*6 Decision will be entered for petitioner.
Petitioner was incorporated under the Indiana Business Corporations Act in 1921 to act as the successor to an unincorporated association formed in 1902 for the purpose of constructing and operating a golf course and country club. The golf course and club house were located on a tract of land leased by the association. Upon the expiration of the lease the owners of the land demanded such an increase in rental upon renewal that it was decided to buy the land. It was necessary to buy the entire tract, including some acreage which proved to be unsuitable for a golf course. Petitioner's attempts to sell this unusable acreage as a whole being unsuccessful, it was sold over a period of years by small tracts at considerably in excess of cost. Held, under facts, petitioner is exempt under section 101 (9) of the Internal Revenue Code.
*1238 Respondent determined a deficiency in petitioner's income taxes for the calendar years 1936, 1937, and 1938, in the respective amounts of $ 3,752.68, *7 $ 2,682.96, and $ 82.74, and excess profits taxes for the same years in the following amounts: $ 1,725.31, $ 1,101.40, and $ 79.43, based upon a denial of the exemption provided for in section 101 (9) of the Internal Revenue Code. Petitioner claims a refund for overpayment of taxes for 1938 in the amount of $ 555.13. The sole issue is whether petitioner is entitled to exemption under the section of the *1239 statute referred to above, other alternative issues raised by the petition having been waived at the time of the hearing.
FINDINGS OF FACT.
The facts were stipulated in part and we incorporate the stipulation herein by reference. Some of the facts hereinafter set out are derived from such stipulation, and some are found by us from the evidence introduced orally at the hearing.
Petitioner is a corporation organized June 21, 1921, under the laws of the State of Indiana, and is located at Anderson, Indiana. It filed its returns with the collector of internal revenue at Indianapolis, Indiana.
It succeeded an unincorporated association of individuals formed in 1902 which had from that time until 1921 leased a tract of land immediately north of the city of Anderson, comprising*8 97 acres, at an annual rental of $ 1,000. On this land the association constructed and operated a 9-hole golf course and a small club house. In 1916 the owners of the land sold it, and upon the expiration of the club's lease the club was notified by the new owners that the annual rental would be increased from $ 1,000 to $ 3,000. The club then consisted of 28 members, and it was felt that it could not afford the increased rental. A committee was appointed to look for new sites, with a view to buying or leasing another location for the club's activities, but, after investigation, it was determined that it would be more expensive to relocate the course and club house than to purchase the land upon which they were then situated. It was therefore decided to purchase the 97 acres at the price asked, $ 50,000. The golf course and club house occupied only about 67 of the 97 acres, and an attempt was made to buy only that portion so used, but the club was required to purchase the entire tract, or none.
In order to facilitate the legal details incident to the purchase, mortgaging, ownership, and sale of the real estate, Anderson Country Club, petitioner herein, was incorporated under*9 the Indiana Business Corporations Act with the following purpose specified in its articles of incorporation:
The business to be done by this corporation shall be and consist in acquiring, buying, owning, leasing and holding of real estate; and the operation, conducting and maintaining thereon of a country club and golf course, and other athletic sports; and the erection, maintaining and operating upon said real estate of hotels, club houses, gymnasiums, residences and other buildings, as a part of said country club, for the use, pleasure, recreation, and the promotion of the health, of its members and guests; and to rent, lease, sell and dispose of the same or any part or parts thereof, and acquire other premises for such purposes, if necessary; as well as all of the allied and interdependent lines of such business.
*1240 The stock of petitioner could be held only by club members, and each member could own but one share.
The purpose of the organization as set forth in its bylaws is as follows:
Sec. 1. The objects of this corporation are for the social advantages and physical culture of its members, and to that end to acquire and maintain a Country Club, Golf Links, Tennis Courts, *10 and other athletic sports, together with suitable grounds and buildings therefor; also buying, selling or leasing real estate.
The real estate was then purchased and the following year it was suggested that the golf course should be enlarged from 9 to 18 holes. An attempt was made to fit the additional nine holes on that part of the tract not then in use, but the terrain, being heavily wooded, and cut by deep ravines, was found to be unsuitable for that purpose. In 1923 or 1924 several club members indicated their desire to buy as building sites parts of the land determined to be useless for club purposes, and in 1925 four such sites were sold to those members. An unsuccessful attempt was then made to sell all of the remaining unused land as a unit. In 1928, upon similar solicitations by other members, five more building lots were sold, of such sizes and shapes as not to interfere with the appearance or operation of the golf course. In 1929 the club membership had grown, and the need for a larger course became more urgent. Club members were solicited for contributions to pay off the unpaid balance of the club's indebtedness for the original tract so that the club could purchase*11 additional acreage north and east of the course suitable for expansion purposes. Approximately $ 17,000 was contributed, the old indebtedness was liquidated, and the new tract, of 66 acres, was purchased, new bonds and mortgages being issued therefor, and an additional 9 holes were constructed thereon.
Shortly after this expansion was undertaken, another effort was made, but without success, to sell all of the remaining land not used or useful for club purposes. About 1933 or 1934 a decision was made to survey and plat the remainder of the tract, and 12 lots were platted along the west side and called Country Club Addition, and in 1936 14 more lots were platted in an area to the south along the river, called Country Club Estates. In addition to the earlier sales mentioned above, one lot was sold in 1931 and one in 1935. In 1936 the other lots which had been platted were turned over to a real estate agent employed to dispose of them. Ten lots were sold in 1936 and three in 1937.
Petitioner made a profit on the sale of the real estate in the amounts determined by the respondent to be $ 14,524.13 in 1936 and $ 5,390.77 in 1937. All of the profit derived from the sales was required, *12 by the terms of the mortgage, to be used and was used, to reduce the mortgage *1241 and bonded indebtedness of the club. None of the money was ever distributed to the members or stockholders. Membership dues were not reduced.
Prior to the erection of its new club house, about 1937, petitioner was not equipped for year-around activity there, due to lack of heating facilities. In order to preserve the interest of the members, and their social contacts, the board of directors appointed a committee to conduct a "Winter Club" in downtown Anderson. This committee conducted card parties and dances, which were not open to the general public. However, some guests other than regular members of the country club were admitted upon the recommendation of certain members and approval by the committee. A fee of $ 10 per season was charged, and the net profits from the season's activity were turned into the club's general funds at the close of the winter. These profits were $ 750 in 1936 and $ 2,200 in 1937, after which year they were discontinued by reason of the completion of the new club house and the operation of a year around program there.
The petitioner is a social club organized*13 and operated for pleasure, recreation, and other nonprofitable purposes, no part of the net earnings of which inured to the benefit of any private shareholder.
Petitioner, on August 31, 1939, filed a claim for refund of $ 555.13 for income tax paid for the year 1938, within three years before the filing of such claim.
OPINION.
The only issue presented for our decision is whether petitioner is exempt under section 101 (9) of the Internal Revenue Code, as a club "organized and operated exclusively for pleasure, recreation and other non-profitable purposes, no part of the net earnings of which inures to the benefit of any private shareholder."
Respondent contends that petitioner should be denied the exemption for two reasons: The fact that it sold, at a profit, certain real estate; and, though this is urged much less strenuously, the fact that some profit was realized by petitioner in 1936 and 1937 from the operation of a "Winter Club" in downtown Anderson during the months when regular country club activity was prohibited by inclement weather and a lack of heating facilities in the club house.
Three aspects of the situation must be examined in order to determine the question here: first, *14 the purpose for which petitioner was organized; second, the purpose for which it was operated; and, third, whether any part of the profits inured to the benefit of any private shareholder.
We have no difficulty in deciding that petitioner was organized exclusively for the recreational purposes defined by the statute. For twenty years prior to petitioner's incorporation, the Anderson Country *1242 Club had operated as an unincorporated association, using the identical property and facilities in precisely the same way as they were used by petitioner upon its organization. It had neither bought nor sold real estate, and it was only because a situation arose whereby, in order to continue as a recreational organization, it became necessary for it to buy the property upon which it was located that the corporate form was assumed. The purchase of the real estate was simply a means to an end; their primary interest was in continuing to operate the recreational facilities which had been in existence for twenty years.
Had petitioner been incorporated under the Societies and Clubs Act for nonprofit organizations, then in effect, it could still have bought and sold real estate, but the*15 statutory procedure governing such transactions was so cumbersome, requiring the individual action of all of the members of the club, that it was decided to utilize the provisions of the regular business corporations act. That it did so does not deprive it of the exemption claimed. Corporations organized under business corporation acts may nevertheless be exempt. Koon Kreek Klub v. Thomas, 108 Fed. (2d) 616; Unity School of Christianity, 4 B. T. A. 61, 69. Similarly, in other cases, clubs and other corporations organized under not-for-profit acts have been denied the exemption. Juniper Hunting Club, 28 B. T. A. 525; Jockey Club v. Helvering, 76 Fed. (2d) 597; Medical Diagnostic Association, 42 B. T. A. 610.
Respondent argues that the petitioner may be presumed to have intended engaging in the real estate business at the time of its incorporation for the purpose of purchasing 97 acres of land, of which only 67 acres were in use by the club. But the evidence shows that petitioner was required to buy the entire tract, *16 or none; that an attempt was made to utilize the unused portion to meet the expanding needs of the club; and that it was only after it became definitely apparent that it was not adaptable to the club's use that the thought of selling the unusable portion was first suggested by the solicitation of interested buyers.
An overall consideration of the activities of the club over the period preceding its incorporation, and its continuation of those activities during all the years in question, convinces us that petitioner was organized for no other purpose than that of carrying on the social and recreational activities inaugurated by its predecessor association and that such purpose fulfills the requirements of the statute.
With respect to petitioner's operation, it is respondent's position that, by selling the real estate in question at a profit over a considerable period of time, petitioner has forfeited the right to claim the exemption.
The respondent's regulations recognize the fact that an incidental sale of property does not extinguish the right to an exemption. Considering "incidental" in its ordinary sense to mean collateral or subordinate *1243 to the principal purpose, we *17 think there is ample evidence that the sales in question were incidental to the primary reason for the club's existence.
The fact that the profits were in some years substantial does not affect the incidental nature of the sales. In Koon Kreek Klub v. Thomas, supra, the revenues from the oil lease were in one of the years in question more than twice as much as the club's revenues from its regular membership dues. In Santee Club v. White, 87 Fed. (2d) 5, the revenue there under consideration was substantial. In each of these cases, however, the club was held to be exempt.
Respondent argues that the fact that the lots, twenty-four in number, were sold over a period of twelve years indicates that the petitioner was engaging in the real estate business. But we are shown that the club made an effort, on at least two different occasions to dispose of the unusable portion of its land as a unit. Should the fact that it was unable to do so require it to hold indefinitely a piece of property which for its purposes had become valueless? We think not. The sales were made piecemeal only because the club had been unable*18 to dispose of the property in any other way. They were not so made in pursuance of any plan to change the general purposes or activities of the club, nor did they change them. They continued as before; the proceeds of the sales went to further them.
Not only were the sales of real estate by petitioner incidental to its purpose of existence, but also the income derived therefrom was necessarily of a nonrecurrent type, and in this important respect they differed from the type of income considered in West Side Tennis Club v. Commissioner, 111 Fed. (2d) 6, affirming 39 B. T. A. 149; and Jockey Club v. Helvering, supra. In both of those cases the income in question was recurrent. In the first a considerable investment had been made by the taxpayer in order to realize the income involved, and in the second the taxpayer made a practice of rendering services from which it derived income recurrent in character. In the instant case the property originally purchased by petitioner was not bought in order that it could be sold, and, once having been sold, it was no longer a source of income.
Respondent*19 feels that the enhancement of the club's facilities, the retirement of its indebtedness, and the possibility of gain upon dissolution by reason of the receipt and application of the profits to such uses require us to hold that the profits inured to the benefit of the shareholders. No authorities are cited to that effect. The record shows that no dividends were ever paid to the shareholders, that the dues were not decreased as a result of the receipt of the income in question, and that dissolution has not been and is not contemplated.
*1244 Similar questions are considered in Santee Club v. White, supra; and Koon Kreek Klub v. Thomas, supra. In each case, it was held that such advantages as these do not constitute the profits inuring to the benefit of a private shareholder, within the meaning of the statute.
Respondent concedes that, standing alone, the activities of the Winter Club conducted by petitioner were not such as to deprive petitioner of its exempt status. Although some profit was realized from these programs, the evidence is uncontradicted and persuasive that they were primarily operated for social*20 and recreational purposes. The profits which were incidentally realized were devoted to other club purposes. We think that activity did not expel petitioner from the class of exempt corporations.
Decision will be entered for petitioner.