Pittsburgh Press Club v. U.S.

• Citation: 579 F.2d 751
• Decision Date: 24 April 1978
• Docket Number: No. 77-1721,77-1721
• Parties: 78-1 USTC P 9457, 3 Fed. R. Evid. Serv. 256 PITTSBURGH PRESS CLUB, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Page 751

579 F.2d 751

78-1 USTC P 9457, 3 Fed. R. Evid. Serv. 256

PITTSBURGH PRESS CLUB, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 77-1721.

United States Court of Appeals, Third Circuit.

Argued Feb. 15, 1978.

Decided April 24, 1978.

Leonard M. Mendelson, T. Lawrence Palmer, Hollinshead & Mendelson, Pittsburgh, Pa., for plaintiff-appellee.

M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews, Leonard J. Henzke, Jr., Robert T. Duffy, Attys., Tax Div., Dept. of Justice, Washington, D. C., for defendant-appellant; Blair A. Griffith, U. S. Atty., Thomas A. Daley, Asst. U. S. Atty., Pittsburgh, Pa., of counsel.

Before SEITZ, Chief Judge, and ROSENN and GARTH, Circuit Judges.

OPINION OF THE COURT

GARTH, Circuit Judge.

This case, involving the Pittsburgh Press Club's action for an income tax refund, comes before us for the second time. Because crucial findings of fact made by the district court were based on inadmissible evidence, we must once again reverse.

I

The Pittsburgh Press Club (PPC or the Club), organized in 1885 under the laws of Pennsylvania, and reactivated in 1955, applied in 1956 for a federal income tax exemption as a social club. In 1959 the Internal Revenue Service (IRS) granted the exemption pursuant to IRC § 501(c)(7), which exempts from federal income taxation:

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

In its application for tax exemption, the Club stated that its purpose was:

To provide a professional and social meeting place for those engaged in news and advertising work on newspapers, magazines, radio and television and in public relations activities for the furtherance of common interests. ¹

In 1964 IRS examined PPC's books and records for fiscal year 1962, and determined that "outside" groups (I.e., nonmember groups) had been permitted to use the Club's facilities twelve times during that fiscal year. IRS did not then challenge PPC's exempt status, but warned the Club's officers that continued use by outside groups jeopardized PPC's exemption. PPC responded by a letter stating that nonmember use of its facilities would be discontinued.

In 1970 an IRS agent conducted an extensive audit of the Club for fiscal years 1967, 1968 and 1969. He determined that during the period of these three years more than 800 functions had been held by nonmember outside groups, although each such group had been member sponsored. ² Based on these findings the agent further determined the amount of "outside" revenues for the three years in question, as well as the percentage those revenues were of the Club's gross receipts (defined to exclude receipts from initiation fees). These determinations were:

On February 1, 1972, IRS revoked the Club's exempt status as of fiscal year 1967, and assessed income taxes for fiscal years 1967 through 1971. The taxes so assessed were paid under protest. IRS's revocation of PPC's exempt status was based on two factors. First, observing that voting members paid lower dues than the other classes of members (associate or affiliate members), IRS concluded that the differential in dues constituted an inurement of net earnings to the benefit of the voting members, who were considered by IRS to be private shareholders. IRS charged that this practice violated IRC § 501(c) (7). See generally Rev.Rul. 70-48, 1970-1 C.B. 133. Second, IRS claimed that PPC's continued practice of permitting its facilities to be used for outside affairs, resulting in PPC's receiving substantial revenues from these outside sources, constituted engaging in business. Thus, it charged that the Club was not being operated exclusively for nonprofit purposes, and was therefore in violation of IRC § 501(c)(7). See generally Treas.Reg. § 1501(c)(7)-1(b); Rev.Rul. 60-324, 1960-2 C.B. 173.

PPC brought suit in the district court for a refund of the taxes which it had paid. IRS counterclaimed for interest which had accrued prior to payment. The district court ruled in the Club's favor on both issues. 388 F.Supp. 1269 (W.D.Pa.1975).

On appeal (at No. 75-1757) this court upheld the district court's ruling that the differential dues scale did not violate the "inurement of net earnings" provision of IRC § 501(c)(7). 536 F.2d 572, 574 (3d Cir. 1976). With respect to the nonmember revenue issue, however, this court remanded for more specific findings, ³ "including the percentage of gross receipts from nonmembers disclosed by the record." Id. at 575 (footnote omitted). ⁴ The court also directed that the district court make findings respecting other relevant factors, such as the amount of "outside" business, net profits derived from nonmembers, the purpose for which PPC's facilities were made available to nonmember groups, and the frequency of such use. Id.

On remand the district court (426 F.Supp. 553 (W.D.Pa.1977)) reopened the record over IRS's objection to allow PPC to present additional evidence. The Club's new evidence consisted principally of a survey (the "second survey") and of expert testimony by an economist (Dr. Kenkel) and by PPC's accountant. The second "survey" was comprised of mailings to the member-sponsors of 690 of the 815 challenged affairs (the addresses of 125 member-sponsors could not be located). This survey resulted in 281 usable responses. Based on extrapolations from these responses, Dr. Kenkel concluded that outside revenue for the three audited years was between $41,502 and $83,004, or two to four percent of total income. Using these figures, the Club's accountants then determined that the net profit attributable to "outside business" was $150 in fiscal 1967 and $72 in fiscal 1968. ⁵ The accountants also concluded that no profit was realized for the following three fiscal years because total banquet operations had resulted in a net loss to the Club for those years.

Based on the new exhibits and testimony, the district court again found in favor of PPC. Its specific findings of fact were as follows:

(1) the amount of outside business is not more than $83,004;

(2) the percentage of outside business is not more than 4%, and may be nearer 2%;

(3) the amount of net profits from outside business is negligible or de minimis;

(4) the purpose of events at which the club facilities are used by outsiders are principally social events such as wedding or bar mitzvah receptions, and business- oriented gatherings for sales presentations and the like, in connection with the trade, profession, or business of the sponsoring member;

(5) the frequency of such events is no more than normal in a club of plaintiff's size, 3550 banquet department events having been held in the years 1967-1971 (PX C-1), of which only 815 were questioned by the IRS, and of these not over 245 were found to be outside business.

426 F.Supp. at 555-56. This appeal by IRS followed.

II

A

IRS initially objected to the district court's decision which permitted PPC to introduce new evidence after remand. On appeal, IRS at first contended that when this court remanded to the district court for more specific findings, we had precluded the reopening of the record or the adducing of additional evidence by our direction that "(t)he district court should make more specific findings on remand, including the percentages of gross receipts from nonmembers Disclosed by the record," 536 F.2d at 575 (emphasis added). IRS also singled out our directive that "(o)n remand, the district court should make more specific findings on all relevant factors, including findings on the amount of 'outside business' of the taxpayer Revealed in the record . . . ," Id. at 576 (emphasis added). This language, according to IRS, indicated a narrow mandate requiring that the district court refer only to the then existing record in making its new findings. IRS argued that in reopening the record the district court exceeded the scope of our mandate. We do not agree.

This court's language in the decision at No. 75-1757 cannot be read to have the restrictive effect claimed by IRS. Whether a trial court will reopen the proceedings on remand is, of course, a matter for its sound discretion. In Rochez Bros., Inc. v. Rhoades, 527 F.2d 891 (3d Cir. 1975), Cert. denied, 425 U.S. 993, 96 S.Ct. 2205, 48 L.Ed.2d 817 (1976), this court enumerated the criteria with which a district court should be concerned in the exercise of that discretion. We noted that the district court should consider several factors: (1) what burden that would be placed on the parties and witnesses by additional proceedings; (2) what "undue prejudice" may result by not taking new testimony; and (3) whether judicial time and resources would be unnecessarily drained. 527 F.2d at 894, n.6.

In the case Sub judice, IRS pointed to no specific burdens placed upon it or its witnesses as a result of reopening the record at the second trial. At the same time, the prejudice to PPC had not been permitted to adduce further evidence was apparent, since PPC had the burden of demonstrating its entitlement to an exemption. Moreover, the two days of trial time required to receive the new evidence cannot be said to have significantly or unnecessarily drawn upon judicial resources, at least where the additional testimony and exhibits had the potential of aiding in the resolution of difficult questions. We conclude, therefore, that the district court did not abuse its discretion by reopening the proceedings. ⁶

B

IRS vigorously asserts that PPC's second "survey" was nothing more than a compilation of hearsay, none of which was admissible under any exception to the hearsay rule of Fed.R.Evid. 802. We agree.

After our remand, the Club decided to undertake a new survey of those affairs which had been classified as "outside business" by IRS. The survey was prepared and taken with the assistance of Dr. James L. Kenkel, an economist and statistician,...