## Facts

- Atlanta Athletic Club (the Club) was exempt from federal income tax as a social club under I.R.C. § 501(c)(7), operating recreational amenities for members and guests.
- In 1964, the Club acquired approximately 617.1 acres in Fulton County, Georgia, which a highway split into an eastern tract (about 425.6 acres) and a western tract (about 191.5 acres).
- The Club built its main facilities on the eastern tract, including golf courses, a clubhouse, a swimming pool, and tennis courts.
- The western tract (the “Westside Property”) remained largely undeveloped. The Club constructed a slag road in 1976 for tournament parking that members later used for jogging.
- The Club attempted to build a jogging track on the Westside Property, but abandoned it due to drainage problems.
- The Club also stocked a lake with fish on the Westside Property and otherwise performed only minimal upkeep such as mowing.
- Club witnesses (members and employees) described recurring recreational use of the Westside Property, including pasture parties, Easter egg hunts, fishing tournaments, kite-flying contests, hot-air balloon rides, organized footraces (including “Turkey Trot” races), individual jogging, archery practice, and flying model airplanes.
- In 1984, for the first time, the Club subdivided the Westside Property into tracts A, B, and C, and sold 108 acres (tracts A and B), realizing roughly a $2.3 million gain; it retained tract C.
- The parties stipulated that the Club reinvested the entire gain, within the statutory time limits, in a new tennis center and clubhouse renovations on the Eastside Property.
- The IRS treated the $2.3 million gain as unrelated business taxable income, asserting that tracts A and B had not been “used directly” for the Club’s exempt function; the IRS assessed a deficiency.
- The Club challenged the determination in the U.S. Tax Court. The Tax Court ruled for the Commissioner, finding the Club had not directly used the sold property for recreation as required for nonrecognition under I.R.C. § 512(a)(3)(D). The Club appealed.

## Issues

1. Whether tracts A and B of the Club’s Westside Property were “used directly” by the Club for members’ pleasure and recreation within the meaning of I.R.C. § 512(a)(3)(D), so that the gain on their sale qualified for nonrecognition.

## Decision

- The Eleventh Circuit reversed the Tax Court.
- The court held that the record showed the Club directly used tracts A and B for members’ recreation, including both organized Club activities and regular member use.
- Because the Club also reinvested the proceeds in qualifying recreational facilities within the statutory time period, the gain qualified for nonrecognition under I.R.C. § 512(a)(3)(D) and was not taxable as unrelated business income.

## Legal Principles

- Under I.R.C. § 512(a)(3)(D), the inquiry centers on actual “use” of the property for the club’s exempt function, not the club’s intent, plans, or future development ideas for the land.
- “Used directly” can be satisfied by recurring recreational use by members and Club-sponsored events on the property; substantial permanent improvements or formal facilities are not required by the statutory text.
- Appellate review of the Tax Court’s factual findings is for clear error; a finding lacks support when the record contains substantial, unrebutted evidence pointing the other way.
- When testimony and contemporaneous club materials (such as newsletters) support that organized events occurred on the relevant parcels, the property may qualify as directly used even if it is largely undeveloped and separated from the main facilities by a roadway.
- If a § 501(c)(7) club sells property used directly for its exempt function and timely reinvests the proceeds in similar exempt-function property, the gain may be nonrecognized under § 512(a)(3)(D).

## Conclusion

The Eleventh Circuit held that Atlanta Athletic Club’s largely undeveloped Westside Property (including tracts A and B) was directly used for members’ recreation through regular jogging and a range of organized Club activities, and—because the Club timely reinvested the sale proceeds in recreational facilities—the $2.3 million gain on the 1984 sale qualified for nonrecognition under I.R.C. § 512(a)(3)(D) rather than unrelated business taxable income.


Atlanta Athletic Club v. Commissioner, 980 F.2d 1409 (1993)