Internal Revenue Service
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 Rev. Rul. 76-48

1976-1 C.B. 265

Section 1372

IRS Headnote

Small business corporation; tennis and handball court receipts. Amounts an electing small business corporation receives for the use of its tennis and handball courts by players who are provided with locker room and parking facilities, lesson fees with no additional charge made for the use of the court, and sales of sport items by a shop on the premises are not passive investment income for purposes of section 1372(e)(5) of the Code.

Full Text

Rev. Rul. 76-48

Advice has been requested whether, under the circumstances described below, an electing small business corporation has passive investment income within the meaning of section 1372 of the Internal Revenue Code of 1954.

The corporation operates tennis and handball courts that are available for use sixteen hours a day, seven days a week, and it charges an hourly rate for the use of a court regardless of the number of players using it. Employees of the corporation handle the actual "rental" of the courts to players.

Players using the courts are provided with a locker room, lockers, saunas, showers, hair dryers, and parking facilities. A full-time janitor is employed by the corporation to clean and maintain the showers, locker rooms, and courts.

The corporation charges separate fees for lessons. Lessons are offered by an employee of the corporation at a specified rate per hour, and there is no additional charge for court time while a lesson is in progress.

The corporation also maintains a shop, for the convenience of the players, on the premises where items such as tennis rackets, gloves, sweaters, balls, and socks are sold. Since most of the people purchasing items from the shop are those who play tennis and handball at the facility, it is estimated that less than one percent of sales are to those who do not use the facilities. The shop is not advertised and is not in competition with other shops in the area.

Section 1372(a) of the Code allows a small business corporation, as defined in section 1371, to elect not to be subject to the tax imposed by Chapter 1 of the Code, but to have all its income taxed directly to its shareholders whether or not such income is distributed to its shareholders. This election is, however, terminated under the provisions of section 1372(e)(5) if, for any taxable year of the corporation for which the election is in effect, more than 20 percent of the gross receipts of the corporation is derived from royalties, rents, dividends, interest, annuities, and sales or exchanges of stock or securities.

Section 1.1372-4(b)(5)(vi) of the Income Tax Regulations provides, in part, that the term "rents," as used in section 1372(e)(5) of the Code, means amounts received for the use of, or right to use, property (whether real or personal) of the corporation. However, the term does not include payments for the use or occupancy of rooms or other space where significant services are also rendered to the occupant.

In Rev. Rul. 65-83, 1965-1 C.B. 430, the facts in one situation provide that a corporation leases golf carts at various golf courses at a charge based upon the number of rounds for which the carts are used, payments received are divided with the owner of the course, whose employees handle the actual rental of the carts to the golfers, and the cost of maintaining and servicing the carts including the wages of a full-time mechanic are paid by the corporation. Rev. Rul. 65-83 holds that the payments received by the corporation are not rents within section 1372(e)(5) of the Code since significant services are performed by the corporation.

Accordingly, in the instant case, the gross receipts for the use of the tennis and handball courts are not passive investment income for purposes of section 1372(e)(5) of the Code since, in connection with the provision of the locker room, lockers, saunas, showers, hair dryers, and parking facilities, significant services are performed by the corporation in connection with such gross receipts.

Further, the lesson fees and the receipts from the sale of the sport items by the shop on the premises are not receipts derived from royalties, rents, dividends, interest, annuities, and sales or exchanges of stock or securities and, therefore, are not passive investment income for purposes of section 1372(e)(5) of the Code.