[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