Source: https://law.justia.com/cases/federal/appellate-courts/F2/456/152/48930/
Timestamp: 2020-05-25 18:03:55
Document Index: 499623823

Matched Legal Cases: ['§ 4401', '§ 4411', '§ 501', '§ 4401', '§ 4421', '§ 4421']

Rochester Liederkranz, Inc., Plaintiff-appellee, v. United States of America, Defendant-appellant, 456 F.2d 152 (2d Cir. 1972) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Second Circuit › 1972 › Rochester Liederkranz, Inc., Plaintiff-appellee, v. United States of America, Defendant-appellant
Rochester Liederkranz, Inc., Plaintiff-appellee, v. United States of America, Defendant-appellant, 456 F.2d 152 (2d Cir. 1972)
US Court of Appeals for the Second Circuit - 456 F.2d 152 (2d Cir. 1972) Argued Nov. 30, 1971. Decided March 7, 1972
The issue on this appeal is whether tax liability arises out of plaintiff's operation of a ticket lottery during the years 1952 to 1964.1 The Commissioner of Internal Revenue made a timely assessment against plaintiff in the amounts of $579,541.24 for wagering excise taxes under 26 U.S.C. § 4401 and of $950 for the special occupational tax on wagering under 26 U.S.C. § 4411. Both sums included penalty and interest. Plaintiff paid $1,008.98 against this assessment and filed a claim for refund of that amount with the District Director of Internal Revenue in Buffalo, New York. The District Director denied the claim, and plaintiff pursued his cause in the United States District Court for the Western District of New York. There plaintiff was met by the Government's counterclaim for $579,482.26, representing the remaining unpaid portion of the Commissioner's assessment. Judge Harold P. Burke, sitting without a jury, ruled for the taxpayer and dismissed the Government's counterclaim. This appeal followed. We affirm.
26 U.S.C. § 501(c) (7).
The basic issue in this case is whether plaintiff is liable for payment of taxes under sections 4401 and 4411 of the Internal Revenue Code, 26 U.S.C. §§ 4401, 4411. Section 4401 imposes an excise tax of 10 per cent on wagers; section 4411 imposes "a special tax of $50 per year to be paid by each person who is liable for tax under section 4401. . . ." The controversy to be resolved here, however, stems not from the phraseology of either of those sections but from the language of section 4421, 26 U.S.C. § 4421, which defines the term "wagers" as used in section 4401. The controversial portion of section 4421 is subsection (2) (B), which exempts from the wagering tax
Although there is little legislative history or judicial precedent to guide us, we think it highly doubtful that Congress intended to deny an exemption from the wagering tax under the circumstances present in this case-when participation in the drawings is limited to members and the net profits derived from the drawings are applied in furtherance of the general purposes for which the organization is entitled to an exemption under section 501. Such an interpretation of the inurement clause in section 4421(2) (B) is supported by the numerous decisions and rulings construing the comparable clause contained in section 501(c) (7), which denies an exemption to a club if any "part of the net earnings of which inures to the benefit of any private shareholder." Two decisions in this circuit are particularly instructive: West Side Tennis Club v. Commissioner of Internal Revenue, 111 F.2d 6 (2d Cir.), cert. denied, 311 U.S. 674, 61 S. Ct. 40, 85 L. Ed. 434 (1940), and Jockey Club v. Helvering, 76 F.2d 597 (2d Cir. 1935). In West Side Tennis Club we held that the substantial income which the club derived from conducting annual national championship tennis matches inured to the benefit of its members. Although the club used the income from its public ticket sales for the general operation of the club, the court found that the net earnings inured to the benefit of members since without the tournaments "they would have had to pay larger dues or restrict club operations uncomfortably. . . ."9 111 F.2d at 8. Similarly, in Jockey Club we held that if a club engages in profitable transactions with the public over a substantial period of time the earnings so derived "'inure to the benefit' of the members, though they are not distributed." 76 F.2d at 598.
We are unpersuaded by the Government's analysis of the statute. It is difficult to see why the net proceeds of club drawings inure to private members when the drawings are held daily but not when held monthly or semi-annually. To make popularity of a club activity, which Congress intended to encourage by enacting both sections 501 and 4421(2) (B), the test for determining inurement would be a strange rule. Furthermore, we think a close reading of the statutory text refutes the Government's arguments. To interpret the two inurement clauses similarly does not necessarily imply redundancy in section 4421(2) (B). Plaintiff has suggested one plausible explanation for the repetition. Section 4421(2) (B) prohibits inurement to "any private shareholder or individual" (emphasis added), while section 501(c) (7) withdraws the exemption only when there is inurement to "any private shareholder." Since a cursory reading of the wagering tax statute reveals that the thrust of the tax is directed at "illegal, organized gambling," Grosso v. United States, 390 U.S. 62, 74, 88 S. Ct. 709, 19 L. Ed. 2d 906 (1968) (Brennan, J., concurring), Congress evidently thought it necessary to add the restriction against inurement to any "individual" to protect against involvement of professional gamblers in club activities. In doing so it may well have thought it both desirable and necessary to spell out the inurement prohibition in detail. In any event, the possibility that Congress may have needlessly repeated itself by adding the inurement clause in section 4421(2) (B) is insufficient reason in our view for concluding that Congress intended to depart from long-standing interpretations given the inurement language in another part of the Code. The better view is that if Congress had intended a substantially different inurement rule in section 4421(2) (B) it would have adopted language substantially different from that employed in section 501.
Nor do the few decisions under section 4421(2) (B) support the Government's construction. As the Government itself candidly concedes, in every case where a court has held that the "lottery" conducted by an exempt organization did not qualify as a "drawing" under section 4421(2) (B), the lotteries were "operated by professionals and tickets were widely sold to the general public."18 See, e. g., Edgewood American Legion Post No. 448 v. United States, 246 F.2d 1 (7th Cir. 1957), cert. denied, 355 U.S. 926, 78 S. Ct. 383 2 L. Ed. 2d 357 (1958); Woodard v. Campbell, 134 F. Supp. 258 (S.D. Ind. 1955), aff'd on other grounds, 235 F.2d 268 (7th Cir. 1956). Those decisions have no application here.
26 U.S.C. § 4421.