Title 26 — Internal Revenue CodeRelease 119-73
§456 Prepaid Dues Income of Certain Membership Organizations
Title 26 › Subtitle Subtitle A— Income Taxes › Chapter 1— NORMAL TAXES AND SURTAXES › Subchapter E— Accounting Periods and Methods of Accounting › Part II— METHODS OF ACCOUNTING › Subpart B— Taxable Year for Which Items of Gross Income Included › § 456
Summary
Membership organizations without capital stock, like clubs and associations, often collect dues in advance for services or privileges they will provide later. Normally that money counts as income when received. An organization can elect instead to spread prepaid dues over the period it owes the services or privileges, as long as that period is no more than 36 months and the organization does not use cash-basis accounting for that business. If the obligation ends early, or the organization shuts down, any dues not yet counted as income must all be reported that year. Making the election also triggers a catch-up rule: dues received in the 3 years before the election that would have been spread into the election year must be added to income, but the organization can then deduct one-fifth of that extra amount each year for 5 years. Once made, the election stays in effect for all later years unless the IRS consents to revoking it.
Full Legal Text
Title 26, §456
Internal Revenue Code — Source: USLM XML via OLRC
(a)Prepaid dues income to which this section applies shall be included in gross income for the taxable years during which the liability described in subsection (e)(2) exists.
(b)In the case of any prepaid dues income to which this section applies—
(1)If the liability described in subsection (e)(2) ends, then so much of such income as was not includible in gross income under subsection (a) for preceding taxable years shall be included in gross income for the taxable year in which the liability ends.
(2)If the taxpayer ceases to exist, then so much of such income as was not includible in gross income under subsection (a) for preceding taxable years shall be included in gross income for the taxable year in which such cessation of existence occurs.
(c)(1)This section shall apply to prepaid dues income if and only if the taxpayer makes an election under this section with respect to the trade or business in connection with which such income is received. The election shall be made in such manner as the Secretary may by regulations prescribe. No election may be made with respect to a trade or business if in computing taxable income the cash receipts and disbursements method of accounting is used with respect to such trade or business.
(2)An election made under this section shall apply to all prepaid dues income received in connection with the trade or business with respect to which the taxpayer has made the election; except that the taxpayer may, to the extent permitted under regulations prescribed by the Secretary, include in gross income for the taxable year of receipt the entire amount of any prepaid dues income if the liability from which it arose is to end within 12 months after the date of receipt. Except as provided in subsection (d), and election made under this section shall not apply to any prepaid dues income received before the first taxable year for which the election is made.
(3)(A)A taxpayer may, with the consent of the Secretary, make an election under this section at any time.
(B)A taxpayer may, without the consent of the Secretary, make an election under this section for its first taxable year in which it receives prepaid dues income in the trade or business. Such election shall be made not later than the time prescribed by law for filing the return for the taxable year (including extensions thereof) with respect to which such election is made.
(4)An election under this section shall be effective for the taxable year with respect to which it is first made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to the revocation of such election. For purposes of this title, the computation of taxable income under an election made under this section shall be treated as a method of accounting.
(d)(1)If a taxpayer makes an election under this section with respect to prepaid dues income, such taxpayer shall include in gross income, for each taxable year to which such election applies, not only that portion of prepaid dues income received in such year otherwise includible in gross income for such year under this section, but shall also include in gross income for such year an additional amount equal to the amount of prepaid dues income received in the 3 taxable years preceding the first taxable year to which such election applies which would have been included in gross income in the taxable year had the election been effective 3 years earlier.
(2)A taxpayer who makes an election with respect to prepaid dues income, and who includes in gross income for any taxable year to which the election applies an additional amount computed under paragraph (1), shall be permitted to deduct, for such taxable year and for each of the 4 succeeding taxable years, an amount equal to one-fifth of such additional amount, but only to the extent that such additional amount was also included in the taxpayer’s gross income during any of the 3 taxable years preceding the first taxable year to which such election applies.
(e)For purposes of this section—
(1)The term “prepaid dues income” means any amount (includible in gross income) which is received by a membership organization in connection with, and is directly attributable to, a liability 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)The term “liability” means a liability to render services or make available membership privileges over a period of time which does not exceed 36 months, which liability shall be deemed to exist ratably over the period of time that such services are required to be rendered, or that such membership privileges are required to be made available.
(3)The term “membership organization” means a corporation, association, federation, or other organization—
(A)organized without capital stock of any kind, and
(B)no part of the net earnings of which is distributable to any member.
(4)Prepaid dues income shall be treated as received during the taxable year for which it is includible in gross income under section 451 (without regard to this section).
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Amendments
1976—Subsec. (c). Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary” wherever appearing. Subsec. (c)(3)(B). Pub. L. 94–455, § 1901(a)(68), substituted “for its first taxable year” for “for its first taxable year (i) which begins after December 31, 1960, and (ii)”.
Statutory Notes and Related Subsidiaries
Effective Date
of 1976 AmendmentAmendment by section 1901(a)(68) of Pub. L. 94–455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title.
Effective Date
Pub. L. 87–109, § 2, July 26, 1961, 75 Stat. 224, provided that: “The
Amendments
made by this Act [enacting this section] shall apply with respect to taxable years beginning after December 31, 1960.”
Reference
Citations & Metadata
Citation
26 U.S.C. § 456
Title 26 — Internal Revenue Code
Last Updated
Apr 6, 2026
Release point: 119-73