Opinion
G. F. Snyder, of Washington, D.C., for plaintiff.
Fred K. Dyar, of Washington, D.C., and Frank J. Wideman, Asst. Atty. Gen. (Charles B. Rugg, Asst. Atty. Gen., on the brief), for the United States. 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:
I. Plaintiff, the Phi Gamma Delta Club, was incorporated under the laws of the state of New York on June 3, 1886, and is the owner of its clubhouse located in New York City.
The certificate of incorporation states: 'We have associated ourselves together to form a club for social and literary purposes under the act of the Legislature of the State of New York known as chapter 267 of the Laws of 1875, and the acts amendatory thereof.'
II. The constitution of the Phi Gamma Delta Club contains the following provisions:
'Article I. Name and object.-- The name of the club is the Phi Gamma Delta Club. It is established to foster and maintain the objects of the fraternity of Phi Gamma Delta, through the medium of a clubhouse located in New York City.'
The objects of the Phi Gamma Delta fraternity, as set forth in the preamble of its constitution, are
'To unite more closely the bonds of a sincere friendship, to stimulate one another in the pursuit of knowledge and the attainment of a high standard of morality, to inculcate elevated sentiments and noble principles, to afford each other every possible assistance and our fellowmen the most unselfish, service, and to incite all to the achievement of an honorable fame.'
Article 5 of the constitution of the Phi Gamma Delta Club provides that only members of the fraternity of Phi Gamma Delta shall be eligible for membership in said club.
III. During the period from March 1, 1924, to February 29, 1928, plaintiff paid a total of $4,142.67 to the collector of internal revenue as taxes on dues and fees of its members.
IV. On April 28, 1928, plaintiff filed its claim with the Commissioner of Internal Revenue, requesting a refund of said taxes, in which claim it assigned as its reason why said refund should be allowed the following: 'Believe we are exempt under section 501 of the Revenue Act of 1926 and similar sections of prior acts in that we are a fraternal society operating under the authority of the National Society of Phi Gamma Delta.'
On January 23, 1929, the Commissioner of Internal Revenue rejected said claim. Said letter of rejection contained the following:
'The constitution and bylaws provide that the club was established to foster and maintain the objects of the fraternity of Phi Gamma Delta through the medium of a clubhouse located in New York City. It appears that the club is located in a nine-story building, the first two floors of which are given over to offices, recreation rooms such as a library, lounging room, reading room, card room, billiard room, and the remaining seven floors to sleeping quarters. It further appears that the social activities provided by the club consist of smokers, musicales, and the like. 'You are advised that section 501 of the Revenue Act of 1926 (26 USCA § 872 note) and corresponding sections of previous revenue acts impose a tax on any amount paid (a) as dues or membership fees (where the dues or fees of an active resident annual member are in excess of $10 per year) to any social athletic, or sporting club or organization or (b) 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 $10 per year. Such sections of the acts specifically exempt all amounts paid as dues or fees to a fraternal society, order, or association operating under the lodge system. 'The Phi Gamma Delta Club of New York does not operate under the lodge system and is therefore not entitled to the exemption provided under section 501 of the Revenue Act of 1926 and corresponding sections of previous revenue acts. 'Careful consideration has been given the evidence submitted in support of the claim, and it is held that the club qualifies as a social club or organization and that the dues and fees paid by the members are subject to the taxes imposed under the above-mentioned sections of the acts.'
V. Plaintiff's by-laws provide:
'Section 2. The finance committee shall consist of three members of the board of governors. It shall be the duty of this committee to consider the financial policies of the club and to advise the board of governors in regard thereto. 'Section 3. The house committee shall consist of five members. This committee shall have general charge of the clubhouse, and shall appoint and remove all employees, and shall regulate the salaries thereof. 'Section 4. The membership committee shall consist of nine members, including ex officio the president and the chairman of the press committee. Its duty shall be to maintain and increase the membership of the club and to pass upon application for membership under the provisions of article IV of these bylaws. 'Section 5. The entertainment committee shall consist of six members, including ex officio the chairman of the press committee, and shall have charge of all entertainments given by the club. 'Section 6. The library committee shall consist of three members and shall select, purchase, and have charge of all books, papers, and periodicals in the clubhouse. 'Section 7. The art committee shall consist of three members and shall have charge of the works of art owned by the club. All permanent improvements in the clubhouse which have any ornamental or decorative character shall be submitted to this committee for its approval. 'Section 8. The press committee shall consist of three or more members. It shall be the duty of this committee to publish the Club News, to provide news for each issue of the Phi Gamma Delta Magazine, and to arrange for such newspaper publicity as may be desirable.'
VI. The phi Gamma Delta Fraternity was founded in 1848, at Jefferson College, by six men of culture who strove to get as members 'outstanding men as scholars and gentlemen. ' The fraternity has grown until it now has undergraduate chapters in seventy-three colleges and graduate chapters in many cities.
All the chapters form an organization which functions through a convention to which the chapters send delegates. This convention elects a governing council of five graduates and also a board of five trustees who are graduates. The governing council administers the affairs of the organization, and the trustees hold the permanent investments. Under the direction of this convention, initiation fees and dues and other charges are assessed and collected from the members of the fraternity. The income of the fraternity comes through dues paid by the undergraduate members and a small amount from graduate chapters. No dues or fees are paid to the fraternity by plaintiff, nor has the plaintiff any part in the government of the fraternity.
VII. The Phi Gamma Delta Club was started in 1886, when the governing board of the Phi Gamma Delta Fraternity, under the old form of government, was located in New York City, and the club was then the meeting place and headquarters of the fraternity. In 1898 the form of government was changed, and the club lapsed. In 1908, at the request of the officers and older members of the fraternity, a number of men got together, and the club was re-established, with a rented building on West Forty-Fourth street for its clubhouse, where the club remained until about 1924, when its lease expired and could not be renewed. The club then took quarters, consisting of two rented rooms, in the Hotel Royalton, at No. 44 West Forty-Fourth street, where it was located until the completion and occupancy of its new clubhouse in February, 1928. During the time the club had quarters in the Hotel Royalton, the social activities of the club, because of the club's limited quarters, were much restricted, no dances being held; there being no ping-pong tables, cards and billiards being seldom played, and there being little other entertainment except the club 'smokers,' which were generally held at the same time as the meetings of the club. During this period the club was striving especially for new quarters and for some means of financing a proposed new clubhouse. VIII. The clubhouse was erected in 1927 and officially opened on February 16, 1928. The building measures 50' by 90' and embraces nine stories. The construction is of steel with brick walls and reinforced concrete floors. The facade is of limestone and face brick, with terra-cotta trim on the upper story. In the basement are located servants' toilets and locker rooms, trunk room, kitchen, storage room, servants' dining room, and engineers' workroom, grillroom, private dining room, and public toilets.
On the first floor is the lobby, with telephone booths and accounting office, one pool table, one billiard table. In the rear of this floor is the main dining room, which is served by a complete kitchen and pantry equipment. The mezzanine contains a card room, a dressing room, shower and wash room.
On the second floor at the front is a large lounge, approximately 38' by 42', which contains a war memorial fireplace. The library is in the rear of this floor, approximately 48' by 19', and is done in early American pine. This room contains writing desks, tables, and a large fireplace. The stairs from the second-floor hall lead to the second mezzanine, where are provided general toilet accommodations and a committee room with a private toilet.
The furnishings of the club are luxurious and attractive. There is a grand piano in the lounge, an upright piano and a radio in the grillroom, and another piano in a private dining room. The lounge contains between thirty and forty chairs and davenports.
Bedrooms occupy all floors from the third to the ninth, inclusive, there being 106 comfortably furnished rooms. Thirty-eight active chapters of the fraternity and a few individuals have paid $325 each for the furnishing of some of these bedrooms, and the names of the donors are placed on the door.
IX. The clubhouse investments are as follows:
Cost of lot ..........
$112,500
Cost of building ......
409,000
Cost of furnishings ....
60,000
--------
Total .............
581,500
For the purposes of financing, the property is held by a holding corporation and is leased to the club for a sum to cover the expenses.
The fraternity owns a participation in a $300,000 first mortgage on the club property. This participation amounts of $60,000. The fraternity owns second-mortgage bonds on the club property of approximately $40,000. The fraternity also owns notes of this club for money invested in the maintenance and operation of said club, approximately $20,000. The fraternity has a total investment therein of approximately $120,000 and is loaning said club annually not less than $12,000.
The membership of this club prior to its moving into the clubhouse is not available. Since opening the clubhouse its total membership, embracing resident, suburban, non-resident, and life, has been as follows: 1928, 1,472. 1929, 1,430. 1930, 1,364. 1931, 1,184. February, 1932, 1,155. As of February, 1932, there were 235 resident dues-paying members.
Plaintiff's main sources of income are membership dues, rent of rooms, meals, sale of cards, rent of lockers, sale of soft beverages, sale of theater tickets, and commissions on laundry. Taking into consideration the fixed charges which the club has to meet, it has operated at a loss since 1927-1928. The loss for the year 1929-1930 was approximately $22,000. The loss for the year 1930-1931 was approximately $27,000.
X. In general the recreational activities of the club consist of smokers, dinners, dances, musicales, lectures and addresses on various subjects of interest and benefit especially to the younger men of the club, together with card games, ping-pong, and pool and billiards. Three or four club dances per year are held, and an annual stag costume affair known as the 'county Fair.' On Sundays ladies may accompany members of the club to dinner and have the use of the lounge during that afternoon and evening, attending the musicales, which are held on Sundays. Open house is held on Friday nights. Tournaments among the club members are held in billiards, pool, and ping-pong, and the grill room is the scene of informal gatherings, with singing, refreshments, and pleasant companionship. Undergraduate members of the Phi Gamma Delta Fraternity are allowed the privileges of the club and sometimes use the club as a meeting place, and some undergraduate chapters of the fraternity have used the club for entertaining prospective members of the fraternity. The New York alumni chapter of the fraternity has its home with the club. The club cared for, advised with, and entertained not less than 2,000 members of the Phi Gamma Delta Fraternity during the period of the World War. The club is a nonprofit organization. Lodging is furnished as low as $30 per month. Many meetings are held at the clubhouse by chapters of the fraternity located in and about New York and New England, with chapter initiations, chapter dinners, smokers and reunions.
The above-noted general activities of the club did not prevail during the years prior to the club's occupation of its new clubhouse in February 1928, to the extent that they thereafter prevailed; and during the period covered by the claim in suit, March, 1924, to February, 1928, they were restricted as, and for the reasons, set forth in finding VII hereof.
XI. The organization and continuation of the plaintiff have been for social and literary purposes and the fostering, stimulating, and maintaining, not only among its members but also among other members of the Phi Gamma Delta Fraternity, of those standards set forth in the preamble to the constitution of that fraternity, as appears in finding II above. The social purposes and activities of the plaintiff have not been merely incidental to its other purposes and activities, but have been a material and important part in the activities and life of the plaintiff.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
PER CURIAM.
This case is controlled by the decision of this court in the case of Union League Club of Chicago v. United States, 4 F.Supp. 929, decided November 6, 1933.