Freeport Country Club v. United States

• Decision Date: 09 July 1970
• Docket Number: No. 17805.,17805.
• Citation: 430 F.2d 986
• Parties: FREEPORT COUNTRY CLUB, Plaintiff-Appellant, v. The UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

430 F.2d 986 (1970)

FREEPORT COUNTRY CLUB, Plaintiff-Appellant, v. The UNITED STATES of America, Defendant-Appellee.

No. 17805.

United States Court of Appeals, Seventh Circuit.

July 9, 1970.

Hamilton T. Hoyt, Milwaukee, Wis., for plaintiff-appellant; Shea, Hoyt, Greene, Randall & Meissner, Milwaukee, Wis., of counsel.

William A. Friedlander, Atty., Tax Division, Johnnie M. Walters, Asst. Atty. Gen., Lee A. Jackson, Leonard J. Henzke, Jr., Attys., Dept. of Justice, Washington, D. C., Thomas A. Foran, U. S. Atty., Chicago, Ill., for defendant-appellee.

Before CUMMINGS and KERNER, Circuit Judges, and GRANT, District Judge.^*

GRANT, District Judge.

This is an appeal from a District Court's order sustaining defendant's motion for summary judgment, denying plaintiff's motion for summary judgment and dismissing the complaint. The question presented by this appeal is whether the amount (up to $10) actually spent for food at the Freeport Country Club (herein referred to as the Club), under a plan in which the Club required its members to spend at least $10 per month in the Club cafe or be assessed for the difference between the $10 and the amount spent in the Club cafe, constitute "dues" within the meaning of § 4242(a) and thus subject to the tax imposed by § 4241(a) (1) of the Internal Revenue Code of 1954.¹

The Freeport Country Club is a non-stock, non-profit Illinois corporation, entirely owned by its members, which operates a private golf course, tennis courts, swimming pool and clubhouse in Freeport, Illinois.

At an annual members' meeting on April 11, 1962, the Club members voted to establish a minimum spending program whereby each member was expected to spend at least $10 in the Club cafe each month. If the member failed to spend that amount, he would automatically be assessed for the difference between $10 and the amount he did spend that month, plus 20% excise tax payable thereon.

Beginning on May 1, 1962, the Club charged those of its members, who spent less than $10 per month in the Club cafe, the amount by which their respective expenditures fell short of $10 plus excise tax. The Club bookkeeper made such charges in the regular course of billing. Certain discretionary exceptions, however, were made in individual cases. In the event a Club member planned to be absent from Freeport during an entire month or more and made a written request in advance to the Club, an officer of the Club might authorize the bookkeeper not to bill that particular member for the month of his absence.

On November 20, 1962, the Board of Directors of the Club adopted the following resolution:

Resolved that whereas the regular dues assessed against the various classes of membership of the Freeport Country Club are predicated in part upon the assumption that substantial operating revenue will be realized from the participation of adult members in the club functions and activities and the use of the club facilities, supplementary dues may be charged to all classes of members, except Juniors and Associates as follows: In the discretion of the Board of Directors a supplementary dues charge may be made against any member other than a Junior or Associate who shall not have spent at least $10.00 in any preceding month in the cafe, said supplemental dues charge shall not be greater than the difference between the member\'s cafe expenditure for the month and said sum of $10.00 together with the dues tax thereon payable to the Federal Government. It is expressly understood that no member shall be required to spend any given amount in the cafe, bar or other facility as a condition to the continued enjoyment of the privileges and facilities of the club and of membership therein. Should the Board of Directors elect to make any such assessments of supplemental dues, they shall be made only for the preceding month\'s differentials and shall not be cumulative and shall be considered an obligation for the month of the differential used.

The supplemental dues program went into effect on December 1, 1962, and each month thereafter (except October, 1963) the Board of Directors, by motion, specifically applied the foregoing resolution to the next succeeding month. No member was ever asked to resign, was ever dropped from membership in the Club, or was ever denied any of the privileges of the Club for the reason that he had not spent as much as $10 in any certain month.

On December 7, 1962, the Board of Directors adopted the following resolution:

Whereas, a Resolution has been adopted by the Board of Directors, authorizing the Directors to make a supplemental dues charge against members spending less than $10.00 in the cafe for a month.

Now, Therefore, Be It Resolved that the Excise Tax on such supplementary dues as may be collected be promptly remitted to the Collector of Internal Revenue, and further, that collections be made from all members of $2.00 a month less any amount collected for tax on supplementary dues, which collections shall be set aside in a separate bank account pending a determination to be made at the request of the Board of Directors of the Director of Internal Revenue for a ruling upon the Excise Tax consequences of said Resolution concerning supplementary dues referred to above and, further, that the President of the Freeport Country Club request such a ruling from the Director of Internal Revenue.

From December 7, 1962, until December 31, 1965, when the excise tax on club dues was repealed, all taxes of supplemental dues levied by the Club were promptly collected and paid to the Internal Revenue Service, and the provisional taxes on amounts spent each month in the Club cafe up to $10 were collected and deposited in a separate bank account.

The Club bookkeeper billed all members under the 11 April 1962 resolution from May 1, 1962, to November 30, 1962, and under the 20 November 1962 resolution from December 1, 1962, to the present time as a matter of regular practice, except when an officer or director issued instructions that the bookkeeper should not bill a certain member for one or more months because of his inability to use the Club facilities for reasons of absence or illness. Toward the end of each month it was not uncommon for Club members to call the bookkeeper to inquire as to the amount they had already spent in the Club cafe that month.

On October 7th and November 11th, 1966, the Government assessed against the Club excise tax totaling $16,109.29 plus interest for the years 1963, 1964 and 1965. On June 6, 1967, the Internal Revenue Service received payment of $534.70 from the Club against the two assessments. This sum was the amount of taxes paid under protest by 249 members of the Club during December, 1965. The Club filed a claim for refund of the $534.70 on June 8, 1967. The Internal Revenue Service formally rejected the claim on February 12, 1968.

On January 18, 1968, the Club filed a complaint for refund of the $534.70 in the United States District Court for the Northern District of Illinois, Western Division. The Government filed on April 29, 1968, an amended answer and counterclaim for excise taxes in the amount of $16,109.29 plus interest of $1,713.16.

On June 26, 1968, the Club filed a motion for summary judgment pursuant to Fed.R.Civ.P. 56. On December 12, 1968, the Government filed its cross motion for summary judgment. The District Court filed its minute order sustaining the Government's summary judgment cross motion, denying the Club's motion for summary judgment and dismissing the complaint on April 3, 1969.

The excise tax in question is imposed by § 4241(a) (1)² with the term "dues" defined in § 4242(a)³ of the Internal Revenue Code of 1954. Plaintiff taxpayer does not contest the applicability of the excise tax on the amount assessed by the Club for the difference between the $10 and the amount spent in the Club cafe. Plaintiff only contests the excise tax on the amount up to $10 spent each month by each member in the Club cafe. The federal excise tax imposed on dues paid to any social, athletic, or sporting club or organization is not an innovation. Section 501 of the Revenue Act of 1926, as amended by § 413 of the Revenue Act of 1928, provided for an excise tax on dues and defined "dues" as any assessment, irrespective of the purpose for which it was made. Section 1712(a) of the Internal Revenue Code of 1939, amended by § 543(b) of the Revenue Act of 1941, while continuing a federal excise tax on dues, substantially changed the earlier wording of the statute to read that the term "dues" included any assessment, irrespective of the purpose for which it was 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 codification of § 4242(a) of the Internal Revenue Code of 1954 continued the definition of "`dues" as it was used in the 1939 Code as amended. The all-inclusive nature of the dues tax statute is reflected in § 49.4242-1 of the Treasury Regulations on Facilities and Services Excise Tax.⁴

The recognized starting point in determining whether certain payments made to a club are taxable as dues is the leading case of White v. Winchester Country Club, 315 U.S. 32, 62 S.Ct. 425, 86 L.Ed. 619 (1941), where the Supreme Court in holding payments subject to the dues tax said at page 41, 62 S.Ct. p. 430:

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 a single round of golf lacks the element of making common cause inherent

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