United States v. Howe

• Decision Date: 25 October 1965
• Docket Number: No. 19732.,19732.
• Citation: 349 F.2d 483
• Parties: UNITED STATES of America, Appellant, v. Mitchell B. HOWE, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

349 F.2d 483 (1965)

UNITED STATES of America, Appellant, v. Mitchell B. HOWE, Appellee.

No. 19732.

United States Court of Appeals Ninth Circuit.

August 5, 1965.

Rehearing Denied October 25, 1965.

Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Robert N. Anderson, Crombie J. D. Garrett, Attys., Dept. of Justice, Washington, D. C., Manuel L. Real, U. S. Atty., Loyal E. Keir, Asst. U. S. Atty., Chief, Tax Sec., Charles H. Magnuson, Asst. U. S. Atty., Los Angeles, Cal., for appellant.

M. A. Sturges, Newport Beach, Cal., for appellee.

Before BARNES and HAMLEY, Circuit Judges, and JAMESON, District Judge.

JAMESON, District Judge.

This is an appeal from a judgment in favor of the appellee taxpayer for the amount of excise taxes paid to the Newport Bay Company, doing business as the "Balboa Bay Club", for the use of slip and mooring facilities during the years 1956 and 1957. Two related questions are presented: (1) whether the Balboa Bay Club is a "social, athletic, or sporting club or organization" within the meaning of section 4241(a) of the Internal Revenue Code of 1954¹; and (2) whether the sums paid by the taxpayer as boat mooring fees constitute "dues" within the meaning of section 4242(a).² Jurisdiction was conferred on the district court by 28 U.S.C. § 1346, and this court has jurisdiction by virtue of 28 U.S.C. § 1291.

The Newport Bay Company, a California corporation owned principally by two life insurance companies, leases a bay-front site of approximately fifteen acres from the City of Newport Beach. It formed the Balboa Bay Club as a profit-making venture. The object of the club as stated in its bylaws is "to promote out-of-doors recreation and sports for and social activities among its members". A club publication, the Bay Window, describes the club as a "private and restricted club serving its members in the enjoyment of life in the beautiful Balboa-Newport area". Except for the shoreline, the club is surrounded by a high fence and is accessible only through a single gate. Guards are on duty at the gate daily, except Monday when the club is closed, to exclude from the club premises persons who are not members or who have not been granted the privilege of using the club.

There are approximately 1500 dues paying members of the club, 100 life members, and 200 complimentary members. Regular members are required to pay an initiation fee of $300 and annual dues of $180, including the 20% federal excise tax. Non-resident members pay a $50 initiation fee and annual dues of $120. Life and complimentary members are not required to pay either initiation fees or dues.

Club facilities include a club house, rooms and apartments, three dining rooms, a cocktail lounge, two swimming pools, tennis courts, slips and spaces for boats and a launching ramp and small boat hoists.³

The application for membership calls for information regarding the applicant's religion, business, family status, citizenship, club and fraternal memberships, and bank. The application also requires references, and makes inquiry as to applicant's ownership of a boat.

The president of the Newport Bay Company appoints the Balboa Bay Club Board of Governors, although the bylaws provide for election by members of the club. Membership on the board is largely honorary — the governors are invited to give suggestions on minor matters and twice a year act as hosts at parties for club members, financed by the club.

Banquet and other facilities of the club are made available to outside groups — commercial, civil and political. These facilities are made available without consulting the board of governors. Rooms and apartments are rented to nonmembers, who are issued guest privilege cards. Beauty and dress shops, to which the public is given access, are located on the club premises, but the patrons of these shops are not permitted to roam about the club.

Club membership carries no interest in the physical properties of the Balboa Bay Club or Newport Bay Company. There are no general meetings of the membership, and the membership is not consulted with respect to matters of policy. The only active committee is one which plans and conducts a monthly party for the members and their guests. Admission to membership and expulsion from the club are controlled by the manager. Membership cannot be transferred. Initiation fees and dues are deposited in the name of Newport Bay Company. No financial report is made to the membership.

The club maintains more than 100 slip or mooring facilities for storage of boats. Except for the guest docks, mooring slips are available only for the use of club members. Because of the demand for slips, it was necessary for members seeking them to place their names on a waiting list. The taxpayer has held a boat slip since 1950 or 1951.

Newport Bay Company built facilities for the Bahia Corinthian Yacht Club, and members of the latter club are permitted to use the Balboa Bay Club's yachting facilities, as well as some of the other facilities of the club. Similar arrangements were made with Pacific Anglers, another sportsman's organization.

The Newport Bay Company filed its federal corporate income tax returns for the years 1956-57, stating therein that its principal activity was a beach and yachting club. It also filed excise tax returns, reporting club dues, fees and slip rentals.

The district court held that the Balboa Bay Club is not a "social, athletic, or sporting club or organization" within the meaning of section 4241 of the Internal Revenue Code; that the club is an organization in outward form only and the establishment has remained in fact a resort hotel operated for profit; and that the sums paid for boat mooring fees are not dues or membership fees.

Section 4241(a) does not define the term "social, athletic, or sporting club or organization". Under the applicable regulation, section 101.24 of Treasury Regulation 43 (1941 Ed.), "Every club or organization having social, athletic, or sporting features is presumed to be included within the meaning of the phrase `any social, athletic, or sporting club or organization', until the contrary has been proved, and the burden of proof is upon it."⁴ The status of a club or organization as social, athletic, or sporting within the meaning of the tax statute is largely a question of fact. United States v. Engineers' Club of San Francisco, 9 Cir. 1963, 325 F.2d 204.

It has been said that the word "social", as used in the statute, "necessarily becomes a term of art, even though an elusive one." Duquesne Club v. Bell, 3 Cir. 1942, 127 F.2d 363, 365, 143 A.L.R. 1377, cert. den. 317 U.S. 638, 63 S.Ct. 30, 87 L.Ed. 514, rehearing denied 317 U.S. 706, 63 S.Ct. 152, 87 L.Ed. 563.⁵ It is generally held that the question of whether a club is "social" depends upon "the extent and nature of the social activities. If a material purpose is social, the organization is a social club, even though it has other important objectives and activities." Downtown Club of Dallas v. United States, 5 Cir. 1957, 240 F.2d 159, 163. In fact, a club may be held to be "social" for the purposes of the taxing statute, although it has a different predominant purpose, if the social activities constitute an important and material part of the life of the organization. Union League Club of Chicago v. United States, 1933, 4 F.Supp. 929, 78 Ct.Cl. 351.⁶

The same tests are applied in determining whether or not a club or organization is "athletic or sporting". If the athletic or sporting features of the "club" are not merely incidental, but a substantial or essential part of the organization, the fact that the club may have other purposes is immaterial. A primary test is whether the members are "associated together for the common purpose of engaging in a sport with special privileges and facilities." Bunker Hill Country Club v. United States, 1934, 9 F.Supp. 52, 56, 80 Ct.Cl. 375.⁷ See also Arner v. Rogan, S.D.Cal., decided May 20, 1940 (40-2 U.S.T.C. par. 9567 at p. 10,421), setting forth a test similar to the one enunciated in Bunker Hill, and Rev. Rul. 58-589, 1958-2 Cum.Bull. 266, 267.

Recognizing that no cases have been cited which are "on all fours" with the instant case, appellee taxpayer argues that Whitehall Lunch Club v. United States, 1934, 9 F.Supp. 132, 80 Ct.Cl. 350, is factually most nearly in point. The Whitehall Lunch Club was organized by a company which built a large office building in downtown New York.⁸ The court found that the "predominant activity of the club was the serving of lunches to its members and their guests in such manner as to enable them to come into desired contact with others in a business and professional way * * *". Recognizing that it was a "border-line case", the court held that the social and gymnasium facilities were "only incidental and not material to the purposes or existence of the club" and "especially when used by only a comparatively few members of the club, does not make the dues taxable".

It is clear that if the basic purposes and program of an organization are "essentially technical and professional", its nonsocial status is not altered by serving meals and refreshments and limited social activities. United States v. Engineers' Club of San Francisco, supra. The same general rule has been followed in cases such as Whitehall Lunch Club, where the "predominant purposes of the club are to furnish to its members convenient luncheon facilities on business days, as well as a place where they can hold business meetings and conferences, the social features being incidental to these predominant purposes". Merchants Club v. United States, 1946, 66 F.Supp. 126, 106 Ct.Cl. 562. There is no evidence in the instant case of the use of the luncheon facilities of the club by any group for professional or business purposes. On the contrary, the social and athletic features of club were a substantial and essential part of the life of the organization, and the rule...