Proposed regulations clarify disallowance rule.

Proposed regulations (sec. 1.274-2) define the term club for purposes of the disallowance rule of section 274(a)(3) of the 1993 Omnibus Budget Reconciliation Act, which disallows a deduction for amounts paid or incurred after 1993 for membership in any club organized for business, pleasure, recreational or other social purposes. (Before section 274(a)(3) was enacted, membership dues paid to professional organizations, civic organizations and business luncheon clubs generally were deductible.)

According to the proposed regulations, clubs organized for such purposes include any organizations whose principal purpose is to entertain members or their guests or provide them with access to entertainment facilities. Such organizations include but are not limited to airline and hotel clubs, golf and other athletic clubs and business luncheon clubs.

However, the proposed regulations say dues paid in 1994 to professional organizations (such as bar associations and medical associations), business leagues, trade associations, chambers of commerce, boards of trade, real estate boards and civic or public service organizations (such as Kiwanis, Lions or Rotary clubs) are deductible unless the organization's principal purpose is to conduct entertainment activities.

Observation: Even though membership dues paid to business luncheon clubs and similar clubs no longer are deductible, 50% of meal and entertainment expenses incurred or paid at such establishments still are deductible as legitimate business expenses.