.28 of Regulations 43 provides in part that in the case of a transfer of stock from a retiring member, the club should collect the tax on the amount paid by the new member for the stock as well as tax on any transfer fee required from the new member. In such a case, the transfer fee required by the club to be paid by the new member as well as the amount paid by him for the stock are paid as a condition precedent to membership in the club.

The holding in Rev. Rul. 137 applies only in cases where a club requires the withdrawing or retiring member to pay the transfer fee. Where a club requires the new member to pay the transfer fee, the amount paid is subject to tax on initiation fees under section 1710(a)(2) of the Code.