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December 19, 1978

UNITED STATES of America, Defendant

The opinion of the court was delivered by: DUMBAULD

In the present posture of the case at bar, *fn1" the task of this Court is to make findings called for by the Court of Appeals, on remand. Pittsburgh Press Club v. U. S., 579 F.2d 751 (C.A.3, 1978). The findings previously made by this Court with respect to five topics specified by the Court of Appeals (see 426 F. Supp. at 555-56) were found to have been based upon inadmissible evidence, and hence unsupported by the record and therefore "clearly erroneous." 579 F.2d at 760. New findings regarding the same five topics seem now called for. 579 F.2d at 762. The new findings are to be "based on the record of the first trial, and so much of the record of the second trial as has not been held to be inadmissible by this court" without any additional evidence. 579 F.2d at 762. This Court is to "rule on the admissibility of and weight to be given to the first survey" (579 F.2d at 762) and also determine "net profits" in accordance with the ingenious and innovative rule elaborated by the Court of Appeals rather than in accordance with the definition of that term under generally accepted accounting principles. 579 F.2d at 760-62. Finally, in the event of a holding against the Press Club, the Court is to determine whether revocation of its exemption could properly be retroactive as of fiscal year 1967. 579 F.2d 763.

Turning first to the preliminary issue of delimiting the universe or corpus of evidence to be considered, we note that the first survey is admissible, and in fact has been admitted at the first trial, without objection. All evidence received at the first trial was considered at the second trial, and our present decision, as noted above, is to be based on all evidence now in the record, except that excluded by virtue of the second Court of Appeals opinion. See 579 F.2d at 762.

 With respect to the weight of that survey, the significant considerations are well elucidated in note 22 of 579 F.2d at 762. The chief weakness is possibility of faulty memory. It would seem that with respect to the nature of an affair given at the club by a member, the member's memory would be more reliable than with respect to the date of the affair, the number of persons served, the amount paid, and similar details. It would also seem that selection of the largest functions as the sample would be favorable to the IRS rather than to the club, since the evidence indicates that it is the entertainment of large numbers of people that is most likely to be an outside affair, whereas common sense as well as the experience of the IRS indicates that there is "a presumption that a genuine guest-host relationship is present if the group is eight or less" (579 F.2d at 753). Hence the data in this study are entitled to some weight, and in considering the specific issues to be adjudicated we shall utilize the contents of the study to such extent as seems appropriate under the circumstances.

 It will also be proper to utilize evidence from the second trial except to the extent that it was held inadmissible by the Court of Appeals. In particular helpful financial information and figures may be gleaned from charts prepared by accountants and other data derived from the club's books of account, and not affected by the subjective interpretations and defects invalidating the responses received in the second survey.

 1. Amount of outside business

 The first figure to be obtained in determining the amount of outside business is the Total banquet business *fn2" for the years in question. Figures from the club's books show the following which we find as a fact: *fn3" , *fn4"


 The next step in calculation will be an attempt to determine how much of the total banquet business is outside business and how much is inside business.

 That survey (PX-12 and 13) was prepared during negotiations with the IRS and was a sample compiled to convince the appellate level that the examining agent Marcolini's RAR report (PX-18) had overstated the outside income. The club chose that year because it was the year which showed the highest percentage of outside income in any year covered by the RAR. The club selected the 25 events showing the highest dollar amount for that year, and received 20 responses (of which only 19 appear in PX-13).

 According to the club's analysis (PX-12) the amounts clearly not outside income were $ 13,328 or 77.4 percent; doubtful were $ 1,910 or 11.1 percent; those clearly outside income were $ 1,989 or 11.5 percent, out of a total billing of $ 17,227.

 Independent analysis of the data in PX-13 shows these three categories as $ 12,506.25, $ 2282.15, and $ 1988.67, respectively, out of $ 16,777.07 total billing. *fn5" The averages of each category were $ 1136.93, $ 571.29, and $ 497.17, and the average as a whole was $ 883. The percentages are 74.5, 13.6, and 11.8 respectively.

 In accordance with a comment at the trial that perhaps those who did not respond to the questionnaire knew that they could say nothing beneficial to the club's case, we endeavored to ascertain who were the 6 sponsors unaccounted for. We could not find in the record a list of persons to whom the questionnaire was mailed. But the record does permit an independent compilation of the 25 highest billings for the year, and comparison of the lists might reveal the names of the six who did not respond.

 The list of the top 25 ($ 750 and over) drawn from PX-C-4, schedules T-1 through T-21, shows a total billing of $ 30,056.90 and only 7 of the ...

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