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whereas their payments in aid of capital improvements are capital
contributions.
The interpretive regulations under section 4243 stated that
the exemption applied to amounts paid for the retirement of
indebtedness (a mortgage loan, for example) incurred by reason of
the construction or reconstruction of any capital addition,
improvement or facility.18 Sec. 49.4243-2(b)(iii), Excise Tax
Regs. However, the regulations did not allow the exemption
unless the funds were earmarked for capital purposes. Id.
In Atlanta Athletic Club v. United States, 277 F.Supp. 669
(N.D. Ga. 1967), the court held that the board’s resolution to
divert 40 percent of future assessments to qualified purposes
allowed the payments so used to qualify for the exemption. The
court based its holding on the facts that the assessments were
based upon known existing needs, although no specific project was
stated, and the funds, although commingled with operating funds,
were held for future construction requirements.
In Gibbons v. United States, 277 F.Supp. 749 (S.D. Ill.
1967), the court held that there was insufficient earmarking for
the exception to apply where the members were not told that a
18 For payments made before Nov. 1, 1959, the regulation
stated that “Assessments paid for the retirement of indebtedness
(a mortgage loan, for example) incurred by reason of the
construction or reconstruction of any such facility * * * are
considered to be assessments for construction or reconstruction.”
Sec. 49.4243-2(a), Excise Tax Regs.
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