Opinion
No. 45228.
December 7, 1942.
Paul F. Myers, of Washington, D.C. (James Craig Peacock, of Washington, D.C., and Maurice R. McMicken, of Seattle, Wash., on the brief), for plaintiff.
Fred K. Dyar, of Washington, D.C., and Samuel O. Clark, Jr., Asst. Atty. Gen. (Robert N. Anderson, of Washington, D.C., on the brief), for the United States.
Before WHALEY, Chief Justice, and LITTLETON, WHITAKER, JONES, and MADDEN, Judges.
Action by the Seattle District No. 3 Mantle Club against United States to recover federal taxes paid by plaintiff on dues and initiation fees.
Judgment for plaintiff.
This case having been heard by the Court of Claims, the court, upon the evidence and the report of a commissioner, makes the following
Special Findings of Fact.
1. Plaintiff is, and at all times material to this action was, an unincorporated association of persons in Seattle, Washington, and adjacent territory, organized under a charter granted in 1934 by the Mantle Club, an unincorporated association organized in New York City in 1929 and now comprising some 30 district units in large cities throughout the United States, of which the Mantle Club of Seattle is District No. 3.
2. The constitution and by-laws of the parent or chartering Mantle Club, under which plaintiff has always functioned, set forth the following purposes:
(1) To unite fraternally and for mutual benefit, protection, improvement and association loyal American male citizens of sound body and health not less than twenty-one nor more than forty-five years of age, of good moral character and of reasonable desire and ambition to improve themselves and willingness to help others.
(2) To foster and cultivate the social, educational and business relations of the members; to improve their standards of honor, ethics, efficiency and productivity; to broaden their interests in the pursuit of their occupations; and to encourage among the members a true feeling of friendship and a friendly spirit of mutual cooperation.
(3) To gather, receive and disseminate such information as may seem helpful to the members; to render mutual assistance by the interchange of knowledge and experience along helpful lines.
(4) To forward and promote the general welfare and prosperity of the members and to improve by any and all lawful and honorable means their status and condition.
(5) To erect, equip and maintain social club houses and other appropriate buildings for the use and enjoyment of all the members of the Club upon and under such terms and conditions, and subject to such rules, regulations and restrictions as are for the best interests of the members.
(6) To assist in any other matters pertaining to the progress and advancement of the members to the highest order of American citizenship.
(7) To develop, foster and maintain by every honest, honorable and legitimate means, activities and interests which shall benefit and improve the general welfare of the people of any community, any State or any part or portion of the United States of America.
3. The following provisions of section 501 of the Revenue Act of 1926, as amended by section 413 of the Revenue Act of 1928, 26 U.S.C.A. Int.Rev. Acts, page 274, comprise the applicable provisions of law involved in this action:
"Sec. 501. (a) There shall be levied, assessed, collected, and paid a tax equivalent to 10 per centum of any amount paid —
"(1) As dues or membership fees to any social, athletic, or sporting club or organization, if the dues or fees of an active resident annual member are in excess of $25 per year; or
"(2) As initiation fees to such a club or organization, if such fees amount to more than $10, or if the dues or membership fees, not including initiation fees, of an active resident annual member are in excess of $25 per year.
* * * * *
"(c) There shall be exempted from the provisions of this section all amounts paid as dues or fees to a fraternal society, order, or association, operating under the lodge system, * * *."
4. Defendant through its Collector of Internal Revenue at Tacoma, Washington, collected from plaintiff, on the dates and in the amounts hereinafter set forth, taxes on initiation fees under section 501 of the Revenue Act of 1926, as amended by section 413 of the Revenue Act of 1928:
December 11, 1935 (including penalty and interest) ..... $7,077.61 April 29, 1936 ............. 228.00 May 27, 1936 ............... 956.00 June 12, 1936 .............. 1,154.00 _________ Total .................. $9,415.61
These taxes were assessed on the full amounts collected from members on account of initiation fees, and were paid by plaintiff out of its own funds.
5. Plaintiff filed a timely claim for refund, the grounds of which were:
1. That claimant is not a "social, athletic or sporting club or organization" within the meaning of section 501(a)(1) and (2) of the Revenue Acts of 1926, as amended by section 413 of the 1928 Revenue Act, and accordingly its initiation fees are not taxable under such Act.
2. The claimant is a "fraternal society, order or association operating under the lodge system," and accordingly under section 501(c) of the Revenue Act of 1926, as amended by section 413 of the 1928 Revenue Act and Article 38 of Regulations 43, claimant is specifically exempted from the payment of the 10% tax on initiation fees imposed by said act.
The second ground asserted in the claim for refund has been abandoned by plaintiff.
6. Plaintiff's claim for refund was rejected by the Commissioner of Internal Revenue on July 28, 1938. In the letter of rejection the Commissioner listed the purposes of the Mantle Club as set out in its constitution and bylaws, and said:
* * * * *
"As shown by the constitution and by-laws, some of the purposes of the Mantle Club are social in nature and one of the aims of the club is to maintain clubhouses for the use of members. The evidence shows that there are various social and athletic activities among members and except for the regular meetings, at which talks are given on character building, etc., the evidence does not disclose any active work of a serious nature.
* * * * *
"It has been held that the Mantle Club qualifies as a social, athletic or sporting club or organization and that the initiation fees are properly subject to the tax imposed by section 501 of the Revenue Act of 1926, as amended by section 413 of the Revenue Act of 1928.
"It is held that the amount in question represents tax, penalty, and interest properly due and paid.
"The claim is rejected in full."
7. On June 28, 1938, a letter was addressed to the Mantle Club, Wilmington, Delaware, in reference to the liability of the Mantle Club, Seattle, and the various other branches located in other cities, for collection of tax on initiation fees under the provisions of section 501 of the Revenue Act of 1926, as amended by section 413 of the Revenue Act of 1928. After setting out the provisions of the constitution and by laws of the Mantle Club, the letter, signed by D.S. Bliss, Deputy Commissioner, followed the phraseology of the letter of July 28, and concluded as follows:
"It is held that the Mantle Clubs qualify as social, athletic or sporting clubs or organizations and that the initiation fees are properly subject to the tax imposed by section 501 of the Revenue Act of 1926, as amended by section 413 of the Revenue Act of 1928. It has been held that the Mantle Club of Seattle, Washington, and the other branch clubs must collect and account for the tax on initiation fees paid by members of the club."
8. The taxability of plaintiff's initiation fees had been in question between the plaintiff and the Collector at Tacoma, Washington, and between that office and the Commissioner of Internal Revenue, as a result of which the Collector was directed to secure a list of members so that steps could be taken to make an assessment against them.
The Collector, on November 29, 1935, notified the Commissioner of Internal Revenue that plaintiff's secretary refused to sign a return because he believed the club operated under the lodge system but desired that the plaintiff, rather than the individual members, be allowed to make payment of the tax upon determination by the Commissioner, or the courts in case of suit, that the tax attached. Thereupon plaintiff requested of the Collector that it be permitted to file a return and pay the tax giving a waiver of the right to file a claim for refund on behalf of its members since it had not collected the tax from them. The waiver provided that: "* * * the taxpayer does not, however, waive rights to a claim for refund on the ground that there is no tax liability on the part of either the club or its individual members within the meaning of the Revenue Act."
9. The Mantle Club is an unusual organization, largely the creation of H.B. Monjar, its founder, whose ideas, personality, and purposes permeate and control the entire organization. The membership includes men from 21 to 45 years of age, and the organization is managed in an autocratic manner, with insistence on implicit obedience to rules.
10. All district clubs are supervised by the National Board of Governors which commends or disapproves their various activities.
The constitution limits the membership in the entire organization to 100,000, the National Board fixing quotas for various large cities of the country according to their population. Plaintiff, District Club No. 3 at Seattle, was increased in its quota from time to time until finally its quota was fixed in 1936 at 3,000 members.
11. Plaintiff had no clubhouse. The matter of building a clubhouse had been mentioned upon occasion from the time of formation of the club, and was a hope of the membership. It was one of the national club's objectives, as set forth in paragraph (5) of the statement of the aims and purposes in the constitution of the national club, which appears in Finding 2. Plaintiff's quarters were a suite of business offices in an office building in the business district of Seattle.
12. The prospectus of the Mantle Club contains, among other provisions, the following:
"Anyone applying for membership must vouch for his belief that an organized group with a definite plan has infinitely more power to accomplish worthwhile objects for himself and others than he has, alone and unaided. He must also be ready to settle down in the community. No one can be admitted to membership unless vouched for by a present member and favorably approved by the Board of Governors.
"We desire earnest and ambitious men who are willing to work diligently for success in their chosen lines, who desire to help other members reach the same objective and who want to take some action, not some other time, but RIGHT NOW to bring about such results.
"The purposes of the club briefly, are as follows:
"1. Fraternal association such as other fraternal organizations of high standing furnish to their members, but with broader contact due to the provision that all members must attend meetings.
"2. To aid the member in every honorable and legitimate manner possible, to improve his ethical standards, his business standing, and his financial status.
"3. To develop and maintain activities and interests which shall benefit and improve the welfare of the people of any community or state or any part of the United States of America.
"All members of this organization will be gauged and rewarded according to that which they accomplish for the organization and for themselves through the organization, and their outside standing, whether financial, political, or social, will have no effect whatever on their status as members.
"The only requirements financially are the Initiation Fee and monthly Dues, which are to be used to accomplish any of the general purposes of the Club. The Initiation Fee is Twenty Dollars and must be paid at the time application for membership is made. The Dues are Two Dollars per month and must be paid in person at the monthly meeting of the organization, which the member faithfully agrees to attend. The only other obligation imposed on the member is that he places himself on honor not to divulge any information he may later accumulate as to any of the activities, personnel, or plans of the organization, and even this memorandum is understood to be personal and confidential.
"Every member receives for his money the usual benefits and privileges of a fraternal organization, supplemented by a larger and broader contact with fellow members, due to each member attending the regular monthly meeting, and to the system of contact used by the Mantle Club. That is all that he pays his initiation fee and dues to receive.
"The other and major benefits are a result of the co-operation of the group under a definite system and plan, and represent additional privileges secured by group interest and application, and not by the payment of money.
"The real basis of power of this organization is the ability to stick together and work together. If you are the type of man who wants to change his mind after giving his word, we do not want you in the organization at all. We want men with a real sense of business honor — men whose word really means something and who will keep their agreements and their promises of their own volition and without the necessity of reminding them of their obligations.
"This organization is run for the purpose of getting results for all of its members and not with an idea of catering to any individual member or any group of members. It is, therefore, run along lines of a business organization, power being concentrated in the hands of a few men who know what has to be done and how it should be done."
13. In order to accomplish the purposes of the organization plaintiff club held numerous meetings, as described hereinafter, practically all of which were devoted to lectures or readings about, and discussion and study of, ideals and principles of honor, loyalty, common sense, courage, justice, ambition, pride, self-control, confidence, energy, responsibility, self-respect, and other desirable qualities, and the importance of the application of these virtues to the everyday lives of individual members.
Great importance was attached to attendance on monthly and other meetings, prompt payment of dues, the contact of prospective members and obtaining new members, as well as zeal in promoting the other activities of the club. Records were kept, and a member was advanced in the club according to the marks that he merited and received.
14. The largest of the meetings was an official monthly meeting which the entire membership was required to attend. This was held on the first Monday of each month in a large auditorium, the attendance averaging approximately ninety per cent. The meeting was opened with patriotic ceremonies, presentation of the flag, and musical numbers or other form of entertainment. At each meeting the monthly message of Mr. Monjar was read, relating to some subject, such as honor, loyalty, common sense, justice, courage, ambition and pride, energy, self-respect and other ethical traits. Addresses were delivered on these subjects and the application of the relevant ethical principles to the daily lives of the members. The principal method of impressing these ideas on the members was repetition of them, which became boring to some members and caused them to drop out of the club. On the other hand, many members found the meetings beneficial.
15. Other meetings of the club were held on succeeding Mondays of each month, sometimes in "sections" of 1,000, and regularly in "divisions" of approximately 100, and also in "captains' groups" of 10 members. Halls would have to be rented for section meetings but division meetings were held in restaurants and churches, preceded by dinner, while captains' group meetings were often held in homes of members. These were called "privilege" meetings as attendance was not compulsory. However, since the merit records of members were advanced by assiduous attendance and zeal in the work, the attendance ratio even at the "privilege" meetings averaged from sixty to seventy-five per cent. The nature of these meetings and the subjects discussed were similar to those of the official monthly meetings except that in the smaller division and group meetings the individual members had more opportunity for expression. The use of liquor was not permitted at any meeting or activity of the club, or on the way thereto or therefrom. No smoking was permitted at meetings.
16. Full minutes were regularly kept of the official monthly meetings, division meetings and meetings of the Local Board of Governors, in which were recorded the nature of discussions and actions of the club. Beginning some time in 1934, minutes of captains' group meetings were also kept. The minutes contain many references to announcements of the social and athletic activities of the club, which will be treated hereafter in Findings Nos. 25 and 26.
17. There were also assimilation meetings for the purpose of familiarizing members with the purposes of the order, especially as set forth in the prospectus, and to explain the prospectus so as to attract new members — this being a feature of the club work greatly emphasized and efficiency in which to a large extent measured a member's marks of merit and entitled him to advancement. The large membership of the club was built up in this manner.
18. Membership consisted of two classes: "associate" and "full". All members were originally associate members and advanced by merit, as determined by record marks as evidence of their zeal in the activities of club work, until they were admitted into full membership when they were carried through an elaborate and serious initiation ceremony and became entitled to vote. The fee for initiation as associate members was $20. The monthly dues were $2. The entire initiation fee and one-half of the dues went to the national organization, which has accumulated at the present time a reserve of approximately one million dollars.
19. The Local Board of Governors together with section and division heads and captains constituted the "contact structure" which held many meetings. Through this contact structure information was conveyed from local board to section head, to division head, to captain, to members, and vice versa through the same line. This system was actively used not only for transmitting information in both directions, but for questions and answers pertinent to the obligations and duties of members.
20. On May 31, 1936, 343 out of 3,078 members had become full members, but by the end of 1937 more than 90% had become full members.
During the period from November 11, 1933, the approximate date of organization, to May 31, 1936, plaintiff received into membership a total of 3,940 men. Its actual membership on December 31, 1934, was 510; on June 30, 1935, 2,499; on December 31, 1935, 2,237; and on May 31, 1936, 3,078. During this whole period a total of 852 men were dropped from membership.
21. The total number of meetings conducted by plaintiff during 1934, 1935, and 1936, not including ritual meetings, committee meetings and local board meetings, was approximately 14,242.
22. The monthly messages from Mr. Monjar, the founder, which were read at each official monthly meeting, and at other meetings, became available in printed form through publication in "The American Key", a monthly magazine published independently by the national leaders of the Mantle Club, of which Mr. Monjar was the editor and guiding spirit. This magazine was distributed at 25 cents a copy at the various meetings. The monthly messages for June 1934 through August 1936 were published in book form entitled "Code of Ethics", which sold for $2. This volume was virtually the text book of the organization and was widely distributed among the members. The purchase of the magazine and the Code of Ethics was encouraged by the leaders of the club. Copies of the magazine are in evidence as plaintiff's exhibits Nos. 3 to 10, inclusive, and the Code of Ethics as plaintiff's exhibit No. 30. These exhibits are made a part of this finding by reference.
23. The Mantle Club also fostered certain business plans which were frequently referred to in the various meetings held by the membership. In connection with these plans the following is an extract from a set of questions and answers used in the early days in training captains and other officers:
"The Mantle Club has a definite fraternal set-up, concerning the handling of the group that will set up an efficient machinery of MEN. The detail of this plan will gradually be revealed to the members as they earn the right to this information. In addition to this, the founder of the Mantle Club has a definite set of business plans that will produce business results for every man in the organization if he will prove up, through the set-up of the Mantle Club. These plans, of course, must be worked through regular business channels, because they have to do with profit making and are the personal property of the founder and not of the club or its membership. They are based on the cooperation of the group. It will require a national membership to put these plans into operation. The member is not buying a place in these plans with his $20. His record in the Mantle Club will entitle him to the opportunity to participate in these plans."
24. On several occasions during the period involved, a considerable number of members of the Seattle Mantle Club were asked by officers of the club to remain at the conclusion of the various meetings, when officials of plaintiff offered this selected group of members the "privilege" of lending money to Mr. Monjar for which no interest was paid and no time for repayment set except such time as he saw fit, as well as the privilege of investing in some enterprise promoted by Mr. Monjar. A large number of members took advantage of these "privileges" because of their absolute faith in Mr. Monjar. The funds so loaned or invested were paid in to certain officers of the Seattle Mantle Club in monthly installments. Members resigning from the club were paid back any money they had so loaned or invested.
25. From practically the date of formation of the club, plaintiff had a "welfare committee" appointed by the Local Board of Governors, whose function, among others, was to control and stimulate so-called "unofficial activities" of the club. Subdivisions of the welfare committee were the employment committee, sick committee, recreation committee and entertainment committee. Affairs conducted by the recreation committee and the entertainment committee included, in addition to the dinners for the division meetings, ice skating parties, swimming parties, fishing derbies, card parties, motion pictures, dances, annual picnics, minstrel shows: some twenty-nine separate affairs in all, not counting the dinners preceding the division meetings. The club had a band, an orchestra, a glee club, and a drum and bugle corps. It supported athletic teams which represented it in the following games and sports: Hockey, basketball, baseball, indoor baseball, soft ball, bowling, golf, and tennis. The athletic teams were at times members of city leagues. At many of these activities prizes were awarded.
These activities were termed "unofficial activities" by the Local Board of Governors, and it warned against and discouraged their "over-emphasis" in relation to the serious work of the club. No credit points for advancement in the club were given for such activities. However, at the official monthly meetings, the division meetings and the group meetings, announcement was made about these activities, and their support was emphasized, discussed, and urged upon the membership by those interested in the activities. They were sponsored by plaintiff club, and without that sponsorship could not have been held. A member of the Local Board of Governors was a member of the welfare committee, which had supervision over these activities and the treasurer of the welfare committee was also a member of the Local Board, although the funds came from the activities and were no part of the official funds of the Seattle Mantle Club. The receipts of the welfare committee in 1935 were $1,408.17, its expenditures $1,536.30, leaving a deficit of $128.13; in 1936 receipts were $3,547.35, expenditures $1,826.18, leaving a balance of $1,733.28. These expenditures included, at least in 1936, an unproved amount for the sick committee and the Christmas fund.
26. The promotion and development of friendship among the membership was particularly stressed. The dinners for members preceding the division meetings of the club provided companionship and sociability. The picnics and other social activities afforded members and their wives opportunities for pleasure and also tended to mitigate such opposition as there may have been on the part of wives to frequent attendance at meetings as required of their husbands. Practically all the social activities participated in were limited strictly to members and their families, and were for the purpose of creating a closer relation between the members in the various activities of plaintiff club.
27. The social and athletic activities of plaintiff club were not a material purpose of the club, as it actually operated during the time here in question, but were subordinate and merely incidental to the predominant purpose of the club, which was the study and discussion of ethical principles.
Plaintiff sues to recover taxes, together with penalties and interest, paid by plaintiff on the initiation fees of its members from 1933 when plaintiff club was organized, through May 1936. The tax was not collected by plaintiff from its members when the initiation fees were paid, and later when the Collector made demand for the tax the plaintiff elected to pay it itself rather than to allow it to be assessed against its members. Its members have not reimbursed plaintiff for the tax so paid. If plaintiff was a "social, athletic, or sporting club or organization" during this period, the tax was due under Section 501(a)(1) and (2) of the Revenue Act of 1926, as amended by Section 413(a) of the Revenue Act of 1928, now Section 1710, Internal Revenue Code, 26 U.S.C.A. Int.Rev. Code, § 1710, and cannot be recovered. Plaintiff denies that it was such a club. In its petition plaintiff made the further claim that even if it did answer the description of a "social, athletic, or sporting club", its initiation fees were still not taxable because it was a "fraternal society, order, or association, operating under the lodge system", and therefore exempt under subdivision (c) of the sections above cited. This latter contention has been abandoned, leaving only the one issue as stated above.
The question of social club vel non has been litigated in numerous cases, many of them in this court. Recent and rather complete citations of the cases have been made in Engineers Club of Philadelphia v. U.S., 42 F. Supp. 182, 95 Ct.Cl. 42, and Duquesne Club v. Bell, 3 Cir., 127 F.2d 363, and will not be repeated here. The decisions are, in general, mere expositions of the text of Article 36 of Treasury Regulations 43, in effect since its promulgation in 1917. Its relevant part is as follows:
"Art. 36. Social clubs. — Any organization which maintains quarters of arranges periodical dinners or meetings, for the purpose of affording its members an opportunity of congregating for social intercourse, is a `social * * * club or organization' within the meaning of the Act, unless its social features are not a material purpose of the organization but are subordinate and merely incidental to the active furtherance of a different and predominant purpose, such as, for example, religion, the arts, or business. The tax does not attach to dues or fees of a religious organization, chamber of commerce, commercial club, trade organization, or the like, merely because it has incidental social features, but, if the social features are a material purpose of the organization, then it is a `social * * * club or organization,' within the meaning of the Act. An organization that has for its exclusive or predominant purpose religion or philanthropic social service (or the advancement of the business or commercial interests of a city or community) is clearly not a `social * * * club or organization.' Most fraternal organizations are in effect social clubs, but if they are operating under the lodge system, or are local fraternal organizations among the students of a college or university, payments to them are expressly exempt."
Our question is, then, whether plaintiff's social features were "a material purpose of the organization", or whether they were, as plaintiff claims, "subordinate and merely incidental to the active furtherance of a different and predominant purpose * * *". We think they were the latter, and that plaintiff may recover the tax it was compelled to pay.
The constitution and by-laws of the parent Mantle Club, under which plaintiff functioned, are set out in Finding 2. In these club tax cases the stated purpose of an organization does not determine its taxable status, if its actual operations are different from the stated ones. Here, paragraph 2 of the by-laws states as one purpose of the club: "To foster and cultivate the social, educational and business relations of the members; to improve their standards of honor, ethics, efficiency and productivity; to broaden their interests in the pursuit of their occupations; and to encourage among the members a true feeling of friendship and a friendly spirit of mutual cooperation." Also, paragraph 5 states its purpose: "To erect, equip and maintain social club houses and other appropriate buildings for the use and enjoyment of all the members of the Club upon and under such terms and conditions, and subject to such rules, regulations and restrictions as are for the best interests of the members." We shall see that these "social" purposes were not in fact carried out to an extent sufficient to bring the club within the taxing statute.
In securing members of plaintiff club, a lengthy prospectus, which is reproduced in Finding 12, was used. It makes no mention of social activities or advantages as such. It speaks of "Fraternal association such as other fraternal organizations of high standing furnish to their members * * *", and again of "the usual benefits and privilege of a fraternal organization", and these statements were probably meant to connote sociability. But the other items mentioned in the prospectus "to improve his [the member's] ethical standards, his business standing, and his financial status" were the ones that, in fact, received the attention of the club. The member's ethical being was exposed to improvement by an almost unbelievably heavy and constant dosage of the writings of the national founder of the club, H.J. Monjar. These writings, or "messages", took up, one by one, qualities such an honor, loyalty, common sense, courage, justice, ambition and pride, self control, confidence, etc. They were long, platitudinous, repetitious, and hence dull. They seem, however, to have been well tuned to the membership, and to have given it substantially what it expected and paid for.
The monthly message was read at the monthly meeting of the whole Seattle Club, which comprised some 3,000 members in 1936. They met in the municipal auditorium which was hired for the meetings. Some former members testified that they were bored, or even put to sleep, by the reading of the message. Such reactions are understandable, but have no tendency to prove that the meetings were social.
Attendance at the monthly meetings was compulsory, and this rule was rigorously enforced. The dues of $2 per person were paid at the meeting. The initiation fee of $20 was collected before admission to the club. The Key magazine, published by Monjar and other leaders of the national Mantle Club, was sold for twenty-five cents a copy at the monthly meetings. It reprinted the preceding monthly message, and contained advice as to how to use the ethical principles of the message to work out the problems of the members. Two of Monjar's books were for sale at $2 each. They contained, in general, the same kind of material as the messages.
After the monthly meetings, which lasted from two and one half to three and one half hours, members who had progressed well in the work of the club were given the "privilege" of lending money to Monjar, through the managers of the Seattle Club, without interest and with no promise to repay the money at any particular time. The members who made these loans seem to have been impelled by their admiration for the character and ability of Monjar, principally as shown by his messages, and by some vague promise of large returns from their loans in the future.
Between the monthly meetings there were meetings of geographical subdivisions of the Seattle Club, Sections of 1,000, Divisions of 100, and Captain's groups of 10. They talked about practically the same things as were discussed at the preceding monthly meeting, but the lesser people had more opportunity to do the talking. In 1935 there were 6,582 meetings; in 1936, 7,248 meetings. Smoking at the meetings, and drinking at and on the way to and from the meetings was forbidden. Minutes of all meetings were made and transmitted to the national office, and comments, sometimes severely critical, were sent back. Members' wives protested at the large number of evenings taken up by the meetings, and some members grew weary and dropped out.
By faithful attendance at meetings, and performance of other acts approved by the club, co-points were amassed, which, when sufficient, entitled the member to be made a "full member" by a somewhat elaborate ritual.
Plaintiff had no club house. Its permanent quarters were mere business offices and no sociability occurred there.
One of plaintiff's standing committees was a welfare committee, appointed by the Local Board of Governors, whose function was to have charge of the so-called "unofficial activities" of the club. Under this committee were several subcommittees, including a recreation committee and an entertainment committee. The Local Board of Governors tended to deemphasize the development of the recreational activities of the members. In 1934 the Board instructed the welfare committee as follows:
"Do not make a dance or a game a major activity. Welfare work is to be a help in time of need. Would it not be more laudable to help some one who needs it than spend money on basketball or something of that sort."
In 1936 the National Board reminded the Local Board that the chairmanship of the welfare committee was not an excuse for non-attendance at a captain's meeting, with the following admonition:
"This is something that should never have happened. On no account should an unofficial activity be ever allowed to interfere with the official functions of the official Contact Structure."
It should be observed that this message came soon after the question of plaintiff's liability for taxes was broached by the Government.
There were, in the three years in question here, some twenty-nine picnics and parties, including swimming, skating, fishing, and card parties, dances, and a minstrel show, held under club auspices. To these the wives and families of the members were welcome. The club had no equipment or quarters for these affairs. There was no regularity about their occurrence. They were arranged for the occasion, just as a church or bar association or labor union might arrange an outing. None of these activities were financed from club funds, the welfare committee being required to support its own activities. The welfare committee had expenditures of $1,536.30 and a deficit of $128.13 in 1935, and a balance of $1,733.28 after expenditures of $1,826.18, including those for the Sick Committee and the Christmas Fund, in 1936.
At the beginning of the monthly meetings there was, sometimes, music by the band, orchestra or glee club. There were announcements of impending parties and athletic contests. The length of time consumed by these announcements varied with the speakers, but was small in comparison with the hours devoted to the hearing and discussion of the message.
When the meetings of "divisions" of 100 members were held, in the neighborhoods where the members lived, the members frequently ate dinner together in a restaurant or a church, and then held their serious discussion in the same room. They had no regular place for such meetings, and by this method they obtained a meeting place, by buying the dinner. During these dinners the members engaged in ordinary social conversation.
While these activities of a recreational nature, when tabulated, look rather extensive, they were small in comparison with all the activities of the club, with its large membership. For example, these small teams of amateur players wearing the letters of the Mantle Club could not fix upon the Club the character of an athletic or sporting club. Any religious or educational or professional organization of men of 21 years and above would almost certainly produce athletic teams, in season. Five young men want to play basketball. They are members of the Mantle Club, so they go into their games wearing the Mantle Club name. They get the recreation committee to buy their suits, if they can, and pay for them out of the proceeds of a minstrel show or a dance. This does not make the club an athletic club. As to the parties and picnics, they are entirely comparable to the occasional diversions of religious, business, professional and labor organizations. In estimating their weight in the whole of Mantle Club activities, we remember that there were, during this period, some 14,000 unquestionably serious meetings, large and small, devoted to the self-improvement of the members by instruction and discussion. In this comparison, the social activities were "subordinate and merely incidental to the active furtherance of a different and predominant purpose" within the meaning of the Treasury Regulation. Here, for a club of some 3,000 members, there was no clubhouse, no dining room, no bar, no game room, no library, no gymnasium, in short, none of the facilities commonly associated with social or athletic clubs. We conclude that the Commissioner of Internal Revenue should not have classified plaintiff as a social club, and that it is entitled to recover the taxes, penalties and interest collected from it.
It is so ordered.
WHITAKER and LITTLETON, Judges, concur.
I cannot agree to the conclusion reached by the majority.
A club may be of a dual nature. According to the regulations issued pursuant to the statute it is not necessary that a club be purely a "social, athletic or sporting" club in order for it to fall within the taxing provision. That need not be its major purpose. It is only necessary that such be one of its material purposes or activities.
It is difficult to escape the conclusion that these activities were a material part or purpose of the organization.
The welfare committee, appointed by the local Board of Governors and which included a member of the Board as one of its members, controlled and stimulated "unofficial activities" of the club. Subdivisions of the welfare committee included an employment committee, a sick committee, a recreation committee and an entertainment committee. There were dinners for division meetings, ice skating parties, swimming parties, fishing derbies, card parties, motion pictures, dances, annual picnics, and minstrel shows. Twenty-nine separate affairs, not including dinners, preceded the division meetings. The club had a band, an orchestra, a golf club, and a drum and bugle corps. Athletic teams included baseball, basketball, hockey, indoor baseball, softball, bowling, golf and tennis.
While no clubhouse had been built it was one of the charter purposes and from the formation of the club was a hope of the membership. In the meantime quarters were rented in a business building.
The minutes of the monthly meetings were replete with references to announcements of social and athletic activities of the club.
True, there were many meetings at which discussion was had of ideals, including honor, loyalty, common sense, courage, justice, ambition, pride, self-control, confidence, energy, responsibility, and numerous other undisputed qualities recognized as desirable by all self-respecting people.
Much emphasis was placed at the monthly meetings on prompt payment of dues. The initiation fee was $20 and the monthly dues were $2. All of the initiation fee and half the dues went to the national organization which was largely under the control of a talented gentleman by the name of Monjar, who was the founder.
At each monthly meeting a message from Mr. Monjar was read. He peddled his meditations and palmed them off in the form of ponderous platitudes, and in effect at so much per platitude, or rather on a monthly installment basis. We are led to make this statement because of the amount of money which went to national headquarters, none of which does the record show ever came back to the local association, except in the form of preachments, tritish advice, and truisms, the points of which by repetition must have become as dull as an old froe, and the cost of which could have been but a small fraction of the total intake. Undoubtedly he was a genius at organization, and, while his messages were in no way objectionable and contained much of merit, stripped of their excess verbal baggage, they amounted to nothing more than a restatement of age-old and generally accepted principles and ideals.
The members listened to these messages. Why shouldn't they? They had paid for them. Listening to these ethical discussions bored some of the members, even made some of them sleepy, but then there was a fine, in addition to the dues, if they didn't attend the meetings.
While there were regular meetings, and in the circumstances, a rather full attendance, we do not see how that alters the fact that the social, athletic, and sporting features were a material part or purpose of the organization. In fact, it is doubtful if the club could have survived but for such activities. It cost the member $20 to get in, but he could get out for nothing, and many of them probably would have done so but for the activities mentioned. However, with almost every conceivable kind of social, athletic, and sporting undertaking, plus the fact that many of their neighbors belonged and the possibility of business advantage, it is not unnatural that they should remain as members.
One natural inquiry is: Why did men join this organization? It does not seem possible that commonplace discussions of well-known principles could have been the chief inducement. Looking at the entire set-up, it is inescapable that at least a material part of the attraction was the desire for social contact with their fellow men, the desire to see and take part in the athletic events and of visiting with each other at the picnics and dinners. These things, the chance of rubbing elbows, of conversation with different individuals at their frequent meetings, which were usually accompanied with food of some kind, afford a more plausible explanation of why men wished to belong to the club.
It was not a poor man's club. The dues, initiation fees, and penalties for failure to attend show that only a man of fair means could afford membership.
The minutes of the meetings show that some form of social gathering and athletic features were almost always announced, evidently for the purpose of keeping up interest and thereby retaining membership so that dues would be paid regularly. Without these social and athletic attractions the club could not have lasted. Those in charge evidently realized this fact, as is shown by the gradually increasing attention paid these activities.
The Commissioner of Internal Revenue having decided the issue adversely, the burden of proof is on plaintiff to show that these activities were not a material part or purpose of the organization. It has not discharged this burden.
I would hold that the social, athletic, and sporting features are a material purpose of the organization, and that it is therefore subject to the tax.
WHALEY, Chief Justice, concurs in this opinion.