26 U.S.C. § 456 — Prepaid dues income of certain membership organizations
submitted 65 years ago by Pub. L. 87-109 to r/title-26-INTERNAL-REVENUE-CODE · 946 words · no verdicts yet
Membership groups, like clubs, can choose a special tax rule for dues paid in advance. Under this rule, prepaid dues count as income gradually over time. The group counts income as it owes services to members. If that duty ends early, or the group stops existing, the leftover dues become taxable right away.
(a) Year in which included: If this section applies to a membership group's prepaid dues income, that income is included in the group's gross income gradually — spread across the taxable years during which the group's "liability" (defined in (e)(2)) to provide services or membership benefits exists.
(b) Where the taxpayer's liability ceases: This subsection covers two situations where the group must include leftover prepaid dues income all at once, in the year the situation happens:
(1) If the group's liability under (e)(2) ends before all the prepaid dues income was included in gross income under subsection (a), the group must include whatever is left in gross income for the year the liability ends.
(2) If the group itself stops existing before all the income was included, the group must include whatever is left in gross income for the year it ceases to exist.
(c) Prepaid dues income to which this section applies:
(1) Election of benefits: This section only applies if the taxpayer* elects it, for the specific trade or business* earning the dues income. The Secretary* sets the manner of making this election by regulation. A taxpayer cannot make this election for a business that already uses the cash method of accounting.
(2) Scope of election: Once made, the election covers all prepaid dues income from that trade or business. Exception: if the group's liability will end within 12 months of receiving the income, the group may instead include the whole amount in gross income in the year it is received, to the extent regulations allow. Except as provided in subsection (d), the election does not reach back to cover prepaid dues income received before the first year the election applies.
(3) When election may be made: (A) With the Secretary's consent, a taxpayer may make this election at any time. (B) Without the Secretary's consent, a taxpayer may make the election for its first taxable year* in which it receives prepaid dues income in that business — but only if it does so by the deadline for filing that year's tax return, including extensions.
(4) Period to which election applies: Once made, the election applies to the year it starts and to every year after, unless the Secretary consents to let the taxpayer revoke it. For tax purposes, using this election counts as a "method of accounting."
(d) Transitional rule: This subsection applies extra rules for the first years a taxpayer uses this election.
(1) Amount includible for election years: In each year the election applies, the taxpayer must include not just the normal portion of prepaid dues income for that year, but also an extra amount. That extra amount equals the prepaid dues income received in the 3 taxable years right before the election started, calculated as if the election had already been in effect 3 years earlier.
(2) Deductions for amounts included more than once: If a taxpayer had to include that extra amount under (1), and part of that extra amount was already taxed once (in one of the 3 years before the election), the taxpayer may deduct one-fifth of the extra amount each year, for the election year and the next 4 years — but only to the extent that portion was already included in gross income before.
(e) Definitions:
(1) Prepaid dues income: Income the group already counts in gross income, that it receives because of — and directly tied to — a duty to provide services or membership benefits stretching past the end of the year it is received.
(2) Liability: A duty to provide services or membership benefits for a period of no more than 36 months. This liability is treated as existing evenly (ratably) across the whole period the services or benefits must be provided.
(3) Membership organization: A corporation*, association, federation, or similar group that is (A) organized without any capital stock*, and (B) does not distribute any of its net earnings to members.
(4) Receipt of prepaid dues income: Income counts as "received" in the taxable year it would be includible in gross income under section 451, ignoring this section.
Prepaid dues income to which this section applies shall be included in gross income for the taxable years during which the liability described in subsection (e)(2) exists.
In the case of any prepaid dues income to which this section applies—
If the liability described in subsection (e)(2) ends, then so much of such income as was not includible in gross income under subsection (a) for preceding taxable years shall be included in gross income for the taxable year* in which the liability ends.
If the taxpayer* ceases to exist, then so much of such income as was not includible in gross income under subsection (a) for preceding taxable years shall be included in gross income for the taxable year in which such cessation of existence occurs.
This section shall apply to prepaid dues income if and only if the taxpayer makes an election under this section with respect to the trade or business* in connection with which such income is received. The election shall be made in such manner as the Secretary* may by regulations prescribe. No election may be made with respect to a trade or business if in computing taxable income the cash receipts and disbursements method of accounting is used with respect to such trade or business.
An election made under this section shall apply to all prepaid dues income received in connection with the trade or business with respect to which the taxpayer has made the election; except that the taxpayer may, to the extent permitted under regulations prescribed by the Secretary, include in gross income for the taxable year of receipt the entire amount of any prepaid dues income if the liability from which it arose is to end within 12 months after the date of receipt. Except as provided in subsection (d), and election made under this section shall not apply to any prepaid dues income received before the first taxable year for which the election is made.
A taxpayer may, with the consent of the Secretary, make an election under this section at any time.
A taxpayer may, without the consent of the Secretary, make an election under this section for its first taxable year in which it receives prepaid dues income in the trade or business. Such election shall be made not later than the time prescribed by law for filing the return for the taxable year (including extensions thereof) with respect to which such election is made.
An election under this section shall be effective for the taxable year with respect to which it is first made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to the revocation of such election. For purposes of this title, the computation of taxable income under an election made under this section shall be treated as a method of accounting.
If a taxpayer makes an election under this section with respect to prepaid dues income, such taxpayer shall include in gross income, for each taxable year to which such election applies, not only that portion of prepaid dues income received in such year otherwise includible in gross income for such year under this section, but shall also include in gross income for such year an additional amount equal to the amount of prepaid dues income received in the 3 taxable years preceding the first taxable year to which such election applies which would have been included in gross income in the taxable year had the election been effective 3 years earlier.
A taxpayer who makes an election with respect to prepaid dues income, and who includes in gross income for any taxable year to which the election applies an additional amount computed under paragraph (1), shall be permitted to deduct, for such taxable year and for each of the 4 succeeding taxable years, an amount equal to one-fifth of such additional amount, but only to the extent that such additional amount was also included in the taxpayer’s gross income during any of the 3 taxable years preceding the first taxable year to which such election applies.
For purposes of this section—
The term “prepaid dues income” means any amount (includible in gross income) which is received by a membership organization in connection with, and is directly attributable to, a liability to render services or make available membership privileges over a period of time which extends beyond the close of the taxable year in which such amount is received.
The term “liability” means a liability to render services or make available membership privileges over a period of time which does not exceed 36 months, which liability shall be deemed to exist ratably over the period of time that such services are required to be rendered, or that such membership privileges are required to be made available.
The term “membership organization” means a corporation*, association, federation, or other organization—
organized without capital stock* of any kind, and
no part of the net earnings of which is distributable to any member.
Prepaid dues income shall be treated as received during the taxable year for which it is includible in gross income under section 451 (without regard to this section).
Source credit: (Added Pub. L. 87–109, § 1(a), July 26, 1961, 75 Stat. 222; amended Pub. L. 94–455, title XIX, §§ 1901(a)(68), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1775, 1834.)
- 1961Enacted · Pub. L. 87-109 · 75 Stat. 222
- 1976Amended · Pub. L. 94-455 · 90 Stat. 1775, 1834
A history note hasn’t been published yet. The record shows enactment by Pub. L. 87-109 on 1961-07-26.
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