Definition of Club

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[IA-30-94]

RIN 1545-AS71

Definition of Club

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations relating to the

definition of a ``club organized for business, pleasure, recreation, or

other social purpose'' for purposes of the disallowance of a deduction

for club dues under section 274(a)(3) of the Internal Revenue Code of

1986. The proposed regulations reflect changes to the law made by the

Omnibus Budget Reconciliation Act of 1993 and affect persons who pay or

incur club dues.

DATES: Written comments must be received by October 11, 1994. Requests

to speak (with outlines of oral comments) at a public hearing scheduled

for November 29, 1994, at 10 a.m., must be received by November 8,

1994.

ADDRESSES: Send all submissions to: CC:DOM:CORP:T:R (IA-30-94), room

5228, Internal Revenue Service, POB 7604, Ben Franklin Station,

Washington, DC 20044. In the alternative, submissions may be hand

delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R

(IA-30-94), Courier's Desk, Internal Revenue Service, 1111 Constitution

Avenue NW, Washington, DC. The public hearing will be held in the IRS

Auditorium, 1111 Constitution Avenue NW, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Michael L. Gompertz, (202) 622-4910,

concerning the regulations; Michael Slaughter, (202) 622-8543,

Regulations Unit, concerning submissions and the hearing. These are not

toll-free numbers.

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to the Income Tax

Regulations (26 CFR part 1) under section 274 of the Internal Revenue

Code of 1986 (Code) as amended by section 13210 of the Omnibus Budget

Reconciliation Act of 1993 (OBRA 1993) (107 Stat. 469). These rules

relate to the definition of club for purposes of the disallowance of a

deduction for club dues under section 274(a)(3) of the Code.

Explanation of Provisions

OBRA 1993 amended section 274 of the Code by adding section

274(a)(3), which disallows a deduction for amounts paid or incurred for

membership in any club organized for business, pleasure, recreation, or

other social purpose.

Prior to the enactment of section 274(a)(3), membership dues or

fees paid to three types of organizations were specifically excepted

from the dues disallowance provisions of section 274 because these

organizations were not considered to be social, athletic, or sporting

clubs within the meaning of section 274(a)(2)(A). The excepted

organizations were: (1) professional organizations such as bar

associations and medical associations, (2) civic or public service

organizations such as Kiwanis, Lions, Rotary, Civitan, and similar

organizations, and (3) business luncheon clubs described in Sec. 1.274-

2(e)(3)(ii) of the regulations. See Q & A 56 and Q & A 57 of Rev. Rul.

63-144, 1963-2 C.B. 129, 138, 139; H.R. Rep. No. 1447, 87th Cong., 2d

Sess. 22 (1962), 1962-3 C.B. 426; S. Rep. No. 1881, 87th Cong., 2d

Sess. 33 (1962), 1962-3 C.B. 739; and H.R. Rep. No. 1278, 96th Cong.,

2d Sess. 32 (1980).

The legislative history of section 274(a)(3) indicates that the

enactment of that section eliminated the third exception listed above

for membership dues or fees paid to business luncheon clubs. The

legislative history further indicates that airline and hotel clubs are

subject to dues disallowance under section 274(a)(3). H.R. Rep. No.

103-213, 103d Cong., 1st Sess. 583. However, the legislative history

does not indicate that the enactment of section 274(a)(3) had any

effect on the first and second exceptions listed above for professional

organizations and civic or public service organizations. Accordingly,

the proposed regulations provide that the dues disallowance provisions

of section 274(a)(3) of the Code apply to business luncheon clubs and

airline and hotel clubs, but generally not to professional

organizations (such as bar associations and medical associations) or

civic or public service organizations (such as Kiwanis, Lions, Rotary,

Civitan, and similar organizations). The proposed regulations further

provide that certain organizations similar to professional

organizations are also generally excepted from dues disallowance,

specifically, business leagues, trade associations, chambers of

commerce, boards of trade, and real estate boards.

Although the proposed regulations generally provide exceptions from

dues disallowance for civic and public service organizations,

professional organizations, and certain organizations similar to

professional organizations, the exceptions are not available if a

principal purpose of the organization is to conduct entertainment

activities for members or their guests or to provide members or their

guests with access to entertainment facilities. Also, as under prior

law, the allowance of a deduction for dues paid to these organizations

may be precluded or limited by provisions of the Code other than

section 274. For example, the dues would not be deductible unless the

ordinary and necessary business expense requirements of section 162 are

satisfied.

The regulations are proposed to be effective with respect to

amounts paid or incurred after December 31, 1993.

Special Analyses

It has been determined that this notice of proposed rulemaking is

not a significant regulatory action as defined in EO 12866. Therefore,

a regulatory assessment is not required. It has also been determined

that section 553(b) of the Administrative Procedure Act (5 U.S.C.

chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and, therefore, a Regulatory

Flexibility Analysis is not required. Pursuant to section 7805(f) of

the Internal Revenue Code, this notice of proposed rulemaking will be

submitted to the Chief Counsel for Advocacy of the Small Business

Administration for comment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments (preferably a

signed original and eight (8) copies) that are submitted timely to the

IRS. All comments will be available for public inspection and copying.

A public hearing has been scheduled for November 29, 1994, at 10

a.m. in the IRS Auditorium, Internal Revenue Service Building, 1111

Constitution Avenue, NW, Washington, DC. Because of access

restrictions, visitors will not be admitted beyond the Internal Revenue

Building lobby more than 15 minutes before the hearing starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must

submit written comments by October 11, 1994 and submit an outline of

the topics to be discussed and the time to be devoted to each topic by

November 8, 1994.

A period of 10 minutes will be allotted to each person for making

comments.

An agenda showing the scheduling of the speakers will be prepared

after the deadline for receiving outlines has passed. Copies of the

agenda will be available free of charge at the hearing.

Drafting Information

The principal author of these proposed regulations is Michael L.

Gompertz, Office of the Assistant Chief Counsel (Income Tax and

Accounting). However, other personnel from the IRS and Treasury

Department participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, the proposed amendments to 26 CFR part 1 are as

follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in

part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.274-2 is amended as follows:

1. Paragraph (a)(2)(ii) is revised.

2. Paragraph (a)(2)(iii) is added.

3. Paragraph (a)(3)(iii) is revised.

4. Paragraph (e)(1) is revised.

5. Paragraph (e)(3)(ii) is revised.

6. The revised and added provisions read as follows:

Sec. 1.274-2 Disallowance of deductions for certain expenses for

entertainment, amusement, or recreation.

(a) * * *

(2) * * *

(ii) Expenditures paid or incurred before January 1, 1979, with

respect to entertainment facilities, or paid or incurred before January

1, 1994, with respect to clubs--(a) Requirements for deduction. Except

as provided in this section, no deduction otherwise allowable under

chapter 1 of the Internal Revenue Code shall be allowed for any

expenditure paid or incurred before January 1, 1979, with respect to a

facility used in connection with entertainment, or for any expenditure

paid or incurred before January 1, 1994, with respect to a club used in

connection with entertainment, unless the taxpayer establishes--

(1) That the facility or club was used primarily for the

furtherance of the taxpayer's trade or business; and

(2) That the expenditure was directly related to the active conduct

of that trade or business.

(b) Amount of deduction. The deduction allowable under paragraph

(a)(2)(ii)(a) of this section shall not exceed the portion of the

expenditure directly related to the active conduct of the taxpayer's

trade or business.

(iii) Expenditures paid or incurred after December 31, 1993, with

respect to a club--(a) In general. No deduction otherwise allowable

under chapter 1 of the Internal Revenue Code shall be allowed for

amounts paid or incurred after December 31, 1993, for membership in any

club organized for business, pleasure, recreation, or other social

purpose. The purposes and activities of a club, and not its name,

determine whether it is organized for business, pleasure, recreation,

or other social purpose. Clubs organized for business, pleasure,

recreation, or other social purpose include any membership organization

if a principal purpose of the organization is to conduct entertainment

activities for members of the organization or their guests or to

provide members or their guests with access to entertainment facilities

within the meaning of paragraph (e)(2) of this section. Clubs organized

for business, pleasure, recreation, or other social purpose include,

but are not limited to, country clubs, golf and athletic clubs, airline

clubs, hotel clubs, and clubs operated to provide meals under

circumstances generally considered to be conducive to business

discussion.

(b) Exceptions. Absent a showing that a principal purpose of the

organization is to conduct entertainment activities for members or

their guests or to provide members or their guests with access to

entertainment facilities, business leagues, trade associations,

chambers of commerce, boards of trade, real estate boards, professional

organizations (such as bar associations and medical associations), and

civic or public service organizations will not be treated as clubs

organized for business, pleasure, recreation, or other social purpose.

(3) * * *

(iii) ``Expenditures paid or incurred before January 1, 1979, with

respect to entertainment facilities or before January 1, 1994, with

respect to clubs'', see paragraph (e) of this section, and

* * * * *

(e) Expenditures paid or incurred before January 1, 1979, with

respect to entertainment facilities or before January 1, 1994, with

respect to clubs--(1) In general. Any expenditure paid or incurred

before January 1, 1979, with respect to a facility, or paid or incurred

before January 1, 1994, with respect to a club, used in connection with

entertainment shall not be allowed as a deduction except to the extent

it meets the requirements of paragraph (a)(2)(ii) of this section.

* * * * *

(3) * * *

(ii) Club dues--(a) Club dues paid or incurred before January 1,

1994. Dues or fees paid before January 1, 1994, to any social,

athletic, or sporting club or organization are considered expenditures

with respect to a facility used in connection with entertainment. The

purposes and activities of a club or organization, and not its name,

determine its character. Generally, the phrase social, athletic, or

sporting club or organization has the same meaning for purposes of this

section as that phrase had in section 4241 and the regulations

thereunder, relating to the excise tax on club dues, prior to the

repeal of section 4241 by section 301 of Pub. L. 89-44. However, for

purposes of this section only, clubs operated solely to provide lunches

under circumstances of a type generally considered to be conducive to

business discussion, within the meaning of paragraph (f)(2)(i) of this

section, will not be considered social clubs.

(b) Club dues paid or incurred after December 31, 1993. See

paragraph (a)(2)(iii) of this section with reference to the

disallowance of deductions for club dues paid or incurred after

December 31, 1993.

* * * * *

Sec. 1.274-5T [Amended]

Par. 3. In Sec. 1.274-5T, the first two sentences of paragraph

(c)(6)(iii) are amended by removing the language ``at any time'' and

adding the language ``before January 1, 1994,'' in its place.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 94-19663 Filed 8-11-94; 8:45 am]

BILLING CODE 4830-01-P