PLR 200533001: Cash gift to social club qualifies for gift tax annual exclusion

Plain-English summary

A member planned to contribute cash to a nonprofit social club for facility upgrades. The club had no stock, and its board would control the money immediately. The IRS treated the transfer as a gift to the club as one entity rather than an indirect gift to its members, because the club operated for recreation and other nonprofitable purposes without economic benefit to members. It also found that the club received a present interest, so the gift qualified for the section 2503(b) annual exclusion up to that year's exclusion amount.

Ruling snapshot

• Question: Would a member's cash contribution to a social club qualify for the gift tax annual exclusion?
• Outcome: Approved, up to the applicable annual exclusion amount.
• Key authorities: IRC §§ 2503(b), 2511; Treas. Reg. §§ 25.2503-3, 25.2511-1.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200533001
Third Party Communication: None
Release Date: 8/19/2005
Date of Communication: Not Applicable
Index Number: 2503.00-00, 2511.12-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:PSI:9
PLR-102100-05
Date:
May 09, 2005
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LEGEND:

Taxpayer = ----------------------------------
Club = -------------------

Dear ----------------:

This is in response to your representative’s letter, dated December 13, 2004, in which you request a ruling concerning the treatment for gift tax purposes of a transfer to Club.

The representations submitted are summarized as follows: Taxpayer, a United States citizen, is a member of Club. Club is organized as a nonstock corporation and does not issue stock to its members. It is represented that Club qualifies for tax exemption under
§ 501(c)(7) of the Internal Revenue Code. Club’s facilities include dining rooms, a bar, banquet facilities, thirteen private meeting rooms, a library, a game room, and ten overnight guest rooms. Activities sponsored by Club include: dinners, dances, lecture series, special guest speakers, and cultural and athletic events.

Taxpayer intends to make cash contributions to Club. Club has plans to upgrade the facilities (such as relocation and remodeling of the library and other projects) with the funds. Any gift to Club by a member will be subject to the immediate control of the board of directors. Taxpayer requests a ruling that the contribution of cash to Club will be treated as a gift to Club as a single entity that will qualify for the gift tax annual exclusion under § 2503(b), to the extent that it does not exceed the annual exclusion amount described therein.

Section 501(a) provides that an organization described in §§ 501(c) or 501(d) shall be exempt from income tax unless the exemption is denied under §§ 502 or 503.

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Section 501(c)(7) describes clubs organized for pleasure, recreation, and other nonprofitable purposes, substantially all of the activities of which are for such purposes and no part of the net earnings of which inures to the benefit of any private shareholder.

Section 2501 imposes a tax on the transfer of property by gift by an individual. Section 2511 provides that the tax imposed by § 2501 shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. Section 2512(b) provides that, where property is transferred for less than adequate and full consideration in money or money's worth, the amount by which the value of the property exceeds the value of the consideration is deemed a gift.

Section 2503(b) provides that the first $10,000 (adjusted annually for inflation) of gifts made to any person by the donor (other than gifts of future interests in property) shall not be included in the total amount of gifts made during the year.

Section 25.2503-3(a) of the Gift Tax Regulations provides that no part of the value of a gift of a future interest may be excluded in determining the total amount of gifts made during the calendar year. "Future interest" is a legal term, and includes reversions, remainders, and other interests or estates, whether vested or contingent, and whether or not supported by a particular interest or estate, which are limited to commence in use, possession, or enjoyment at some future date or time. Section 25.2503-3(b) provides that an unrestricted right to the immediate use, possession, or enjoyment of property or the income from property (such as a life estate or term certain) is a present interest in property.

Section 25.2511-1(c)(1) provides that the gift tax applies to gifts indirectly made. Thus, any transaction in which an interest in property is gratuitously passed or conferred upon another, regardless of the means or device employed, constitutes a gift subject to tax.

Section 25.2511-1(h)(1) provides that a transfer of property by a donor to a corporation generally represents a gift by the donor to the other individual shareholders of the corporation to the extent of those shareholders' proportionate interests in the corporation. The regulation further provides that there may be an exception to this rule, such as a transfer made by an individual to a charitable, public, political or similar organization which may constitute a gift to the organization as a single entity, depending upon the facts and circumstances in the particular case.

In this case, Club qualifies as an organization eligible for tax exempt status under
§ 501(c)(7). Club is a nonprofit organization and none of the earnings of Club inure to the benefit of any individual. In view of the nature and operation of Club including the fact that Club is operated solely for nonprofitable purposes (the recreation, enjoyment, education, and entertainment of its members) and not for the economic benefit of its members, we conclude that Club comes within the exception to the general rule of

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§ 25.2511-1(h)(1), "for charitable, public, political or similar organizations." Accordingly, we conclude that Taxpayer’s transfer to Club will be a gift to Club as a single entity.

Further, since Club, the donee of the gift, will receive the immediate and unrestricted use of Taxpayer’s gift, the gift will constitute a gift that is not limited to commence in use, possession or enjoyment at a future date or time and will thus be a gift of a present interest. Accordingly, to the extent that Taxpayer’s gift to Club does not exceed the annual exclusion amount for the calendar year as described in § 2503(b), Taxpayer’s gift will be excludible for gift tax purposes under § 2503(b). Compare Rev. Rul. 71-443, 1971-2 C.B. 337, which concludes that a gift to the corporation in that ruling was a gift of a future interest in property to the shareholders of the corporation.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative.

The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination.

Sincerely,

James F. Hogan
Senior Technician Reviewer, Branch 9
Associate Chief Counsel
(Passthroughs & Special Industries)

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