McDonald v. United States

• Decision Date: 06 April 1963
• Docket Number: No. 14765.,14765.
• Citation: 315 F.2d 796
• Parties: Angus McDONALD, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

315 F.2d 796 (1963)

Angus McDONALD, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 14765.

United States Court of Appeals Sixth Circuit.

April 6, 1963.

Nathan Elliott, Jr., Lexington, Ky., for appellant.

Crombie D. Garrett, Dept. of Justice, Washington, D. C., for appellee.

Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Robert N. Anderson, Charles B. E. Freeman, Attys., Dept. of Justice, Washington, D. C., Bernard T. Moynahan, Jr., U. S. Atty., Lexington, Ky., on the brief.

Before WEICK and O'SULLIVAN, Circuit Judges, and LEVIN, District Judge.

O'SULLIVAN, Circuit Judge.

Angus McDonald, plaintiff-appellant, appeals from a District Court judgment dismissing his action to recover a federal excise tax paid by him. The tax was a 20% levy on a $1,000.00 bond purchased by him in 1947 from the Idle Hour Country Club of Lexington, Kentucky. The government claimed that the amount paid for the bond was "an initiation fee" subject to the tax assessed by virtue of § 1710(a) (2) and § 1712(b) of the Internal Revenue Code of 1939.¹

McDonald purchased the bond in 1947; the Commissioner assessed the tax in 1960. McDonald denies liability for the tax on two grounds: First, that the $1,000.00 paid for the bond was not an "initiation fee"; and, second, that the assessment is barred by the four year limitation provided in § 3312(a) of the 1939 Code. The government asserts that the limitation provided in § 3312(a) was tolled for "failure to file a return" (§ 3312(b), I.R.C.1939).

1. Did the bond purchased amount to payment of an initiation fee?

The Idle Hour Country Club was organized as a Kentucky Corporation in 1946. Pertinent parts of its Articles of Association are set forth below.²

The Club's bylaws established the following classes of membership: Certificate Members, Associate Members, Intermediate Members, Junior Members, Non-resident Members and Special Members. Certificate Members were described by Section 1-A of the bylaws as follows:

"Certificate members shall be persons who are elected by the Board of Governors and who personally own a membership certificate in the Idle Hour Country Club and who pay the dues fixed by the Board of Governors for such members. Exclusive voting privileges shall be vested in the Certificate Members."

It is apparent from the stipulated facts that the issuance of bonds, as authorized by Article VII, was a part of the original plan of the Club's organization. The bond purchased by McDonald was issued as of December 1, 1946, and he purchased it in 1947. By his purchase, he received a Certificate of Membership in the club. It was stipulated that no Certificate of Membership (Class A) has ever been issued by the Club except to a holder of one of the first mortgage bonds. Although Article VI provided that any Certificates of Membership, within the fixed limit of 350, not taken up by bond purchasers, "shall be issued by it (the corporation) from time to time for such consideration as the Board of Governors may determine" it is apparent that no plan was ever devised for admitting anyone to Class A membership except through the purchase of a bond. McDonald's bond, with others, was secured by a mortgage on the Club's assets, had a maturity date (December 1, 1996) and carried non-cumulative contingent interest. No interest has ever been paid. We think that any view of the substance of what was done discloses that the only way McDonald could become a Certificate Member (Bylaws, §§ 1, A) in the Club was by the purchase of a bond — making a loan to it. Because by statutory definition an initiation fee "includes any payment * * * or loan, required as a condition precedent to membership," we are of the opinion that the 20% excise levy was payable on the $1,000.00 which McDonald paid for his bond.

Prior to the Revenue Act of 1928, which, by its § 413, amended the predecessor to § 1712 of the 1939 Code, it was held by this court in Masonic Country Club of Western Michigan v. Holden, 18 F.2d 553 (C.A.6, 1927), that the purchase of a share of stock which granted the privilege of club membership was not a taxable initiation fee. We there approved like holdings of the Court of Claims in the cases of Alliance Country Club v. United States, 62 C.Cl. 579; Page v. United States, 62 C.Cl. 590; Lukens v. United States, 62 C.Cl. 598. At the time of these decisions, the Revenue Code merely provided for an excise tax on an amount paid to a club "as an initiation fee." The Code did not define that term. The amendment in the 1928 Act, carried forward into § 1712(b) of the 1939 Code, specifically included "any payment, contribution, or loan required as a condition precedent to membership" within the term "initiation fee." Our Masonic Country Club decision cannot, therefore, be considered applicable under the Code as now written.

We find no decision which considered a plan of club organization and membership fitting precisely the one involved here. However, since 1928 it has been held that where ownership of a share of stock is necessary to membership in a club, the amount paid therefor is subject to the excise levy. Vitter v. United States, 279 F.2d 445, (C.A.5, 1960) cert. denied 364 U.S. 928, 81 S.Ct. 353, 5 L.Ed.2d 266; Munn v. Bowers, 47 F.2d 204 (C.A.2, 1931); Knollwood Club v. United States, 48 F.2d 971, 74 Ct.Cl. 1 (C.Cl., 1931); Wild Wing Lodge v. Blacklidge, 59 F.2d 421 (C.A.7, 1932). We do not consider the case of United States v. Riverlake Country Club, Inc., 306 F.2d 564 (C.A.5, 1962) to be contrary to our conclusion.

It is asserted that, because there were other classes of membership in the Idle Hour Club, for some of which McDonald might have qualified without buying a bond, the purchase of a bond was not a condition precedent to membership. McDonald, however, chose to become a full fledged Class A member with voting and ownership rights, and paid what he had to pay for these privileges. We agree with the Treasury interpretation of its Regulation that "it is not material to the application of the tax that the payment be a prerequisite to all classes of membership in the club. The essential question is whether such a payment is made as a prerequisite for any type of membership therein." (S.T. 387, 1-2 Cum. Bull. 291 (1922))

2. Was the assessment barred by the statute of limitations?

McDonald purchased the bond in 1947. The Commissioner assessed the 20% levy thereon thirteen years later, May 6, 1960. The Commissioner concedes that there was no fraud committed by McDonald or his Club in failing to pay or collect the tax. The taxpayer asserts that the assessment in question was barred by § 3312 of I.R.C.1939, which (excluding income and some other specified taxes), in subparagraph (a), provides that:

"All internal revenue taxes shall * * * be assessed within four years after such taxes become due * * *."

The government claims that no return reporting the taxable event which gave rise to the tax was ever made and, therefore, the above limitation does not apply. It relies on subparagraph (b) of said § 3312, which provides that:

"In case of * * * failure to file a return within the time required by law, the tax may be assessed * * * at any time."

By § 1710(b) set out in note 1 above, it was McDonald's duty to pay the tax. By § 1715(a),³ it was the duty of the Idle Hour Club to collect the tax. The time and place for remitting such taxes is provided in subparagraphs (b) and (c) of § 1715. By § 1716,⁴ the Idle Hour Club, as the collecting agent, was likewise required to make the excise tax return. The time and place for making such returns are specified in subparagraphs (b) and (c) of said § 1716. The record in this case does not disclose any regulation adopted by the Commissioner specifying just what the return required by § 1716(a) is to contain. The excise tax return form provided (Treasury Dept. Form 729), however, contains some general instructions and quotes the § 1712 definition of club "dues." No reference is made to the statutory definition of "initiation fees."

In 1947, the month in which it received the $1,000.00 for McDonald's bond purchase, the Idle Hour Club made and filed a timely excise tax report, using the form provided by the government (Treasury Department Form 729) for making a report of "Tax on Admissions, Dues and Cabarets, Roof Gardens, etc." Under a column headed "Character of Tax" spaces are provided for reporting taxes collected for (g) Club dues and (h) Club initiation fees. While the report made showed amounts collected for club dues and initiation fees, neither the $1,000.00 received from McDonald nor a tax thereon was included in the report. Such items were not disclosed in the return because neither the club nor McDonald considered that the $1,000.00 paid was subject to an excise tax.

The limitation statute before us (§ 3312) is different than that applying to income taxes (§ 275, 276 I.R.C.1939). In the latter case, the filing of a return begins the period of limitation; the taxes must be assessed "within three years after the return was filed." The filing of a return starts the running of the statute. Not so in the case of excise taxes. The assessment must be made "within four years after such taxes become due," provided a "return" was timely filed.

Clear guidance as to what will be held to be a valid return to start the running of the statute in income tax cases cannot be obtained from decided cases (see annotation 3 A.L.R.2d 647), but it may be said generally that the return must comply with the requirements prescribed by the Commissioner. Lucas v. Pilliod Lumber Co., 281 U.S. 245, 50 S.Ct. 297, 74 L.Ed. 829; Florsheim Bros. Drygoods Co. v. United States, 280 U.S. 453, 50 S.Ct. 215, 74 L.Ed. 542; Commissioner v. Lane-Wells Co., 321 U.S. 219, 64 S.Ct. 511, 88 L.Ed. 684; John D. Alkire Investment Co. v. Nicholas, 114 F.2d 607 (C.A.10, 1940); Paso Robles Mercantile Co. v. Commissioner, 33 F.2d 653 (C.A.9, 1929); National...