included also, if it were shown, for example, that certain rooms are heated and lighted only when needed for outside business. However, it is believed that the constant use of facilities available for inside business, as well as outside business, probably makes impracticable such a segregation of expenses.
For simplicity, therefore, we shall calculate merely the cost of goods sold.
This is shown as follows:
The amount of "net profits" according to the formula used is therefore $ 130,589.96 for the five year period, or 15 percent of banquet receipts and 4 percent of gross receipts from restaurant and bar.
4. Purpose for use of club by nonmembers
The purpose of events at which the club facilities are used by outsiders is principally for social events such as weddings or bar mitzvah receptions, and business-oriented gatherings for sales presentations and the like, in connection with the trade, profession, or business of the sponsoring member.
The overwhelming number of business gatherings are for the normal and legitimate business purposes of the sponsoring members, whether to discuss particular developments in the trade, or to promote good will by entertaining past and prospective customers in accordance with standard business custom and practice. Only a few instances come to mind where a member simply served as sponsor for a nonmember desiring to use club facilities for his own purposes. Occasional events such as meetings of the Institute of Architects or the Kaufmann Glee Club or the Duff or Wheeler business schools are out of the mainstream of club activities, which usually center about journalism, advertising, news, public relations, and the particular business activities of the sponsoring members, or purely social gatherings of personal concern to the member holding the affair.
5. Frequency of use by nonmembers
The frequency of events in which nonmembers are entertained is no more than normal in a club of plaintiff's size, 3550 banquet department events having been held in the years 1967-1971 (PX-C-1) of which only 815 were questioned by the IRS. As hereinabove determined, the percentage of outside volume of business amounted to 6.75 percent of total restaurant and bar service.
It is clear that the Press Club is operated in a normal and customary manner, confined to "the service a club usually provides its members and their guests," and is not a sham or facade for a commercial operation such as a proprietary "bottle club" serving the general public. 388 F. Supp. 1274-75.
In view of the foregoing findings, our determination on the merits is in favor of plaintiff. Particularly with respect to the period after the Act of 1969 made unrelated income taxable, so that receipt of such income would not necessarily deprive a club of its exemption, the plaintiff's exempt status is clear.
Moreover, the 5 percent criterion favored by the IRS is not necessarily conclusive on the courts. 536 F.2d at 575. The 6.75 percent figure here calculated does not seem excessive. Plaintiff argues that no court decision has upheld revocation where less than 46 percent was shown. 426 F. Supp. at 555.
The Court has been requested by the parties to pass upon the question of retroactive revocation, whether or not a decision in favor of defendant on the merits is made. On this question of retroactivity our view is that it is not appropriate in the case at bar. Plaintiff has not been guilty of misrepresentation or operating in a manner materially different from its professed intentions.
The club's letter of June 3, 1964 (GX-4) we continue to believe should be interpreted as referring to the abandonment of the prior practice of permitting use of facilities by completely unrelated groups, rather than member-sponsored "outside" groups. 388 F. Supp. at 1276-77. Hence there was no deliberate and intentional deception which would warrant retroactive revocation. See Lesavoy Foundation v. CIR 238 F.2d 589, 593 (C.A.3, 1956). Moreover, as pointed out at 579 F.2d at 763, the restrictive criteria now applied by the IRS were not developed until later in 1964 and 1971 and were not propounded by the IRS at the 1964 audit of the Press Club. In the event our determination that the plaintiff is entitled to exempt status for the years in question before 1971 as well as for 1971 is erroneous, revocation should be effective only prospectively from February 2, 1972, when the IRS made its determination.
This opinion shall be deemed to constitute the Court's findings of fact and conclusions of law.
Counsel for the parties are directed to compute and present to the Court a judgment in accordance with this opinion.