Atlanta Athletic Club v. C.I.R.

• Decision Date: 11 January 1993
• Docket Number: No. 91-9047,91-9047
• Citation: 980 F.2d 1409
• Parties: -588, 61 USLW 2445, 93-1 USTC P 50,051 ATLANTA ATHLETIC CLUB, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE SERVICE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1409

980 F.2d 1409

71 A.F.T.R.2d 93-588, 61 USLW 2445,

93-1 USTC P 50,051

ATLANTA ATHLETIC CLUB, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE SERVICE, Respondent-Appellee.

No. 91-9047.

United States Court of Appeals Eleventh Circuit.

Jan. 11, 1993.

Terence J. Greene, Timothy J. Peaden, Sidney O. Smith, Jr., Frazer Durrett, Jr., Alston & Bird, Atlanta, Ga., for petitioner-appellant.

Gary R. Allen, Chief, Steven W. Parks, Brian C. Griffin, Robert S. Pomerance, Appellate Section, Tax Div., U.S. Dept. of Justice, Washington, D.C., for respondent-appellee.

Appeal from a Decision of the United States Tax Court.

Before FAY and COX, Circuit Judges, and HENDERSON, Senior Circuit Judge.

COX, Circuit Judge:

Atlanta Athletic Club (the "Club") appeals a United States Tax Court ruling that the Club must recognize and report as unrelated business taxable income a $2.3 million gain from the sale of land. The Club argues that the gain qualifies for nonrecognition under I.R.C. § 512(a)(3)(D) (West Supp.1992) because the Club used the property for its members' recreation and reinvested the sale proceeds in recreational facilities. The Tax Court found that the Club did not directly use the property for recreation within the meaning of § 512(a)(3)(D). Atlanta Athletic Club v. Commissioner, 61 T.C.M. (CCH) 2011, 2019 (1991). Thus, according to the Tax Court, nonrecognition was unavailable under the statute. We find that the Club directly used the property for recreation, and we reverse the Tax Court's ruling.

BACKGROUND

The Club is a private social organization that owns and operates recreational facilities for members and their guests. It is exempt from federal income tax as a social club under I.R.C. § 501(c)(7) (West Supp.1992).

In 1964 the Club bought 617.1 acres of land at its present location in northern Fulton County, Georgia. A highway divided the property into a 425.6-acre eastern tract (the "Eastside Property") and a 191.5-acre western tract (the "Westside Property"). The Club held all of the land for two decades before selling 108 acres of the Westside Property in 1984.

From the start, the Eastside Property was the hub of the Club's activities. It is there that the Club built its golf courses, clubhouse, swimming pool and tennis courts. On the other hand, the Club did little to develop the Westside Property across the highway. The Club constructed a slag road on the Westside Property in 1976 to accommodate public and member parking for a professional golf tournament. After the tournament, Club members began jogging on the slag road. The Club also built a jogging track with a pine bark surface on the Westside Property, but drainage problems quickly forced members to abandon the track. The Club once stocked a lake on the Westside Property with fish. Other than mowing grass in the open areas, the Club made no other effort to improve the Westside Property for recreational uses.

When it decided to sell part of the Westside Property, the Club for the first time divided the parcel into three tracts: A, B and C. The 1984 sale of the 108 acres in tracts A and B brought the Club a $2.3 million gain. The Club retained tract C.

The parties have stipulated that the Club spent its $2.3 million gain to construct a new tennis center and renovate the clubhouse on the Eastside Property. The money was reinvested within the time limits specified by § 512(a)(3)(D). ¹

The Club deferred payment of income tax on the gain for its taxable year that Club members and employees testified before the Tax Court that the Westside Property was the site of a number of activities through the years. Among the events were "pasture parties," Easter egg hunts, fishing tournaments, kite-flying contests, hot-air balloon rides and organized foot races. ³ Many members jogged on the property, and some members used the area for archery practice and to fly model airplanes.

                ended March 31, 1985, in the belief that § 512(a)(3)(D) allowed nonrecognition of the full amount.   The Commissioner of Internal Revenue (the "Commissioner") disagreed.   The Commissioner determined that the nonrecognition provision did not apply because the Club did not directly use tracts A and B for the Club's exempt function (i.e., the pleasure and recreation of Club members).   Treating the $2.3 million gain as unrelated business taxable income, the Commissioner assessed a $658,063 deficiency against the Club. 2  The Club petitioned the Tax Court to redetermine the deficiency
                

To counter this testimony, the Commissioner relied largely on the Club's monthly newsletters and other documents from the 1970s and 1980s. The Commissioner argued that some of the organized events described by the Club's witnesses were held either on the Eastside Property or on the portion of the Westside Property retained by the Club, not on tracts A and B. ⁴

The Tax Court ruled in favor of the Commissioner, stating that it was "not convinced" by the testimony of the Club's witnesses. Atlanta Athletic Club, 61 T.C.M. (CCH) at 2019. ⁵ The Tax Court determined that, at most, individual members merely jogged across tracts A and B on their own initiative. Id. Jogging "was not an activity directly sponsored by the Club as part of its exempt function." Id. Therefore, "[s]uch activity [was] not sufficient to establish that the Club directly used Tracts A and B for exempt functions." Id.

ISSUE

The issue before this court is whether the Tax Court erred in finding that tracts A and B of the Westside Property were not "used directly" by the Club, within the meaning of I.R.C. § 512(a)(3)(D), to provide pleasure and recreation for Club members.

STANDARD OF REVIEW

The Tax Court's determination of the activities that took place on the Westside Property are factual findings that we will not disturb unless clearly erroneous. See 26 U.S.C.A. § 7482(a) (West Supp.1992); Fed.R.Civ.P. 52(a). A finding of fact is clearly erroneous "if the record lacks substantial evidence to support it," Thelma C. Raley, Inc. v. Kleppe, 867 F.2d

                1326, 1328 (11th Cir.1989), so that our review of the entire evidence leaves us "with the definite and firm conviction that a mistake has been committed."  United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948);  see also Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985) (quoting Gypsum ).   The Tax Court's interpretation and application of § 512(a)(3)(D) are conclusions of law that we review de novo.  Young v. Commissioner, 926 F.2d 1083, 1089 (11th Cir.1991)
                

DISCUSSION

This is a case of first impression in our circuit. We find no guidance from other circuits, either: no reported case resolves a similar dispute under the terms of § 512(a)(3)(D).

The statute speaks in terms of use rather than intent. Therefore, the Tax Court correctly observed that the Club's various plans for the land were irrelevant. Atlanta Athletic Club, 61 T.C.M. (CCH) at 2019. The analysis must concentrate on the ways in which the Westside Property was or was not "used directly." This process entails factual findings as to the activities that occurred on tracts A and B of the Westside Property, and legal conclusions as to whether those activities constituted sufficient recreational uses by the Club.

After hearing the Club's witnesses and reviewing the documentary evidence, the Tax Court found as a fact that "[t]he only activities which may have occurred on Tracts A and B were running and jogging." Id. In reaching this conclusion, the Tax Court disregarded significant portions of the testimony from the Club's witnesses. The Tax Court stated that, "[i]n light of the evidence," it was "not convinced from the testimony of members that the Club held activities on Tracts A and B." Id.

We do not read the Tax Court's "not convinced" remark to mean that the court rejected all testimony by the Club's various witnesses as incredible. The Tax Court accepted the same witnesses' testimony that many members individually used the property. See id. If the Tax Court did discount extensive portions of the testimony, it articulated no reasons for rejecting such testimony as incredible and none are apparent from the record. Most of the testimony about specific activities on tracts A and B conflicts with nothing in the documentary evidence, and the Commissioner called no witnesses to dispute the recollections of the Club's witnesses. The following examples illustrate that key aspects of the testimony were unchallenged:

--Witnesses said the annual "Turkey Trot" foot races traversed tracts A, B and C. This testimony was contradicted only as to the 1983 run. A 1979 newsletter gave the location as "across the entrance from the clubhouse," indicating the Westside Property. (Joint Exh. 118DN at 12.) Announcements of the Turkey Trot races in other years specified no location.

--Witnesses stated repeatedly that kite-flying contests were held on tract A. Announcements in the Club's newsletters said simply that the contests would be conducted "across the entrance drive" or "opposite the cluhouse [sic] on Hwy. 141," again referring to the Westside Property. (Joint Exhs. 146EP at 5, 157FA at 6.)

--Witnesses said the Club's annual pasture parties were held on tract A before it was sold. Newsletters indicated that pasture parties were held "outdoors and across the roadside," a reference to the Westside Property. (Joint Exhs. 153EW at 5, 165FI at 3.) A pasture party announcement after the 1984 sale also gave the location as "outdoors and across the roadside." (Joint Exh. 189GG at 5.) This post-1984 announcement could not have been referring to tracts A and B. Nevertheless, because the entire Westside Property was viewed as one tract prior to the sale, the pre-1984 newsletters do not contradict the witnesses' testimony about the earlier parties.

--As the Tax Court itself noted, the record contains "no evidence other than the...