                       T.C. Memo. 1995-567



                     UNITED STATES TAX COURT


         DEER PARK COUNTRY CLUB, Petitioner v. COMMISSIONER
                 OF INTERNAL REVENUE, Respondent


     Docket No. 26210-93.             Filed November 28, 1995.



     John S. Elias, for petitioner.

     William I. Miller, for respondent.


                       MEMORANDUM OPINION


     HAMBLEN, Chief Judge:   Deer Park Country Club (petitioner)

is a nonprofit Illinois corporation qualifying as a social club

that is exempt from taxation under section 501(c)(7).1

Respondent determined a deficiency of $33,782 in petitioner's

Federal income tax liability for its taxable year ended October

     1
      Unless otherwise indicated, section references are to the
Internal Revenue Code as in effect for the year in issue. Rule
references are to the Tax Court Rules of Practice and Procedure.
                                   - 2 -


31, 1987.2      The sole issue for decision is whether the gain that

petitioner realized on the sale of land during the taxable year

in issue constitutes unrelated business income subject to Federal

income tax under section 512(a)(3)(A) or income that qualifies

for nonrecognition treatment under section 512(a)(3)(D).

Background

       This case was submitted fully stipulated pursuant to Rule

122.       The stipulation of facts and attached exhibits are

incorporated herein by this reference.       At the time the petition

was filed, petitioner maintained its principal place of business

in Oglesby, Illinois.

       Petitioner operates a country club providing recreational

and social activities, including, but not limited to, golf,

swimming, and tennis.       In 1976, petitioner purchased two tracts

of land consisting of 48.1 and 40.8, acres respectively.

Petitioner used the 48.1-acre tract as a 9-hole golf course and

the 40.8-acre tract as a fishing property.       Petitioner continued

to use the fishing property in the performance of its exempt

function from 1976 to 1981.




       2
      We note that although the first page of the notice of
deficiency issued to petitioner identifies the tax period as the
taxable year ended Oct. 1, 1987, the petition filed herein
includes an allegation that the tax period in dispute concerns
petitioner's tax year ended Oct. 31, 1987. Respondent admits
this allegation in her answer.
                              - 3 -


     In 1981, petitioner transferred the 40.8-acre fishing

property, plus an additional sum of $34,900, to the State of

Illinois in exchange for 63.8 acres of farmland.    Petitioner

accepted the 63.8-acre tract subject to development restrictions

imposed by the State of Illinois that remained in effect for 5

years from the date of the transfer.    As a consequence of these

development restrictions, petitioner rented out the 63.8-acre

tract as farmland from 1981 to 1986.

     During the 5-year period that the property was rented out as

farmland, petitioner engaged a layout designer to develop plans

for constructing an additional 9-hole golf course, a swimming

pool, and tennis courts on the 63.8-acre tract.    The layout

designer produced, and petitioner's board of directors

considered, various plans that would utilize the entire 63.8-acre

tract for recreational facilities.    However, after consulting

with the banks that would provide financing for the planned

expansion, petitioner was forced to adopt a plan under which a

portion of the 63.8-acre tract would be devoted to a housing

development as opposed to recreational facilities.    The plan that

petitioner finally settled on provided for 59 acres to be devoted

to new recreational facilities with the remaining 4.8 acres to be

subdivided as homesites for sale.

     Construction of the new recreational facilities on the 59-

acre tract was completed prior to the close of petitioner's
                               - 4 -


taxable year ended October 31, 1986.    The remaining 4.8 acres

were subdivided into 14 homesites.     During petitioner's taxable

year ended October 31, 1987, 11 of the 14 homesites were sold to

petitioner's members for a total of $149,000.    Petitioner's tax

basis and development costs for the 11 homesites sold totaled

$5,742 and $21,190, respectively, leaving petitioner with a gain

of $122,068.   Petitioner used the proceeds from the sale of the

11 homesites to pay for the construction of the new recreational

facilities during the period beginning 1 year before and ending 3

years after the sale of the 11 homesites.3

     Although petitioner originally intended that the entire

63.8-acre tract would be used for the development of new

recreational facilities (following the expiration of the 5-year

restriction period), petitioner never used any part of the 4.8-

acre tract for recreational activities.    On the other hand, the

new recreational facilities constructed on the 59-acre tract have

been used by petitioner directly in the performance of its exempt

function.

     Although petitioner filed a Form 990 (Return of Organization

Exempt from Income Tax) for its taxable year ended October 31,

1987, petitioner did not file a Form 990-T (Exempt Organization




     3
      At the time this case was submitted, the three remaining
homesites remained unsold.
                                   - 5 -


Business Income Tax Return) reporting the gain realized on the

sale of the 11 homesites in question.

Discussion

     Respondent determined that the gain that petitioner realized

on the sale of the 11 homesites during the taxable year ended

October 31, 1987, constitutes unrelated business income subject

to Federal income tax under section 512(a)(3)(A).      Petitioner

counters that the gain in question qualifies for nonrecognition

treatment under section 512(a)(3)(D).

     It is well established that the Commissioner's deficiency

determination generally carries with it a presumption of

correctness and that the taxpayer bears the burden of proving

that the determination is incorrect.       Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).       Moreover, it has often been

said:

     Exemptions as well as deductions are matters of
     legislative grace, and a taxpayer seeking either must
     show that he comes squarely within the terms of the law
     conferring the benefit sought * * *.

Nelson v. Commissioner, 30 T.C. 1151, 1154 (1958); see New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

     The parties agree that petitioner is an organization

described in section 501(c)(7) that is exempt from income

taxation under section 501(a).4      Notwithstanding its exempt

     4
        Sec. 501(c)(7) provides:
                                                        (continued...)
                                - 6 -


status, petitioner may nevertheless be subject to tax with

respect to business income that is not related to its exempt

function.   Sec. 501(b).   In particular, section 511(a)(2)(A)

provides that an organization described in section 501(c) that is

exempt from taxation under section 501(a) may be subject to the

imposition of a tax computed as provided in section 11 for each

taxable year in which such organization earns unrelated business

taxable income as defined in section 512.

     Section 512(a)(3) sets forth special rules regarding the

application of the unrelated business income tax to certain

organizations described in section 501(c).    Section 512(a)(3)

provides in pertinent part:

          (3) Special Rules Applicable To Organizations
     Described In Paragraph (7), (9), (17), or (20) of
     Section 501(c).--

               (A) General Rule.--In the case of an
     organization described in paragraph (7) * * * of
     section 501(c), the term "unrelated business taxable
     income" means the gross income (excluding any exempt
     function income), less the deductions allowed by this
     chapter which are directly connected with the
     production of the gross income (excluding exempt
     function income), both computed with the modifications

     4
      (...continued)
     (c) List of Exempt Organizations.--The following
organizations are referred to in subsection (a):

               *     *      *     *     *     *     *

       (7) Clubs organized for pleasure, recreation, and other
nonprofitable purposes, substantially all of the activities of
which are for such purposes and no part of the net earnings of
which inures to the benefit of any private shareholder.
                                    - 7 -


     provided in paragraphs (6), (10), (11), and (12) of
     subsection (b). * * *

               (B) Exempt Function Income.--For purposes of
     subparagraph (A), the term "exempt function income"
     means the gross income from dues, fees, charges, or
     similar amounts paid by members of the organization as
     consideration for providing such members or their
     dependents or guests goods, facilities, or services in
     furtherance of the purposes constituting the basis for
     the exemption of the organization to which such income
     is paid. * * *

                       *   *    *    *   *   *   *

               (D) Nonrecognition of Gain.--If property used
     directly in the performance of the exempt function of
     an organization described in paragraph (7) * * * of
     section 501(c) is sold by such organization, and within
     a period beginning 1 year before the date of such sale,
     and ending 3 years after such date, other property is
     purchased and used by such organization directly in the
     performance of its exempt function, gain (if any) from
     such sale shall be recognized only to the extent that
     such organization's sales price of the old property
     exceeds the organization's cost of purchasing the other
     property. * * *

For purposes of the present case, section 512(a)(3) can be

summarized as providing that an organization described in section

501(c)(7) generally is subject to unrelated business income tax

with respect to its gross income except:         (1) Exempt function

income; and (2) gains that, while realized, need not be

recognized by virtue of section 512(a)(3)(D).         The dispute in the

instant case centers on section 512(a)(3)(D).

     Respondent determined that petitioner is subject to

unrelated business income tax in respect of the gain realized on

the sale of the 11 homesites.       In particular, respondent
                              - 8 -


maintains that the gain in question does not qualify for

nonrecognition treatment under section 512(a)(3)(D) because the

4.8-acre tract on which the 11 homesites are situated was never

"used directly" in the performance of petitioner's exempt

function.

     Petitioner asserts that the gain realized on the sale of the

11 homesites qualifies for nonrecognition treatment under section

512(a)(3)(D) on the theory that its various acts, including the

engagement of a layout designer to develop a plan to construct

recreational facilities over the entire 63.8-acre tract,

demonstrate that the property was used directly in the

performance of its exempt function.   In this regard, petitioner

contends:

     Petitioner used the 63.8 acres during the five-year
     restriction period in the only way it realistically
     could, which was to rent it out as farmland and to
     begin the process of developing the New Facilities on
     the 63.8 acres by engaging a layout designer to develop
     plans. Petitioner used the 63.8 acres during the five-
     year restriction period in performance of Petitioner's
     exempt function by beginning the development of better
     recreational facilities. It is difficult to comprehend
     how the development would not be in performance of
     Petitioner's exempt function.

In support of the foregoing, petitioner asserts that neither the

plain language of section 512(a)(3)(D) nor the legislative

history of the provision requires that property "be in actual (as

distinct from planned) recreational use" in order to qualify for

nonrecognition treatment.
                               - 9 -


     We begin our analysis with the well established rule of

statutory construction that statutes are to be read so as to give

effect to their plain and ordinary meaning unless to do so would

produce absurd or futile results.      United States v. American

Trucking Associations, 310 U.S. 534, 543-544 (1940); see Tamarisk

Country Club v. Commissioner, 84 T.C. 756, 761 (1985).     Moreover,

where a statute is clear on its face, we require unequivocal

evidence of legislative purpose before construing the statute so

as to override the plain meaning of the words used therein.

Halpern v. Commissioner, 96 T.C. 895, 899 (1991); Huntsberry v.

Commissioner, 83 T.C. 742, 747-748 (1984).

     Although there is a dearth of case law construing section

512(a)(3)(D), we nonetheless find one of our prior cases, Atlanta

Athletic Club v. Commissioner, T.C. Memo. 1991-83, revd. 980 F.2d

1409 (11th Cir. 1993), to be instructive.     In Atlanta Athletic

Club v. Commissioner, supra, the taxpayer (an organization

described in section 501(c)(7) and exempt from income taxation

under section 501(a)) operated a country club including two 18-

hole golf courses, a clubhouse, a swimming pool, tennis courts,

and other recreational facilities for the benefit of its members

and their guests.   During its taxable year ended March 31, 1985,

the taxpayer realized gain of approximately $2.3 million on the

sale of 108 acres of land.   The taxpayer subsequently reinvested

the $2.3 million in additional recreational facilities within 3
                             - 10 -


years of the date of the sale.   Upon review of the matter, the

Commissioner determined that the taxpayer was liable for

unrelated business income tax in respect of the gain realized on

the sale of its land because the land in question was not used

directly in the performance of the taxpayer's exempt function as

required for nonrecognition treatment under section 512(a)(3)(D).

     In proceedings before this Court, the parties presented

conflicting testimony and other evidence regarding both the

taxpayer's intentions with respect to the use of the land in

question and whether activities in furtherance of the taxpayer's

exempt function were actually conducted on the property.   In

rendering our decision, we first rejected the parties' evidence

respecting the taxpayer's intentions with respect to the use of

the land on the ground that the applicability of section

512(a)(3)(D) does not turn on a taxpayer's intent.   Further,

based upon our review of the remaining testimony and evidence, we

found that the land in question was not used directly in the

performance of the taxpayer's exempt function.   Consequently, we

sustained the Commissioner's determination that the taxpayer was

liable for unrelated business income tax.   Atlanta Athletic Club

v. Commissioner, T.C. Memo. 1991-83.

     The taxpayer appealed our decision to the U.S. Court of

Appeals for the Eleventh Circuit.   As a preliminary matter, the

Court of Appeals agreed with this Court's initial determination
                               - 11 -


that a taxpayer's intention with respect to the use of property

is not relevant in determining the applicability of section

512(a)(3)(D).   In this regard, the Court of Appeals reasoned as

follows:

          The statute speaks in terms of use rather than
     intent. Therefore, the Tax Court correctly observed
     that the Club's various plans for the land were
     irrelevant. Atlantic Athletic Club, 61 T.C.M. (CCH) at
     2019. The analysis must concentrate on the ways in
     which the Westside Property was or was not "used
     directly." This process entails factual findings as to
     the activities that occurred on tracts A and B of the
     Westside Property, and legal conclusions as to whether
     those activities constituted sufficient recreational
     uses by the Club. [Atlanta Athletic Club v.
     Commissioner, 980 F.2d at 1412.]

The Court of Appeals nevertheless reversed our decision after

concluding that the testimony and evidence demonstrated that the

taxpayer had in fact directly used the property in question in

the performance of its exempt function.   In particular, the Court

of Appeals focused on evidence that it concluded tended to show

that the taxpayer conducted various activities on the property in

question, including kite flying contests, foot races, and

picnics.   Id. at 1412-1413.

     The plain language of section 512(a)(3)(D) limits

nonrecognition treatment to gains realized on the sale of

property used directly in the performance of the organization's

exempt function.   Consistent with Atlanta Athletic Club v.

Commissioner, supra, we conclude that the plain and ordinary

meaning of the phrase "used directly in the performance of the
                              - 12 -


exempt function of an organization" as set forth in section

512(a)(3)(D) connotes an exempt organization's use of assets or

property that is both actual and direct in relation to the

performance of its exempt function.    Given petitioner's

concession that no part of the 4.8-acre tract on which the 11

homesites are situated was ever physically used by petitioner for

recreational activities, it follows that the gain realized on the

sale of the 11 homesites does not qualify for nonrecognition

under section 512(a)(3)(D), but rather is subject to the

unrelated business income tax.

     Petitioner argues that Atlanta Athletic Club v.

Commissioner, supra, is factually distinguishable from the

instant case.   Specifically, petitioner asserts that unlike the

instant case, there is no indication that the taxpayer in Atlanta

Athletic Club v. Commissioner, supra, attempted to obtain a

development plan for the property in question or that the

property was subject to any sort of use restriction as is the

case here.   Simply stated, we are not persuaded that the Tax

Court or the Court of Appeals would have altered its

interpretation of section 512(a)(3)(D) in the face of such

evidence.

     We likewise are not convinced that the legislative history

underlying section 512(a)(3)(D) supports petitioner's position.

Petitioner relies on S. Rept. 91-552 (1969), 1969-3 C.B. 423, for
                              - 13 -


the proposition that it would be contrary to congressional intent

to subject the gains that it realized on the sale of the 11

homesites to unrelated business income tax.   S. Rept. 91-552, at

72-73 (1969), 1969-3 C.B. 423, 470-471, states in pertinent part:

          In addition, the committee's bill provides that
     the tax on investment income is not to apply to the
     gain on the sale of assets used by the organizations in
     the performance of their exempt functions to the extent
     the proceeds are reinvested in assets used for such
     purposes within a period beginning 1 year before the
     date of sale and ending three years after that date.
     This provision is to be implemented by rules similar to
     those provided where a taxpayer sells or exchanges his
     residence (sec. 1034). The committee believes that it
     is appropriate not to apply the tax on investment
     income in this case because the organization is merely
     reinvesting the funds formerly used for the benefit of
     its members in other types of assets to be used for the
     same purpose. They are not being withdrawn for gain by
     the members of the organization. For example, where a
     social club sells its clubhouse and uses the entire
     proceeds to build or purchase a larger clubhouse, the
     gain on the sale will not be taxed if the proceeds are
     reinvested in the new clubhouse within three years.

Relying on this excerpt, petitioner argues that it would be

inappropriate to subject the gains in question to unrelated

business income tax where the gains were immediately reinvested

in new recreational facilities.

     As previously noted, where a statutory provision is clear on

its face, we require unequivocal evidence of legislative purpose

before construing the statute so as to override the plain meaning

of the words used therein.   Halpern v. Commissioner, 96 T.C. 895,

899 (1991).   Although petitioner immediately reinvested its gains

in new recreational facilities used in the performance of its
                               - 14 -


exempt function, the fact remains that Congress enacted a

nonrecognition provision that is limited to a narrowly defined

set of circumstances.   The benefits of section 512(a)(3)(D) are

limited to gains realized on the sale of property that is used

directly in the performance of the organization's exempt

function.   Petitioner has failed to demonstrate that the gain

that it realized on the sale of the 11 homesites fits within the

terms of section 512(a)(3)(D).    Moreover, we are not satisfied

that the legislative history relied upon by petitioner rises to

the level of unequivocal evidence of legislative purpose

sufficient to ignore the literal terms of the controlling

statute.    Accordingly, we agree with respondent that petitioner

was obligated to recognize and report the gain on its 1987 tax

return.

     We have considered petitioner's remaining arguments and find

them unpersuasive.   To reflect the foregoing,

                                      Decision will be entered

                                 for respondent.
