Keystone Auto. Club v. Comm'r of Internal Revenue, Docket No. 13738.

• Citation: 12 T.C. 1038
• Decision Date: 10 June 1949
• Docket Number: Docket No. 13738.
• Parties: KEYSTONE AUTOMOBILE CLUB, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: United States Tax Court

12 T.C. 1038

KEYSTONE AUTOMOBILE CLUB, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 13738.

Tax Court of the United States.

Promulgated June 10, 1949.

Petitioner, an automobile club deriving its income principally from membership dues and rendering to its members various travel services, including low cost insurance, safety promotion, touring advice, and the procurement of emergency repairs, held not exempt from tax under section 101(9), Internal Revenue Code. Chattanooga Automobile Club, 12 T.C. 967, followed. R. Lester Moore, Esq., for the petitioner.

William H. Best, Esq., for the respondent.

By this proceeding petitioner challenges respondent's determination of deficiencies for the calendar year 1943 as follows:

+--------------------------------------------+
                ¦Income tax                       ¦$13,242.02¦
                +---------------------------------+----------¦
                ¦Declared value excess profits tax¦104.81    ¦
                +---------------------------------+----------¦
                ¦Excess profits tax               ¦12,905.05 ¦
                +--------------------------------------------+
                

The above deficiencies resulted from respondent's action in ruling that petitioner was not entitled to exemption as a ‘club,‘ within the meaning of section 101(9), Internal Revenue Code, and in holding that entrance fees and dues received by petitioner from its members during the taxable year constituted income within the meaning of section 22(a), Internal Revenue Code.

FINDINGS OF FACT.

Petitioner, a Pennsylvania corporation, filed its corporation income and declared value excess profits tax and corporation excess profits tax returns for the calendar year 1943 with the collector of internal revenue for the first district of Pennsylvania. Petitioner is an automobile club which operates in Pennsylvania, east of Harrisburg and south of Bethlehem; in New Jersey, south of New Brunswick to Cape May; in Maryland; in the District of Columbia; and in the several northern counties of Virginia.

In 1906 the Automobile Club of Delaware County, an unincorporated association, was organized in Delaware County, Pennsylvania. That club was incorporated in 1911 under the laws of Pennsylvania, its charter stating in part as follows:

Second, - The purpose for which this corporation is formed is to maintain a club for social enjoyment and a club house, and for the comfort, protection and convenience of its members in the pursuit of the pastime of automobiling.

Eighth, - The annual income of the said corporation other than that derived from real estate shall not exceed the sum of Twenty thousand dollars ($20,000).

In 1917 the name of the club was changed by court decree from the Automobile Club of Delaware County to Keystone Automobile Club, petitioner in the instant proceeding. In 1929 the above provisions in petitioner's charter were amended to read as follows:

Second. The purpose for which this corporation is formed is to promote the construction and maintenance of public highways, to promote the safe and convenient use of the public highways, to collect and disseminate touring and other information valuable to automobile users, to promote the comfort, protection, convenience and interests and to protect the rights of automobile owners and users in general, and its members in particular, to facilitate the co-operation of its members to their mutual advantage and protection in matters relating to the use and ownership of motor vehicles, to maintain a club for social enjoyment, and a club house, and to purchase, lease and improve such real estate or other property as may be necessary for such aforesaid purpose.

Eighth. The annual income of the said corporation, other than that derived from real estate, shall not exceed the sum of Two million dollars ($2,000,000).

Petitioner's bylaws contained the following provisions with regard to eligibility for membership:

ARTICLE II.

Membership.

Section 1. Any person who is a member of the white race and interested in the objects of this Club shall be eligible for membership.

The procedure by which a person becomes a member of petitioner is the filing with the board of directors of an application endorsed by a member. Upon payment of dues and election by the board, the applicant becomes a member. In addition to the eligibility requirements in the bylaws, the applicant must meet the further requirements of not having an unfavorable reputation as a reckless driver and of not having a criminal record of convictions for driving while intoxicated, stealing an automobile, or similar offenses. During the taxable year petitioner charged an entrance fee of $2 for new members, and the annual dues were $10 for all members except those in the Washington and Baltimore operating areas, where the dues were $12, and in the central Pennsylvania area of York and Harrisburg, where the dues were less than $10. The differences in dues charged in the above areas resulted from differences in the cost of servicing members in those areas. Petitioner's membership on December 31, 1942, was 54,000; at the close of the taxable year, on December 31, 1943, it was 48,010; and at the time of the hearing in this case, 88,000. Petitioner's letterhead carries a statement that petitioner is the largest automobile club ‘in the East.‘

The bylaws of petitioner, effective March 23, 1943, contain the following provisions:

ARTICLE IV.

Meetings.

Section 1. The annual meeting of the Club shall be held in February, March or April of each year on such date and at such place within the Commonwealth of Pennsylvania as the Board of Directors, by a majority vote, shall determine. Notice of the holding of such meeting shall be sent to each member at least ten days prior thereto.

Section 2. Meetings other than the annual meeting may be called by the President, either at his own discretion or at the direction of a majority of the Board of Directors, and notice of the time and place of holding same be sent to each member at least ten days prior thereto.

Section 3. Twenty-five members shall constitute a quorum for the transaction of business.

ARTICLE V.

Board of Directors

Section 1. The Board of Directors shall consist of twenty-seven members to be elected as follows: At the annual meeting in 1926, nine to serve for a period of three years, nine to serve for a period of two years, and nine to service for a period of one year, and at each annual meeting subsequent to 1926, nine shall be elected for a term of three years to succeed the directors whose terms expire at such meeting.

Section 2. The general management and control of the affairs, funds and property of the Club shall be vested in the Board of Directors, including the election of members to the Club, and the making of rules for the government of the Board and of committees authorized by them.

ARTICLE VI.

Officers

Section 1. The officers of the Club shall be a President, a Vice-President, and five other Vice-Presidents, a Secretary and a Treasurer, all of whom shall be elected from among the Directors, with the exception of the Secretary who may or may not be a Director. The officers shall be elected at the organization meeting of the Board of Directors to be held immediately following the annual meeting. Each officer shall serve for a period of one year from his election and until his successor shall have been duly elected and qualified.

The incentive for becoming a member of petitioner is the right to obtain the various services rendered. During the taxable year the activities engaged in and the services rendered by petitioner were as follows: Public safety and traffic engineering, sign posting, motor patrol, safety education, emergency road services, touring and routing services, license and notary services, bail services, publication of the Keystone Motorist— monthly organ of petitioner, insurance facilities, and automobile finance facilities.

Public safety activities were developed by petitioner to decrease the high mortality resulting from accidents involving children on the highways going to and from school. Petitioner's Public Safety and Engineering Department organizes safety patrols in the schools, numbering some 20,500 boys and girls designated as patrolmen and guides. Among the items which petitioner uses for this part of its activities are booklets on the subject of the safety patrols, a pamphlet of bicycle safety rules, a highway safety textbook for high schools, advertising posters illustrating the work of the safety patrols and directing the attention of school children towards highway safety, and belts, badges, and insignia for use of safety patrol members.

Traffic engineering activities of petitioner are spread over many fields, including an advisory capacity to state legislatures in the preparation of motoring regulations. The engineering department collaborates with local municipal authorities in such matters as street lighting, modernizing road construction specifications, and removal from highways of hazards dangerous to motorists.

Sign posting services consist of the furnishing and erection of highway signs— warning signs of dangers, and direction signs. Petitioner has supplied, erected, and maintained about 60,000 such signs at its own expense.

Motor patrols consisted in the taxable year of uniformed patrolmen mounted on motorcycle cars equipped with automobile tools. The patrolmen's duties were the repair of minor mechanical defects on members' automobiles, and the rendering of first aid on the highways. Each patrolman was a graduate of the American Red Cross first aid course.

Safety education activities of petitioner are divided into two parts: (1) the Keystone Motorist, petitioner's monthly organ, which is distributed to every member with no charge other than his membership dues; and (2) radio broadcasting, moving pictures, and the publication of numerous pamphlets. Weekly broadcasts are made over nine radio stations, and contain statements on developments that have occurred in the...