Rev. Rul. 59-335

Advice has been requested concerning whether certain assessments paid by club members in connection with enlargements made by a country club qualify for the exemption from the excise tax on club dues provided by section 4243(b) of the Internal Revenue Code of 1954, as added by the Excise Tax Technical Changes Act of 1958, Public Law 85-859, C.B. 1958-3, 92.

The stockholders of a country club authorized the board of directors to contract for certain enlargements to the clubhouse. In order to pay the cost of these improvements, an assessment of $200 per share of the outstanding capital stock was authorized, with the assessment to be paid by the owners of the stock on or after January 2, 1959. Specifically, advice is requested with respect to the following questions:

(1) Whether the exemption applies if the club awarded the construction contract before January 1, 1959, but the contractor did not begin the construction prior to that date.

(2) Whether the exemption applies if preliminary grading or the pouring of concrete footings was commenced before January 1, 1959.

Section 4241(a)(1) of the Code imposes a tax upon 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 4243(b) of the Code provides that there shall be exempted from the provisions of section 4241 of the Code any assessment paid for the construction or reconstruction of any social, athletic, or sporting facility (or for the construction or reconstruction of any capital addition to, or capital improvement of, any such facility).

Section 132(d)(2) of the Excise Tax Technical Changes Act of 1958 provides that the provisions of section 4243(b) of the Code shall apply only with respect to assessments paid on or after January 1, 1959, for construction or reconstruction begun on or after that date.

Preliminary grading, as well as the actual pouring of concrete footings, in connection with enlargements made by the country club are considered part of construction within the intent and meaning of the statue. Accordingly, it is held that where such construction is commenced prior to January 1, 1959, as in the instant case, the assessments paid on or after that date to cover the cost of the enlargements do not qualify for the exemption from tax on club dues provided by section 4243(b) of the Code. However, the awarding of a contract prior to January 1, 1959, for construction to begin on or after that date will not of itself defeat the exemption provided by section 4243(b) of the Code.