Rev. Rul. 64-203

Advice has been requested concerning the excise tax on club dues with respect to life memberships which are purchased or inherited from prior holders thereof under the circumstances described below.

A club, which qualifies as a social, athletic, or sporting club for purposes of the excise tax on club dues, formerly issued transferable life memberships. Currently, some prospective members arrange to purchase life memberships from life members, some of whom are not the original holders of those life memberships. The amount paid by the purchaser may be more or less than the amount paid to the club by the original holder of the life membership. Sometimes, the life memberships are acquired by bequest or inheritance from deceased members, some of whom likewise may not have been the original holders of the life memberships.

Section 4241(a)(3) of the Internal Revenue Code of 1954, as amended by the Excise Tax Technical Changes Act of 1958, Public Law 85-859, C.B. 1958-3, 92, imposes a tax on life memberships as follows:

LIFE MEMBERSHIPS-In the case of life memberships-

(A) a tax equivalent to the tax upon the amount paid as dues or membership fees by members (other than life members) having privileges most nearly comparable to those of the person holding the life membership; or

(B) at the election (made at such time not later than the day on which the first amount is paid for life membership, and made in such manner and form, as the Secretary or his delegate shall by regulations prescribe) of the person holding the life membership, a tax equivalent to 20 percent of any amount paid for the life membership. Any election under this subparagraph shall be irrevocable.

Specifically, the question presented in the instant case is whether a person acquiring a life membership under the circumstances described may elect to pay the one-time tax provided by subparagraph (B) of section 4241(a)(3) of the Code.

Section 49.4241-1(c)(3) of the Facilities and Services Excise Tax Regulations provides that the election may be made only by the individual holding the life membership. The election must be made not later than the day on which the first amount is paid for the life membership and shall be evidenced by a statement signed by the life member and furnished to the club or organization in which he holds the life membership. The statement must show, among other things, the total amount paid or to be paid for the life membership and the date on which the first payment for the life membership was made and the amount of such payment.

Revenue Ruling 59-315, C.B. 1959-2, 321, relates to the acquisition of a life membership in a social, athletic, or sporting club or organization by purchase from another life member and by payment of a transfer fee by the acquiring member to the club. Under those circumstances, that Revenue Ruling holds that where a life member elects to pay a one-time tax under the provisions of subparagraph (B) of section 4241(a)(3) of the Code, the amount paid to the transferor of the life membership and the transfer fee paid to the club are subject to the excise tax on life memberships.

Similarly, in the instant case, where a life membership is acquired by purchase and the new life member makes a timely election in accordance with subparagraph (B) of section 4241(a)(3) of the Code and the applicable regulations, the tax is based upon the amount paid by the purchaser of the life membership, including both the amount paid to the prior holder of the life membership and the amount of any transfer fee paid to the club by the acquiring member with respect to such transfer. Under these circumstances, the amount paid to the club by the original holder of the life membership is irrelevant.

On the other hand, where a life membership is acquired by bequest or inheritance, and the new life member pays nothing for the life membership, the election to pay a one-time tax under section 4241(a)(3)(B) of the Code cannot be made, irrespective of whether such an election was made by the deceased life member at the time the life membership was originally acquired. Under the provisions of section 4241(a)(3)(A) of the Code, the new life member is liable for the tax on life memberships equivalent to the tax upon the amount paid as dues or membership fees by members (other than life members) having privileges most nearly comparable to those of the new life member. Under these circumstances, no tax is due upon any transfer fee paid to the club by the new member or by others for him.