Opinion
No. M-74.
May 2, 1932.
Action by the Houston Club against the United States.
Judgment for the plaintiff.
This is a suit for the recovery of $17,189.85, with interest, representing taxes alleged to have been wrongfully collected and assessed under the provisions of section 413(a), Revenue Act of 1928 ( 26 USCA § 872).
The court, upon the report of a commissioner and the evidence, makes the following special findings of fact:
1. Plaintiff is a corporation organized and existing under the laws of the state of Texas. It was incorporated June 27, 1894. The issue in this case is whether the plaintiff is a social club within the meaning of section 801 of the Revenue Act of 1921 ( 42 Stat. 291) and section 501 of the Revenue Acts of 1924 and 1926 ( 26 USCA § 872 note). The plaintiff's charter sets forth the particular purpose and object of the Houston Club as follows: "Article 2. This corporation is formed for literary purposes; to promote social intercourse among its members and to provide for them the convenience of a Club House."
Under Texas law corporations can be formed only for the purposes specifically set forth in the statute, and in 1894 the only statutory purpose under which the club could have been organized was as follows: "The support of any literary, scientific undertaking; the maintenance of a library, or the promotion of painting, music, and other fine arts."
2. For the years 1927 and 1928 the plaintiff paid to the collector of internal revenue at Austin, Tex., a total of $11,753.04 as taxes on dues and initiation fees of its members under the provisions of section 501 of the Revenue Act of 1926 ( 26 USCA § 872 note) and section 413(a) of the Revenue Act of 1928 ( 26 USCA § 872).
For the year 1929 the plaintiff paid to the collector of internal revenue at Austin, Tex., a total of $5,436.81 as taxes on dues and initiation fees of its members under the provisions of section 413(a) of the Revenue Act of 1928.
3. February 22, 1930, the plaintiff filed a claim for refund of the $11,753.04 tax on dues and initiation fees paid for the years 1927 and 1928 on the following grounds: "The Houston Club is not a social, athletic, or sporting club, and therefore does not fall within section 501 of the 1926 act, nor section 413(a) of the 1928 act. The purpose of the Houston Club is to provide for members a place and means for obtaining meals and for discussion of business and civic matters. The club does not give or sponsor social, athletic, or sporting events of any kind. Ladies are not admitted except at meal times as guests of members. * * *"
April 4, 1930, the plaintiff filed a claim for refund of the $5,436.81 tax on dues and initiation fees paid for the year 1929 on the following grounds: "The Houston Club is not a social, athletic, or sporting club, and therefore does not fall within section 413(a) of the 1928 act. The purpose of the Houston Club is to provide for members a place and means for obtaining meals and discussion of business and civic matters. The club does not give or sponsor social, athletic, or sporting events of any kind. Ladies are not admitted except at meal times as guests of members. * * *"
4. April 28, 1930, the Commissioner of Internal Revenue rejected the claim for refund of $11,753.04 which had been filed February 22, 1930.
October 24, 1930, the Commissioner of Internal Revenue rejected the claim for refund of $5,436.81 which had been filed April 4, 1930.
5. Article VI of the by-laws of the Houston Club provides for the following character and kind of membership:
"Membership."Section 1. Any gentleman of good character and legal age is eligible for membership in the club, which shall consist of three classes, viz.: Resident members, nonresident members, and honorary members.
"Sec. 2. All applications for membership shall be made to the board of directors, signed by the applicant, recommended by two members of the club, and accompanied by the initiation fee.
"Sec. 3. No candidate shall be balloted unless his name and residence shall have been posted on the bulletin board for at least ten days prior thereto. It shall be the duty and privilege of every member to give in writing, or otherwise, reason why any candidate is not eligible to membership, and such communication shall be held confidential.
"Sec. 4. All applications shall be acted upon by the board of directors, whose proceedings thereon shall be secret, confidential and final. The vote on the admission of members shall be secret ballot, and the application shall be returned without approval in the event of any negative vote being cast. No balloting shall take place unless five directors are present.
"Sec. 5. An applicant once refused admission shall not again be a candidate until a period of twelve months shall have elapsed since the date of his previous petition for membership.
"Sec. 6. Resident members may be those otherwise eligible who reside in Harris County, or who have an established place of business therein.
"Sec. 7. Nonresident members may be those who do not reside in Harris County, or who have not an established place of business therein. They shall be elected in the same manner as resident members, and shall be entitled to all the privileges of resident members, save of voting and holding office. Nonresident members becoming residents of Harris County, may upon written application become resident members in all respects, as though originally elected resident members, and unless such application is made, upon their becoming residents of Harris County or having an established place of business therein, they shall forfeit their nonresident membership in the club.
"Sec. 8. Honorary members (not residents of Harris County) shall be elected only by unanimous vote of the members of the board of directors present at the meeting; such membership to be for a term of one year, unless a longer period is designated at the time of their election. They shall be entitled to all privileges of the club, except that of voting, holding office, and endorsing applications for membership.
"Sec. 9. The membership of this club is hereby limited to seven hundred resident members and two hundred nonresident members; nonresident members may, nevertheless, become resident members as provided in section 7 of this article."
6. The house rules of the club provide:
"I. The clubrooms shall be kept open daily from 7:30 o'clock in the morning until midnight. At 12 o'clock p.m. the clubrooms shall positively be closed. Any members violating these rules which direct the closing of the clubrooms, shall be fined $5 for the first offense and $10 for every subsequent offense.
"II. No resident of Harris County shall be admitted to the clubrooms, other than members of the club. The members of the immediate family of a club member may enjoy the privilege of the dining rooms, provided, they observe that portion of this rule, which applies to residents of Harris County.
"III. Nonresidents may enjoy the privileges of the club for two weeks, provided they are registered by a member for that length of time, and such privileges will be extended at the discretion of the board of directors, who may issue a card for that purpose.
"IV. The property of the club shall not be removed from the clubrooms, nor shall any book, periodical, pamphlet, or newspaper be removed from the library or reading room.
"V. The clubrooms shall not be used for sectarian or political meetings.
"VI. The billiard and pool tables shall not be used for continuous games to the exclusion of others desiring to play.
"VII. All members of the club are responsible for the conduct and indebtedness of their guests.
"VIII. Property of the club destroyed or injured must be promptly paid for by the member with whom the accident occurred.
"IX. No servant shall be in any way reprimanded or in any way punished by a member. All complaints shall be made to the manager in writing.
"X. No dogs shall be allowed in the clubrooms.
"XI. The servants of the club shall only be sent out of the clubrooms by authority of the manager.
"XII. Refreshments must be settled for with the due bills when check for same is presented by the waiter.
"XIII. The playing of poker is prohibited by the rules of the club and by-laws. Members will be governed accordingly.
"XIV. The seventh and eighth floors of the club are reserved exclusively for the members and their male guests, and it shall be regarded as an offense punishable by suspension or expulsion, at the discretion of the directors, for any woman to be permitted to visit any room located on either the seventh or eighth floors, and will terminate immediately and automatically right to occupy rooms.
"XV. The general management of the clubrooms, not especially provided for in the above rules, shall be passed unto the board of directors, who shall also have power to regulate or prohibit entirely anything that in their judgment is in any way detrimental to the club."
7. From the latter part of 1922 or the early part of 1923 until on or about October 30, 1930, when the club moved into new quarters, the plaintiff club as lessee occupied the seventh, eighth, ninth, and tenth floors of the Chamber of Commerce Building, in the city of Houston, paying therefor an annual rental of $36,000. On the tenth floor was the main dining room, two smaller dining rooms, kitchen, and small rest room for ladies. On the ninth floor was a dining or grill room and there were two pool tables and one billiard table, offices of the club, men's lounge room, cigar stand, and men's wash room. In the men's lounge were book-cases and one table containing newspapers and periodicals. On the eighth floor were seventeen bedrooms and the linen room, and on the seventh floor eighteen bedrooms.
8. The bedrooms maintained by the club were not essential to the club and were seldom filled. When the quarters which were occupied in 1927, 1928, and 1929 were vacated, the bedrooms were abolished. Prior to that time the club attempted to give up the bedrooms but was unable to do so because of the lease. A few bachelors were permitted to live permanently at the club, and this helped to pay some of the expenses. Had it been possible to fill the rooms with guests, permanent residents would not have been permitted. Some few other members of the club kept rooms there to help carry the club along.
9. The pool and billiard tables in the grill room were seldom used despite the fact that there was no charge for their use. For one period of six months the covers were not taken off and the club finally gave the tables away.
10. The plaintiff had no golf course, tennis courts, swimming pool, or gymnasium. It did not hold dances, musicals, or gathererings of a similar nature. While it had no rooms specifically devoted to cards or billiards, facilities for billiards, pool, and card playing were provided, as stated in finding 9.
11. The clubrooms were open from 7:30 a.m. until midnight and were used primarily as a luncheon club. The club was seldom used in the evening, and only one employee was kept from 8:30 p.m. until midnight. Sometimes the lights were turned out at 9 o'clock. During 1927, 1928, and 1929, the club each day served approximately five to seven breakfasts, ninety to one hundred lunches, and seven to twelve dinners. Very few ladies ate at the club during those years, as the facilities were poor.
The clubrooms were used to a limited extent for the purpose of meeting with friends.
12. The plaintiff subscribes to all the Houston newspapers, as well as Galveston, Dallas, New York, and Chicago newspapers and the United States Daily, and has them available for the use of its members. It also subscribes to certain trade journals, but to very little fiction other than the Saturday Evening Post. It has a small collection of books which were donated to the club. The club does not publish a magazine or other club publication of any kind.
13. The club had reciprocal arrangements with the Racquet Club of Washington, D.C., the Dallas Athletic Club, the Kansas City Athletic Club, and the Wichita Club. No letter was issued to members with reference to the reciprocal arrangements with other clubs, so these facilities were not used.
14. The income and expenses of the club were as follows:
3,764.57 17,573.06 3,260.57 16,627.39 11,524.05 17,931.47 34,511.32
------------------------------------------------------------------------------------------ | For the year ended — |------------------------------------- | 2-29-28 | 2-28-29 | 2-28-30 --------------------------------------------------- |------------|------------|----------- Income | | | Membership: | | | Quarterly dues .................................. | $51,554.17 | $50,675.28 | $48,781.25 Initiation fees ................................. | 8,860.00 | 6,260.00 | 6,400.00 |------------|------------|----------- | 60,414.17 | 56,935.28 | 55,181.25 |============|============|=========== Income from operations: | | | Café and cigar counter sales .................... | 83,435.07 | 76,859.20 | 62,445.61 Less cost of sales .............................. | 63,636.49 | 61,661.01 | 52,673.65 |------------|------------|----------- | 19,798.58 | 15,198.19 | 9,771.96 Room rentals .................................... | 17,024.83 | 18,212.07 | 10,775.80 |------------|------------|----------- Total income .................................. | 97,237.58 | 90,345.54 | 75,729.01 |============|============|=========== Expense | | | Administrative and operating: | | | Salaries and labor .............................. | 34,457.02 | 34,265.54 | 33,395.60 Rent ............................................ | 36,000.00 | 36,000.00 | 36,000.00 Laundry ......................................... | 4,224.61 | 3,897.30 | 3,056.82 Gas, ice, lights, and power ..................... | 3,133.95 | 3,461.77 | 3,331.68 Steam ........................................... | 2,724.00 | 2,724.00 | 2,724.00 Coats and linens ................................ | 2,000.00 | 2,050.00 | 2,050.00 Repairs and renewals ............................ | 2,930.76 | 2,207.01 | 1,776.97 Telephone ....................................... | 1,326.05 | 1,433.01 | 1,413.76 Crockery and glassware .......................... | 1,050.00 | 1,125.00 | 1,200.00 Insurance ....................................... | 419.68 | 390.30 | 779.97 Stationery and printing ......................... | 681.52 | 1,243.12 | 754.95 Postage ......................................... | 510.43 | 664.07 | 652.96 Subscriptions and periodicals ................... | 213.20 | 233.00 | 228.62 Bonus to employees .............................. | 207.50 | 259.00 | 641.00 Miscellaneous ................................... | 2,598.20 | 4,156.99 | 5,295.74 |------------|------------|----------- Total expense ................................. | 92,476.92 | 94,110.11 | 93,302.07 |============|============|=========== Profit-loss from operations ....................... | 4,760.66 | | Other income: Interest received, etc. ............. | 312.50 | 504.00 | 945.67 |------------|------------|----------- | 5,073.16 | | Other deductions: |============|============|=========== Depreciation — Furniture, fixtures, and equipment | 6,695.31 | 6,838.89 | 7,191.67 Amortization of lease improvements ................ | 8,531.76 | 7,425.17 | 7,425.17 Charge off of doubtful accounts ................. | 379.13 | 363.60 | 3,226.08 Miscellaneous ................................... | 991.01 | 43.24 | 41.01 |------------|------------|----------- Total ......................................... | 16,597.21 | 14,670.90 | 17,883.93 |============|============|=========== Net loss ...................................... | | | ------------------------------------------------------------------------------------------15. During 1927, 1928, and 1929 the chamber of commerce occupied the fourth and fifth floors of the Chamber of Commerce Building, which was the same building as that in which the plaintiff is located. The executive committee, the board of directors, and all standing committees of the chamber of commerce met at the Houston Club. Not less than five such meetings were held each week at the club and sometimes as many as two or three a day. The executive committee met each Wednesday at luncheon at the club. It was essential for the chamber of commerce to be located in the same building as the club. A large portion of the business men of Houston lunch at the club, and so are available for meetings of the chamber of commerce when needed.
The chamber of commerce and the Houston Club have a common object and are correlated in almost everything for the up-building of Houston. The club is interested in the business welfare and advancement of Houston, and aids the business of Houston as much as the chamber of commerce. The Houston Convention Bureau could hardly function without the club.
While the chamber of commerce and the club function together they are separated financially, as some of the smaller business men might support the chamber of commerce in a limited way while they would not support the club. The Houston Club tries to have in its membership the most representative business men of Houston.
About 60 per cent. of the members of the chamber of commerce are members of the club, and a large majority of the members of the club are members of the chamber of commerce.
If the Houston Club had not provided clubrooms, dining rooms, etc., it would have been necessary for the chamber of commerce to provide committee meeting places for organizations to meet and lunch together, as nearly all the business is done at luncheon.
16. The community chest and practically all other welfare organizations of Houston hold their directors' and board meetings at the club. Likewise the Better Business Bureau, the Social Service Bureau, the Houston Port Bureau, and the Port Commission meet at the club.
17. It is customary for the Houston business firms, such as Seaboard Life Insurance Company, Cheek-Neal Coffee Company (Maxwell House coffee), and others, to hold the meetings of their executive committees, boards of directors, sales groups, and the like, at the club.
18. It was not necessary for the persons who attended the meetings mentioned in findings 16 and 17 to be members of the club.
19. The chamber of commerce put up at the club as its guests such men as members of Army boards, the United States Shipping Board, and other governmental officers who were guests of the city. Nationally prominent people who come to Houston are invited to the club and there meet the business men of Houston.
20. During the years involved herein the Houston Club had a membership of approximately 600, all but comparatively few of whom were residents of Houston. During those years the Houston Club was predominantly a civic and business men's luncheon club where representative business and professional men of Houston and their guests met to discuss matters of mutual interest. It was a convenient place for members and their guests to meet and transact their business over the luncheon table. The club was clearly not an athletic club or a sports club, and such social features as it had were not in those years a material purpose of the organization, but were subordinate and merely incidental to the active furtherance of its predominant purpose as hereinabove stated.
Robert Ash, of Washington, D.C. (J.A. Phillips, on the brief), for plaintiff.
Fred K. Dyar, of Washington, D.C., and Charles B. Rugg, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
This case, precisely similar in most of its aspects with numerous others of the same character, involves a suit to recover a refund of taxes paid during the years 1927, 1928, and 1929. No jurisdictional issue arises and the single debatable question of fact is whether the plaintiff organization is a social club within the meaning of section 801 of the Revenue Act of 1921 ( 42 Stat. 291) and section 501 of the Revenue Acts of 1924 ( 43 Stat. 321) and 1926 ( 44 Stat. 92 [ 26 USCA § 872 note]).
Plaintiff club is an incorporated organization, incorporated under the laws of Texas, and during the taxable years in issue occupied under leasehold the seventh, eighth, ninth, and tenth floors of the Chamber of Commerce Building in Houston, Tex. The activities of the club were restricted to the business welfare of the community. It served in fact as an adjunct to the local chamber of commerce, affording its membership a convenient, adequate, and comfortable place for conferences, meetings, and gatherings related almost exclusively to the promotion of business and commerce. Its membership was made up of the city's representative business men, and almost 60 per cent. of the members of the chamber of commerce were members of the club, and a large majority of the club's membership were also members of the chamber of commerce. The record unquestionably establishes the fact that the plaintiff club was intended as a somewhat more exclusive organization than the chamber of commerce; its membership was limited to 700 resident members, whereas the chamber of commerce was not limited in this respect, and the two organizations functioning in unison comprehended practically all the active and interested business men of the city. The evidence positively discloses that during the taxable years involved, and we are not concerned with others, the club was persistent and active in forwarding all business enterprises which concerned the localities of its influence, and that its primary and predominant purpose was to extend the business welfare of Houston. The findings show that the club maintained dining rooms, and that the club building was open to members from 7:30 a.m. until midnight, and it is clear from the record that while billiard and pool tables were available for play, notwithstanding their use was gratis they were seldom used. No card rooms were provided and the club did not in any way encourage or support athletics — golf or tennis. The principal source of revenue, aside from dues and initiation fees, was from the proceeds of luncheons served its membership. A very few members took breakfast and dinner at the club, and while the ladies of a member's family were permitted the privileges of the dining room, very few availed themselves of the same. As a matter of fact, after the passage of the luncheon period the clubrooms were more or less deserted, and frequently in the evenings as early as 9 o'clock the lights were extinguished and the clubrooms dark. The private bedrooms maintained by the club were a liability and not an asset; in fact, the club management sought to give them up, but the owner of the premises declined to allow it under the terms of the lease. A few of the rooms were occupied, the remainder vacant.
We are unable to find in the record facts which characterize the club as predominantly social. It must be conceded that the usual and customary events which go to make up distinctly social activities are conspicuously absent — no dances, banquets, no encouragement of outdoor sports or games, no surroundings or facilities, provided which tend in any way to divert business men from the ordinary duties and activities of their calling. The club of course afforded a convenient place of meeting for luncheons. It likewise afforded a few restricted advantages not obtainable save by gatherings of this character. That was one of the intended purposes of its organization, and, as this court has said, "no club can exist without having something social in its nature, and this must have been well understood by Congress." Army Navy Club of America v. United States, 53 F.2d 277, 282, 72 Ct. Cl. 684. This court said in the case of the Aldine Club v. United States, 65 Ct. Cl. 315, 319: "And though there may be social features incident to its general activities, yet if the social feature is a subordinate and merely incidental feature to the `predominant' purpose of the organization, it is not a social club. This must be true unless all clubs where people congregate are social clubs, `because practically all clubs may be said to have a feature of the social, using the term as having to do with human intercourse.' Chemists' Club [v. United States], decided June 6, 1927, 64 Ct. Cl. 156."
The record we think brings this case within the Aldine Case, supra, in so far as the taxable years 1927, 1928, and 1929 are concerned. The undisputable weight of the testimony is to the effect that during the above period the plaintiff club was in effect an auxiliary organization to the chamber of commerce; that the club organization co-operated with the chamber of commerce, and that its predominating purpose was centered upon the promotion, advancement, and prosperity of business interests and commerce. What few social activities obtained were confined to those usual and customary contacts which always attend a gathering of individuals, even though the purpose of the gathering is distinctly for another and a settled purpose.
Judgment for plaintiff for $17,189.85. It is so ordered.