[Federal Register Volume 60, Number 138 (Wednesday, July 19, 1995)]
[Rules and Regulations]
[Pages 36993-36995]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17665]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8601]
RIN 1545-AS71


Definition of Club

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary 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. The 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: These regulations are effective July 19, 1995.
    For dates of applicability, see Sec. 1.274-2 (a) and (e).

FOR FURTHER INFORMATION CONTACT: Michael L. Gompertz, (202) 622-4910 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document provides final and temporary Income Tax Regulations 
(26 CFR part 1) under section 274(a)(3) of the Internal Revenue Code of 
1986 (Code). This provision was added by section 13210 of the Omnibus 
Budget Reconciliation Act of 1993 (107 Stat. 469).
    On August 12, 1994, the IRS published a notice of proposed 
rulemaking defining club in the Federal Register (59 FR 41414). No 
public hearing on the proposed regulations was requested or held, but 
written comments were received. After consideration of all the 
comments, the proposed regulations are adopted by this Treasury 
decision with one minor editorial change in Sec. 1.274-2(a)(2)(iii)(b).
    On December 16, 1994, the IRS published a notice of proposed 
rulemaking in the Federal Register (59 FR 64909) relating, in part, to 
the tax treatment of payment by an employer of an employee's club dues. 
This Treasury decision has no effect on the notice of 

[[Page 36994]]
proposed rulemaking published on December 16, 1994. Final regulations 
on this subject will be published at a later date.

Explanation of Provisions

    Section 274(a)(3) of the Code disallows a deduction for amounts 
paid or incurred for membership in any club organized for business, 
pleasure, recreation, or other social purpose.
    Under the final regulations, the dues disallowance provisions of 
section 274(a)(3) apply to any membership organization a principal 
purpose of which is to conduct entertainment activities for members or 
their guests or to provide members or their guests with access to 
entertainment facilities. The membership organizations subject to dues 
disallowance under the final regulations 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. The dues 
disallowance provisions of section 274(a)(3) do not, in general, apply 
to (1) civic or public service organizations such as Kiwanis, Lions, 
Rotary, Civitan, and similar organizations; (2) professional 
organizations such as bar associations and medical associations; and 
(3) certain organizations similar to professional organizations, 
specifically, business leagues, trade associations, chambers of 
commerce, boards of trade, and real estate boards.
    Under the final regulations, the three exceptions from dues 
disallowance listed above do not apply 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.
    A commentator on the proposed regulations requested clarification 
of the terms entertainment and a principal purpose. The term 
entertainment is defined in existing Sec. 1.274-2(b)(1) and that 
definition applies for purposes of these final dues disallowance 
regulations. The final regulations do not provide any additional 
guidance with respect to determining whether a principal purpose of an 
organization is to conduct entertainment activities or provide access 
to entertainment facilities.
    Two commentators objected to the proposed regulations' disallowance 
of all deductions for airline club dues. The commentators indicated 
that these clubs are used for business purposes, and little or no 
personal benefit is derived from airline club membership. However, the 
legislative history of section 274(a)(3) specifically provides that 
deductions are not allowed for airline club dues. Therefore, the final 
regulations do not change the proposed rule concerning airline clubs.
    One commentator stated that the proposed regulations would permit 
taxpayers to deduct, as a business expense, dues paid to certain 
organizations described in section 501(c)(8) because the organizations 
are civic or public service organizations. The commentator requested 
that the regulations be amended to preclude a business expense 
deduction for these dues because the organizations are not formed for a 
business purpose but, rather, to promote charitable, philanthropic, 
patriotic, and educational activities.
    The IRS and the Treasury believe that the regulations, as proposed, 
adequately address the commentator's concern. Section 274 and these 
regulations do not expand the category of items that are deductible as 
business expenses. Rather, section 274 disallows certain business 
expense deductions that would otherwise be allowable under section 162. 
If dues paid to certain section 501(c)(8) organizations are not 
deductible under section 162 because they are not ordinary and 
necessary business expenses, section 274 and these regulations do not 
make the dues deductible.
    The final regulations are effective with respect to amounts paid or 
incurred after December 31, 1993.

Special Analyses

    It has been determined that this Treasury decision 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, 
the notice of proposed rulemaking preceding these regulations was 
submitted to the Small Business Administration for comment on its 
impact on small business.

    Drafting Information: The principal author of these regulations 
is Michael L. Gompertz, Office of 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.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended 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. The heading of paragraph (e) and text for paragraph (e)(1) are 
revised.
    5. Paragraph (e)(3)(ii) is revised.
    The additions and revisions 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 

[[Page 36995]]
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. Unless 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 Public Law 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'' in 
each sentence and adding the language ``before January 1, 1994,'' in 
its place.
Margaret M. Richardson,
Commissioner of Internal Revenue.

    Approved: June 21, 1995.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 95-17665 Filed 7-18-95; 8:45 am]
BILLING CODE 4830-01-U