dissenting: Here we have the question of whether a social club is entitled to exemption from the Federal income tax, and to answer that question, we are required to interpret and apply a number of "slippery” concepts, such as, what activities entitle a club to exemption, to what extent may a club engage in nonexempt activities and still retain its exemption, what is the effect of a club engaging in activities for profit either with its own members or with the public, and what is the effect of a club engaging in competition with commercial businesses. In our system of Government, Congress is given the legislative power, which includes the authority and responsibility for laying down the general policies as to what organizations are entitled to exemption and the particular conditions which must be satisfied by them. When a dispute develops, it becomes our responsibility to apply those general policies to the particular facts of the case before us, but our ultimate objective in deciding the case must be to attempt to achieve the result intended by the Congress. In my opinion, the Court, in this case, has lost sight of that ultimate objective and reached a result inconsistent with the policy guidelines laid down by the Congress. For that reason, I must dissent.
Before 1976, section 501(c)(7) and its predecessors provided that for a social club to be exempt, it must be "organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes.” In deciding what activities may be the basis for granting exemption, it has been held that activities for pleasure or recreation which involve the commingling of the members of the club may qualify. See Chattanooga Automobile Club v. Commissioner, 182 F.2d 551, 554 (6th Cir. 1950), affg. 12 T.C. 967 (1949); Keystone Automobile Club v. Commissioner, 181 F.2d 402, 404 (3d Cir. 1950), affg. 12 T.C. 1038 (1949); Augusta Golf Association v. United States, 338 F.Supp. 272, 276-278 (S.D. Ga. 1971); Rev. Rul. 74-148, 1974-1 C.B. 138; Rev. Rul. 74-30, 1974-1 C.B. 137. Thus, such activities may be identified as "exempt activities.”
Throughout the history of the income tax, there has been difficulty in deciding upon the proper mix between the exempt and nonexempt activities to be maintained by an exempt club. Although a literal reading of the statute would have required a holding that engaging in any nonexempt activities would cause a club to lose its exemption, the courts have never gone that far. E.g., Scofield v. Corpus Christi Golf & Country Club, 127 F.2d 452 (5th Cir. 1942); Koon Kreek Klub v. Thomas, 108 F.2d 616 (5th Cir. 1939); Aviation Country Club, Inc. v. Commissioner, 21 T.C. 807 (1954); cf. Pittsburgh Press Club v. United States, 536 F.2d 572 (3d Cir. 1976). In all those cases, a club has been permitted to engage in some nonexempt activities and still retain its exemption, but the courts have had a great deal of difficulty in deciding precisely the standard to be applied in judging the extent to which an exempt club may engage in nonexempt activities. For example, in United States v. Fort Worth Club of Fort Worth, Texas, 345 F.2d 52, 57 (5th Cir. 1965), the court declared:
for a social club to qualify for exemption under section 501(c)(7), its outside profits must be (1) strictly incidental to club activities, not a result of an outside business, and (2) either negligible or nonrecurring. * * * [Fn, ref. omitted.]
But elsewhere in the same opinion, the court said:
The Fort Worth Club cannot deny that it has derived substantial and recurrent profit from a business altogether unrelated to its activities as a social club. [345 F.2d at 57; emphasis supplied.]
In fact, the club derived more than half of its gross receipts from rental of a building owned by it. In Aviation Country Club, Inc. v. Commissioner, supra, a club which derived from 20 to 25 percent of its gross income from nonmembers was found to be tax exempt. The Court of Appeals for the Third Circuit has held that where a club derived from 11 to 17 percent of its gross receipts from nonmember sources, such amount was not so substantial that, as a matter of law, the club was not operated exclusively for exempt purposes within the meaning of section 501(c)(7). Pittsburgh Press Club v. United States, supra at 575. Other cases have prohibited substantial business dealings with the public, because otherwise it would be "a simple matter to tack a profitable business on to a club that was having difficulty in carrying as large and luxurious a plant as the members might like without the payment of burdensome dues.” West Side Tennis Club v. Commissioner, 111 F.2d 6, 8 (2d Cir. 1940), affg. 39 B.T.A. 149 (1939), cert. denied 311 U.S. 674 (1940); see also United States v. Fort Worth Club of Fort Worth, Texas, supra at 57; Jockey Club v. Helvering, 76 F.2d 597, 598 (2d Cir. 1935), affg. per curiam 30 B.T.A. 670 (1934); Augusta Golf Association v. United States, 338 F.Supp. at 275.
In the past 8 years, Congress has twice considered the subject of the business activities of social clubs. In 1969, the Finance Committee declared:
In recent years, many of the exempt organizations not now subject to the unrelated business income tax — such as churches, social clubs, fraternal beneficiary societies, etc. — have begun to engage in substantial commercial activity. * * * it is difficult to justify taxing a university or hospital which runs a public restaurant or hotel or other business and not tax a country club or lodge engaged in similar activity. [S. Rept. No. 91-552 (1969), 1969-3 C.B. 423, 467; emphasis supplied.]
See also H. Rept. No. 91-413, (Part 1, 1969), 1969-3 C.B. 200, 230. In such statement, Congress recognized that business activities of social clubs were exceeding the standard laid down in the Fort Worth Club case; that is, such business activities were more than "strictly incidental” or "negligible or non-recurring.” Nevertheless, Congress did not propose to withdraw the exemption from the social clubs because of such business activities; instead, it merely decided to impose the unrelated business tax on the income derived from the business activities. Had the clubs been engaged merely in "strictly incidental” or "negligible or non-recurring” business activities, there would have been little reason to tax such activities, but because they had become substantial, Congress concluded that they should be taxable. Cf. Pittsburgh Press Club v. United States, 536 F.2d at 579 n. 9. In addition, the conference report stated:
The fact that an unrelated business income tax is payable by an organization is not intended to mean that the organization should, or should not, retain its exemption. This is to be determined on the basis of the organization’s overall activities without regard to the fact that some of its activities are subject to the unrelated business income tax. [Conf. Rept. No. 91-782 (1969), 1969-3 C.B. 644, 652.]
In 1976, Congress decided to amend the statute to provide that a social club was entitled to exemption so long as "substantially all” of its activities were exempt activities.1 Pub. L. 94-568, 90 Stat. 2697. In connection with that change, Congress again recognized that social clubs were engaged to a substantial extent in nonexempt activities. Although the amendment was made applicable only to taxable years beginning after 1976, Congress declared that the change in the statute did not make a change in the law, but merely clarified the law. S. Rept. No. 94-1318 (1976), 1976-2 C.B. 597-598.
In connection with the 1976 amendment, the committees concerned with the legislation set forth their understanding of how the law is to be applied. The committee reports establish guidelines pursuant to which social clubs are permitted to receive up to 35 percent of their gross receipts, including investment income, from nonmember sources. Within this 35-percent amount, not more than 15 percent of the gross receipts may be derived from the use of a social club’s facilities or services by the general public. If a club’s outside income is within the guidelines, its exempt status will not be lost on account of nonmember income; however, if a club earns more than is permitted under the new guidelines, a decision as to whether substantially all of its activities are related to its exempt purpose will continue to be based upon all of the facts and circumstances. S. Rept. No. 94-1318 (1976), 1976-2 C.B. 597, 599; H. Rept. No. 94-1353, to accompany H.R. 1144 (Pub. L. 94-568), 4-5(1976).
In summary, an examination of the legislative history surrounding the 1969 and 1976 amendments reveals clearly that Congress understood that social clubs were engaging in nonexempt activities to a substantial extent, and the only congressional response thereto was the decision to impose a tax upon the unrelated business income of such clubs. A reading of the statute and the decisions interpreting it leaves one with uncertainty as to the standard to be applied, and Congress has undertaken to clarify the law and to set forth the standards it considers appropriate. In a number of cases, the Supreme Court has recognized the wisdom of considering any relevant legislative history in interpreting a statute, even congressional declarations which occurred subsequent to the enactment of the legislation. Glidden Co. v. Zdanok, 370 U.S. 530, 541 (1962); Massey Motors v. United States, 364 U.S. 92, 102 (1960); Commissioner v. Estate of Holmes, 326 U.S. 480, 488 (1946); Helvering v. Weaver Co., 305 U.S. 293, 296 (1938). When, as here, we have a vague standard to be applied and Congress has indicated how it believes the standard should be applied, the course of judicial wisdom and responsibility calls for us to accept and follow those congressional guidelines.
Moreover, in deciding a case involving the business activities of a social club in 1977 or subsequently, the congressional guidelines will surely be given great weight. Congress made clear that in making the changes in the statute, it did not intend to change the law but merely clarify it. Under such circumstances, there is no compelling reason to apply the guidelines only prospectively; accordingly, in my opinion, we should make use of them in deciding the controversy before us.
Though the guidelines are helpful, they cannot be applied mechanically in this case. They establish a limit of 15 percent on gross receipts derived from the use of facilities or services by nonmembers and a limit of 35 percent on the total amount of receipts from nonmembers. If the receipts from the nonexempt activities in this case are compared with all receipts by the club, the nonexempt activities represent approximately 25 percent of the total activities. Such nonexempt activities come within the 35-percent limitation. Although the nonexempt activities in this case involve sales for profit, such business was not carried on with members of the public; thus, this is not a situation in which profits from dealings with the public are being used to subsidize the activities for members. Compare West Side Tennis Club v. Commissioner, 111 F.2d at 8. For that reason, it seems that the 15-percent limit should not be applicable. Twenty-five percent may represent the outer limit on the extent to which an exempt club may engage in such activities for profit, but in my opinion, we cannot say that 25 percent exceeds the permitted limit on such activities. Accordingly, I would hold that this club is entitled to exemption for each of the years at issue. I am confident that such a result is consistent with what Congress has done and said in the past 8 years.
A similar change was approved by the Ways and Means Committee in 1972, but Congress took no further action with respect to such legislation. See H.R. 11200, 92d Cong., 2d Sess., 118 Cong. Rec. 8752 (1972); H. Rept. No. 92-929, to accompany H.R. 11200 (1972).