*125 Decision will be entered for the petitioner as to 1941. Decision will be entered for the respondent as to 1942 and 1943.
Exempt Corporations -- Social Clubs. -- A social club loses its exempt status during years in which it makes large profits from the use of its facilities and services to nonmembers.
*377 The Commissioner determined deficiencies and additions thereto for delinquency in filing returns as follows:
| Delinquency | Declared | Delinquency | Excess | Delinquency | ||
| Year | Income tax | addition | value excess | addition | profits tax | addition |
| profits tax | ||||||
| 1941 | $ 506.18 | $ 25.31 | $ 366.56 | $ 18.33 | ||
| 1942 | 1,378.90 | 2,739.02 | $ 11,280.31 | $ 2,820.08 | ||
| 1943 | 1,459.25 | 364.81 | 9,149.59 | 2,287.40 | 45,063.17 | 11,265.79 |
*126 The only error assigned is the Commissioner's determination that the petitioner was not exempt from taxes under section 101 (9) of the Internal Revenue Code.
FINDINGS OF FACT.
The petitioner is a corporation, without capital stock, organized and existing under the laws of the State of Utah authorizing nonprofit corporations. It filed blank returns for the taxable years in question, with the collector of internal revenue for the district of Utah, claiming exemption from taxes.
The petitioner was organized on November 15, 1940, by thirty persons living in or near Salt Lake City, who were interested in aviation. Their purpose was to operate the club as a nonprofit social organization primarily for persons interested in aviation. Each of the thirty organizers loaned the petitioner $ 100 for organization expenses and for the initial payment on a large residence property which was purchased later as a clubhouse. These loans in the total amount of $ 3,000 were repaid by the petitioner in 1942.
The general purpose of the petitioner, as stated in its articles of incorporation and in its bylaws, was to promote the interest of its members in aviation, to disseminate knowledge, information, *127 and instruction pertaining thereto, and to promote, provide for and sponsor cultural, fraternal, social, and educational activities of its members, with particular emphasis upon their interest in aviation.
*378 The petitioner intended to accumulate profits only to the extent that they would be necessary to provide it with adequate property and equipment. It never had any specific intention of distributing any of its profits to its members, although its charter provided that upon the termination of the corporation any surplus would be divided among the regular members then in good standing.
The club property was acquired in the early summer of 1941. It was located in a residential section of Salt Lake City, about six blocks from the business district. It appears from the outside to be a residence. It was unfurnished. The petitioner had no funds with which to furnish it and none of the members of the petitioner was experienced in operating a social club.
The petitioner sought out and entered into a contract with C. LeRoy Jensen in April 1941. Jensen agreed to supply furniture and equipment for the clubhouse and he in turn was given the exclusive right to operate the dining*128 room, certain club rooms, bedrooms for rent, and other designated activities, including a bar. Jensen was to keep the building in repair and the grounds in good condition. He was to pay a monthly rental to the petitioner and they were to divide the profits of the operation of the concessions granted to Jensen. The exact terms of the original contract are not shown in the record, but under an amendment dated October 23, 1942, to be in effect until June 30, 1944, the provisions for sharing the profits between the petitioner and Jensen were changed slightly to provide that the net profits were to be divided as follows:
| Petitioner | Jensen | |
| Per cent | Per cent | |
| First $ 1,000 | 60 | 40 |
| Second $ 1,000 | 70 | 30 |
| Third $ 1,000 | 80 | 20 |
| Fourth $ 1,000 | 70 | 30 |
| All additional income | 60 | 40 |
The contracts were carried out in accordance with their terms. Accounts were kept by both Jensen and the club. Jensen operated the concessions during the taxable years. He was not a member of the club during that period. The contract also provided that the club could acquire the personal property in the club owned by Jensen upon payment to him of the amount invested in that property. The petitioner*129 bought out Jensen in a later year and thereafter operated the club itself.
Although the petitioner made some distinction in name between its original thirty members and those subsequently elected to regular membership, there is no distinction for present purposes and they will all be referred to herein as regular members. They alone were elected after having been passed upon by the nominating committee and the *379 board of directors, they alone paid dues, and they alone were entitled to vote, to hold office, and to the general privilege of inviting others to the club. No initiation fee was charged during the years here in question. The regular members of the club paid monthly dues of $ 2, plus taxes thereon. The club had an average of about 212 regular members during 1941, about 162 during 1942, and about 154 during 1943. They were the only real members of the club during those years. The clubhouse was never open to the public.
The club, soon after its organization, adopted the practice of issuing cards at the request of regular members to their nonresident friends visiting the city for a few days. Those persons were designated "associate members." Later, the designation*130 was changed to "guest members." Such persons were not charged any dues or initiation fees, but paid for refreshments and meals and other club services which they desired at the same rates charged regular members.
Civilian Defense authorities requested the social clubs of Salt Lake City to offer their facilities to officers in the armed forces temporarily stationed in or near Salt Lake City. The petitioner, actuated by patriotic motives, complied with this request in the early part of 1942 and began the practice of issuing guest membership cards good for a specified number of days to any male commissioned officer of the armed forces of the United States in uniform who presented himself at the clubhouse and requested a card. They did not have to be sponsored by a member of the club. This practice was discontinued after V-J Day. Thousands of officers availed themselves of this privilege. Many of them were in Salt Lake City for a few days only. Between 3,000 and 4,500 guest cards were issued to such officers during 1942 and between 9,000 and 10,000 were issued during 1943. The use of the club by these guests was so great that regular members were materially restricted in their *131 use of the club during these years. Persons to whom these cards were issued were guests rather than members of the club, they could not hold office, they had no voting rights, they paid no dues or initiation fees, their cards were useful for a short period, and they were not permitted to bring nonmembers into the club, except that each was permitted to bring one lady as his guest for dances and other entertainments which were arranged at the club for their benefit. These holders of guest cards were required to pay in advance for all services furnished them or their lady guests at the club.
Jensen met with the board of directors of the petitioner on February 17, 1942, and stated that increased costs made it necessary to raise prices or to reduce the amount served as portions in the club. The directors authorized an increase in prices and further agreed that, if any further price increases occurred, Jensen was authorized to raise his prices in proportion.
A number of coin-operated slot machines belonging to a third party *380 were installed in the petitioner's clubhouse upon a rental basis and were in operation during the taxable years. The machines paid out money upon a winning*132 play. It was unlawful to operate such machines in the State of Utah, but they were in operation in other Salt Lake City social clubs. The owner of the machines took a percentage of the profits and the remaining profits were divided between Jensen and the club in accordance with their general agreement. The buffet, dining room, and slot machines were operated at a profit during the taxable years. Jensen's gross receipts were as follows:
| 1941 | 1942 | 1943 | |
| Buffet | $ 14,680.00 | $ 92,814.46 | $ 223,783.98 |
| Dining room | 16,602.92 | 43,397.20 | |
| Music box | 201.70 | 601.55 | 922.25 |
| Rooms | 1,587.44 |
The buffet receipts include receipts from the bar and slot machines. The receipts from the slot machines were as follows:
| 1941 | $ 7,508 |
| 1942 | 28,527 |
| 1943 | 55,274 |
The food and drink furnished on the premises of the petitioner was the best obtainable and the prices charged were comparable to prices charged for similar commodities by other establishments in the vicinity.
The petitioner has never distributed any of its income or assets to its members. The petitioner, in 1943, appointed a post-war planning committee, which recommended improvements to the club building and the purchase*133 of some additional ground. A parking lot adjoining the club property was purchased for $ 3,500 in 1942. An adjacent plot for a swimming pool was purchased for $ 1,000 in 1944. Improvements to the tennis court were made in 1943 or early in 1944. The petitioner bought out Jensen for $ 28,800 in 1945. The contract price of the original club property was $ 20,000, and the petitioner at the end of 1943 still owed $ 12,493.07 of that purchase price. It had endeavored to pay off the amount, but the seller would not accept accelerated payment.
No member or officer of the petitioner received any salary except one, an accountant who acted as clerk of the board and kept the books. He received $ 150 a month, which was reasonable compensation for the services rendered by him.
The petitioner did not seek to increase its regular membership in 1942 and 1943 because it was so crowded with persons holding guest cards. Regular members were not encouraging their friends to join during those years because the club was so crowded that they could *381 not fully enjoy it themselves. The petitioner intended to put on a membership drive after the close of the war, when additional regular members*134 could be accommodated comfortably.
The Commissioner, in determining the deficiencies, held that the petitioner was not exempt under section 101 (9) of the Internal Revenue Code, and explained as follows:
Since more than 95 per cent of your income during the year 1943 was received from a source other than membership fees, dues and assessments, it is held that you are not entitled to exemption from Federal income tax under the provisions of Section 101 (9) of the Internal Revenue Code, and, accordingly, you are required to file income tax returns.
He determined that the petitioner's income and deductions for the three taxable years were as follows:
| 1941 | 1942 | 1943 | ||
| Income: | ||||
| Membership dues | $ 2,527.76 | $ 3,441.64 | $ 3,352.56 | |
| Rental to concessionaire | 1,062.50 | 1,500.00 | 1,500.00 | |
| Share of concessionaire's profit | 2,227.11 | 23,067.06 | 73,609.31 | |
| 5,817.37 | 28,008.70 | 78,461.87 | ||
| Deductions: | ||||
| Taxes | 591.14 | 841.14 | 740.61 | |
| Addition to reserve for bad debts | 75.00 | 825.00 | 300.00 | |
| Miscellaneous expenses | 1,807.82 | 4,982.19 | 7,146.23 | |
| Depreciation | 566.46 | 610.25 | 959.95 | |
| 3,040.42 | 7,258.58 | 9,146.79 | ||
| Net income | 2,776.95 | 20,750.12 | 69,315.08 |
The use of the club*135 and its services by nonmembers during 1941 was merely incidental to the use of the club and its services by members.
The petitioner, during 1941, was a club organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net earnings of which inured to the benefit of any private stockholder.
Its profits for 1942 from the use of the club and its services by nonmembers were several times as large as the amount of dues and profits received from the use of the club and its services by members.
Its profits for 1943 from the use of the club and its services by nonmembers were about ten times as large as the amount of dues and profits received from the use of the club and its services by members.
The profits for 1942 and those for 1943 received by the petitioner from the use of the club and its services by nonmembers inured to the benefit of its members.
The petitioner, during 1942 and 1943, was not a club organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net earnings of which inured to the benefits of its members.
*382 OPINION.
The petitioner claims exemption from tax under section*136 101 (9) of the Internal Revenue Code. That section provides that "Clubs organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net earnings of which inures to the benefit of any private stockholder" shall be exempt from taxation under chapter 1. The income tax is imposed by chapter 1, but the declared value excess profits and the excess profits tax are imposed by chapter 2. Section 727 (a) provides that corporations exempt under section 101 from the tax imposed by chapter 1 shall be exempt from tax imposed by subchapter E -- excess profits tax. The declared value excess profits tax is imposed under subchapter B of chapter 2. Section 600 provides that, if any corporation is taxable under section 1200, a declared value excess profits tax shall be imposed. Section 603 provides that all provisions of law applicable in respect of taxes imposed by chapter 1 shall, in so far as not inconsistent with subchapter B, be applicable in respect of the declared value excess profits tax. The petitioner does not contest the additions to the tax for delinquency in filing returns except by its single contention that it was wholly exempt from*137 tax for all three years.
The petitioner, up to the close of 1941, was a club organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net earnings of which inured to the benefit of any private stockholder. It operated a dining room and buffet, as had been intended from the first. Those facilities were operated for the convenience and pleasure of its members. Their use by guests of members was not extensive and the club was not operated for their benefit. Small profits were realized but they were realized principally from the use of the club by the members themselves, and only incidentally, if at all, from the use of the club by guests of members. The club needed funds from some source to pay for the facilities which it was acquiring or hoped to acquire. It would seem to be immaterial whether a club, needing to acquire facilities, obtained the necessary funds by charging its members dues, initiation fees, or assessments, or whether it obtained them in whole or in part by charging the members somewhat more for services than the cost to the club of furnishing the services. A club may engage in business to the extent necessary*138 to maintain a clubhouse, including a dining room and a bar, for the benefit of its members, so long as its business activity is incidental to its main purpose. Cf. Anderson Country Club, 2 T. C. 1238. No decided case holding that such operations would prevent a club of this kind from being exempt from tax has come to our attention.
*383 The operations were changed materially in 1942 and there was a further increase in the degree of change in 1943. The club was not operated exclusively for the pleasure and recreation of its members during those two periods. The pleasure and recreation of its members were subordinated, in the operation of the club during those years, to the operation of the club for other purposes, to wit, for the entertainment of transient officers in the armed forces of the United States, who were in no true sense members of the club. They were nonmembers, as the petitioner recognizes in its argument. They came into the club in such numbers that the real members of the club were deprived of the use of the club to a very substantial extent, as has been indicated in the findings of fact. The use of the club by these nonmembers*139 was not a mere incident of the original purpose for which the club was organized. The profits which the club made from the use of the club and its facilities by these nonmembers were extremely large in proportion to what it had made previously. Its net income for 1942 was more than 7 times what it was in 1941 and its net income for 1943 was almost 25 times its net income for 1941. Of course, the club was not in operation during all of 1941. It is apparent from the figures in evidence that most of the profits which the petitioner made in 1942 and 1943 were made from the nonmember officers of the armed forces of the United States to whom guest cards were issued. The petitioner recognizes this fact in its briefs.
If it appeared that the use of the club by nonmembers and the profits made from that use were merely incidental to the main purpose for which the club was operated during those years, the petitioner might not lose its exempt status. But the profits just mentioned in serving nonmembers were not incidental to the operation of a club exclusively for the pleasure, recreation, and other nonprofitable purposes of the members of the club. "Incidental" in this connection means*140 subordinate to the general purpose, a minor occurrence, something coming casually as a result or an adjunct of some more important purpose, something aside from the main design, something happening without regularity or design. The above is not intended as an all-inclusive or exclusive definition, but it serves to demonstrate that the profits here in question were not incidental to the operation of this club exclusively for the pleasure, recreation, and other nonprofitable purposes of its members. Cf. Trinidad v. Sagrada Orden de Predicadores, 263 U.S. 578">263 U.S. 578.
The petitioner had no stockholders, but its regular members may be regarded as "stockholders" within the meaning of that term as used in section 101 (9). West Side Tennis Club, 39 B. T. A. 149; affd., 111 Fed. (2d) 6; certiorari denied, 311 U.S. 674">311 U.S. 674. The petitioner *384 makes no argument to the contrary. The earnings of 1942 and 1943 amounted to more than $ 90,000. Those earnings inured to the benefit of the members of the club in that they were used to pay off or were available to pay off the indebtedness*141 of the club and were used or available for use in enlarging and improving the club facilities which the members would thereafter enjoy at no cost to themselves. The phrase "inures to the benefit of" covers a situation where the profits are available to be used or are used for the benefit of a person. They need not be actually distributed to the persons who are to be benefited. The profits of 1942 and 1943 were not the result of an isolated transaction, but were the result of a course of conduct continued over several years. The conclusion that the accumulation of these profits was deliberate on the part of the petitioner can not be avoided. It is not determinative that a spirit of patriotism prompted the club to initiate this new use of its clubhouse and facilities. Patriotic motives prompted it to issue the guest cards to these transient officers, but the profits could easily have been avoided by charging no more for the services than it cost the petitioner to furnish those services.
Jensen was in this business to make money. The contract which he had with the petitioner provided that the profits should be shared between the two in certain percentages. His profits increased*142 along with those of the petitioner. He was, of course, interested in making those profits. He asked and obtained permission from the petitioner to increase prices during the period here in question and apparently he did increase the prices. Monthly reports were rendered to the petitioner and it was fully aware of what was going on. It can not successfully contend, under such circumstances, that it did not intend to realize the profits which it actually realized during the period in question.
A substantial and profitable business was thus conducted during these years which had only an indirect relation to the original purpose for which the club was created. A profitable business of that kind, with nonmembers, tacked onto a club, providing it with a larger or more luxurious plant for the benefit of its members without the payment of burdensome dues or other charges by them, destroys its exempt status. West Side Tennis Club, supra;Jockey Club, 30 B. T. A. 670; affd., 76 Fed. (2d) 597. Cf. Berkeley Hall School, Inc., 31 B. T. A. 1116; affd., 84 Fed. (2d) 539;*143 Northwestern Jobbers' Credit Bureau, 14 B. T. A. 362; affd., 37 Fed. (2d) 880; Underwriters' Laboratories, Inc., 46 B. T. A. 464; affd., 135 Fed. (2d) 371; certiorari denied, 320 U.S. 756">320 U.S. 756.
Decision will be entered for the petitioner as to 1941. Decision will be entered for the respondent as to 1942 and 1943.