ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA (D.C. Civil No. 73-1051)
Before Gibbons, Higginbotham and Sloviter, Circuit Judges.
This case involves a suit for the refund of federal income taxes and the Government's counterclaim for uncollected interest. These claims result from the revocation of the Pittsburgh Press Club's tax exemption as a nonprofit social club under Section 501(c)(7) of the Internal Revenue Code of 1954 (the Code) because the Club's trade with nonmembers constituted an impermissible business for profit. The Government appeals for the third time from a judgment entered in the Club's favor. We hold that the district court's findings of fact are clearly erroneous and that the Club's trade with nonmembers was inconsistent with its exemption. However, we agree with the district court that the Commissioner abused his discretion in revoking the Club's exemption retroactive to 1967. We therefore will reverse.
The Pittsburgh Press Club was first organized in 1885 under the laws of the Commonwealth of Pennsylvania as a nonprofit corporation. The Club was reactivated in 1955 after a period of dormancy. In 1956, it filed an application with the Internal Revenue Service (IRS) for exemption from income taxes as a social club. In 1959, the IRS determined that the Club was exempt from federal income taxes as a nonprofit social club under Section 501(c)(7) of the Code. The purpose of the Club as set forth in its exemption application is:
To provide a professional and social meeting place for those engaged in news and advertising work on newspapers, magazines, radio and television and in public relations activities for the furtherance of common interests.
In 1964, Revenue Agent Ciro Aloisi examined the Club's books and records for fiscal year 1962, which encompassed June 1, 1961 through May 31, 1962. His report described the use of the Club by nonmembers as follows:
On approximately 12 occasions during 1962 the Club permitted outside groups to have luncheons & parties on Club premises. Total income from these affairs was about $1,000. The Club officers were informed during this exam that this practice jeopardizes their exempt status. A letter was received signed by Club officers, stating that this practice would be discontinued.
Our organization has been examined by an agent of the Internal Revenue Service. We were informed that the use of club facilities, by outside groups, is jeopardizing our tax-exempt status.
We have discontinued allowing outside groups to use club facilities at any time.
The agent's report concluded that the Club was operating within the scope of its exemption.
The subsequent audit of the Club which triggered the revocation of its tax exemption occurred in 1970 when Revenue Agent Egisto Marcolini spent 200 hours auditing the Club for the fiscal years 1967, 1968 and 1969 (June 1, 1966 May 31, 1969). Marcolini's work papers included lists of approximately 1000 functions, arranged by date of use of the Club. With some exceptions, only those functions for which the charge exceeded $200 or which were for parties of more than twenty persons were listed. Marcolini prepared the work papers with the extensive cooperation of the Club's office manager and the Club's manager. As a result, Marcolini was able to determine which functions were permissible bona fide guest/host functions, and which were proscribed functions where members sponsored groups of outsiders. Member-sponsored functions are ...