In 1940, the Krewe was determined by the Commissioner to be exempt as a social club, and it has never sought or secured a determination that it qualified for exemption under any other provision of section 501. 1983 U.S. Tax Ct. LEXIS 92">*106 However, in its petition and at trial, the Krewe maintained that it also qualified as a civic league or organization within the meaning of section 501(c)(4) or as a business league within the meaning of section 501(c)(6). Yet, in its brief, the Krewe offered no arguments in support of such positions, and we consider that it has abandoned them. Moreover, it is clear that the Krewe does not qualify under either such provision. While the Gasparilla invasion and parade do serve some public purpose, most of the activities of the Krewe are restricted to its members and their guests and are not directed to, and do not result in, providing benefits either for the public at large or any community as a whole. The evidence shows beyond a doubt that the Krewe is primarily a social club, and such organization cannot qualify as a civic league under section 501(c)(4). Sec. 1.501(c)(4)-1(a), Income Tax Regs.; American Women Buyers Club, Inc. v. United States, 338 F.2d 526">338 F.2d 526 (2d Cir. 1964); People's Educational 80 T.C. 755">*762 , 39 T.C. 756">39 T.C. 756 (1963), affd. 331 F.2d 923">331 F.2d 923 (2d Cir. 1964).1983 U.S. Tax Ct. LEXIS 92">*107 ² Nor could the Krewe qualify as a business league since its membership included individuals from various professions and businesses and since the organization served no common business interest. Sec. 1.501(c)(6)-1, Income Tax Regs.; American Automobile Association v. Commissioner, 19 T.C. 1146">19 T.C. 1146, 19 T.C. 1146">1158 (1953); Associated Industries of Cleveland v. Commissioner, 7 T.C. 1449">7 T.C. 1449, 7 T.C. 1449">1465 (1946); compare MIB, Inc. v. Commissioner, 80 T.C. 438">80 T.C. 438 (1983).

Now we can turn to the issue concerning the construction of section 512(a). The Krewe maintains that section 512(a)(3) merely provides rules for computing the income which a social club derives from a trade or business regularly carried on by it within the meaning of section 512(a)(1), that the annual1983 U.S. Tax Ct. LEXIS 92">*108 staging of the Gasparilla invasion and parade does not constitute the regularly carrying on of a trade or business within the meaning of such provision, and that therefore it had no unrelated business taxable income for the years at issue. We agree that the staging of the Gasparilla invasion and parade is not a trade or business regularly carried on within the meaning of section 512(a)(1). See Suffolk County Patrolmen's Association v. Commissioner, 77 T.C. 1314">77 T.C. 1314 (1981). However, we do not agree with the Krewe's construction of section 512(a).

For taxable years beginning before January 1, 1970, social clubs were not subject to the tax on unrelated business income under section 511. Thus, unless its exemption was revoked, such a club was not taxable on its income. See and compare Scofield v. Corpus Christi Golf & Country Club, 127 F.2d 452">127 F.2d 452 (5th Cir. 1942), and Koon Kreek Klub v. Thomas, 108 F.2d 616">108 F.2d 616 (5th Cir. 1939), with United States v. Fort Worth Club, 345 F.2d 52">345 F.2d 52 (5th Cir. 1965), modified 348 F.2d 891">348 F.2d 891 (5th Cir. 1965), Jockey Club v. Helvering, 76 F.2d 597">76 F.2d 597 (2d Cir. 1935),1983 U.S. Tax Ct. LEXIS 92">*109 affg. 30 B.T.A. 670">30 B.T.A. 670 (1934), and Coastal Club, Inc. v. Commissioner, 43 T.C. 783">43 T.C. 783, 43 T.C. 783">806 (1965), affd. 368 F.2d 231">368 F.2d 231 (5th Cir. 1966).

The Tax Reform Act of 1969, Pub. L. 91-172, 83 Stat. 487, subjected social clubs to the tax on unrelated business income for taxable years beginning after December 31, 1969. Such 80 T.C. 755">*763 provision resulted from a proposal by the Treasury Department, and in explanation of its proposal, the Treasury Explanation stated:

under the proposal, all income, other than that from members in exchange for exempt function facilities, would be included in gross income, whether or not the activities generating the income were sufficient to meet the requirements of a "trade or business regularly carried on" generally applicable under the unrelated business income tax. * * * [Technical Explanation of Treasury Tax Reform Proposals, Hearings on the Subject of Tax Reform before the Comm. on Ways and Means, 91st Cong., 1st Sess., part 14, 5050, 5139-5140 (Apr. 22, 1969).]

In discussing the application of the unrelated business tax to social clubs, the Ways and Means Committee1983 U.S. Tax Ct. LEXIS 92">*110 report provided, in part:

The bill also imposes a tax on investment income of organizations which are exempt on the grounds of mutuality or common membership. Social clubs, for example, are operated for the benefit of members and any profit derived from rendering the services to members is used by the club for the benefit of the members. Therefore, where a social club has income from interest, dividends, rents, royalties, etc., this income reduces the members' costs below the actual cost of providing the personal facilities made available by the organization. Because of this, the bill would tax the social clubs and these other membership organizations on all income other than that derived from rendering services to the members. This income would be treated and taxed as business income. [H. Rept. 91-413 (Part 1) (1969), 1969-3 C.B. 200, 231; emphasis added.]

The Senate Finance Committee report also stated:

Since the tax exemption for social clubs and other groups is designed to allow individuals to join together to provide recreational or social facilities or other benefits on a mutual basis, without tax consequences, the tax exemption operates1983 U.S. Tax Ct. LEXIS 92">*111 properly only when the sources of income of the organization are limited to receipts from the membership. Under such circumstances, the individual is in substantially the same position as if he had spent his income on pleasure or recreation (or other benefits) without the intervening separate organization. However, where the organization receives income from sources outside the membership, such as income from investments * * *, upon which no tax is paid, the membership receives a benefit not contemplated by the exemption in that untaxed dollars can be used by the organization to provide pleasure or recreation (or other benefits) to its membership. For example, if a social club were to receive $ 10,000 of untaxed income from investments in securities, it could use that $ 10,000 to reduce the cost or increase the services it provides to its members. In such a case, the exemption is no longer simply allowing individuals to join together for recreation or pleasure without tax consequences. Rather, it is bestowing a substantial additional advantage to the members of the club by allowing 80 T.C. 755">*764 tax-free dollars to be used for their personal recreational or pleasure purposes. The1983 U.S. Tax Ct. LEXIS 92">*112 extension of the exemption to such investment income is, therefore, a distortion of its purpose. [S. Rept. 91-552 (1969), 1969-3 C.B. 423, 469-470.]

Such legislative history demonstrates clearly that the rules of section 512(a)(3) were intended to provide an alternative method for determining the amount of the unrelated business taxable income of a social club and were not intended merely to limit the income otherwise determined under section 512(a)(1). Section 512(a)(1) provides a rule which is generally applicable to exempt organizations and taxes any income that they derive from regularly carrying on a trade or business. However, the obvious purpose of the rules under section 512(a)(3) was to provide that, in the case of a social club, any income derived by the organization from dealings with nonmembers was to be subjected to taxation. Congress clearly considered that nonmember income should not be used to subsidize the activities carried on for members, and there is absolutely no reason to believe that Congress meant for such a rule to apply only to income derived from a trade or business regularly carried on. In fact, the Treasury Explanation expressly1983 U.S. Tax Ct. LEXIS 92">*113 rejects such a possibility, and the discussion in the committee reports of investment income also shows that the rules of section 512(a)(3) were not to be limited to income from a trade or business regularly carried on. If the Krewe's position were adopted, investment income or income from a business not regularly carried on could be used to subsidize the activities of members, and such a result is manifestly inconsistent with the objective of section 512(a)(3) and its legislative history.

In support of its position, the Krewe relies on certain statements contained in the Senate Finance Committee report:

Both the House bill and the committee amendments extend the unrelated business income tax to all exempt organizations (except United States instrumentalities created and made tax exempt by a specific act of Congress). The organizations newly made subject to this tax include churches and conventions or associations of churches, social welfare organizations, social clubs, fraternal benefit societies, employees' beneficiary organizations, teachers retirement fund associations, benevolent life insurance associations, cemetery companies, credit unions, mutual insurance companies, 1983 U.S. Tax Ct. LEXIS 92">*114 and farmers cooperatives formed to finance crop operations.

80 T.C. 755">*765 As under present law, this tax does not apply unless the business is "regularly" carried on and therefore does not apply, for example, in cases where income is derived from an annual athletic exhibition. In the case of membership organizations, income resulting from charges to members for goods, facilities, and services supplied in carrying out the exempt function is not subject to tax.

[S. Rept. 91-552, supra, 1969-3 C.B. at 467; emphasis added.]

From such statements, the Krewe argues that all the organizations subjected to the unrelated business tax by that legislation are subject to the "regularly carried on" requirement. However, in our view, such an interpretation of the committee report takes the underlined sentence out of context and disregards the legislative history dealing particularly with the treatment of social clubs. The quoted material indicates that the unrelated business tax is being made applicable to virtually all exempt organizations, and some of those organizations are subject to the general rule of section 512(a)(1) for defining the income subject to tax. 1983 U.S. Tax Ct. LEXIS 92">*115 A reading of the entire legislative history shows that the underlined sentence must have been intended to apply to those organizations which are subject to the general rule of section 512(a)(1), but it is utterly inconsistent with the particular discussion of social clubs to construe that such sentence was also intended to apply to them. Accordingly, we conclude and hold that the concession income and interest received by the Krewe are unrelated business taxable income within the meaning of section 512(a)(3). ³ See generally Council of British Societies in Southern California v. United States, an unreported case ( C.D. Cal. 1978, 42 AFTR 2d 78-6014, 78-2 USTC par. 9744).

1983 U.S. Tax Ct. LEXIS 92">*116 The next issue for decision is whether the Krewe is entitled to offset the expenses of staging the invasion and parade against the concession income received by it. The resolution of such issue depends upon whether the expenses of staging the invasion and parade were "directly connected with the production" of the concession income within the meaning of section 512(a)(3)(A). In this case and in his proposed regulations, the 80 T.C. 755">*766 Commissioner takes the position that to be deductible under such provision the expenses must be "directly connected with the income and incurred in the production of such income." Sec. 1.512(a)-3(b), Proposed Income Tax Regs., 36 Fed. Reg. 8808, 8809 (May 13, 1971).

The term "directly connected with" is also used in section 512(a)(1) to describe the deductions which are allowable in computing the unrelated business taxable income derived from an unrelated trade or business regularly carried on by an exempt organization subject to that provision. The regulations under such provision take the position that the "directly connected with" language has the effect of imposing a requirement in addition to that otherwise applicable1983 U.S. Tax Ct. LEXIS 92">*117 to a claimed deduction and that to satisfy such requirement, an expense must have a "proximate and primary" relationship to the carrying on of the unrelated trade or business. Sec. 1.512(a)-1(a), Income Tax Regs. The meaning of the requirement of section 512(a)(1) was considered by the Court of Claims in Iowa State University of Science & Tech. v. United States, 205 Ct. Cl. 339">205 Ct. Cl. 339, 500 F.2d 508">500 F.2d 508 (1974). The university operated a commercial television station, and the court held that such activity constituted an unrelated trade or business the income from which was taxable. The university also operated noncommercial AM and FM radio stations, and the court had to decide whether the expenses of operating the radio stations could be included in computing the income on which the university was taxable. The court examined the cases involving membership organizations which carried on income-producing activities and in which it was held that the income-producing activity was a separate activity and that only the expenses of carrying on that activity could be offset against the income from such activity. See, for example, Five Lakes Outing Club v. United States, 468 F.2d 443">468 F.2d 443 (8th Cir. 1972);1983 U.S. Tax Ct. LEXIS 92">*118 Adirondack League Club v. Commissioner, 55 T.C. 796">55 T.C. 796 (1971), affd. per curiam 458 F.2d 506">458 F.2d 506 (2d Cir. 1972). The court concluded that for purposes of applying section 512(a)(1), a similar test should be applied, that the operation of the commercial television station was a separate activity, and that only the expenses of carrying on that activity could be offset against the income derived therefrom. See also Rensselaer Polytechnic Inst. v. Commissioner, 79 T.C. 967">79 T.C. 967 (1982); Disabled American Veterans v. 80 T.C. 755">*767 , 227 Ct. Cl. 474">227 Ct. Cl. 474, 650 F.2d 1178">650 F.2d 1178 (1981), unreported supplemental opinion, June 22, 1982 (50 AFTR 2d 82-5206, 82-2 USTC par. 9440).

We are convinced that to carry out the purpose of section 512(a)(3), a similar test must be applied. The staging of the invasion and parade were principal activities of the Krewe, and those activities would have been carried on irrespective of the concession income. Thus, the invasion and parade were activities carried on independently of the operation of the1983 U.S. Tax Ct. LEXIS 92">*119 concessions, and the expenses of those activities were independent from the production of the concession income. On the other hand, the expenses of securing the seating, of securing and distributing the refreshments, and of producing and selling the logbooks, were the only expenses directly related to the production of the concession income, and since the Krewe received only a share of the net income from such concessions, those expenses have been allowed in computing the Krewe's unrelated business income.

Moreover, the adoption of the interpretation urged by the Krewe would frustrate the purpose of section 512(a)(3). The purpose of that provision is to tax the income which a social club receives from nonmember sources; thus, such income cannot be used to subsidize the activities of the members without being subject to taxation. If the position of the Krewe were adopted, the concession income would wholly avoid taxation. Such income could be used to subsidize the staging of the invasion and parade without being subjected to taxation. To carry out the purpose of section 512(a)(3), the production of the concession income must be viewed as a separate activity, and in determining1983 U.S. Tax Ct. LEXIS 92">*120 the amount subjected to taxation, only the expenses directly connected with the production of such income are deductible. Hence, we hold that the Krewe is not entitled to deduct the expenses of staging the invasion and parade.

The last issue for decision is whether interest from the special ship account constituted exempt function income. The Krewe maintains that for 364 days a year, the ship was moored at a pier in downtown Tampa where it could be viewed by the public; thus, it argues that during such time, the ship served an educational purpose and that therefore the interest from the special ship fund was used for a purpose described in 80 T.C. 755">*768 section 170(c)(4). The Commissioner disputes that the interest from such fund was set aside as required by section 512(a)(3)(B) and that such interest was used for an educational purpose within the meaning of section 170(c)(4). The Krewe has the burden of proving that the income from the special ship fund constituted exempt function income. Rule 142(a), Tax Court Rules of Practice and Procedure; Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933). In our view, the Krewe has wholly failed to prove that the fund was1983 U.S. Tax Ct. LEXIS 92">*121 set aside for purposes described in section 170(c)(4).

The Krewe did provide a marker setting forth historical information, but the public was not allowed aboard the ship. Other than to state that the fund was established to maintain the ship, and that the public could look at such ship from the pier, the Krewe introduced no evidence showing that the income from the fund was used for an educational purpose. The record shows that the ship was constructed to participate in the mock invasion, and the mere fact that at other times, it was available for the public to view is not enough to show that the income from the special ship fund served an educational purpose. Accordingly, we hold that the Krewe has failed to prove that the income from the special ship fund constituted exempt function income. ⁴

1983 U.S. Tax Ct. LEXIS 92">*122 Decision will be entered for the respondent.