Are prepaid club dues deductible?

• Author: Reese, Susan M.

The Revenue Reconciliation Act of 1993 (RRA) completely eliminates the deduction for club does paid or incurred after Dec. 31, 1993. The repeal applies to dues paid to any club organized for business, pleasure, recreation or other social purposes (Sec. 274(a)(3)). Because of this new prohibition, many taxpayers who use their clubs for business entertainment have raised questions as to the types of organizations whose dues are subject to the new rules, as well as whether deductions will be permitted for club dues prepaid on or before Dec. 31, 1993.

What is a club?

The first question that must be answered is what constitutes a "club" for purposes of Sec. 274(a)(3)? The RRA Conference Report indicates only that the provision applies to "all" types of clubs, including business, social, athletic, luncheon, sporting, airline and hotel clubs. Given the limited legislative history and broad language found in the statute (which specifically includes clubs organized for "business" purposes), the scope of this provision may be wider than most taxpayers anticipate. The IRS has indicated informally that it will probably interpret the term "club" broadly, so as to include any organization in which membership is "voluntary." This may come as a surprise to many business and professional associations that have assumed that they are outside the scope of Sec. 274(a)(3). it is hoped that the Service will issue formal guidance in the near future to limit (or at least clarify) the applicability of this provision to business organizations whose activities have only incidental social aspects.

Prepayment for

cash-basis taxpayers

In general, a cash-basis taxpayer may deduct up to 12 months of prepaid expenses if certain tests under Rev. Rul. 79-229 are satisfied.

1. The prepayment must be a true prepayment, not simply a refundable deposit.

2. The payment must have a substantial business purpose separate and apart from generating an income tax deduction.

3. No material distortion of income may result from deducting the prepayment. (The courts have generally held that this test is satisfied if the substantial business purpose requirement is satisfied.)

The applicability of these rules to prepaid club dues is currently under consideration by the IRS. In the absence of specific guidance, there appears to be a reasonable basis for deducting a prepayment of club dues, provided the payment is in fact nonrefundable and a substantial business purpose exists for the...