North Ridge Country Club v. Comm'r of Internal Revenue

• Decision Date: 15 September 1987
• Docket Number: Docket No. 20651-82
• Citation: 89 T.C. 563,89 T.C. No. 40
• Parties: NORTH RIDGE COUNTRY CLUB, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

89 T.C. 563

89 T.C. No. 40

NORTH RIDGE COUNTRY CLUB, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 20651-82

United States Tax Court

Filed September 15, 1987.

JUST Petitioner, a private social club exempt from tax pursuant to section 501(c)(7), engaged in three nonexempt activities: nonmember banquets, nonmember golf tournaments with associated banquets, and an investment program.

HELD, each nonexempt activity, separately considered, was entered into by petitioner with a profit objective.

HELD, FURTHER, losses from one such profit seeking activity are deductible against net gains from another such activity. Robert L. Gallaway for the petitioner.

Paul J. Krug, for the respondent.

OPINION

KORNER, JUDGE:

This case was assigned to Special Trial Judge Helen A. Buckley pursuant to the provisions of section 7456(d)(3) of the Code (redesignated sec. 7443A(b)(3) by sec. 1556 of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2755) and Rules 180, 181 and 182. ¹ The Court agrees with and adopts her opinion which is set forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

BUCKLEY, SPECIAL TRIAL JUDGE: Respondent determined a deficiency of $2,846 in petitioner's 1979 Federal income tax.

The issue before the Court is whether petitioner, a section 501(c)(7) tax exempt social club with different sources of ‘unrelated business taxable income,‘ may offset net gain from one source of unrelated business taxable income with the excess deductions from another such source.

FINDINGS OF FACT

Some of the facts have been stipulated, and unless otherwise noted those facts are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.

Petitioner is a private social club exempt from tax pursuant to section 501(c)(7). Petitioner's exempt status was granted on September 24, 1954. Petitioner timely filed an Exempt Organization Business Income Tax Return and a Return for Organization Exempt From Income Tax, Forms 990-T and 990, respectively, for 1979. On June 7, 1982, respondent issued a valid notice of deficiency and petitioner timely filed its petition for redetermination. ² At that time and at all other times relevant to this litigation, petitioner had its principal place of activity and business in Fair Oaks, California.

Petitioner operates a golf club, restaurant and bar, swimming pool and tennis courts for the benefit of its members and their guests. This is and always has been petitioner's purpose. In addition to maintaining facilities for its members, petitioner also, from time to time, makes its facilities available to nonmembers. ³

Petitioner derives revenue from members as well as nonmembers. For 1979, petitioner had total revenue in excess of $1,200,000. All of the revenue, except for $118,789, came from members, either as membership dues or fees for services provided to members and/or their guests. Of the $118,789 in revenue which did not derive from members or their guests, $10,098 represents interest income and the remainder came from the following stipulated nonmember activities: ⁴ golf, golf cart rentals; food sales; beverage sales; and guest fees.

The parties stipulated that during 1979 petitioner derived revenue from nonmember activities and incurred expenses directly connected with those activities as follows:

+--------------------------------------------------------------+
                ¦       ¦Golf   ¦Golf carts¦Food   ¦Bar    ¦Guest fees¦Interest¦
                +-------+-------+----------+-------+-------+----------+--------¦
                ¦Revenue¦$13,170¦$11,819   ¦$39,281¦$43,406¦$1,015    ¦$10,098 ¦
                +--------------------------------------------------------------+
                

Expenses
                Direct         8,820  3,975 43,389   28,225
                Utilities      54     ---   1,899    2,099
                Property taxes 36     ---   1,259    1,392
                Depreciation   352    2,023 3,461    3,824
                General
                administration 2,004  1,798 5,977    6,605  154
                Club house     627    563   1,870    2,066  48
                Total expenses 11,893 8,359 57,855   44,211 202
                Net income     1,277  3,460 (18,574) (805)  813 10,098
                

The expenses listed as direct expenses are those which are incurred and increased in direct proportion to the volume of the particular nonmember activity. Included here are items such as additional labor costs and costs of goods sold. Each dollar of direct expense is traceable to the particular nonmember activity and would not have been incurred put for the activity.

The other expenses (for simplicity referred to as indirect) are those which are either fixed or quasi-fixed. Those which are fixed, such as property taxes and depreciation, are incurred by petitioner whether or not there is nonmember activity. The other indirect expenses, such as utilities, general administration and club house expense may be increased by nonmember activity, but the increases are only nominal or bear no calculable relationship to a particular nonmember activity. ⁵ For purposes of computing net income, indirect expenses are allocated to each nonmember activity although they are not traceable to any particular nonmember activity.

Although the expenses attributable to nonmember activities are analyzed and recorded in terms of whether they bear direct relationships with each respective activity, the parties have stipulated that all the expenses in issue are directly connected with ⁶ the production of the gross income for each activity.

The nonmember revenues, other than the interest income, derive from two sources. First, petitioner allows its facilities to be used for a number of nonmember golf tournaments each year. These tournaments are held on days when the facilities are closed to members. ⁷ Civic or charitable organizations normally sponsor the nonmember tournaments. In order for nonmembers to secure the use of petitioner's facilities for tournaments the following requirements must be met:

1. There must be at least 130 tournament participants;

2. A course marshal must be provided;

3. All participants must use golf carts rented from petitioner;

4. Prizes must be purchased from petitioner's Pro shop and there must be a certain guaranteed expenditure from the shop; and

5. The organization sponsoring the tournament must have a banquet or luncheon using petitioner's dining facilities. These requirements are part of a comprehensive policy developed by petitioner's Board of Directors with respect to nonmember activity.

The second source of nonmember revenue is that which petitioner receives from food and beverage sales from nonmember banquets other than those associated with golf tournaments. These banquets are usually held once or twice a month on Saturday evenings. There are also some nonmember banquets held during the week around the Christmas holiday season.

The record is not clear with respect to the amount of nonmember food and beverage revenue which is associated with the nonmember golf tournaments as opposed to that which is independent of golf tournaments. As stated previously, however, the nonmember revenues, other than the interest income, emanate from only two sources. This is so despite the parties' stipulated classification of the nonmember activities into the five categories of golf, golf carts, food, beverage and guest fees. One source of nonmember revenue is the golf tournament activity, which includes golf, golf carts, a portion of the food and beverage revenue and guest fees. ⁸ The other source is the food and beverage revenue emanating from nonmember banquets independent of golf tournaments.

Prices paid by nonmembers for the use of petitioner's facilities are substantially higher than those paid by members. In 1979, nonmember golf tournament participants paid a greens fee of $11, while the greens fee paid by guests of members was $7.50. ⁹ If a member or his/her guest rented a golf cart, the cost was $9 or $10, while the cost of the mandatory golf cart rental to nonmember tournament participants was $10 or $11. The same escalated pricing structure applied to the cost of food and drink at nonmember banquets whether or not they were associated with golf tournaments.

In allowing nonmember activity, petitioner was very concerned about keeping the level of inconvenience to its members at a minimum. The record contains minutes of Board of Directors meetings where such concerns were discussed and appropriate policy changes enacted. In 1979, the policies with respect to these concerns served to limit the number of nonmember golf tournaments to six per year and to assure that they were held on days when the club was closed to members. ¹⁰ With respect to banquets not associated with golf tournaments, petitioner avoided inconveniencing its members by maintaining separate facilities for members and nonmembers and by giving members priority in the use of the banquet facilities. ¹¹

Various economic considerations were taken into account when decisions were made by the club with regard to its nonmember activities. Thus, in setting prices for nonmember activities, petitioner attempted to strike an appropriate balance between maximizing revenue and remaining competitive with other establishments offering similar services. Petitioner also attempted to minimize the costs of providing nonmember activities. For example, a concerted effort was made to schedule all nonmember banquets nor associated with golf tournaments on evenings when member dining activity was high. This is because the kitchen was already staffed and open, thereby reducing startup costs. In gauging the nonmember activities for profit, the cost of the goods, the cost of help and overhead ¹² were considered. It appears that only direct expenses (as defined previously) were taken into account when measuring the profitability of nonmember activities, and indirect expenses were not considered. This was so even though the indirect expenses would be allocated to the nonmember activities for purposes of computing Federal income taxes.

Petitioner's view with respect to the profitability of...