APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA (D.C. Civil No. 73-1051).
Seitz, Chief Judge, and Van Dusen and Weis, Circuit Judges.
The principal issue presented by this suit for an income tax refund is whether the Pittsburgh Press Club (PPC) qualifies as an exempt organization under I.R.C. § 501(c)(7), 26 U.S.C. § 501(c)(7). That provision of the Tax Code exempts from federal income taxation
"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 shareholder."
The district court held that PPC was such an exempt organization, and granted judgment for the Club.*fn1 We reverse and remand this case for further proceedings.
The purpose of the Club is given in Article II of its Constitution and By-Laws (plaintiff's Exhibit 1, Civil No. 73-1051, W.D. Pa.):
"The purpose of the Club is to bring together in closer friendship members of the news and related professions, to provide and maintain clubrooms and facilities, to promote the interests of the professions and their members, and to afford members a means of assembling for discussion of common professional problems."
In 1959, the Internal Revenue Service determined that PPC was an exempt, § 501(c)(7) social club. As the result of an audit conducted in 1970 by Internal Revenue Agent Egisto Marcolini, the IRS on February 1, 1972, revoked the Club's exempt status effective as of the first day of the Club's fiscal year 1967 (June 1, 1966). The IRS assessed an income tax deficiency of $228,483.00 on PPC for its tax years 1967 to 1971. The Club paid the asserted deficiency and instituted the instant action seeking a refund of this amount plus interest.*fn2
The Government contends that the revocation of the tax exempt status was proper for two reasons:
(1) One class of members pay substantially lower dues and initiation fees than other classes; that class receives benefits and services which they would not otherwise receive but for the greater dues and initiation fees paid by the other classes; and therefore net earnings of the Club inure to the benefit of some of its private shareholders.
(2) Substantial income for the Club is generated by permitting the Club's facilities to be used by members of the general public, i.e., persons or groups other than members of the Club and their bona fide guests; and therefore the Club is not "organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes . . . ."
During the years at issue, the Club had four classes of members*fn3 and the dues ...