Cohen v. United States

• Decision Date: 20 July 1967
• Docket Number: No. 340-65.,340-65.
• Parties: Ethel COHEN, Executrix of the Estate of Harry L. Cohen, Deceased, v. The UNITED STATES.
• Court: U.S. Claims Court

180 Ct. Cl. 647, 381 F.2d 383 (1967)

Ethel COHEN, Executrix of the Estate of Harry L. Cohen, Deceased, v. The UNITED STATES.

No. 340-65.

United States Court of Claims.

July 20, 1967.

J. P. Janetatos, Washington, D. C., for plaintiff. Walter A. Slowinski and Baker & McKenzie, Washington, D. C., of counsel.

Edward B. Greensfelder, Jr., Washington, D. C., with whom was Asst. Atty. Gen. Mitchell Rogovin, for defendant. Philip R. Miller, Washington, D. C., of counsel.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, COLLINS, SKELTON, and NICHOLS, Judges.

ON DEFENDANT'S MOTION AND PLAINTIFF'S CROSS MOTION FOR SUMMARY JUDGMENT

SKELTON, Judge.

Plaintiff, Harry L. Cohen, brought this suit to recover the sum of $10.50, plus interest, from the United States, claiming that such sum represents an overpayment by him of Federal excise tax to the Internal Revenue Service for the period from September 1, 1964 to November 30, 1964, in connection with his membership in the Woodmont Country Club (hereinafter called "Club"), at Rockville, Maryland. After this suit was filed, plaintiff, Harry L. Cohen, died and the Executrix of his estate, Ethel Cohen, was substituted as plaintiff.

The Club was a social, athletic, and sporting club whose facilities were available only to its members. Its facilities consisted of the clubhouse with various dining and grill rooms, lounges, locker rooms, card rooms, two eighteen hole golf courses, ten tennis courts, a swimming pool, and other facilities usually furnished to members by a country club. It served food and beverages in the various dining room and grills maintained by it.

The plaintiff was a Class A member of the Club and as such was required by the rules of the Club to pay monthly dues in the sum of $35.00, together with the excise tax of 20 per cent on such dues, amounting to the total sum of $42.00. These dues and taxes were paid during the period involved in this case and are not in any way involved in this controversy.

At the semi-annual meeting of the membership of the Club held June 27, 1962, an amendment to the Club-by-laws was adopted which provided as follows:

The Board of Governors shall have authority to impose a monthly charge on active members, determined by reference to their spending in the preceding month, exclusive of tips and sales tax, in the restaurant and/or bars of this Club, not in excess of the following schedule:

                              Class A Members
                    Restaurant-Bar
                monthly spending —        Monthly charge
                exclusive of (plus government
                gratuity and sales tax tax)
                       0-0                      $20.00
                  $0.01 to $5.00                 17.50
                   5.01 to 10.00                 12.50
                  10.01 to 15.00                  7.50
                  15.01 to 19.99                  2.50
                  20.00 and up                     .00
                

* * * * * *

It was agreed by stipulation of the parties that the purpose of this amendment to the by-laws was to encourage increased attendance at the Club and that the $17.51 minimum monthly payment was required as a condition to continuing membership in the Club.

As may be seen from the above schedule, if a member spent nothing for food or drink during a given month, he was assessed a charge of $20.00. If he spent any amount from 1 cent up to $5.00, he was assessed $17.50. If his spending was between $5.01 and $10.00, he was charged $12.50. If his spending was between $10.01 and $15.00, the charge was $7.50. If he spent between $15.01 and $19.99, the charge was $2.50 and if he spent more than $20.00, no monthly charge was made.

On first reading this schedule, it would appear that the minimum monthly payment was $20.00 and that if any excise tax was due, it should be levied on this amount. However, a closer examination of the schedule reveals that the very least amount of money that a member could spend and keep his membership in force was $17.51, which would be arrived at by his spending 1 cent for food or drink and $17.50 in cash. Accordingly, it was agreed between the parties that $17.51 was the minimum monthly payment which was required of a member as a condition to continuing his membership in the Club. This requirement was in force during the period of time involved in this case.

During the months of September, October, and November 1964, the plaintiff spent the amounts of $78.10, $34.05, and $25.35, respectively, for food and drink at the Club. On January 26, 1965, the Club paid excise taxes in the sum of $10.50 to the Internal Revenue Service representing the 20 per cent excise tax rate on club dues as applied to $17.51, the minimum monthly payment required of the plaintiff as a condition to his continuing membership in the Club, and the Club, in turn, collected the $10.50 from the plaintiff.

On March 17, 1965, the plaintiff filed a timely claim for refund of such alleged tax in the sum of $10.50. On September 30, 1965, the District Director not having acted on such claim, the plaintiff filed this suit in this court to recover the $10.50 plus interest.

In this case the plaintiff contends that since he spent more than $20.00 for food and drink during each of the three months involved, he was not required to pay any dues or assessments over and above the regular $35.00 dues and that the money that he spent for food and beverages was not dues or assessments and consequently he should not be required to pay any excise tax on any part of the money that he spent at the restaurant and bar of the Club during such months.

The plaintiff points out that on October 23, 1962, the Commissioner of Internal Revenue issued a private ruling to the Club to the effect that dues taxes do not apply to charges made for food and beverages at the Club.¹ However, the defendant counters with the statement that this ruling was revoked by the Commissioner of Internal Revenue on August 19, 1964.²

The defendant contends that the $17.51 minimum monthly charge is includable within the broad statutory definition of dues, since such minimum charge was a regular and periodic obligatory payment imposed upon all the club members for the privilege of using the Club's social, athletic, and sporting facilities. In support of this position, the defendant invokes sections 4241 and 4242 of the Internal Revenue Code of 1954, 26 U.S.C. §§ 4241, 4242 (1964) and Treasury Regulations on Facilities and Services Excise Tax § 49.4242-1, together with examples shown therein.

The tax in question is imposed by § 4241(a) (1) which provides:

(a) Rate.

There is hereby imposed —

(1) Dues or membership fees.

A tax equivalent to 20 percent of any amount paid as dues or membership fees to any social, athletic, or sporting club or organization, if the dues or fees of an active resident annual member are in excess of $10 per year.

The term "dues" is defined by § 4242 (a) as follows:

(a) Dues.

As used in this part the term "dues" includes any assessment, irrespective of the purpose for which made, and any charges for social privileges or facilities, or for golf, tennis, polo, swimming, or other athletic or sporting privileges or facilities, for any period of more than six days; * * *

The sole question for resolution, therefore, is whether the required minimum monthly payments of $17.51 made by the taxpayer to the Woodmont Country Club are "dues" within the meaning of § 4242(a) and thus subject to the tax imposed by § 4241(a) (1) of the Internal Revenue Code of 1954. We hold that such payments are dues and are taxable.

A proper starting point in determining whether certain payments made to a club are taxable is the oft-cited case of White v. Winchester Country Club, 315 U.S. 32, 41, 62 S.Ct. 425, 430, 86 L.Ed. 619 (1942), where the Supreme Court in holding payments subject to tax, uses the following language:

Consideration of the nature of club activity is a necessary preliminary to the formulation of a test of what constitutes a "due or membership fee." So far as finances go, the fundamental notion of club activity is that operating expenses are shared without insistence upon equivalence between the proportion of an individual\'s contributions and the proportion of the benefits he receives. Thus, on the one hand, payment of the price of an individual dinner at the club dining room or of a single round of golf lacks the element of making common cause inherent in the idea of club activity. But, on the other hand, payment for the right to repeated and general use of a common club facility for an appreciable period of time has that element and amounts to a "due or membership fee" if the payment is not fixed by each occasion of actual use. Such was the case here, and we therefore hold that the payments in question were subject to the tax.

While the definition of dues now found in § 4242(a) had its genesis in the Revenue Act of 1941, c. 412, § 543(b), 55 Stat. 687, and was not under scrutiny in the Winchester Country Club case, that amendment merely broadened the scope of the definition of "dues" to include certain fees and assessments not previously within the grasp of the tax. Boots and Saddles, Inc. v. United States, 66-2 USTC ¶ 15, 710 (E.D.Mich.1966); Boyden v. United States, 218 F.Supp. 220, 222 (D.C.Mass.1963); H.Rep. No. 1040, 77th Cong., 1st Sess., 54 (1941-2 Cum. Bull. 413, 455); S.Rep. No. 673, Part I, 77th Cong., 1st Sess., 48 (1941-2 Cum. Bull. 466, 502-03).

Subsequent to the decision in Winchester Country Club, supra, most courts that have had this issue posed to them have also made the distinction between obligatory payments and payments made by a club member where there was a necessary equivalence between the payment and the benefit received. Boots and Saddles, Inc. v. United States, supra; "The Benedicts" v. United States, 234 F.Supp. 1 (W.D. N.C.1964); Boyden v. United States, supra. In the former instance — where the payment had to be made whether or not the member ever availed himself of the club's facilities — tax liability was found. "The Benedicts" v. United States, supra; ...