This is the fourth article in a special six-part series commemorating the 50th anniversary of the National Club Association. This article from the Dec/Jan 1993 issue of Club Director offers a comprehensive history on one of the most pervasive impositions on private clubs—the issue of dues deductibility and the reduction in the deductibility of business meals and entertainment. Though we were successful in some of our attempts to maintain the tax deductibility of dues, eventually legislation did pass so dues are not deductible and meals and entertainment is still only 50 percent deductible.
Clubs date back to the ancient Greeks and Romans. The ancient Greeks’ clubs consisted mostly of religious groups, worshipping gods outside of the state religion, and some political, commercial and athletic groups. The Romans continued the tradition with trade and political groups. After the fall of the Roman Empire about 395 A.D., social clubs became extinct and social life revolved around religion.
In the early 17th century, social clubs began to crop up in England and proliferated in London during the 18th century. The English “clubs” began meeting in coffeehouses. It wasn’t until the 19th century that private homes were used solely for the purposes of the club.
The club tradition followed the English on the journey to the New World—America. American clubs, as the English clubs, were formed to bring together people with common interests and leisure time. After the Civil War, political and social clubs began to flourish. Today, it is estimated there are nearly 4,000 “truly private” clubs in the United States, including golf, tennis, athletic, city and yacht clubs.
For most of their history, private clubs were viewed as purely social groups, escaping government and regulatory scrutiny. In the early part of the 20th century, however, the Internal Revenue Service (IRS) and Congress began to eye private clubs as a revenue source. Since that time, repeated attempts have been made to tax clubs and club members, and to remove or limit business-expense deductions for dues and entertaining expenses.
At times, the motivation for legislation has been an overriding need to raise revenue. At other times, taxation of clubs has been a thinly disguised attempt to drive social policy. The historical perspective of the effort to tax the private club community is one that has remained constant for the better part of this century.
Post World War I
The first tax levied on clubs was in 1917, when an excise tax of 10 percent was placed on club dues. Excise taxes, preeminent during this period, were levied on a variety of items in order to pay for World War I.
Subsequently, the Revenue Act of 1926, later amended in 1928, defined dues to “include any assessment, irrespective of the purpose for which made.” The tax was levied on the person paying the dues or fees and applied to dues or membership fees to any social, athletic, sporting club or organization if the dues or fees were in excess of $25 per year. Initiation fees were also subject to the 10-percent tax, if the fees amounted to more than $10. Fraternal societies, orders and associations operating under the lodge system were exempt. This was the first legislative attempt to define club dues after the initial taxation in 1917.
In the late 1930s and early 1940, law suits contesting the application and the definition of the club dues tax flourished. Although the tax applied specifically to members as payers of dues or initiation fees, a number of clubs sued as agents for their members who paid the tax.
One such case eventually made its way to the U.S. Supreme Court. The case, White et. al., Former Collectors of Internal Revenue v. Winchester Country Club, 315 U.S. 32; 62 S. Ct. 425, centered on whether members’ payments to the Winchester Country Club for certain “privileges” constituted dues or membership fees “subject to the tax imposed by Section 413 of the Revenue Act of 1928.”
Members at the club could either maintain full privileges by paying annual dues of $50, which entitled a member to all the privileges of the club except golf. By paying $35 more for limited privileges, a member became entitled to play golf during the year, except on specified days. By paying an additional $50, members received the privilege of playing golf at any time during the year. All but a small portion of the members acquired golf privileges of one sort or another.
The Supreme Court held that payment for the right to repeated and general use of a common club facility for an appreciable period of time amounted to a “due or membership fee.”
Most of the lower court cases that preceded this case also affirmed the statute and upheld the tax. The number of cases initiated by either clubs or members demonstrated, however, that the club community was not willing to sit still during this period.
The Postwar 1940s
The definition of club dues remained unchanged until 1941 when an attempt was made to clarify the inconclusive litigation which had resulted from the previous definition of club dues. Section
543(b) of the Revenue Act of 1941 broadened the definition of dues to include, in addition to any assessments, any “charges for social privileges or facilities, or for golf, tennis, polo, swimming or other athletic or sporting privileges or facilities for any period of more than six days.”
As a result, the IRS viewed the new definition in a broader context and went so far as to conclude that even the annual subscription price for a monthly club magazine was subject to the dues tax because a member was entitled to 12 issues of the magazine during the year, thus fulfilling the Act’s six-day requirement.
With the start and finish of World War II, excise rates rose for clubs. In 1941, the rate was increased to 11 percent. In 1943, the tax was increased again to 20 percent. Clubs were eventually granted an exemption to the tax if dues and assessments were allocated to construction or other capital projects.
Clubs were not singled out; other items that had been taxed at the pre-war rate of 10 percent rose to 20 percent, as well. It was expected that a reduction in the rate would occur after the war debt was paid.
The 1950s
Until approximately 1955, it appeared that Congress had devised a workable definition of club dues. During this period, there was little litigation and administrative change in the concept. Regular membership payments and periodic assessments were treated as coming under the definition. However, IRS did not attempt to include separate payments made by club members on a voluntary basis for special, limited purposes.
In 1954, Congress reviewed the excise tax rates and decided to decrease rates to the pre-war level of 10 percent. The House Ways & Means Committee included club dues in the general reduction. The Senate took exception, however, and the tax on club dues, along with taxes on cabarets and admission to horse and dog races, remained at 20 percent. In 1955, the IRS began considering voluntary payments as within the language which had been added to the club dues definition in 1941. From 1955 to 1960, the IRS took every opportunity to broaden the definition of club dues to include:
- 1955—Voluntary payments for use of lockers and bathhouses came under the definition.
- 1956—Voluntary payments made by members for cleaning and storing of golf clubs were subject to dues tax.
- 1958—The IRS applied club dues to voluntary payments made by members of yachting clubs for the use of docking and mooring facilities.
- 1960—Voluntary payments for the rental of horse stalls or for boarding a horse came within the definition of club dues.
The 1960s and NCA
In 1960, the 20-percent excise tax on cabarets was reduced to the pre-World War II level of ten percent. Club dues, however, remained at the 20-percent level. The National Club Association was established to address this and other inequities; its first undertaking in 1961 was to fight for a reduction in the tax on club dues.
In 1962, tax legislation was introduced in Congress that would have completely eliminated the deducibility of club dues as a business expense. Working with other organizations, NCA helped defeat this bill.
Later that same year, NCA led the effort with the Club Managers Association of America (CMAA) and other groups to press Congress to repeal or reduce the excise tax on club dues.
Not only was the excise tax a burden to clubs, the paperwork associated with the accounting of the tax was immense. Walter A. Slowinski, a partner with the law firm of Baker, McKenzie, testified on behalf of NCA before the House Ways &c Means Committee. Slowinski asked the Committee to “provide legislative relief which will eliminate the necessity of having clubs keep more and more detailed records for no productive purpose.” He went on to say that “the
[IRS] is now sweeping all payments under the umbrella of dues [and] the traditional concept of dues has been abandoned.”
Prior to 1961, taxpayers were allowed a deduction if they could prove that entertainment expenses were incurred for a business purpose. In 1962, Congress and the IRS officially recognized that club dues were proper business deductions. (See H.R. Rep. No. 1447, 87th Cong., 2nd Sess., 1962, p. 22.) Although Congress recognized dues as a business deduction, changes were made to Section 274 of the Internal Revenue Code. The new language charged individuals with the burden of proving that use of the club was primarily (more than 50 percent of the time) in pursuit of business. The change also required extensive documentation of all deductible entertainment expenses.
During 1965, NCA supported legislation and proposals that would reduce the excise tax on club dues to 10 percent, as well as measures that would provide much-needed paperwork relief to clubs. Clubs were to receive a bigger bonus than expected. On June 21, 1965, President Johnson signed into law legislation entirely repealing the excise taxes on all clubs and fees. [P.L. 89-44, H.R. 8371]
The celebration did not last for long. The following year legislation was introduced to reinstate the excise tax at the pre-World War II level of 10 percent. NCA lobbied to help defeat this legislation. In 1969, NCA testified again before the House Ways & Means Committee against the Tax Reform Act of 1969; clubs came away without any additional tax increase or changes in the law.
The Carter Years—1970s
The late 70s ushered in a new president and a new focus on club dues and business-entertainment expenses. As the economy faltered, President Carter proposed massive tax reforms and the search for new government funding sources began. The proposed reforms included disallowing 50 percent of the business deductions for business meals and luncheon club dues, and 100 percent of the deductions for club dues and other business-entertainment expenses at clubs and similar facilities. The deduction for “ordinary and necessary” business expenses, including reasonable amounts for entertainment, had been allowed since 1916, when the income tax law was enacted.
On March 17, 1978, NCA President Milton E. “Bob” Meyer, Jr., testified before the House Ways & Means Committee charging that President Carter’s proposal to disallow deductions for club dues and entertaining expenses was a politically motivated attack that could devastate the club industry. During his testimony, Meyer noted that if the Carter Administration wanted to curb abuses in expense and club dues deduction, that stricter enforcement of documentation requirements was the answer. Meyer labeled the President’s use of the term “three martini lunch” as “an unbecoming emotional play that transgresses the bounds of intellectual honesty and confuses the real issue involved, which is: To what extent is it proper for government, through the tax code, to influence the management decisions of business and professional people as to how they conduct their business and maximize their profits?”
James E. Maser, then president of Club Corporation of America, also testified before the Committee that day. Maser told the Committee that if dues revenue was reduced, “the only practical way to reduce costs to meet reduced revenues [would be] through large payroll reductions.” Maser went on to tell the Committee that business-entertaining expenses were valid business expenses similar to advertising.
In addition to testifying before Congress, NCA mounted an extensive campaign to retain the tax deduction for clubs. The lobbying campaign included visits with all key Congressional leaders and Administration officials. Arnold Palmer was called upon to assist in the effort. Prior to the House-Senate Conference Committees’ meeting that was to decide the fate of club dues deductions, Arnold Palmer, at the request of NCA, talked at length with Rep. Dan Rostenkowski (D-IL) about the devastating effect the disallowance would impose on private clubs.
Palmer discussed the anticipated club closings that would result should dues deductions be eliminated, and told the Congressmen that thousands of employees would probably be laid off. Palmer was a crucial participant in helping develop a compromise proposal that ultimately saved club dues at the final hour.
As a result of their efforts, the private club industry managed to keep the wolf at bay again in 1978, when on October 15, Congress approved a tax bill that did not end deductions for club dues. The important victory for private clubs came in the waning minutes of the 95th Congress when, despite intense lobbying by Administration officials, a House-Senate Conference Committee rejected the provision that would have ended club dues deductions.
The announcement came in the late evening hours and in an emotionally packed moment. NCA members, gathered at NCA’s 1978 convention, received the news that private club dues were saved. “The odds against the Conference Committees’ removing the Senate’s vote to end dues deductions were astronomical,” noted NCA incoming-President Herb Emanuelson, Jr., “but thanks to the continuous lobbying effort by our Washington lobbying team and the support of member clubs, we convinced key members to defend our cause.”
Speaking before NCA’s 1978 annual convention, Rep. Guy Vander Jagt (R-MI), who earlier in the day predicted a loss, announced the victory efforts on behalf of club dues deductions as “masterful.”
The Reagan Years—1980s
In 1985, the Reagan Administration introduced a proposal to repeal entirely the deducibility of club dues and restrict the deductibility of business meals. The president of NCA at the time, Joseph N. Noll, testified before the Ways & Means Committee on June 26, 1985, in opposition to the part of the President’s tax proposals to eliminate the tax deductibility of club dues.
“Eliminating the tax deductibility of certain expenses is unjustified and would devastate the private club industry,” Noll told members of the Ways & Means Committee. Appearing with four other panelists, representing the restaurant, hospitality and entertainment industries, he predicted that 81,000 full-time employees would be laid off because of the decline in club use. Noll went on to challenge the wisdom of having government dictate which business expense deductions are appropriate and deductible, and which are not.
Three months later, on October 4, 1985, Noll testified before the Senate Finance Committee on the same subject. Noll again expressed his concern over the number of jobs that would be lost due to the changes in the deductibility law.
Noll also addressed the public perception of widespread abuse of the business deduction. He stated, “Under the present code there are very stringent restrictions on deductibility and precise documentation is required to substantiate even partial deducibility.” He added that if there was indeed any alleged abuse, government should enforce the law instead of changing it and penalizing all clubs.
He concluded, “We believe that the entire hospitality and entertainment industry, as used for business-marketing purposes, along with those businessmen who make legitimate use of it, have been singled out in a prejudicial and harmful manner, not to serve any national interest, but rather for ‘populist’ political purposes.”
Although club dues deductibility was preserved in full, in 1986 President Reagan signed a bill, the Tax Reform Act of 1986, reducing the business-meal deduction to 80 percent for all taxpayers, including club members.
The 1990s
As of early 1993, Congress is still attempting to deny club dues deductibility. In fact, the last year has been unprecedented for the club community. The repeal of club dues was targeted as a revenue-raiser by the tax-writing committees and included in three separate pieces of legislation.
The effort began early in the year when the issue of the nondeductibility of club dues was included, at the final hour, in H.R. 4210, a multi-billion-dollar tax bill that moved through a Democratic Congress. The repeal of club dues was used as a revenue-raiser to pay for a proposed employer tax credit on the FICA tax on tips, which was heavily endorsed by the National Restaurant Association. Before the bill even reached President Bush’s desk in late March, he sent Congress a veto message. Congress was unable to override the veto.
Victory was to be short-lived, however, when several months later the repeal of the club dues deduction resurfaced in both the Revenue Act of 1992 (H.R. 11) and the Energy Bill (H.R. 776); in both cases the dues disallowance was to be worth $1-5 billion. Once again, the battle was on.
H.R. 11, after being approved by the House Ways & Means Committee, passed the House on July 2, 1992, by a vote of 356-55. The Senate took a different course and did not include the repeal of club dues in its version of the bill, in part because it had earlier been responsible for including the nondeductibility of club dues in the Energy Bill to offset certain energy-related tax credits. After a long week of debate and discussion of over 100 amendments, H.R. 11 was passed by the Senate by a vote of 70-29.
In an effort to complete a House-Senate conference before the 102nd Congress adjourned in October, Sen. Lloyd Bentsen (D-TX) and Rep. Dan Rostenkowski (D-IL) worked without other conferees to negotiate a bill. Although the issue of club dues was removed from the Energy Bill during its conference, it remained in H.R. 11. Despite last minute lobbying by NCA and indications that dues would not appear in the bill, Congress passed it in the closing days of the session.
Once again, victory came through a presidential veto on November 4. Democratic leadership quickly announced, however, the bill would be reintroduced in its entirety when the 103rd Congress convenes on January 5, 1993.
The Future
The most recent assaults on the deductibility of club dues have little to do with the issue of whether dues should or should not be deducted for business purposes. The laws and regulations affecting deductibility are stringent; dues, per se, are not deductible. Before qualifying for any deduction of dues one must meet the 50-percent test—use the club directly and indirectly for business purposes more than 50 percent of the time. After meeting the test, only the portion of dues that is directly related to business use of the club can be deducted.
The deduction for ordinary and necessary business expenses, including reasonable amounts for entertainment, has been allowed since 1916, when the income tax law was enacted. Business deductions were allowed then and have survived for almost 80 years. The deduction law has remained intact with relatively few changes. Why the need to remove deductions 80 years later?
Club dues unfortunately have been marked as a potential revenue-raiser next year and remain an easy target. The perception is that the rich are to be punished financially by reducing or eliminating the deductibility of club dues. In truth, the middle class, including many women and minorities, find it to their advantage to use club facilities for their business development activities; it is they who will feel loss of deductibility the most.
In 1993 with trillion-dollar budget deficits, Congress is on a never-ending quest to generate revenue. Congressional committees look in every nook and cranny for money to allegedly reduce the deficit, when in fact, for every dollar saved, three dollars are spent.
Rep. Bill Archer, ranking Republican on the House Ways & Means Committee, has been most outspoken in his theory of tax expenditures. Archer says he has noticed that a growing number, if not the majority, of people connected with the Ways & Means Committee and other Congressional bodies hold to the theory that all money belongs to the government except for that amount which it lets citizens deduct or keep. The government views deductions as a “taking” from the overall tax base. Rather than operate under the principal that the money belongs to individuals to invest, and the government gets a piece of what remains, government now feels justified, even compelled, to mandate how people invest their own money.
This quest by the U.S. government for the dollar will continue to drive a number of initiatives against private clubs and their members. The industry must organize and resist measures that would hurt private clubs and their members.
Heather Anne Keith was NCA’s government relations manager.
Sidebar:
Editor’s note: This opinion article is from the July 1993 issue of Club Director, and was published before legislation was passed that eliminated the deductibility of club dues and reduced the deductibility of business meals and entertainment to 50 percent.
Murder on Capitol Hill
By George M. Horn, CPA, and Kevin F. Reilly, JD, CPA
Margaret Truman was right. Capitol Hill is full of intrigue and mystery. The halls of Congress reverberate with the sound of members defending their pet projects or attacking their pet peeves. Suddenly a shot rings out! Who is this week’s politically incorrect victim, and is it terminal?
If this scene took place over the last several years, one of the victims would be the private club industry. It has been under constant attack by federal, state and local authorities. The private club is everyone’s favorite whipping boy. The public only receives one side of the story. The benefits to the community in direct employment or by providing income to related vendors and suppliers are never emphasized. Instead, taxpayers are given a view of a group of white males sitting around in a smoke-filled room. This portrait of clubs makes it very difficult for a politician to stand up and support the need for and value of these establishments. The fact that this membership view is inaccurate seems to have little bearing on those with a specialized agenda who attack private clubs.
The latest attack by the federal government is the nondeductibility of dues and the reduction to 50 percent of the cost of business meals and entertainment that may be deducted. The tax bill working through Congress looks very different than the initial program submitted by President Clinton. The House of Representatives made substantial modifications and sent the bill to the Senate. Upon receipt, the Senate made its own changes and reduced the amount of new taxes and increased the number of spending cuts. At press time, the House/Senate Conference Committee had just begun negotiating the final budget and tax package (H. R. 2264). The ultimate result is expected to be somewhere between the House and the Senate bills.
Unfortunately, the provisions affecting clubs are the same in all three proposals. The rationale is that Congress believes it is inappropriate to permit a deduction for club dues because some element of personal pleasure and enjoyment is present. Under current law, no deduction is permitted for club dues unless the taxpayer establishes that the use of the club was primarily for the furtherance of the trade or business, and the specific expense was directly related to the active conduct of that trade or business. As a result, before dues could be deducted in any case, the club had to be used more than 50 percent for business. Instead of increasing compliance to challenge those who improperly take the deduction, Congress wants to eliminate it totally.
Most clubs and others in the hospitality industry employ a large number of low- or minimum-wage employees. A reduction in the use of the club will immediately affect the employment status of these individuals. When survival is at stake, businesses frequently eliminate so-called discretionary spending. Some entertainment still needs to be conducted. It is a necessary business expense no more frivolous than a machine is to a manufacturer. As these businesses cut expenses, clubs will also cut back.
While clearly unfair and a hit on a very large segment of the economy, it appears the nondeductibility of club dues and the reduction in the deductibility of business meals and entertainment to 50 percent is a given if the tax bill passes. Clubs need to go to their members and employees and have them become much more aggressive in marketing the benefits of the club to the public. Be proactive. Become a more visible part of the community before you need its support. As the states continue to attack the viability of private clubs, friends will be needed more and more.
It seems ironic that when the Supreme Court rules investment income may not be offset against nonmember food and beverage losses because the club is not conducting a trade or business, so many states are trying to treat clubs as public accommodations. Year after year, legislation is introduced which would eliminate the ability of private clubs to operate and to be selective in the admission of its members. The National Club Association and the California State Club Association have been successful in slowing down the legislation by joining with other groups, to fight these bills. While reasonably successful, the effort must continue.
The shot that rang through the halls of Congress need not be fatal to the private club industry. However, the importance of following and commenting on legislation cannot be over emphasized. Vigilance is needed.
George M. Horn was a director of the California affiliate of Pannell Kerr Forster Worldwide—now known as PKF, located in Los Angeles. Kevin F. Reilly was then national director of taxation and director of club services for Pannell Kerr Forster Worldwide, located in the Washington, D.C. area. PKF is an international association of tax, audit and consulting firms specializing in services to the hospitality industry, particularly clubs. Note: Presently Reilly is a member of the firm, PKF Witt Mares, and serves as a director of NCA and secretary/treasurer of the NCA Foundation.