Atlanta Athletic Club v. Commissioner

The Atlanta Athletic Club (club) (plaintiff) was a tax-exempt social club under § 501(c)(7) of the Internal Revenue Code (code). The club owned a large mass of land that was split in two by a highway. The club developed its principal amenities—golf courses, tennis courts, a pool, and a clubhouse—on the tract east of the highway (eastside property). Apart from an abandoned attempt at building a jogging track, the club did not develop the tract west of the highway (westside property). Club members and employees testified about activities held on the westside property, despite the property’s nondevelopment. These activities included hot-air balloon rides, footraces, fishing tournaments, and Easter egg hunts. The westside property was also a popular jogging spot for many members. Two decades after acquiring the large mass of land, the club sold a large portion of the westside property, generating a $2.3 million profit. The club reinvested the profits into improving its facilities. The Internal Revenue Service (IRS) (defendant) treated the $2.3 million as unrelated business taxable income to the club. The club challenged that determination in the United States Tax Court. The Tax Court ruled in favor of the IRS, holding that the club did not directly use the westside property for recreation before selling it, as required by statute for the gain to escape tax. The club appealed.