Rev. Rul. 56-526

Advice has been requested concerning the applicability of the cabaret tax to amounts paid for food, refreshment, or merchandise, in a room entirely separate from the room in which entertainment is offered.

The type of establishment to which this question is pertinent is illustrated as follows: The establishment contains a dining room and a ballroom separated by a solid wall. There are separate entrances from the outside to both the dining room and the ballroom. Dining room patrons cannot witness therefrom the entertainment in the ballroom. Those dining room patrons who wish to enter the ballroom must leave the dining room by its outside entrance, purchase an admission ticket and enter the ballroom by means of the outside entrance thereto.

Section 4231(6) of the Internal Revenue Code of 1954 imposes a tax on all amounts paid for admission, refreshment, service, or merchandise, at any roof garden, cabaret, or other similar place furnishing a public performance for profit, by or for any patron or guest who is entitled to be present during any portion of such performance. The term `roof garden, cabaret, or other similar place' includes any room in any hotel, restaurant, hall, or other public place where music and dancing privileges or any other entertainment, except instrumental or mechanical music alone, are afforded the partons in connection with the serving or selling of food, refreshment, or merchandise.

Section 101.14 of Regulations 43, made applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954-2, 47, provides that amounts paid for refreshment, service, or merchandise, in a room which is entirely separate from the room in which entertainment is furnished are not subject to tax, provided that the patrons in such separate room may not witness the entertainment and any door in the wall or partition separating the two rooms remains closed during the period of the entertainment, except when persons pass from one room to another.

Mimeograph 5699, C.B. 1944, 647, sets forth certain rules in clarification of the above stated provisions of the regulations. It is stated in Mimeograph 5699 that where the patrons or guests in the related room cannot witness the entertainment in another room but acquire the right to enter the entertainment room by paying an admission charge or other stipulated sum, the cabaret tax applies to all payments for refreshment, ect., (including such admission charge or other stipulated sum) made by or for those patrons or guests in the related room who exercise the right of entry into the entertainment room by paying such admission charge or other stipulated sum.

It is now held that, where entertainment is offered in a room entirely separate from the room in which food, refreshment, or merchandise is sold, the test with respect to the cabaret tax liability in such a case is whether there is one operation or two, and the fact that patrons go out on public or private property in passing from the entertainment room to the room where such food, refreshment, or merchandise is sold is not a factor in determining the applicability of the tax.

The basic question to be resolved is whether the operation of the room in which food, refreshment, or merchandise is sold is so independent of the operation of the entertainment room that they can be regarded as two separate operations, or whether they are so interdependent that they must be regarded as one operation. This question must be resolved on the basis of the facts and circumstances in each case.

A significant circumstance to be considered is the amount of any charge for admission to the entertainment room. Where a bona fide admission charge is made to enter the entertainment room in which the selling or serving of food and refreshments is not permitted or is merely incidental to the furnishing of of music and dancing privileges, two operations are involved and liability for admissions tax only under section 4231(1) of the Code is incurred. Under such circumstances, the room in which food and refreshments are sold is not a related room and amounts paid therein for food and refreshments by or for patrons or guests are not subject to the cabaret tax even though such patrons or guests may, after paying the admission charge, enter the entertainment room to witness or participate in the entertainment.

If, however no charge or less than a bona fide admission charge is made to enter the entertainment room, such room presumably is maintained only to attract patrons to the room in which the food or refreshments are sold. This circumstance tends to establish the interdependent relationship of the rooms as an entertainment room and a related room, respectively, and, therefore, together they constitute a single operation. Accordingly, all amounts paid in the related room, as well as any amounts paid in the entertainment room for admission, food, and refreshments by all patrons who witness or participate in the entertainment, are subject to the cabaret tax. The cabaret tax does not apply to amounts paid for food or refreshments in the related room by patrons who cannot witness therefrom the entertainment in the entertainment room and who do not avail themselves of the privilege of entering the entertainment room to participate in or witness the entertainment.

For purposes of the foregoing ruling, the term `bona fide admission charge' means a charge equivalent to that which would be made if the room in which the entertainment is provided were operated without, or entirely independently of, the room in which the food and refreshments are sold. In determining the bona fides of an admission charge, a comparison may be made, in the light of local trade practices and conditions, with other separately operated dance halls or ballrooms, giving due consideration to the entertainment and facilities offered and the type of patronage attracted.

Mimeograph 5699, C.B. 1944, 647, is modified to the extent that it is inconsistent with this Revenue Ruling.