[Federal Register Volume 59, Number 155 (Friday, August 12, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19663]


[[Page Unknown]]

[Federal Register: August 12, 1994]


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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