Gearhart v. United States

• Decision Date: 09 June 1967
• Docket Number: Civ. A. No. 5594.
• Citation: 269 F. Supp. 309
• Parties: Joseph P. GEARHART, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Eastern District of Virginia

269 F. Supp. 309

Joseph P. GEARHART, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. A. No. 5594.

United States District Court E. D. Virginia, Norfolk Division.

June 9, 1967.

Willcox, Savage, Lawrence, Dickson & Spindle, Richard B. Spindle, III, Norfolk, Va., for plaintiff.

Claude Vernon Spratley, Jr., U. S. Atty., Norfolk, Va., James A. Oast, Jr., Asst. U. S. Atty., Tax Division, Dept. of Justice, Jerry A. Wells, Washington, D. C., for defendant.

MEMORANDUM

WALTER E. HOFFMAN, Chief Judge.

This suit was instituted under 28 U.S.C. § 1346(a) (1) for the recovery of an excise tax which was allegedly collected erroneously from plaintiff. Although the amount in controversy in this case is only $231.30, plus interest, there are a number of similarly situated taxpayers whose rights will be determined by the outcome of this test case. The essential facts, most of which were stipulated, are set forth herein:

Plaintiff is and has been a voting member of Tidewater Horse and Pony Association (hereinafter referred to as "THPA"), a non-stock, non-profit corporation organized under the laws of Virginia in the middle 1950's. He served as a member of the Board of Directors of THPA in 1957 and was chairman of the Stable Committee from 1956 through May 1960.

According to its certificate of incorporation, THPA was organized for the following purposes:

"To operate a nonprofit, nonstock corporation for the promotion of interest in horseback riding and horse and pony shows, which corporation shall have the power to own, operate and/or lease clubs, club facilities, houses, barns, stables, farms, land, riding facilities, horse show facilities, and all types of accommodations and amusement facilities for the benefit of the members of the Tidewater Horse and Pony Association, Incorporated, and their guests and invitees, and to do and perform all acts necessary or incidental to such purposes, including among other things the right to give, conduct, foster or promote riding and horse shows, contests or exhibitions and activities related or incidental thereto."

Shortly after its organization, THPA leased certain properties from Greenbrier Farms, Inc., located in what is now the City of Chesapeake, for the sum of $50.00 per month. On the property there was situated a large cattle barn. The plaintiff, and other persons who desired to stable horses in such barn, constructed at each individual's own expense stalls appropriate for the stabling of horses.

Although the persons stabling horses in said barn were not initially all members of THPA, the great majority were, and it became the practice that all persons stabling horses in the barn should or must become members of THPA. Mr. Withers Floyd, who succeeded plaintiff as chairman of the Stable Committee, testified that some persons stabled their horses on the premises for about 60 or 90 days before joining THPA, but that ultimately they all became members. There were, of course, many other members of THPA who did not stable any horses in the barn.

Those persons stabling horses in the barn determined amongst themselves, in informal meetings from time to time, an amount to be charged per month to meet expenses. This charge covered the cost of feed for the horses, wages of stable personnel, and, beginning in 1959, the sum of $1 per stall per month which was paid to THPA as a rental fee.¹ During the quarters ending September 30, 1961 through March 31, 1963, this monthly charge was $32.50; beginning with the quarter ending June 30, 1963, the charge was increased to $34.00 per month. Checks were made payable to the THPA Stable Fund or to the chairman of the Stable Committee. These funds were kept in a bank account under the name "THPA Stable Fund", which account was entirely separate from the main THPA account. All disbursements for feed and wages of stable personnel and for the stall rental were made from the THPA Stable Fund, as were withholding and social security payments for stable personnel.

Those persons stabling horses elected a chairman of their group, who at all times pertinent hereto was the same individual who was chairman of the THPA Stable Committee. This person had sole authority to draw on the THPA Stable Fund, and he prepared monthly reports of the aforementioned receipts and disbursements. These reports were entitled "Tidewater Horse and Pony Association —Stable Committee Report" and were prepared under the signature of the Stable Committee, THPA. Although Mr. Floyd testified that it was his practice to post copies of this monthly report in the THPA clubhouse (which was built on the property leased from Greenbrier after THPA's organization), as well as in the stable, both he and plaintiff testified that THPA did not require the submission of these reports to the Association itself, nor did THPA ever tell the stable group how much it should charge for stable expenses. This matter was determined by the "stable group" at its own meetings, which were held separate and apart from the THPA meetings, but generally following the THPA meetings. There was also evidence that the stable group had its own social security number, but its tax returns were filed in the name of THPA.

In February 1965 the Internal Revenue Service made a deficiency assessment of excise taxes against plaintiff for the period July 1, 1961, through June 30, 1964. Plaintiff paid the assessment, with interest, and filed a claim for refund, which was disallowed. Plaintiff then instituted this action on June 2, 1966.

The excise taxes in question were assessed pursuant to Section 4241 of the 1954 Internal Revenue Code, 26 U.S.C. § 4241,² which states as follows:

"§ 4241—Imposition of tax.

(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 legal issues may be framed thus:

(1) Did the monthly charge to the members of the stable group for the care and feeding of their horses constitute "dues" within the meaning of the statute?

(2) Was THPA, or, alternatively, the "stable group", a "social, athletic or sporting club or organization?"

With regard to the first issue, we believe that the monthly assessment constituted "dues" as that term has been defined and interpreted. Section 4242 (a) of the Internal Revenue Code of 1954 defines "dues" as follows:

"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;"

Additionally, § 49.4242-1 of the Federal Tax Regulations offers this interpretation, in subsection (a) (2):

"In determining whether a charge by such a club or organization constitutes dues or membership fees * * * the test is whether payment of the charge confers the right to use a social, athletic, or sporting privilege or facility of the club or organization for the prescribed period. It is immaterial whether the privilege or facility is one for which a charge is mandatory, even though the member chooses not to avail himself of the privilege or facility, or whether the privilege or facility is one for which a charge is made only if the member, at his own election, chooses to have the privilege or facility made available to him. Any privilege or facility offered by a social, athletic, or sporting club or organization which is so directly related to a social, athletic, or sporting activity in which the club is engaged, or for which it was created, as to partake of the nature of the activity itself is considered to be a social, athletic, or sporting privilege or facility. This is true even though such privilege or facility, if considered entirely apart from any social, athletic, or sporting activity, would not in and of itself constitute a social, athletic, or sporting privilege or facility."

The Tax Regulations also offer a number of examples of what constitute "dues or membership fees" so as to be subject to tax. Among those items which are regarded as being dues or fees are the following: (1) a "minimum expenditure" of $200 annually charged by a social club for food and drink, with the member being billed for the difference if his actual expenditures are less than that amount; (2) assessments made by a social club to meet expenses, in lieu of regular dues or membership fees; (3) a charge (in addition to regular dues) made by a social club for golf privileges, so long as the privilege is for more than a 6-day period; (4) a charge made by a social club for boat docking and mooring facilities for its members; (5) a charge made by a beach club for the rental of cabins or cabanas to its members, if the period exceeds 6 days. Among the examples of charges which are not considered to be taxable dues or membership fees are the following: (1) a social club offers golfing, swimming and skating facilities and also maintains suites of rooms in...