guideline for audits a de minimis factor of $2,500 outside revenue, or 5 percent of the club's gross revenue.) 1964 -- 2 Cum. Bull. 962.
We consider the 75 percent requirement unreasonable and not a binding interpretation of the statute. Regulations and Treasury Decisions (approved by the Secretary of the Treasury) apparently have a greater dignity than other rulings issued for the guidance of employees in audits and of taxpayers desirous of avoiding controversial transactions. Higgins v. Comm'r., 312 U.S. 212, 215, 85 L. Ed. 783, 61 S. Ct. 475 (1941). But even Regulations are invalid if contrary to the underlying statutory authority. U.S. v. Calamaro, 354 U.S. 351, 359, 1 L. Ed. 2d 1394, 77 S. Ct. 1138 (1957); Dixon v. U.S., 381 U.S. 68, 73-74 (1965).
In our opinion revenue from member-sponsored occasions involving attendance of non-members should not be considered as outsider transactions with respect to their impact on exempt status if it would be reasonable and normal, in the ordinary course of the activities usually pursued by social clubs, to utilize club premises or services for such occasions.
This is not to say that there is no limit to the extent to which a club may properly engage in activities open to non-members when sponsored by a member. If, for example, a member were to sponsor an event open to all alumni of Harvard University one would be inclined to think that such action was equivalent to holding out accommodation to the general public.
On the other hand, it would seem to be within the bounds of reason and custom for an affluent Chicago alumnus of the Law School class of 1917 to entertain his classmates at an affair in recognition of the accomplishments of an illustrious member of the class (Joseph N. Welch) when the American Bar Association met in Chicago in 1954 in the wake of the Army-McCarthy hearings.
And, where it would be reasonable and normal for an affluent club member to sponsor a particular event, it should be equally permissible for a less affluent member to do so under an arrangement involving reimbursement or direct collection from the invitee group. In other words, the event should be one in keeping with the nature of the club's normal activities and the relationship of the parties.
A mechanical test of 75 percent overlap in membership seems too arbitrary. The criteria should bear a closer connection to the factors of congeniality and compatibility with the club's normal activities.
Moreover, data submitted in evidence by plaintiff, particularly in the light of Mr. Weisgerber's testimony of November 27, 1974, point to the conclusion that the "outside business" of the Press Club was in fact considerably less than as calculated by the auditing agent.
Plaintiff contends (Brief, p. 10) that no court has denied exemption unless the percentage of outside income to total income was over 46%. Under the Government's figures (Brief, pp. 7, 15) the percentages in the case of the Press Club ranged from 11 to 17 percent for the year involved. According to a survey by plaintiff's accountant, the percentage was from 2 to 4 percent. (PX-12, 13, 19-21).
The Government's justification of retroactive rather than prospective revocation is based upon the contention that there was a knowing departure on the part of the club from representations made in a letter of June 3, 1964 (GX-4) that "We have discontinued allowing outside groups to use club facilities at any time."
However, from the testimony it appears that this assurance was given in connection with a program of "Luncheon with the Stars" of the Civic Light Opera which the club had been sponsoring but which was discontinued after the audit and admonition which led to the letter of 1964. It would therefore appear that there was not a deliberate violation of the representations made, which would warrant retroactive revocation, but rather a bona fide controversy with respect to the propriety of later club practices and the validity of certain IRS pronouncements such as the 75 percent rule.
In short, we conclude that the activities of the Press Club did not violate the terms of the statute or Regulations; and that the Revenue publications of lesser dignity which they may have contravened, while helpful as a rule of thumb or guideline for audits, are not controlling in a contested case, where the applicable law must be interpreted and applied in the light of the total fact situation as developed in the record.
For the foregoing reasons we conclude that plaintiff is entitled to recover the tax paid under protest for the tax years involved in the case at bar.
This opinion shall be deemed to constitute the Court's findings of fact and conclusions of law. The parties are directed to calculate the amount to be recovered by plaintiff and to submit a proposed judgment in accordance with this opinion.
Dumbauld / UNITED STATES DISTRICT JUDGE