Down Town Ass'n of City of New York v. United States

• Citation: 278 F.2d 313
• Decision Date: 02 May 1960
• Docket Number: No. 191,Docket 25903.,191
• Parties: DOWN TOWN ASSOCIATION OF CITY OF NEW YORK, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

278 F.2d 313 (1960)

DOWN TOWN ASSOCIATION OF CITY OF NEW YORK, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 191, Docket 25903.

United States Court of Appeals Second Circuit.

Argued March 10, 1960.

Decided May 2, 1960.

Timothy N. Pfeiffer, New York City (Milbank, Tweed, Hope & Hadley and Rebecca M. Cutler, New York City, of counsel, on the brief), for plaintiff-appellant.

Joseph M. Field, Asst. U. S. Atty., New York City (S. Hazard Gillespie, Jr., U. S. Atty., New York City, on the brief), for defendant-appellee.

Before CLARK, WATERMAN and LEWIS,^* Circuit Judges.

LEWIS, Circuit Judge.

Appellant brought suit on behalf of its members to recover taxes collected by appellant from its members and remitted to the Collector of Internal Revenue for the period between August 1942 and March 1947, in compliance with the directive of Section 1710(a) (1) of the Internal Revenue Code of 1939, 26 U.S. C.A. § 1710(a) (1)¹ The trial court ruled that the social aspects of the service maintained by the appellant make it a social club within the terms of that section and dismissed the complaint with costs. Appellant challenges that finding.

The major facts were stipulated: The Down Town Association of the City of New York is a New York corporation, incorporated in 1860 for the purpose of furnishing "to persons engaged in commercial and professional pursuits in the City of New York, facilities for social intercourse, and such accommodations as are required during the intervals of business while at a distance from their residences, also the advancement of literature and art, by establishing and maintaining a library, reading-room and gallery of art, or by such other means as shall be expedient and proper for such purpose." However, despite the stated objects at the time of organization, it is agreed that the literary and artistic aspects of the club have not been promoted and that the activities of appellant for the past forty years have been restricted almost exclusively to serving luncheon on working days from 12:00 noon until 2:30 p. m.

The appellant owns the clubhouse at 60-62 Pine Street, which is a five story building. The first floor contains a lobby, a smoking room, and a small bar at which cocktails and hors d'oeuvres are served; the second floor, two large dining rooms and a library where members and guests are served coffee and read an assortment of magazines and daily newspapers; the third floor, three dining rooms; and the fourth floor one large dining room and six private rooms. The fifth floor houses the utility rooms necessary to the clubhouse's operation. The bar is open during the hours the clubhouse is open, 8:00 a. m. until 4:00 p. m. except Sundays and holidays but is rarely used except during the early part of the luncheon hours. Liquor sales were approximately eight per cent of food sales during the period under examination.

Membership in the organization is obtained by application, election, and payment of an entrance fee of $300 and yearly dues. The sole restriction on availability of memberships is a limitation as to the number who might join, and the occupations of the members, although predominantly lawyers, cover numerous fields.

A candidate for membership is passed upon by the governing board of fifteen "Trustees and Managers" by ballot, and this board also controls the internal affairs of the Association.

There is no Association rule prohibiting members from bringing their wives or others to the house of the Association, but members rarely do so, and members with lady guests are limited to the use of the dining room on the third floor or the private dining rooms. Wives, other family members or lady guests are not permitted except in the company of the member.

The Association has never sponsored a party, dance or similar function; there are no facilities for games such as cards or billiards, nor, in fact, a radio or television set.

For several years prior to 1929, appellant paid taxes on its members' dues under statutes preceding Section 1710 taxing dues of social, sporting and athletic clubs, which payments were returned in full in 1929 by The Commissioner of Internal Revenue. Thereafter and until August 21, 1942, no taxes were required from appellant, but on that date appellant was notified that it must collect and remit taxes on membership dues thereafter. Between August 1942 and March 1947, taxes were paid in the amount of $129,090.87; claim for refund of this amount was rejected by the Commissioner of Internal Revenue, and this suit followed.

The trial court after reviewing the stipulated facts and testimony which showed that many members used the club in connection with their various businesses, stated:

"This Court has little doubt that the time of many of the members spent in the clubhouse is at least partly devoted to discussions of their business. Indeed we are ready to find that some busy lawyers and business executives find the ordinary business day too brief for their work and that their luncheon hour is at times necessarily devoted to such of their work as consists of discussions that can be had away from their desks. Such discussions serve the member\'s purpose. While the club of course makes no effort to procure company for a member, its only reason for being is to afford those members a facility for enjoying lunch in convenient and pleasant surroundings and with company attractive to them. We call such a purpose altogether social. Plaintiff has no `different or predominant\' purpose required by the regulation."

The regulation to which reference is made is U. S. Treasury Regulation 43, § 101.24-.25, 26 C.F.R. §§ 101.24-.25:

"101.24. Determination of character of club. The purposes and activities of a club or organization and not its name determine its character for the purpose of the tax. Every club or organization having social, athletic, or sporting features is presumed to be included within the meaning of the phrase, `any social, athletic, or sporting club or organization,\' until the contrary has been proved, and the burden of proof is upon it. * * *"

"101.25. Social clubs. Any organization which maintains quarters or arranges periodical dinners or meetings, for the purpose of affording its members an opportunity of congregating for social intercourse, is a `social * * * club or organization\' within the meaning of the Code, unless its social features are not a material purpose of the organization but are subordinate and merely incidental to the active furtherance of a different and predominant purpose, such as, for example, religion, the arts, or business. The tax does not attach to dues or fees of a religious organization, chamber of commerce, commercial club, trade organization, or the like, merely because it has incidental social features, but if the social features are a material purpose of the organization it is a `social * * * club or organization\' within the meaning of the Code. An organization that has for its exclusive or predominant purpose religion or philanthropic social service (or the advancement of the business or commercial interests of a city or community) is clearly not a `social * * * club or organization.\' * * *"

Although the cases interpreting the statute and regulation are many, see 143 A.L.R. 1381; 80 A.L.R. 1296, most of them seek to resolve the question of whether a club originally organized for a philanthropic or business purpose depends upon its social activities for its existence. The question here is considerably narrowed by the stipulation and as presented becomes whether a businessman's luncheon club, serving no other function of entertainment, is by definition a social club.

The recitation in the articles of incorporation that one of the purposes of the corporation is to furnish opportunity for social intercourse is not conclusive of the determination, Century Club v. United States, 12 F.Supp. 617, 81 Ct.Cl. 878; Union Club of Pittsburgh v. Heiner, 3 Cir., 99 F.2d 259, for indeed it is recognized that any organization, regardless of its compelling purpose for existence, provides the means of social intercourse, United States v. McIntyre, 4 Cir., 253 F.2d 728, 729. In Tidwell v. Anderson, 2 Cir., 72 F.2d 684, 687, it is stated:

"The test of taxability is not whether a club has any social features at all, but whether or not such activities, viewed, of course, in the light of all the circumstances of its existence including the declared purpose of the organization as shown by its constitution and by-laws, if their provisions are enforced, are what in fact provide the real reason for its existence and enable it to secure members and retain them. Another way to put the problem is `whether the social features of the club involved are merely incidental or whether, on the other hand, they are a material purpose of the organization.\' Union League Club of Chicago v. United States, supra. 4 F. Supp. 929, 78

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