[Code of Federal Regulations]
[Title 26, Volume 6]
[Revised as of April 1, 2002]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.456-5]

[Page 148-149]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
DEFERRED COMPENSATION, ETC.--Table of Contents
 
Sec. 1.456-5  Definitions and other rules.

    (a) Prepaid dues income. (1) The term ``prepaid dues income'' means 
any amount for membership dues includible in gross income which is 
received by a membership organization in connection with, and is 
directly attributable to, a liability of the taxpayer 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.
    (2) For purposes of section 456, prepaid dues income does not 
include amounts received by a taxpayer in connection with sales of 
memberships on a prepaid basis where the taxpayer does not have the 
liability to furnish the services or make available the membership 
privileges. For example, where a taxpayer has a contract with several 
membership organizations to sell memberships in such organizations and 
retains a portion of the amounts received from the sale of such 
memberships and remits the balance to the membership

[[Page 149]]

organizations, the amounts retained by such taxpayer represent 
commissions and do not constitute prepaid dues income for purposes of 
section 456.
    (b) Liability. The term ``liability'' means a liability of the 
taxpayer to render services or make available membership privileges over 
a period of time which does not exceed 36 months. Thus, if during the 
taxable year a taxpayer sells memberships for more than 36 months and 
also memberships for 36 months or less, section 456 does not apply to 
the income from the sale of memberships for more than 36 months. For the 
purpose of determining the duration of a liability, a bona fide renewal 
of a membership shall not be considered to be a part of the existing 
membership.
    (c) Membership organization. (1) The term ``membership 
organization'' means a corporation, association, federation, or other 
similar organization meeting the following requirements:
    (i) It is organized without capital stock of any kind.
    (ii) Its charter, bylaws, or other written agreement or contract 
expressly prohibits the distribution of any part of the net earnings 
directly or indirectly, in money, property, or services, to any member, 
and
    (iii) No part of the net earnings of which is in fact distributed to 
any member either directly or indirectly, in money, property, or 
services.
    (2) For purposes of this paragraph an increase in services or 
reduction in dues to all members shall generally not be considered 
distributions of net earnings.
    (3) If a corporation, association, federation, or other similar 
organization subsequent to the time it elects to report its prepaid dues 
income in accordance with the provisions of section 456, (i) issues any 
kind of capital stock either to any member or nonmember, (ii) amends its 
charter, bylaws, or other written agreement or contract to permit 
distributions of its net earnings to any member or, (iii) in fact, 
distributes any part of its net earnings either in money, property, or 
services to any member, then immediately after such event the 
organization shall not be considered a membership organization within 
the meaning of section 456(e)(3).
    (d) Receipt of prepaid dues income. For purposes of section 456, 
prepaid dues income shall be treated as received during the taxable year 
for which it is includible in gross income under section 451, relating 
to the general rule for taxable year of inclusion, without regard to 
section 456.

[T.D. 6937, 32 FR 16395, Nov. 30, 1967]