Legal Document

497 U.S. 154 110 S.Ct. 2780 111 L.Ed.2d 126 PORTLAND GOLF CLUB, Petitionerv.COMMISSIONER OF INTERNAL REVENUE. No. 89-530. Argued April 17, 1990. Decided June 21, Syllabus As a nonprofit corporation that owns and operates private social club, petitioner's income derived from membership fees other receipts members is exempt tax. However, all non-exempt "unrelated business taxable income," defined in § 512(a)(3)(A) of the Internal Revenue Code as "the gross (excluding any function income), less deductions allowed by this chapter which are directly connected with production income)." Petitioner has nonexempt sales food drink to nonmembers return on its investments. During 1980 1981 tax years, petitioner offset net losses nonmember against earnings investments reported no unrelated income. In computing losses, identified two categories expenses incurred sales: (1) variable (direct) expenses, such cost food, which, each year question, were exceeded sales; (2) fixed (indirect) overhead would have been whether or not had made nonmembers. It determined what portions attributable employing an allocation formula known "gross-to-gross method," based ratio bore total sales. The these costs On audit, Commissioner could deduct associated up amount themselves, but use those activities investment because it failed show undertaken intent profit. sought redetermination, Tax Court ruled favor, concluding adequately demonstrated profit motive, since consistently activities. Appeals reversed, holding applied incorrect legal standard determining profit, context meant gains excess direct indirect costs. court remanded case for determination engaged required Held: may only if motivated be using same method used compute actual loss. Pp. 160-171. (a) statutory scheme taxation clubs was intended achieve neutrality ensuring subject disadvantages consequence their decision pool resources purchase recreational services, provide advantage. 160-163. (b) By limiting allowable under "this chapter," limits Chapter 1 Code. Since 162 serves basis claimed here, taxpayer's fall within 162's scope shown, see v. Groetzinger, 480 23, 35, 107 980, 987-988, 94 25, must Dispensing profit-motive requirement run counter principle underlying scheme. 163-166. (c) correctly concluded inherent contradiction argue calculating can also attributed acted requisite Having chosen calculate gross-to-gross formula, foreclosed attempting demonstrate some method. 166-170. (d) earn costs, where allocated P. 171. 876 F.2d 897, (CA9 1989) affirmed. BLACKMUN, J., delivered opinion Court, REHNQUIST, C.J., BRENNAN, WHITE, MARSHALL, STEVENS, JJ., joined, O'CONNOR, SCALIA, KENNEDY, joined except Parts III-B IV. filed concurring part judgment, O'CONNOR post, p. Leonard J. Henzke, Jr., Washington, D.C., petitioner. Clifford M. Sloan, respondent. Justice BLACKMUN Court. This requires us determine circumstances liability federal tax, selling realized 2 * Portland Golf Club Oregon corporation, most whose 501(c)(7) 1954, 26 U.S.C. 501(c)(7).1 1914 owned operated golf country club course, restaurant bar, swimming pool, tennis courts. great dues club's members; sources income": nonmembers, investments.2 3 present controversy centers Golf's fiscal years ended September 30, 1980, 1981, respectively. received form interest $11,752 $21,414 1981. App. 18. sustained $28,433 $69,608 therefore years. different First, (or direct) varied depending beverages sold (and made). For costs.3 included expense portion indirect) club—expenses sales, employed described sales.4 When so calculated, added sales.5 4 took position conclusion belief motive sources, profit.6 deficiencies $1,828 $3,470 1981; reflected owed 48-51. 5 redetermination That favor. 55 TCM 212 (1988), ¶ 88,076 P-H Memo TC. assumed, without deciding, course court, however, held activities.7 "petitioner entitled loss beverage computed allocating activity manner respondent agrees acceptable." Id., at 217, TC, 413. 6 United States Ninth Circuit remanded. Pet. Cert. 1a, judgt. order 897 (1989). appellate relied North Ridge Country Commissioner, 877 750 (1989), "can properly non-member undertakes means costs." 756. concluded: "Because did do so, relying stipulated reasonable we REMAND activities." 2a-3a.8 7 Because perceived conflict Sixth Cleveland Athletic Club, Inc. States, 779 1160 (1985),9 importance issue, granted certiorari. 493 1041, 834, 830 (1990). II 8 Virtually tax-exempt organizations pay income." law governing clubs, significantly entities. than defines income" organization trade (as section 513) regularly carried it, carrying business." 512(a)(1).10 512(a)(3)(A).11 salient point 512(a)(1) (which applies organizations) "trade business," while clubs) contains limitation. Thus, not. 9 distinction reflects fact exemption justification fundamentally underlies grant exemptions organizations, encourage provision services deemed socially beneficial. Taxes levied prevent gaining unfair advantage over competing commercial enterprises.12 See American College of- Physi cians, 475 838, 106 1591, 1594, 89 841 (1986) ("Congress need restrain competition fostered laws"). Congress investors reaping passive businesses, excluded organizations.13 10 rests totally premise. Social exempted conferring advantages, services. Senate Report accompanying Reform Act 1969, 83 Stat. 536, explained purpose does justify investments: 11 "Since groups designed allow individuals join together facilities benefits mutual basis, consequences, when limited membership. Under circumstances, individual substantially he spent his pleasure recreation benefits) intervening separate organization. receives outside membership, . upon paid, benefit contemplated untaxed dollars case, longer simply allowing consequences. Rather, bestowing substantial additional tax-free personal purposes. extension is, therefore, distortion purpose." S.Rep. 91-552, 71 (1969), U.S.Code Cong. & Admin.News pp. 1645, 2100. 12 extended clubs. include Our review informed central facts. should indeed devised definition mind. Second, neutrality, advantage: Even members' payments ensure disadvantaged compared persons who pursue through purchases rather medium III 13 Petitioner's principal argument demonstrating alternative, contends agreed) impose requirement, then satisfied case. We address arguments turn. A. 14 agree statute provides that, term 'unrelated income' (emphasis added). concedes, italicized language Brief 21-22. our view, case—expenses payroll, sales—are allowable, all, F.2d, 753; Brook, 799 833, 838 (CA2 1986).14 Section 162(a) deduction "all ordinary necessary paid during Although expressly require business" shown. 987, 25 (1987) ("[T]o [§ 162] business, primary engaging profit"). will constitute "deductions chapter" performed profit.15 15 dispensing Indeed, considerable tension govern (unlike consequences taxpayer. To 16 concedes "[g]enerally factor 23. contends, including 512(a)(3)(A)'s thereby obviated inquiry into disagree. Congress' describe hardly manifests define otherwise 162. reading render superfluous words "allowed 512(a)(3)(A): If "deemed" "directly connected" presumably deductible. Moreover, interpretation ignores general according principles applicable taxpayers. conclude profit.16 B 17 Losses motive—that generate parties courts taken divergent positions range qualify considered motive. view established fromnonmember definition, even absence disregarded 18 firm precise between member insist profit.17 He insist, Respondent 44-46. allocable share being 19 Appeals' entirely clear point, n. 8, supra, seems middle ground. rejected Court's assertion showing costs; insisted appeared, leave open possibility motive.18 20 Commissioner's correct one. rests, puts "inherent contradiction." 44. calculation claim regarded Given assertion, believe ignored (or, more accurately, activities) Essentially criticism approach. left employ losses. approach, functions establishing This, like rationale rest 21 response economic quite emphasizes numerous provisions establish preferences purport mirror reality. Therefore, argues, taxpayers frequently act though foreseeable (and, indeed, intended) result efforts they suffer achieve) Much Code, rendered nullity mere sufficed taxpayer lacked rendering unavailable. purposes stipulation, irrelevant represents question. 22 accept contention acknowledge, moreover, many serve (such encouragement certain types investment) accurate measurement A takes kind expectation realizing income.19 seeks allocate kind. state irrespective right reasonably identifies 512(a)(3)(A), incurred" 162(a).20 Language this, us, attempt measure income—not effort ancillary calculated arguing accurately reality.21 IV 23 hold uses (fixed plus variable) method.22 judgment 24 ordered. whom SCALIA join, judgment. found Club's qualified 162(a), unclear. 1a. exceed produce both reconsider taking account activity. I decision, affirm Appeals. 27 opinion. concur decides significant issue unnecessary disposition and, my wrong way. instructed consider specify how particular, one motivation. ante, 167-168. purports Appeals, eliminates possibility, thus works dramatic change remand order. rules so-called prove opportunity first instance. reached disagreement conclusion. 28 cannot turn particular accounting reports Service (IRS). cites authority novel rule adopt confront hard provides: "There shall business. ." 162(a). motivation express terms, inferred usage, contemplate 27-28, 983-984, (1987); Flint Stone Tracy Co., 220 107, 171, 31 342, 357, L.Ed. 389 (1911). Yet, making demanding distinguish trades businesses pursued Whipple 373 193, 197, 1168, 1171, 288 (1963). forms permissible method, endorses improper conception 29 often choose among methods IRS, either actual-use showed relevant shown 158, 5. turns filling out forms, status lie control accountants. find "to affront common understanding deny facts experience." Helvering Horst, 311 112, 118, 61 144, 147, 85 75 (1940). alter nature enterprise selecting another. 30 departs traditional practice IRS. Rather strict consistency accounting, long evaluated variety factors indicate characteristic See, e.g., Teitelbaum C.I.R., 294 541, 545 (CA7 1961); Patterson 459 487, 493-494, 198 Ct.Cl. 543, 552-553, (1972); Boyle, What Trade Business?, 39 Law. 737, 743-745 (1986); Lee, Blend Old Wines New Wineskin: 183 Beyond, L.Rev. 347, 390-447 (1974). regulation wide prior decisions, IRS itself follows: "Deductions connection collection management, conservation, maintenance property Except provided [26 CFR] 1.183-1 [which authorize S-corporations hobby losses], reference objective standards, required, entered activity, continued profit." CFR 1.183-2(a) 32 facilitate application standard, supplied list nine factors, body law, evaluating These include: carries activity; expertise advisors; (3) time expended (4) assets appreciate value; (5) success similar dissimilar activities; (6) history respect (7) occasional profits, any, earned; (8) financial taxpayer; (9) elements recreation. §§ 1.183-2(b)(1) (9). 33 today longstanding approach pinning report laws strive reflect true taxpayer, times allows understate overstate expenses. acknowledges, tends exaggerate percentage 157-158, 4. saying unconditional committed best Some inconsistency exist undertook But solution lies altering stipulation cases, changing 34 effect remains states understand confine ruling alone. extent receipts. Confronted difficulty oral argument, stated authority, own "generosity," rare implausible. Tr. Oral Arg. 42-43. asserts disallow future. id., Cf. (authorizing losses). further counsels stringent reasons, opinion, exception IV, grants "[c]lubs organized pleasure, recreation, nonprofitable purposes, inures shareholder." 511 taxed corporate rate. petitioner, 512(a)(3)(A). encompasses members. bar dining room totaled $84,422, $61,821. $106,547, $78,407. 85. example, 10% appears generous Golf. charges higher prices charged, nonmembers' meals prepare serve. likely overstates parties, reasonable. 17. following table shows method: Gross $84,422 $106,547 Variable (61,821) ( 78,407) Allocated (51,034) 97,748) Net ($28,433) ($69,608) note alternative "square foot hours use" 29, sum years: (78,407) (3,153) (4,666) $19,448 $23,474 profit-seeking venture deducted income; not-for-profit sources. B. Bittker L. Lokken, Federal Taxation Income, Estates Gifts &Par; 20.1.2, 22.5.4, 20-6, 22-63 22-64 (2d ed. 1989). "did intend make related absent sales." TCM, 216, 416. articulating earlier reviewed T.C. 563 (1987). subsequently reversed. us. appears, "actual 5, supra ), continuing Both interpret manner, disapproval 47, ("[T]his untenable"); 48 ("While Circuit's better Government, basically unprincipled"). makes 833 1986); Rev.Rul. 81-69, 1981-1 Cum.Bull. 351-352; Scialabba, Unrelated Business Taxable Income Clubs, Campbell 249 (1988). 513(a) "any conduct exercise performance charitable, educational, constituting exemption." 512(a)(3)(B) "exempt dues, fees, charges, amounts consideration providing dependents guests goods, facilities, furtherance paid." 2375, 81st Cong., 2d Sess., (1950) ("The problem directed primarily competition. [these] enables them profits expand operations, competitors remaining after taxes"); H.R.Rep. 2319, 36 (1950). 1950, ch. 994, 64 906. 30-31; 38. concede too. 162"). identify permits before enactment 183, revenues earned declared 6, 22-63. inapplicable Golf, followed permitting 33. At distinguishes looking source payment: "[E]xempt money 512(a)(3)(B). easily organize events yet arrange modest contributions toward events. Those income"; income, relatively easy avoid recognition incurs derives intrinsic Code's limitation deductibility (expenses to, above, produced activity) are, essence, question generates Just brief states: debate ought treated 'directly connected' might argued with' 45, 24. supra. noted 212, 213 TC 412, (That reduction "profit.") Gefen 87 1471, 1490 ("A transaction substance recognized offers exclusive benefits"); Seaman 84 564, 588 (1985) (" '[P]rofit' independent savings"); Surloff 81 210, 233 (1983) (same). Accord, Simon 499, 500 (CA3 1987). dispute principle. cases uniformly 'economic profit' savings, gain' savings") (footnotes omitted). assume, potential reductions exists. earlier, chapter." deductible here stipulated, reasonableness consistently, favorable Had entirely, gain higher. suffered not, itself, disproved year. Treas.Reg. 1.183-1(c)(1)(ii), 1.183-1(c)(1)(ii) (1989) (most presumed exceeds five consecutive years); 1.183-2(b)(6), 1.183-2(b)(6) series initial start-up stage necessarily indication formula. asserted, possessed reluctance understandable: every 1975 1984, basis. 213,

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