
    JAMES C. DUDLEY v. THE UNITED STATES
    [No. 182-61.
    Decided March 6, 1963]
    
      
      Grant W. Wiprud for plaintiff. Robert T. Molloy on the briefs.
    
      Gynthia Holcomb, with whom was Assistant Attorney General Louis F. Oberdorfer, for defendant. Edward S. Smith, and Lyle M. Turner, on the brief.
   Laramore, Judge,

delivered the opinion of the court:

This is a suit for refund of excise taxes paid pursuant to section 4241(a) (2) of the Internal Eevenue Code of 1954. The question presented is whether payment for certain debentures constituted payment of an initiation fee as defined in section 4242(b) of the Internal Eevenue Code of 1954.

The Winter Club, Inc. (hereinafter referred to as the Club) is a membership corporation which was organized under the laws of New York in April 1957 for the purpose of operating a private skating club during the winter months on premises leased from the Huntington Country Club. The governing committee of the Club, at its organization meeting on April 30, 1957, established three classes of membership with the following entrance fees and annual dues: (1) Eegular — $200 entrance fee, $125 dues; (2) Country Club (those members who were also members of the Huntington Country Club) — $150 entrance fee, $100 dues; (3) Founding (those aiding in the founding of the Club) — such annual dues as the President shall determine. Thereafter, on November 24, 1958, two additional classes of membership, Non-Eesident and Service, were authorized.

At its organization meeting in April 1957, the Club’s Governing Committee authorized the Club to issue debentures to be known as Non-Interest Bearing Subordinated Debenture Bonds. They were to be limited in aggregate principal amount to $150,000 outstanding at any one time, to mature on July 1, 1969, with a grace period for payment of principal of two years thereafter, to be prepayable, and to bear no interest at any time.

A Prospectus dated February 13, 1957, which was subsequently approved by the Club, set forth the purposes of the Club, its plans for building a skating rink, and the manner in which the Club intended to finance the rink and its other operations.

In regard to the proposed issuing of debentures, the Prospectus stated:

We estimate that at least $100,000 must be raised through sale of debentures and $40,000 through initiation fees. The debentures would be subject to a 12 year sinking fund to begin two years following the opening date of the rink. They will bear no interest, since to pay interest would extend the period of sinking fund very materially. However, those who buy bonds will not be required to pay initiation fees and will be forgiven a portion, or in some cases all, of their dues for life. The debentures will be transferable, but not the privileges accorded the buyer.
$5,000 debenture entitles buyer to 100% lifetime dues forgiveness
$4,000 debenture entitles buyer to 80% lifetime dues forgiveness
$3,000 debenture entitles buyer to 60% lifetime dues forgiveness
$2,000 debenture entitles buyer to 40% lifetime dues forgiveness
$1,000 debenture entitles buyer to 20% lifetime dues forgiveness
Regular dues will be $125 per family membership per season, except that a member of the Huntington Country Club will pay $100, the difference being paid to the Country Club, up to certain limits, for house privileges of non-members. Bond buyers, regardless of membership in the Country Club, will pay no initiation fee and will compute their dues reduction on the basis of $125 dues.
Initiation fees will be $200 per family membership, except that members of Huntington Country Club will pay $150. We estimate that 65 non-debenture-buying Country Club members may wish to ioin the Winter Club.

Subsequently, the debentures were issued pursuant to the provisions of the Prospectus. They were originally purchased by 58 members of the Club, which consisted of about one-third of the original membership. The remaining original members did not buy any bonds at all. Membership in the Club has never been conditioned npon purchase of one or more of the debentures, and of the many new members since 1957, only a few have purchased any of them. At the present time there are 57 debenture-holding members, which figure includes all the Founding members.

The plaintiff in this case is James C. Dudley, who was a charter member, governor, and first president of the Club. Sometime between July and September of 1957, plaintiff purchased two of the $1,000 debentures for cash. He was thus excused from paying any entrance fee to the Club, and became entitled to an annual reduction of 40 percent of his dues, for the duration of his membership in the Club. Thus his dues were $75 annually, based upon a 40 percent reduction from the $125 basis set forth in the Prospectus.

Originally plaintiff did not pay any initiation excise tax based on the cost of the bonds, but he did pay an excise tax on the full amount of the dues, which he would have owed had he not been entitled to the 40 percent reduction due to his purchase of the debentures.

The Commissioner of Internal Eevenue refunded, in full, the excise tax paid by plaintiff on the amount of his dues which, in fact, were forgiven and not paid to the Club. In 1960, the Commissioner of Internal Eevenue assessed a tax of $400, plus $73.05 interest thereon, against plaintiff on the theory that plaintiff’s purchase of the debentures in the amount of $2,000 was payment of an initiation fee subject to the 20 percent excise tax of section 4241(a)(2) of the Internal Eevenue Code of 1954. Plaintiff paid the assessment and filed a claim for refund. His claim was denied, and he hereby brings this suit to recover the assessment.

The question before us is whether the debentures purchased by plaintiff for $2,000 constituted payment of an initiation fee under section 4242 (b) of the 1954 Code, which then would be subj ect to the excise tax provided for in section 4241 (a)(2) of the Code.

Section 4242 (b) defines initiation fees:

(b) Initiation Fees. — As used in this part the term “initiation fees” include any payment, contribution, or loan, required as a condition precedent to membership, whether or not any such payment, contribution, or loan is evidenced by a certificate of interest or indebtedness or share of stock, and irrespective of the person or organization to whom paid, contributed, or loaned.
Section 4241(a) (2) imposes an excise tax on initiation fees:
(a) Kate. — There is hereby imposed—
* * * * *
(2) Initiation Fees. — A tax equivalent to 20 percent of any amount paid as initiation fees to such a club or organization, if such fees amount to more than $10, or if the dues or membership fees, not including initiation fees, of an active resident annual member are in excess of $10 per year.

The Commissioner of Internal Kevenue determined that plaintiff, as well as the other debenture holders in the Club, were in a separate membership class from the other members, and that purchase of one or more debentures was a requisite to admittance to this type of membership. Thus the debentures were in the words of section 4242(b), “* * * any payment, contribution, or loan, required as a condition precedent to membership, * * *.” The reason for this determination was that debenture holders received certain rights and privileges not enjoyed by the general membership; i.e., nonpayment of entrance fees and reduced dues.

The Commissioner’s determination is supported by the well-reasoned opinion of the District Court in Edgewood Country Club v. United States, 204 F. Supp. 508, aff’d per curiam by the Fourth Circuit, 310 F. 2d 379. There a club required its members in the Family and Single classes of membership to purchase ten shares of stock in the building association that owned the club’s properties or else pay an additional amount of $25 in annual dues. Judge Watkins held that in order for the members to receive certain privileges denied to other members, i.e., payment of less dues, it was mandatory for them to purchase ten shares of stock even though it was not required of them, and therefore the cost of the ten shares was an initiation fee subject to the excise tax.

We believe Judge Watkins’ interpietation of sections 4241 and 4242 is correct. This is particularly true in view of the complete legislative history of those sections set forth in his opinion which show that the statutes were intended to close a loophole whereby taxes were avoided through the device of having members make loans to an organization instead of directly paying fees and dues.

As did the taxpayer in the Edgewood case, the taxpayer in this case claims that the purchase of debentures was not a mandatory requirement for admission to the Club and therefore not an initiation fee. The short answer to that contention is that plaintiff had the choice of paying the standard entrance fee and dues in order to become a member, or of purchasing the debentures and paying a lesser amount of dues. The choice was his and as he voluntarily chose to gain admittance to the type of membership in the Club which required purchase of debentures, he is responsible for payment of the appropriate excise tax.

Plaintiff also argues that the purchase of non-interest bearing debentures was purely a loan to the Club and thus not taxable under Eevenue Euling 55-576, 1955-2 Cum. Bull. 641. This ruling determined that advancements made to a Club as voluntary loans for a building program were not subject to an excise tax as dues or initiation fees because a member’s rights and privileges in the dub were in no way affected by the making of such loans or the refusal to make such loans. Thus the loans were not a condition precedent to membership. The ruling went on to state “If, however, such advances are required of new members or of members electing to acquire a new or different membership as a condition precedent to membership, the amounts thereof are clearly initiation fees * * *.”

Thus, in reply to this contention of plaintiff, the facts in the instant case show that the purchasing of debentures was something in addition to a loan and was a condition precedent which entitled the purchaser to certain privileges over non-debenture-holding members. The purchasers are, therefore, taxable under both Eevenue Euling 55-576, supra, and Revenue Ruling 281,1953-2 Cum. Bull. 344, which, is similar in determination.

Whether plaintiff would have been financially better off costwise by paying the standard fees instead of purchasing the debentures is not clear. However, that state of events is not relevant to the determination of this case. Plaintiff is liable for the excise tax imposed upon the costs of the type of membership he chose.

The plaintiff also states that the action of the Commissioner of Internal Revenue was arbitrary in that an initiation tax was imposed on those members who purchased one to four debentures, but not on those who purchased five debentures. We do not think such action by the Commissioner was arbitrary or unreasonable. The reason for not imposing an initiation tax on purchasers of five debentures was because such a purchase relieved the purchaser from payment of any dues or membership fees for the duration of his entire membership and, therefore, was a purchase of a life membership. Section 4241(a) (3) of the 1954 Code imposes a different tax on purchase of a life membership and allows the purchaser an election either to pay a 20 percent tax on the cost of such membership or pay a tax equivalent to the tax paid by regular dues paying members at such time as their dues tax is due (which is annually in the present case.)

Plaintiff cites In the Matter of Riverlake Country Club, Inc., 203 F. Supp. 442, affirmed on appeal to the Fifth Circuit with one judge dissenting, 306 F. 2d 564, as partially supporting his position. In that case the court held that purchasers of $1,000 bonds who were entitled to membership in the country club without having to pay the $400 resident or $50 non-resident membership fee did not have to pay an initiation fee tax on the cost of the bonds, but did have to pay such a tax on the cost of the membership fee they otherwise would have had to pay in order to join the club.

We respectfully disagree with the majority opinion handed down by the Fifth Circuit in that case, and agree with the dissenting opinion that the statutes require the tax to be imposed on the amount of the loans made by the member in order to achieve membership and not on the fees he otherwise could have paid for membership had he chosen to do so.

Therefore plaintiff’s purchase of the $2,000 worth of debentures was correctly subject to tax as an initiation fee, and his petition is dismissed.

Reed, Justice {Bet.), sitting by designation; Davis, Judge; Dueeee, Judge; and JoNes, Chief Judge, concur.

FINDINGS OF FACT

The court, having considered the facts as stipulated by the parties, and the briefs and argument of counsel, makes findings of fact as follows:

1. The plaintiff herein, James C. Dudley, is an individual residing at East Gate Road, Lloyd Harbor, Huntington, New Tork. Plaintiff was a charter member, governor, and first president of The Winter Club, Inc. (hereinafter sometimes called “Winter Club”), a membership corporation organized under the Laws of the State of New York in April 1957.

2. Under the terms of its Certificate of Incorporation, filed with the Secretary of State of the State of New York on April 24, 1957, Winter Club was organized for the purpose of maintaining and operating “a club exclusively for pleasure, recreation, no part of the net earnings of which shall inure to the benefit of any of its members.” (Article Second) . More specifically, Winter Club was organized to operate a private skating club during the winter months, on premises leased for the purpose from the Huntington Country Club, also a New York membership corporation. The Agreement of Sublease between Huntington Country Club and The Winter Club, Inc., dated as of April 1, 1958, provides (par. 3) that: “Lessee may use the leased premises only for the purposes of a private skating club to be open to members of Lessee during the period from November 15th to March 15th of each lease year.”

3. Under Article Fifth of the Certificate of Incorporation, it is provided that the directors of the corporation shall be known as “Governors”, shall be 14 in number, and shall be known as the “Governing Committee.” Under the Con-stitutioix of Winter Club, adopted by the members of the Club at their organization meeting on April 30,1957, it is provided in Article IV.4.J that the Governing Committee shall have the power: “To fix [from] time to time initiation fees and dues under the terms and conditions hereinafter provided.” It is further provided under Article VII.l that:

The Governing Committee shall have the power to fix and change the entrance fees and yearly dues of members, and the time of payment thereof, from time to time, in such amounts as it may determine or to waive such fees.

4. The organization meeting of the Governing Committee of Winter Club was held on April 30,1957. It appears from the minutes of that meeting that the Governing Committee unanimously resolved to adopt the Constitution of Winter Club “as and for the by-laws of The Winter Club, Inc.” The Governing Committee further resolved that:

The following classes of membership in The Winter Club, Inc. are hereby established:
A. Regular Members — Members other than Country Club and Founding Members.
B. Country Club Members — Members who are also members of the Huntington Country Club.
C. Founding Members — Members who aided in the founding of The Club.
Besolved: The following entrance fees and annual dues are fixed for the year 1957-1958:
A. Regular Members — $200 entrance fee and $125 annual dues.
B. Country Club Members — $150 entrance fee arid $100 annual dues.
C. Founding Members — Such annual dues as the president shall determine.

In addition, it was further resolved at the organization meeting of Winter Club’s Governing Committee that:

1. The Winter Club, Inc., in exercise of the borrowing power conferred on it by the State of New York, and in order to obtain funds for its proper corporate purposes, hereby approves the creation of an issue of its debentures to be known as its “Non-Interest Bearing Subordinated Debenture Bonds” to be limited in an-gregate principal amount to $150,000' outstanding at any one time, to mature on July 1, 1969 with a grace period for payment of principal of two (2) years thereafter, to bear no interest at any time, to be prepayable in whole or in part at any time, to be subordinated to all other claims and obligations of the corporation except for other debentures of the same issue, and to be governed by such other covenants and provisions as are contained in the form of debenture submitted to this meeting.
2. The form of debenture submitted to this meeting, together with all the recitals, conditions, terms, covenants, agreements and provisions therein contained are hereby authorized, approved, confirmed and adopted; provided, however, that such changes may be made in the form of debenture and in the recitals, conditions, terms, covenants, agreements and provisions therein contained as may be approved by the officers, or any one or more of them, of The Winter Club, Inc., such approval to be evidenced conclusively by his signature in executing any such debenture or debentures.

5. The manner in which the organizers of Winter Club proposed to finance the venture was further spelled out in a Prospectus dated February 13, 1957. This document was prepared and issued in the name of Winter Club by James C. Dudley in concert with other individuals who, like Mr. Dudley, were organizers, original members and on the first Board of Governors of the Club. While this Prospectus was drafted before Winter Club was formally organized, it was reviewed and approved particularly with respect to its financing provisions, by a legal committee of organizers which was formed to incorporate the Club. The Prospectus was used by organizers of the Club in securing new members, being handed to prospects in personal conversations and, later on, delivered by hand or mail to others in the community to induce them to join.

6. Winter Club’s Prospectus dated February 13, 1957, set forth the purposes of the Club, its plans for building the skating rink, how the construction of the rink was to be financed, and similar pertinent fiscal and operational details. After setting forth in detail (p. 3) the estimated initial expenses and the operating costs for the first winter season, the Prospectus continued witli the following proposal for financing through debentures (p. 4) :

We estimater that at least $100,000 must be raised through sale of debentures and $40,000 through initiation fees. The debentures would be subject to a 12 year sinking fund to begin two years following the opening date of the rink. They will bear no interest, since to pay interest would extend the period of sinking fund very materially. However, those who buy bonds will not be required to pay initiation fees and will be forgiven a portion, or in some cases all, of their dues for life. The debentures will be transferable, but not the privileges accorded the buyer.
$5,000 debenture entitles buyer to 100% lifetime dues forgiveness
$4,000 debenture entitles buyer to 80% lifetime dues forgiveness
$3,000. debenture entitles buyer to 60% lifetime dues forgiveness
$2,000 debenture entitles buyer to 40% lifetime dues forgiveness
$1,000 debenture entitles buyer to 20% lifetime dues forgiveness
Eegular dues will be $125 per family membership per season, except that a member of the Huntington Country Club will pay $100, the difference being paid to the Country Club, up to certain limits, for house privileges of non-members. Bond buyers, regardless of membership in the Country Club, will pay no initiation fee and will compute their dues reduction on the basis of $125 dues.
Initiation fees will be $200 per family membership, except that members of Huntington Country Club will pay $150. We estimate that 65 non-debenture-buying Country Club members may wish to join the Winter Club.

7. At a meeting of the Governing Committee on November 24, 1958, by resolution duly adopted and set forth in the minutes of that meeting, two additional classes of membership in Winter Club were created: (1) Non-Resident Members (defined as members whose residence is more than 60 air miles from the Club’s site in Huntington, New York), who were required to pay an entrance fee of $200 and annual dues of $35; and (2) Service Members (defined as members in the service of the United States or of any foreign government), who were excused from payment of an entrance fee, but required to pay annual dues of $125.

8. At the same meeting of the Governing Committee on November 24, 1958, the following policies were agreed upon and adopted: (1) If a Founding Member became eligible for Non-Resident membership, his dues should be fixed by the determination of the president; (2) an applicant for Service membership should receive priority on the waiting list, after former members and their relatives; and (8) the status of Service and Non-Resident members should be reviewed annually by the treasurer to determine if a reclassification were necessary.

9. The class of Non-Resident Members was created at the request of one who was already a member of the Club, and who desired the new non-resident status with its modest annual dues since he planned to move away from the area of the Club, temporarily. The class of Service Members was created for the benefit of a proposed new member who moved into a house which he had rented in the locality of the Club, knowing that he would only be in the area for a year while working on a special government project in New York. As of the date of this stipulation, there is one NonResident Member, and no Service Members.

10. Since Winter Club was organized, it has never been required that applicants for membership should purchase one or more of the $1,000 Subordinated Debentures, in order to join the Club. Debentures were originally purchased by 58 members of the Club, a group constituting about one-third of the original membership. The remaining original members did not buy any bonds at all. Since the first bonds were sold in 1957, many new members have been admitted to the Club upon their undertaking to pay the regular entrance fee and annual dues for one of the classes of membership created as set forth in findings 4 and 7. Only a few members who have joined the Club since 1957 have purchased debentures. The names of present members of the Club who are debenture-holders, together with the face amount of their debentures, are as follows:

Hoyt Ammidon-$1,000. 00
Donald Arthur, Jr- 5,000.00
E. Farrar Bateson, Jr- 2, 000. 00
Adelrick Benziger- 1,000.00
David W. Brown_ 1,000. 00
Samuel R. Callaway- 1,000. 00
John Campbell- 1, 000. 00
Miner D. Crary, Jr- 3,000.00
Raymond deClairville- 1,000. 00
Douglas Despard, Jr- 1,000.00
James C. Dudley- 2,000. 00
Joseph R. Eggert, Jr- 1,000.00
Duncan R. Elder, Jr- 1, 000. 00
John D. Fennebresque- 1,000. 00
Clarance E. Galston-j.- 5,000.00
Charles V. Graham- 1,000.00
Horace Havemeyer, Jr- 5,000. 00
Dr. William W. Heroy_ 5,000.00
Charles L. Hewitt_ 1,000. 00
Garfield H. Horn_ 1,000.00
Ward L. Johnson, Jr- 1,000.00
Dr. Francis C. Keil, Jr- 1,000.00
Walter Kernan- 1,000. 00
Francis S. Kinney_ 1,000. 00
Orín T. Leach_ 1,000. 00
David A. Lindsay- 1,000. 00
George N. Lindsay, Jr_ 1,000. 00
Robert V. Lindsay_ 1,000. 00
William H. Mathers_ 1,000.00
Richard B. McAdoo- 1,000.00
James A. McCurdy, II_ 1,000.00
William S. Niven_ 1,000.00
David C. Noyes, Jr_ 1,000.00
George D. O’Neill_ 2,000. 00
Arthur W. Page, Jr- 2, 000. 00
John H. Page- 1,000. 00
William H. Peck, Jr_ 1, 000. 00
Edward E. Post- 5,000. 00
Frank C. Powell- 1,000. 00
Francis C. Powers_ 5,000. 00
Theodore H. Price, Jr- 1,000.00
John T. Ricks_ 1, 000.00
Charles S. Robertson_ 5, 000. 00
Walter N. Rothschild, Jr_ 2,000.00
James A. Rousmaniere_ 5,000.00
Paul C. Sbeeline_$1,000. 00
Richard S. Storrs_ 5,000.00
Joseph S. Stout_ 1,000. 00
Charles C. Townsend, Jr_ 1,000.00
Edmund S. Twining, Jr_ 5,000. 00
Richard Veit_ 1, 000.00
Charles W. B. Wardell, Jr_ 1,000.00
Dr. David E. Warden_ 1,000.00
Taggart Whipple_ 5,000.00
Edward C. R. Whitcraft_ 2,000.00
Valentine Wood- 1,000.00
Emmet J. McCormack_ 5,000.00

In addition to the above debenture-holding members, there are at present the following non-debenture-holding members: 92 Regular members, 68 Country Club members, and 1 Non-Resident member. At the present time there are no members in the Service category. All Founding members are debenture holders.

11. Those members of Winter Club who have purchased debentures have not been required to pay an initiation fee, and the annual dues forgiveness schedule set forth in the Prospectus dated February 13,1957, has been uniformly applied to the dues paid by such debenture-holders. The debenture-holders have paid federal excise tax on the basis of anual dues in the amount of $125, without regard to any forgiveness of such dues, as provided in the Prospectus; but they have paid Federal excise tax only on the initiation fee actually paid, if any.

12. During the third calendar quarter of the year 1957, plaintiff voluntarily purchased two of the $1,000 debentures of Winter Club for $2,000 cash. By reason of this purchase, and pursuant to the policies set forth in the Prospectus, plaintiff was excused from paying any initiation fee to Winter Club, and, in addition, became entitled for the duration of his membership to an annual reduction of 40 percent in his Winter Club dues. The Secretary’s delegate (hereinafter called the “Commissioner”) refunded in full Federal excise taxes paid by the plaintiff on the amount of his dues which, in fact, were forgiven and not paid to the Winter Club.

13. On the other hand, on November 25,1960, the Commissioner assessed a tax of $400, plus $73.05 interest thereon, against plaintiff, on the theory that plaintiff’s purchase of his two Winter Club Subordinated Debentures in 1957 for $2,000 cash was payment of an initiation fee subject to a 20 percent tax under section 4241(a) (2) of the Internal Revenue Code of 1954, as amended (hereinafter referred to as the “Code”). The foregoing assessment of $473.05 was duly paid by plaintiff by check dated November 28, 1960.

14. On or about January 3, 1961, plaintiff filed with the District Director of Internal Revenue, Brooklyn, New York, a formal claim for refund on Form 843, seeking the repayment of the tax plus interest collected from plaintiff on or before November 28, 1960. Plaintiff’s refund claim was timely filed. By certified mail under date of April 4,1961, the Commissioner gave statutory notice of his disallowance of plaintiff’s refund claim.

15. The grounds on which the Commissioner assessed the foregoing tax, and to which he adhered in rejecting plaintiff’s claim for refund, are set forth in detail in a letter dated May 19, 1960, from Thomas E. Scanlon, District Director of Internal Revenue, 250 Livingston Street, Brooklyn 1, New York, to Mr. George M. Terry, Manager, Peat, Marwick, Mitchell & Company, Seventy Pine Street, New York 5, New York. This letter contained extensive extracts from another letter, received by the District Director on May 16, I9601 from the Chief of the Excise Tax Branch, National Office, Internal Revenue Service. In these extracts the Chief of the Excise Tax Branch took the view that there is “no basis, in fact, for non-taxability of the amounts paid for bonds” in 1957 and 1958 by the club membership of The Winter Club, Inc. These extracts continue in pertinent part as follows:

In the situation on which our ruling regarding minimum food charges was predicated, a club had no required minimum on amounts spent by its members for food and refreshments, although the charges for food, liquor, and similar items served as a basis for determining the amount of dues to be paid by a member in the next succeeding year. In that case the amount of dues for the succeeding year fluctuated depending on the amount spent for food and drink. There was nothing to be gained in spending less for such items, and the amount paid by members for dues in the following year could go up as well as down, depending on the amount spent. In the instant case there is a minimum expenditure required if the privilege of reduced dues is to be enjoyed, and unlike the former case, such expenditure always results in reduced dues.
Concerning the [Winter Club’s] attorney’s attempt to place the purchase of bonds by members in the instant club in the same category as a member performing services for a club and thus being relieved from paying dues, we refer to our published ruling covering such matters, namely, Eevenue Ruling 58-494 (C.B. 1958-2, 822). As that ruling implies the employee-member was relieved from payment of any dues, assessments, contributions, fees, or other levies. _ We held that the services performed and the facilities furnished by the employee-member were equal in value, at least, to the amount paid as dues or membership fees by other members who enjoyed the same rights and privileges as the employee-member, and he was liable for the tax on dues or membership fees in an amount equal to the tax paid by such other members. Unlike the facts in that case, a member of the Winter Club, Inc., was required to purchase a bond before being relieved from payment of dues.
With respect to the attorney’s reference to section 4241(a) (3) of the Code, relating to life memberships, we feel that of the 58 members who purchased bonds in the organization, only the 12 members who purchased five bonds and were thus relieved from payment of dues for life, could be classified life members within the meaning of that section.
Section 4242(b) of the Code defines the term “initiation fees” to include payment, contribution, or loan required as a condition precedent to membership, whether or not any such payment, contribution, or loan is evidenced by a certificate of interest or indebtedness or share of stock, and irrespective of the person or organization to whom paid, contributed or loaned.
Our position as set forth in Revenue Ruling 55-516, on which the attorney based his nontaxable appeal, is that where members advance funds to a club on a strictly voluntary basis, and under an agreement whereby the club guarantees repayment to the members of the amount advanced, such loans do not constitute assessments within the meaning of the law, nor are they considered initiation fees, since the enjoyment of membership rights and privileges are in no way affected by making or refusing to make such loans.
We have given careful consideration to the evidence submitted in this case, and also to the contentions advanced by the attorney on behalf of his client. It appears that while the purchase of debentures by members of the Winter Club, Inc., apparently was not a condition precedent to membership in the club, the purchase of such debentures granted to the purchaser certain privileges not enjoyed by members who did not purchase debentures, namely, reduced annual dues and cancellation of an otherwise required entrance fee. On that basis, purchasers of debentures have certain rights and privileges differing from other classes of members and, in accordance with the clearly defined position of the Service, they comprise a separate class of membership, regardless of whether they are so designated. In addition to Revenue Ruling 55-516, mem-tioned above, see also Revenue Ruling 281 (C.B. 1953-2, 344).
In view of the above, it is held that amounts paid for debentures by members of the Winter Club, Inc., represent initiation fees as defined above, and that the tax imposed by section 4241(a) (2) of the Code applies thereto. Since the evidence clearly indicates that each $1,000.00 bond entitled its owner to a 20 percent reduction in dues for life, it is our conclusion that the tax applies to the amounts paid for debentures by the members who thus acquired the 20, 40, 60 or 80 percent reduction in dues. A member who purchased one debenture and acquired a 20 percent reduction in dues for life, is liable for tax on the purchase price of one debenture; a member who purchased two debentures and acquired a 40 percent reduction in dues for life is liable for tax on the purchase price of two debentures; and so on through the purchase price of four debentures.
The 12 members who purchase five debentures, however, and became entitled to membership for life, without further payment of dues, would be required to pay only the dues tax paid by the active resident annual members with respect to dues or fees, other than assessments. There would be no tax in their case on the amount paid for the five debentures, as under the law no tax was levied on the amount paid for life membership.
According to the evidence submitted in the case, the same tax has been paid by debenture-holding members as by nondebenture-holding members. This was not correct as the tax should have been based upon the various amounts actually paid by such members as dues. Therefore, those members who enjoyed a 20 percent remission in dues should likewise have paid 20 percent less in tax. Proportionate reductions in dues would similarly apply to the holders of 2, 3, or 4 debentures whose dues were remitted by 40, 60 or 80 percent, respectively.

16. This suit is timely filed, i.e., within two years of the date of the formal rejection by the Commissioner of plaintiff’s timely filed refund claim. Jurisdiction to hear and determine this cause at this time is conferred upon this court by sections 6532(a) and 7422(a) of the Code. Jurisdiction of the subject matter is conferred upon this court by section 1491 of Title 28, United States Code.

17. Plaintiff is and always has been the sole owner of the claim here sued upon, and no assignment or transfer thereof, or any part thereof, or interest therein, has been made by plaintiff.

18. No action on plaintiff’s claim has been taken by the Congress of the United States, or by any Department of the Government, except as hereinbefore set forth.

CONCLUSION OF LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is not entitled to recover, and the petition is therefore dismissed. 
      
       26 U.S.C. (I.R.C. 1954) §4241 (a) (2) (1958 Ed.)
     
      
       26 U.S.C. (I.R.C. 1954) § 4242(b) (19581 Ed.)
     
      
       It is impossible to avoid payment of federal tax on what dues would normally be.
     
      
       It Is impossible to avoid payment of federal tax on what dues would normally be.
     