Santa Barbara Club v. Comm'r of Internal Revenue
| Decision Date | 23 March 1977 |
| Docket Number | Docket No. 8544-74. |
| Citation | 68 T.C. 200 |
| Parties | SANTA BARBARA CLUB, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner, a corporation organized as a social club, sold bottled liquor to its members for consumption away from the club's premises. For each year in issue, such sales exceeded 25 percent of the club's total gross receipts. Held, petitioner was not operated exclusively for exempt purposes and did not qualify for tax exemption under sec. 501(c)(7), I.R.C. 1954. Gerald S. Thede, Carl A. Stutsman, Jr., Terry John Connery, and Jack R. White, for the petitioner.
David Roth, for the respondent.
Respondent determined the following deficiencies in petitioner's Federal income taxes:
+--------------------+
¦Year ¦Income tax ¦
+------+-------------¦
¦ ¦ ¦
+------+-------------¦
¦1969 ¦$774 ¦
+------+-------------¦
¦1970 ¦912 ¦
+------+-------------¦
¦1971 ¦743 ¦
+--------------------+
The sole issue for our consideration is whether a social club's status as a tax-exempt organization under section 501(c)(7)1 can be revoked because the club sold liquor to its members for consumption away from the club's premises.
Some of the facts are stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by reference.
The Santa Barbara Club (hereinafter petitioner or the club) is a nonprofit corporation organized in 1894 and existing under the laws of the State of California with its principal place of business in Santa Barbara, Calif., at the time of the filing of the petition herein. It filed its Federal corporate income tax returns for the years in question with the Internal Revenue Service Center at Fresno, Calif.
Petitioner is a social club organized solely for the entertainment and diversion of its members. Its primary function is to provide downtown facilities for members and their guests. It is also used for approximately 15 social events each year. Among the services provided are the serving of food and liquor for consumption on the premises of the club, the sale of package liquor for consumption off the premises, and the sale of tobacco products for consumption on or off the premises. It is open only to members (and guests accompanied by a member) and the services listed above, including the sale of package liquor, are provided solely to such persons.
For approximately 40 years, petitioner had sold alcoholic beverages for consumption both on and off its premises.2 Package liquor could be purchased only from the club's general manager or his secretary and could not be consumed at the club. Usually a member desiring to purchase package liquor would place his order with the general manager or his secretary and the member would take the liquor with him as he left the club. Occasionally, an order would be placed over the telephone, in which case the club would deliver the liquor to the member's home.
The package liquor sold by the club consisted of both ‘name brands' and ‘club brands.’ ‘Name brand’ liquor was sold under the label of individual distillers. Club brands were standard brands of bourbon, scotch, vodka, and gin sold under the label of the club. Prices of the name brand liquor were the minimum retail price permitted by the California Fair Trades Act for such brands. Club label liquor was priced at 12 to 15 percent above its wholesale cost, which was somewhat cheaper than the price charged for the same liquor sold under the label of its distillery. Sales of club label liquor accounted for between 75 and 80 percent of the package liquor sold. Other clubs in southern California employed similar procedures for selling package liquor to their members.
Club members were charged for food served in the dining room, liquor sold by the drink at the bar, tobacco and package liquor sold at the club, and the special social events held each year. For the years in question, the sales, gross income, and net income from the sale of package liquor and other activities were as follows:
+------------------------------------------------------------------+
¦Year ¦ ¦Package liquor ¦Other activities ¦Total ¦
+------+------------+----------------+------------------+----------¦
¦ ¦ ¦ ¦ ¦ ¦
+------+------------+----------------+------------------+----------¦
¦1969: ¦Sales ¦$27,955.65 ¦$27,851.22 ¦$55,806.87¦
+------+------------+----------------+------------------+----------¦
¦ ¦Gross income¦4,515.91 ¦15,104.50 ¦19,620.41 ¦
+------+------------+----------------+------------------+----------¦
¦ ¦Net income ¦4,060.95 ¦(10,505.69) ¦(6,444.74)¦
+------+------------+----------------+------------------+----------¦
¦1970: ¦Sales ¦29,314.00 ¦27,642.00 ¦56,956.00 ¦
+------+------------+----------------+------------------+----------¦
¦ ¦Gross income¦4,708.00 ¦15,132.00 ¦19,840.00 ¦
+------+------------+----------------+------------------+----------¦
¦ ¦Net income ¦4,165.00 ¦(10,635.00) ¦(6,470.00)¦
+------+------------+----------------+------------------+----------¦
¦1971: ¦Sales ¦29,444.00 ¦26,379.00 ¦55,823.00 ¦
+------+------------+----------------+------------------+----------¦
¦ ¦Gross income¦4,833.00 ¦14,303.00 ¦19,136.00 ¦
+------+------------+----------------+------------------+----------¦
¦ ¦Net income ¦4,255.00 ¦(11,486.00) ¦(7,231.00)¦
+------------------------------------------------------------------+
In addition to sales income, petitioner had the following amounts of membership income, rental income, and interest in 1969, 1970, and 1971:
+---------------------------------------------+
¦ ¦Membership ¦Rental ¦ ¦
+------+------------+-----------+-------------¦
¦Year ¦income ¦income 3 ¦Interest 3 ¦
+------+------------+-----------+-------------¦
¦ ¦ ¦ ¦ ¦
+------+------------+-----------+-------------¦
¦1969 ¦$43,920 ¦$840 ¦$3,199.23 ¦
+------+------------+-----------+-------------¦
¦1970 ¦49,593 ¦1,050 ¦4,044.00 ¦
+------+------------+-----------+-------------¦
¦1971 ¦46,617 ¦1,080 ¦3,378.00 ¦
+---------------------------------------------+
By letter dated January 15, 1943, respondent determined that petitioner was exempt from Federal income taxes under the provisions of section 101(9) of the Internal Revenue Code of 1939, now section 501(c)(7) of the Internal Revenue Code of 1954. Respondent revoked petitioner's tax-exempt status, effective as of January 1, 1969, in a ruling dated September 6, 1972, on the ground that petitioner ‘derived a substantial amount of income from the sale of liquor by the package to (its) members for off-premises consumption.’
OPINIONAmong organizations granted an exemption from the general provisions of the income tax are social clubs, which are defined in section 501(c)(7) as ‘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.'4 The question before us is the extent to which petitioner should be deprived of the benefits of this provision.
Initially, we think it important to emphasize what is not in issue. Although the club realized a profit from the liquor sales in question, which was utilized to offset operating expenses, respondent has not argued that such profits ‘inure(d) to the benefit of’ the club's members in violation of the latter part of section 501(c)(7).5 Moreover, respondent has specifically renounced, at least for the purposes of decision herein, any contention that such profit constituted ‘unrelated business income’ for the taxable years 1970 and 1971 within the meaning of section 512(c); under such circumstances, we will not consider whether petitioner should in any event be subject to tax on the income from its bottled liquor sales under section 511. 6
Clearly, the bottled liquor sales were an ongoing and recurring operation of the club and petitioner does not contend otherwise. Nor is there any dispute between the parties that the major, or even predominant, purpose of the club's existence was, and continued to be, during the taxable years in issue, the carrying on of social and recreational activities through the commingling of its members. Similarly, we are not confronted with the problem of income derived from ‘outsiders'—a problem with which the courts and the Congress have had to struggle over the years. See, e.g., Pittsburgh Press Club v. United States, 536 F.2d 572 (3d Cir. 1976); United States v. Fort Worth Club, 345 F.2d 52 (5th Cir. 1965); S. Rept. No. 94—1318 (1976), 1976—2 C.B. 597.
We now turn to the narrow issue which we must resolve, namely, whether petitioner should be deprived of its exemption because of its sales of bottled liquor to its members for consumption away from its premises. We approach its resolution mindful of two general principles which have been applied in this area and which to some degree are in conflict: (1) Although the statute uses the word ‘exclusively,‘ case law and respondent's regulations have abjured a literal application and permitted nonexempt activity of an insubstantial, though recurring, nature (see Pittsburgh Press Club v. United States, supra; see and compare Aviation Club of Utah v. Commissioner, 162 F.2d 984 (10th Cir. 1947), affg. 7 T.C. 377 (1946), with Aviation Country Club, Inc. v. Commissioner, 21 T.C. 807 (1954)); and (2) where an exemption is designed to facilitate private activities rather than public goals, any doubts as to proper construction should be resolved in favor of the Government (see The Associates v. Commissioner, 28 B.T.A....
To continue reading
Request your trial
-
Hawkins v. Comm'r of Internal Revenue (In re Estate of Short)
... ... ¦1 share—River Bend Country Club ¦750.00 ¦ ... ...
-
Pittsburgh Press Club v. U.S.
...amendments made by this section shall apply to taxable years beginning after the date of enactment of this Act.") See Santa Barbara Club v. Commissioner, 68 T.C. 200 (1977). In the latter case, the more liberal test would not apply to any of the taxable years involved in this 24 If on reman......
-
Tucker v. Comm'r of Internal Revenue
...Rept. 92-437 (1971), 1972-1 C.B. 559, 600. We need not resolve any potential conflict in the legislative history (see Santa Barbara Club v. Commissioner, 68 T.C. 200 (1977)), since we are convinced that Congress in 1969 simply intended to codify existing law. For an excellent analysis of th......
-
Associated Master Barbers & Beauticians of America, Inc. v. Comm'r of Internal Revenue
...convinces us that the petitioner's insurance activities were not merely incidental. They were substantial. Cf. Santa Barbara Club v. Commissioner, 68 T.C. 200, 206-207 (1977). For these reasons we conclude that the petitioner failed to meet the fourth requirement necessary to qualify for ex......