Engineers Club of San Francisco v. United States, C-83-5814-CAL.

• Decision Date: 12 February 1985
• Docket Number: No. C-83-5814-CAL.,C-83-5814-CAL.
• Parties: The ENGINEERS CLUB OF SAN FRANCISCO, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Northern District of California

609 F. Supp. 519

The ENGINEERS CLUB OF SAN FRANCISCO, Plaintiff, v. UNITED STATES of America, Defendant.

No. C-83-5814-CAL.

United States District Court, N.D. California.

February 12, 1985.

Lawrence V. Brookes, Valentine Brookes, Brookes & Brookes, San Francisco, Cal., for plaintiff.

Jay R. Weill, Michael J. Yamaguchi, David L. Denier, Asst. U.S. Attys., Tax Div., San Francisco, Cal., for defendant.

OPINION

LEGGE, District Judge.

Plaintiff, The Engineers Club of San Francisco seeks refunds with respect to income taxes which it paid for its fiscal years ended August 31, 1978 through 1981. The refunds are based on plaintiff's claim that it should have been taxed as a business league under 26 U.S.C. § 501(c)(6), rather than as a social club under 26 U.S.C. § 501(c)(7). The difference between a business league and a club primarily affects the method for calculation of unrelated business income under 26 U.S.C. §§ 511-513.

The case was tried without a jury and submitted for decision. The court has reviewed and weighed the testimony, the exhibits which were introduced into evidence, and the limited stipulation of facts. The court makes the following findings of fact and conclusions of law, and enters judgment in favor of plaintiff.¹

I.

Plaintiff is a corporation, organized and existing as a nonprofit corporation under the California Corporations Code. Plaintiff's corporate purposes are stated in its amended articles of incorporation:

"... to provide an organization in which Engineers of all branches of the Profession may come together, and through which they may cooperate and foster the development of the Engineering Profession as a whole in California and incidentally and in aid of such main purpose to acquire by purchase, lease or otherwise and conduct suitable quarters for a meeting place for carrying out such purposes."

Plaintiff's membership is composed primarily of professional engineers and persons associated with the engineering profession. Plaintiff serves its members, and the professional engineering societies to which they belong, by providing meetings and meeting space, logistical support, a location for operations, mailing service, telephone service, storage of records, and other facilities and services. Several of the engineering societies use plaintiff's address as their address. Plaintiff's manager coordinates the activities of some of the societies.

Plaintiff leases space in an office building in downtown San Francisco. The facilities consist of: the top two floors of the building, on one of which is located kitchen facilities, meeting and dining rooms, and on the other additional space and a bar; the administrative offices are located on another floor; and storage space is located in the basement. Meetings, seminars, educational presentations, and meal and beverage service take place in the rooms on the top two floors. The premises contain the records and equipment of plaintiff and of certain of the societies which use plaintiff's facilities.

The stipulation of facts records that during the years in question plaintiff's facilities were used extensively by over twenty engineering societies, and by other organizations associated with the engineering profession, the construction industry, and affiliated activities. The stipulation also states that other professional societies met at plaintiff's facilities periodically. Plaintiff's facilities are used by the engineering societies free of charge.

The meetings of the professional organizations are conducted primarily to provide professional education and training to members, and to disseminate information for the benefit of the profession as a whole. To reach a wide audience, many of the meetings are held outside of normal business hours, or are specially scheduled when the members of the professional societies are in the San Francisco area. A significant number of meetings occur during lunch hour or dinner time and include the service of meals and beverages. Typically, a society will have a technical meeting or an opportunity for members to exchange professional views, prior to or during a cocktail hour. There will then be a meal service of three quarters of an hour to an hour. There will then be a meeting, with an hour or two of technical presentation. Sometimes there are technical speakers during the meal service. Many of the meetings at plaintiff's facilities have no food or beverage service.

It is not necessary for a member of an engineering society to be a member of plaintiff in order to attend a society meeting, or to eat or drink preceding or during a meeting. The engineering society meetings are arranged by a member of plaintiff who is also a member of the particular society.

Not all of plaintiff's activities are in connection with engineering societies. Plaintiff's facilities are available for, and are used by, its members for purely social functions. Plaintiff itself offers its members certain social activities. And plaintiff's facilities are also open for meetings of other groups to which its members may belong, not necessarily of an engineering type. However, plaintiff gives preference to engineering societies over others in the use of its facilities.

II.

The Internal Revenue Service had classified plaintiff as a "club," exempt from some income tax under 26 U.S.C. § 501(c)(7). In November 1981, plaintiff filed with the Internal Revenue Service a written request for a determination that it qualified for many years, including fiscal years 1978 through 1980, as a "business league" exempt under 26 U.S.C. § 501(c)(6). The IRS issued a ruling denying that exempt status in July 1982. The denial was timely protested, and hearings at the national office of the IRS took place in January 1983. The IRS issued a letter affirming its denial of that exempt status in March 1983.

This action seeks a refund of income taxes for plaintiff's fiscal years ended August 31, 1978 through 1981. On its original returns, plaintiff calculated its income taxes based upon its being a club under Section 501(c)(7). Timely claims for refund were filed with IRS for each of the fiscal years in question. The refund claims were based on plaintiff's assertion that it is a business league under Section 501(c)(6). The refunds were denied and this suit was filed. This court has jurisdiction under 28 U.S.C. §§ 1340 and 1346(a)(1), and 26 U.S.C. § 7422(a).

The issue is whether during the years in question plaintiff should be classified as a club or as a business league. The dispute centers on plaintiff's food and beverage operation and its social activities.

III.

The exemptions for clubs and business leagues are defined in Title 26 Sections 501(c)(6) and (7) as follows:

(6) Business leagues, chambers of commerce, real-estate boards, boards of trade or professional football leagues (whether or not administering a pension fund for football players), not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.

(7) Clubs organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net earnings of which insures to the benefit of any private shareholder.

The IRS has adopted regulations under those two sections.² Those regulations and their predecessors have been in effect for years and have acquired the effect of law. See National Muffler Dealers Assoc. v. United States, 440 U.S. 472, 99 S.Ct. 1304, 59 L.Ed.2d 519 (1979); North Carolina Association of Insurance Agents v. United States, 739 F.2d 949 (4th Cir.1984).

A.

Plaintiff asserts that the IRS is collaterally estopped from claiming that plaintiff is a club by virtue of United States v. Engineers Club of San Francisco, 325 F.2d 204 (9th Cir.1963). The Ninth Circuit there affirmed a decision of the district court that plaintiff was not a "social club" within the meaning of Section 1710 of the Internal Revenue Code of 1939 and Section 4241 of the 1954 Code, with respect to excise taxes on dues and initiation fees. That case is helpful to plaintiff here, but is not collateral estoppel for the following reasons: First, the tax statutes involved were different and presented the issue of whether plaintiff was a social or a non-social club, not the issue of whether it is a club or a business league. In addition, the facts involved in that issue were for the years 1952 through 1959, while the facts involved here occurred approximately twenty years later. There was testimony during the trial of this case that the nature of plaintiff's operations had not changed, but the testimony was conclusionary in nature and not factually probative. Further, plaintiff has accepted the tax benefits of being a club under section 501(c)(7) for several years, and cannot claim that it has relied upon the 1963 decision for purposes of its income taxes at issue here.

The method of analysis used by the Ninth Circuit in the 1963 case is instructive here. The court looked at the basic purposes and programs of plaintiff, and said that there is a recognized rule that if the basic purposes and programs are essentially technical and professional, then incidental and limited social features such as meals and beverages will not make it social; 325 F.2d at 206.

B.

Since the 1963 decision is not dispositive, this court must return to the statutes, the regulations, and the cases which have interpreted them.

Numerous cases have been decided on the issue of whether an organization is or is not a business league under Section 501(c)(6). However, those decisions were primarily factual and provide only limited guidance. In National Muffler Dealers Association v. United States, supra, the Supreme Court upheld the decisions of the lower court that the taxpayer there was not a business league because it consisted only of the franchisees of one company, and was not therefore a "line of business" as defined in the regulations. In the...