Edgewood Country Club v. United States

• Decision Date: 28 April 1962
• Docket Number: No. 2488.,2488.
• Citation: 204 F. Supp. 508
• Parties: EDGEWOOD COUNTRY CLUB, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Southern District of West Virginia

204 F. Supp. 508

EDGEWOOD COUNTRY CLUB, Plaintiff, v. UNITED STATES of America, Defendant.

No. 2488.

United States District Court S. D. West Virginia, at Charleston.

April 28, 1962.

Thomas N. Chambers, Lee O. Hill (Jackson, Kelly, Holt & O'Farrell), Charleston, W. Va., for plaintiff.

Louis F. Oberdorfer, Asst. Atty. Gen., John B. Jones, Jr., Acting Asst. Atty. Gen., Edward S. Smith, Lyle M. Turner, Philip R. Miller, Cynthia Holcomb, Attys. Dept. of Justice, Washington, D. C., for defendant.

HARRY E. WATKINS, District Judge.

This is a tax refund suit for the recovery of Federal excise taxes in the sum of $3,335.00, paid to the government on initiation fees for the period from April 1, 1955, through June 30, 1958. Jurisdiction is conferred on this court by Section 7422, Internal Revenue Code of 1954, 26 U.S.C. § 7422 and 28 U.S.C. § 1346, and all jurisdictional prerequisites have been satisfied. The issue to be decided is whether the ownership of stock in the Edgewood Building Association is a condition precedent to membership in the Edgewood Country Club, thus making payments for this stock taxable as initiation fees under Section 4241(a) (2), Internal Revenue Code of 1954, 26 U.S.C. § 4241(a) (2).

Plaintiff, a non-stock, non-profit corporation organized under the laws of West Virginia, conducts a country club, with golf course, tennis courts, swimming pool and clubhouse, in Charleston, West Virginia, and has conducted such a club since 1898. The by-laws of plaintiff in the years in issue provided the following classes of membership: Single, Family, Non-Resident, Associate Class A and Class B, Junior and Honorary. Unmarried men living within thirty-five miles of the City of Charleston were eligible for Single membership. Married men and unmarried men with families living within thirty-five miles of the City of Charleston were eligible for Family membership. Men living beyond thirty-five miles of the City of Charleston were eligible for Non-Resident membership. Associate Class A membership consisted of those unmarried women having no male member of the family to make application for membership. Widows with families were eligible for Associate Class B membership. Male persons between the ages of 15 and 21, not the sons of members, were eligible to be Junior members. The Governor of West Virginia was eligible for Honorary membership. The by-laws contained provisions governing the election to membership of applicants and imposed substantial initiation fees and annual dues for the various classes. There was also a separate provision in the by-laws exacting additional dues of $25.00 per annum from Single and Family members who did not own a minimum of ten shares of the common stock of the Edgewood Building Association. This provision was the prime mover for the present case and its origin and development merit closer attention.

The Edgewood Building Association (hereinafter referred to as the Association) was incorporated in West Virginia as a for profit corporation in 1906 for the purpose of:

"Buying, selling, leasing and renting real estate: Building, renting and leasing clubhouses: Laying off golf-links, tennis courts and fields and tracts for athletic sports and games: Supplying clubs and social organization (sic) renting or leasing from this corporation with light, water and other facilities: Renting or leasing any and all grounds or buildings owned or leased by this corporation, and carrying on any business and doing anything, not forbidden by law, necessary, convenient, auxiliary or incidental to such objects and purposes or in connection therewith." (Articles of Incorporation as quoted in the stipulation of the parties to this suit)

The Association is not a social, athletic or sporting club and has been, from its inception, a separate and distinct organization from plaintiff. Since 1907, the Association has leased to plaintiff the land and buildings upon and in which plaintiff has carried on its country club activities. From 1922 to March 13, 1957, the authorized capital stock of the Association consisted of 3500 shares of $50.00 par value, of which 2700 shares were common stock and 800 shares were preferred stock. On March 13, 1957, the authorized capital stock was increased to 4800 shares of $50.00 par value of which 4000 shares are common stock and 800 shares are preferred stock. During the years 1955-1958 no preferred stock was issued and outstanding.

For some time prior to December of 1935 there had been efforts on the part of some persons to corner the stock of the Association with a view toward selling its property. In December of 1935 the principal clubhouse which plaintiff leased from the Association was destroyed by fire. The majority of the Board of Directors of the Association, desiring a more diversified and equitable ownership of Association stock to prevent a cornering thereof, would not agree to apply the fire insurance proceeds toward the building of a new clubhouse unless plaintiff took some steps to assure the desired diversification. Plaintiff took such steps in 1936 by amending its by-laws to require Single and Family members not owning a minimum of ten shares of the common stock of the Association to pay, in addition to regular dues, the sum of $25.00 per annum for ten years, the time to begin in 1936 or upon becoming a member, whichever occurred later. A permanent Stock Subscription Committee was created:

"* * * to enforce the promises of the members of Edgewood Country Club to purchase the common capital stock of Edgewood Building Association and to supervise the purchase and distribution of said stock; supervise the collection of extra dues assessed against members who do not own ten shares of said stock; to supervise the redistribution of stock to members, through family connections or otherwise, now held by estates; and generally to supervise, control and administer in every particular the redistribution of said stock."

In response to these efforts of plaintiff, the Association applied the fire insurance proceeds toward the construction of a new clubhouse. The by-laws were amended in 1945 to allow the stock to be in the member's name or in the name of a member of his family or an estate or trust for his benefit, and to require payment of the additional dues by non-stockholders indefinitely. In 1957 the by-laws were again amended to provide that non-stockholders who became members prior to 1945 would only have to pay the additional dues for a period of ten years.

Other than the payment of additional dues, there is no distinction between the stockholding and non-stockholding members of plaintiff. No additional rights, benefits, or privileges are conferred by virtue of ownership of stock, nor are any taken away by the failure to own stock.

During the period in issue, 1955-1958, plaintiff operated with full Single and Family membership (limited by its by-laws to 325 members). It was impossible for every Single and Family member to each own ten shares of the common capital stock of the Association. A number of shares of stock were held by persons not members of plaintiff, and several members of plaintiff owned more than ten shares. There has always been a substantial number of members of plaintiff who do not own stock and who have paid the additional $25.00 yearly dues. Since January, 1957, at least seventeen members of plaintiff neither own stock nor pay additional dues, having been members since prior to January 20, 1945, and having paid the additional dues for at least a ten-year period. At no time has there been a practice on the part of plaintiff or its officers to force or coerce members to acquire stock in the Association.

Plaintiff neither collected nor remitted excise tax on members' purchases of Association stock from the adoption of the by-law requiring its purchase (or, in lieu of purchase, requiring an additional dues payment of $25.00 per annum) until an Internal Revenue audit was concluded in 1958. Upon such audit, it was determined by the Internal Revenue that the amounts paid by members of plaintiff for ten shares of Association stock were subject to the federal excise tax on initiation fees imposed by Section 4241 (a) (2) of the Internal Revenue Code of 1954. At the suggestion of the Revenue Agent by letter of March 3, 1958, plaintiff collected the tax of $3,335.00 asserted to be due from its members and paid it to the government on or about August 29, 1958. On July 17, 1959, plaintiff filed a claim for refund of these taxes. On or about January 18, 1960, plaintiff was notified that its refund claim had been disallowed by the Commissioner of Internal Revenue. This suit was timely filed September 23, 1960.

Section 4241(a) (2) of the Internal Revenue Code of 1954 imposes a tax equivalent to 20 per cent of any amount paid as initiation fees to an organization such as plaintiff. Section 4242(b) defines initiation fees to include:

"* * * any payment, contribution, or loan, required as a condition precedent to membership, whether or not any such payment, contribution, or loan is evidenced by a certificate of interest or indebtedness or share of stock, and irrespective of the person or organization to whom paid, contributed, or loaned." 26 U.S.C. § 4242(b).

Plaintiff admits that the statutory definition is broad enough to encompass a purchase of Association stock if paid as a condition precedent to membership in plaintiff. The sole dispute in this case is whether the stock purchase is a condition precedent to membership in plaintiff.

Regulation 43, promulgated under the Internal Revenue Code of 1939, and made applicable to the 1954 Code by T.D. 6091, 19 F.R. 5167 (the 1954 Code regulation 49.4242-2 defining initiation fees was issued by T.D. 6536) states:

"(b) Under the Code the term `initiation fees' includes any payment, contribution, or loan required as a condition precedent to membership, whether or not any such payment, contribution, or loan is

...