California State Automobile Ass'n v. Smyth

• Decision Date: 26 February 1948
• Docket Number: No. 26017.,26017.
• Citation: 77 F. Supp. 131
• Court: U.S. District Court — Northern District of California
• Parties: CALIFORNIA STATE AUTOMOBILE ASS'N v. SMYTH.

77 F. Supp. 131

CALIFORNIA STATE AUTOMOBILE ASS'N v. SMYTH.

No. 26017.

District Court, N. D. California, S. D.

February 26, 1948.

Arthur H. Deibert, of Los Angeles, Cal., and George E. Sanford, of San Francisco, Cal., for plaintiff.

Frank J. Hennessy, U. S. Atty., and William E. Licking, Asst. U. S. Atty., both of San Francisco, Cal., for defendant.

LEMMON, District Judge.

Plaintiff is a non-profit, non-stock corporation, organized in the year 1907 under the laws of the State of California. This action is brought to recover income and excess profit taxes, plus interest to the date of payment, assessed for the years 1943 and 1944, and interest on the aggregate amounts from the dates of the alleged overpayments.

The tax returns and the consequent payment of taxes for these years were made as the result of a demand by the Commissioner of Internal Revenue. The plaintiff had, prior to the years in question, been exempt from the payment of income and excess profit taxes.

The membership of the plaintiff corporation is largely made up of owners of pleasure cars. There is rendered to the members towing service, emergency road service, touring bureau service and service on the procuring of motor licenses. Plaintiff has rendered service to the public generally through road signing and various war services in connection with the problems arising during the gas rationing period, acting as an official agency for the Federal Government in signing of highways in dim-out and black-out areas, and in rendering to members of the armed forces its services without cost. The taxpayer publishes a monthly magazine known as the "Motor Land." During the years in question it had no income from advertising. The magazine was distributed to the entire membership and was not sold generally to the public. The emergency road service afforded the members is rendered under contracts which plaintiff makes with garages. This service is restricted to passenger cars. The garage bills are paid for by the members who receive the service but plaintiff makes no charge to the members for towing service. If a member is involved in an accident, plaintiff undertakes to adjust the matter of damages, and, if the member is involved in an arrest in a remote place, counsel is provided by the association; if a fine is assessed the fine is paid by the plaintiff and the member is called upon to reimburse plaintiff for such outlay. The legal service which is rendered is furnished pursuant to an agreement made by the plaintiff and the State Bar of California. Plaintiff gives to its members a special limited traffic accident policy written by the North American Accident Insurance Company. The California State Automobile Inter-Insurance Bureau affords insurance service to certain of plaintiff's members. The bureau is a separate corporate entity. It is a reciprocal insurance exchange for the inter-exchange of insurance on a cooperative basis. No one can be so insured unless he is a member of the plaintiff association. The insurance is restricted to certain individuals who meet certain qualifications. There is no requirement that a member of the plaintiff association become a subscriber to the bureau. The bureau writes participating insurance. The plaintiff and the bureau occupy the same office quarters in San Francisco and in each of thirty-five district offices. The bureau compensates the plaintiff for the space it occupies, the rental being calculated on a square foot basis. Other expenses, including personnel costs, are divided upon the basis of proper percentage of costs that should be borne by each organization and no profit was derived by plaintiff through its relationship with the bureau. Dues for the years in question were $12 per year, plus an initiation fee for $3 for the first year. Membership is open to all owners of automobiles who are not considered too old and who are deemed to be persons without a bad traffic record or otherwise irresponsible. No social, racial or religious discrimination is made wth reference to membership. It has been the policy of plaintiff to expend its annual income for services but during the years 1943 and 1944 for reasons readily apparent its services were restricted and curtailed. No dividends have been declared by plaintiff to its members and its income has never been paid or credited on its books to any of its members. The directors of the association serve without financial remuneration. The members have the right to participate in the affairs of the plaintiff, including their presence at the annual board meetings, notices of which are sent out at least 60 days prior to the meeting. Although plaintiff has no member clubs it is affiliated with the American Automobile Association and under that affiliation plaintiff recognizes the membership of such other clubs affiliated with that association when such members are visiting plaintiff's territory and such visitors are entitled to many of the services above enumerated. Outside of the annual meeting, the meetings of the Board of Directors and other meetings occasionally called by plaintiff and its committees (which the members are entitled to attend), plaintiff does not have any social features. There are other activities such as safety education work, the distribution of safety posters and the sponsoring of school safety patrols, the making of traffic surveys and participation in activities relating to vehicle legislation, in which the plaintiff engages. Plaintiff's records show that on December 31, 1937, there was a slight excess of receipts over expenditures but that during each of the years 1938, 1939, and 1940 there was a deficiency; that during the next 5 years the income exceeded the expenses and this resulted in surplus balances for each of these years. In 1946 the expenditures exceeded the income. A check of 16 years shows a surplus for 8 years and a deficiency for 8 years.

This abridged recital of the purposes and activities of plaintiff corporation is sufficient as a basis for approaching the problem which is to be solved, whether plaintiff comes within the exemption which excludes from the tax organizations falling within Section 101(9) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 101(9), which reads as follows:

"Clubs organized and operated exclusively for pleasure, recreation, and other non-profitable purposes, no part of the net earnings of which inures to the benefit of any private shareholder."

This section poses three questions. 1. Is the plaintiff a club? 2. Is plaintiff organized and operated exclusively for pleasure, recreation and other non-profitable purposes? 3. Do any of its net earnings inure to the benefit of any of its members?

The New International Encyclopedia defines "club" as "A word said to be derived from the Saxon cleafan to divide—a club being an association the expenses of which are shared among its members". It "indicates a division of the reckoning", Merion Cricket Club v. United States, 3 Cir., 119 F. 2d 578, 579, "a definite association organized for indefinite existence; not an ephemeral meeting for a particular occasion to be lost in a crowd at its dissolution", Eichbaum v. Irons, 6 Watts & S., Pa., 67, 40 Am.Dec. 540. Plaintiff is an association the expenses of which are shared among its members. Equivalence between the proportion of a member's contributions and the benefits which he enjoys is of no moment as long as there is payment by him for the repeated use of its facilities, available to the members. The services provided by plaintiff to its members are for their pleasure and recreation, to enjoy to the extent the wants or fancies of the individual member require.

Defendant contends that in order to constitute a club the purposes and activities must embrace a commingling of the members, one with the other, in fellowship; that it is not sufficient that the members make a common cause in a financial or other sense or that there be present group activity, both of which conditions are here found. United States v. Anderson, 7 Cir., 108 F.2d 475, and Arner v. Rogan, D.C., 27 A.F.T.R. 1092, 1093, cases in which the application of the exise tax under Section 501 of the Revenue Act of 1926, 26 U.S.C.A. Int.Rev.Acts, page 274, on "any amount...