Tamarisk Country Club v. Comm'r of Internal Revenue
| Decision Date | 24 April 1985 |
| Docket Number | Docket No. 1652-83. |
| Citation | 84 T.C. 756,84 T.C. No. 50 |
| Parties | TAMARISK COUNTRY CLUB, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
P, a tax-exempt social club under sec. 501(c)(7), I.R.C. 1954, purchased land in 1972 to expand its recreational facilities. P sold the land and realized gain in 1974. Within the 4-year period commencing 1 year before the sale and ending 3 years after the sale, P purchased other property for an amount less than the consideration it received on the land sale less selling expenses.
HELD, P's realized 1974 gain is recognized. The nonrecognition provisions of sec. 512(a)(3)(D), I.R.C. 1954, do not apply. Sec. 512(a)(3)(D), I.R.C. 1954, requires that gain realized on the sale of property used directly in the performance of the exempt function of a ‘sec. 501(c)(7) organization‘ be recognized, to the extent that the consideration for the sale, less selling expenses and expenses for work performed to assist in the sale of the property, exceeds the cost of other property purchased by the organization and used directly in the performance of its exempt function. MICHAEL C. COHEN, for the respondent.
RICHARD J. SIDEMAN, for the petitioner.
* Respondent, in a November 4, 1982, statutory notice, determined a deficiency of $44,592 in petitioner Tamarisk Country Club's Federal income tax liability for its taxable year ended September 30, 1974. We must decide the extent to which the gain realized by petitioner, a tax exempt social club, on the sale of property used directly in the performance of its exempt function must be recognized pursuant to section 512(a)(3)(D). 1
The parties have stipulated to the facts in this case. Their stipulation of facts and accompanying joint exhibits are incorporated by this reference.
Petitioner is an organization exempt from taxation under section 501(c)(7). Its principal place of business is located in Rancho Mirage, California, and its principal activity is the operation of a private golf club for its members. For its taxable year ended September 30, 1974, petitioner filed with the Internal Revenue Service Center in Philadelphia, Pennsylvania, a Return of Organization Exempt From Income Tax (Form 990) and an Exempt Organization Business Income Tax Return (Form 990-T).
On April 24, 1972, petitioner purchased a 55-acre tract of land adjacent to its existing facilities. The new property was to be used either for expansion of the club's golf course or for construction of other related recreational facilities. There was no intent to hold the 55-acre tract as an investment. The purchase price of the land was $643,218, including $1,654 for fees incident to the purchase. Petitioner deposited $100 cash, assumed existing trust deeds of $379,430 on the property and paid the remainder of the purchase price in cash from the proceeds of an unsecured bank loan of $262,033.78. To raise funds to pay for the land, petitioner, pursuant to a resolution of its membership, assessed each member $1,250, payable in five annual installments of $250 each and refundable upon death or resignation from the club. This assessment resulted in the collection of $318,500 from petitioner's membership. These collected funds were applied to reduce the amount owing on the deeds of trust that had been assumed at the time of purchase.
Membership in petitioner began to decline in mid-1973 and by November 1973 it became apparent that petitioner might be unable to finance the projects proposed for the acquired land. The membership considered the situation and voted in favor of selling the property. On March 26, 1974, petitioner sold the property for a total consideration of $850,000 in cash.
At the time of sale, petitioner's adjusted basis in the property was $695,819, including interest and taxes that petitioner had elected to capitalize under section 266. Petitioner incurred $5,541 in selling expenses and realized a gain of $148,640 on the sale. The sale proceeds were applied as follows:
+--------------------------------------------------+
¦Refund of membership assessments ¦$318,500¦
+-----------------------------------------+--------¦
¦Full payment of note (including interest)¦ ¦
+-----------------------------------------+--------¦
¦from bank loan ¦265,000 ¦
+-----------------------------------------+--------¦
¦Selling expenses ¦5,541 ¦
+-----------------------------------------+--------¦
¦Retained by petitioner as of ¦ ¦
+-----------------------------------------+--------¦
¦Mar. 26, 1974 ¦260,959 ¦
+-----------------------------------------+--------¦
¦ ¦850,000 ¦
+--------------------------------------------------+
During the 4-year period beginning March 26, 1973 (1 year prior to the sale of the land), and ending March 26, 1977 (3 years subsequent to the sale of the land), petitioner purchased property used directly in the performance of its exempt function with a total cost of $305,511. 2
On its Form 990 for the taxable year ended September 30, 1974, petitioner claimed that recognition of its realized gain on the land sale was deferred pursuant to section 1.512(a)-3(e), Proposed Regs. 3 Respondent in his statutory notice determined that the gain realized upon the sale constituted unrelated business taxable income in the amount of $148,640, taxable in petitioner's fiscal year ended September 30, 1974.
Petitioner's purchase and sale of land and subsequent purchase of other property raise the issue of the amount of gain, if any, petitioner must recognize on its sale of the 55-acre tract of land. In general, gain realized from the sale of property is recognized. Secs. 1001(c), 1002. Congress has permitted nonrecognition and deferral of gain in certain circumstances, such as like-kind exchanges (section 1031) and sale and acquisition of a principal residence (section 1034). This case involves the construction of section 512(a)(3)(D), which provided, in pertinent part, as follows:
SEC. 512. UNRELATED BUSINESS TAXABLE INCOME.
(a) Definition.—For purposes of this title,
* * *
(3) Special rules applicable to organizations described in section 501(c)(7) or (9).
* * *
(D) Nonrecognition of gain.—If property used directly in the performance of the exempt function of an organization described in section 501(c)(7) or (9) is sold by such organization, and within a period beginning 1 year before the date of such sale, and ending 3 years after such date, other property is purchased and used by such organization directly in the performance of its exempt function, gain (if any) from such sale shall be recognized only to the extent that such organization's sales price of the old property exceeds the organization's cost of purchasing the other property. For purposes of this subparagraph, * * * rules similar to the rules provided by subsections (b), (c), (e), and (j) of section 1034 shall apply.
To our knowledge, this nonrecognition provision has not previously been construed.
Section 511(a) imposes a tax on the unrelated business taxable income of ‘section 501(c)(7) organizations.‘ 4 ‘Unrelated business taxable income‘ is essentially gross income, excluding membership dues and fees, less allowable deductions directly connected with the production of gross income. Sec. 512(a)(3)(A), (B). 5 As noted, respondent determined that petitioner's realized gain of $148,640 on the land sale constituted ‘unrelated business taxable income,‘ and determined petitioner's tax liability for the taxable year ended September 30, 1974, as $44,592. Petitioner maintains that no recognizable gain arose from the sale of the land and the subsequent purchase of other property. 6
Petitioner contends that section 512(a)(3)(D) permits nonrecognition so long as the ‘price of the ORGANIZATION'S equity in the old property does not exceed the cost of the organization's equity in the new property.‘ According to petitioner, if all profits are reinvested in property that is also used for exempt purposes, no gain is to be recognized. 7 Petitioner asserts that under section 512(a)(3)(D), the ‘organization's sales price‘ of the land is $260,959. The $260,959 result is arrived at by subtracting from the $850,000 proceeds of the sale selling expenses ($5,541), amounts spent to discharge the indebtedness on the unsecured loan ($265,000) and the refund of the membership assessment ($318,500). Since the cost of purchasing other property was $305,511, an amount higher than the amount petitioner contends is the ‘organization's sales price,‘ petitioner concludes that it had no recognizable gain.
Respondent, in contrast, asserts that petitioner ‘organization's sales price‘ under section 512(a)(3)(D) is $844,459, the $850,000 sale proceeds, less $5,541 in selling expenses. According to respondent, the organization's sales price ($844,459) exceeds the cost of the new property ($305,511) by more than the gain realized ($148,640) so that petitioner must recognize the full amount of its realized gain. We agree with respondent and hold that petitioner must recognize the $148,640 gain.
The starting point for interpreting a statute is the language of the statute itself. E.g., Rosewell v. LaSalle National Bank, 450 U.S. 503, 512 (1981); Consumer Product Safety Commission v. GTE Sylvania, 447 U.S. 102, 108 (1980). Absent a clearly expressed legislative intention to the contrary, the language of a statute ordinarily must be regarded as conclusive. E.g., United States v. Turkette, 452 U.S. 576, 580 (1981); Consumer Product Safety Commission v. GTE Sylvania, supra at 108.
According to the express language of section 512(a)(3)(D), ‘rules similar to the rules provided by subsections (b), (c), (e), and (j) of section 1034 shall apply.‘ Citing no authority, petitioner asserts that section 512(a)(3)(D) should be read without resort to section 1034...
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