Rev. Rul. 65-49

The Internal Revenue Service has been requested to clarify the phrase `attains cabaret status' as used in Revenue Ruling 63-154, C.B. 1963-2, 541.

Revenue Ruling 63-154 provides that the Service will no longer litigate cases involving liability for cabaret tax on amounts paid at an establishment for food, refreshment, service, or merchandise ordered and served before the establishment attains cabaret status or after such status has been terminated. Under the Revenue Ruling, if either the ordering or the serving of the food, refreshment, service, or merchandise takes place during a period when the establishment is in cabaret status, then the amounts paid for such food, refreshment, service, or merchandise are subject to the cabaret tax. Typical of an establishment to which the question is pertinent is one whose operations are described below.

The operations of the establishment include a gambling casino and a theater-type restaurant, both of which are located in the same building. The restaurant, which consists of a room completely separated from all gambling activities, will seat in excess of 500 persons. It has a stage and related equipment so arranged that all persons seated anywhere inside the room can witness any performance furnished in conjunction with the serving of food, refreshments, etc. The performances are repeated in accordance with a daily schedule of business hours as follows:

 Period                  Open for business           Entertainment

For approximately 1 hour between each period, as indicated in the above schedule, the restaurant is closed for business. All patrons are requested to vacate the room within approximately a half-hour following the termination of the entertainment so that the room can be closed and cleaned.

Each patron of the restaurant room is obligated to pay a minimum charge, which varies dependent upon the particular period and evening of the week involved. In consideration of this minimum charge, each patron is entitled to be served food, refreshments, etc., equal to the amount thereof and to be present during the entertainment. Patrons are advised to arrive well before the enterainment commences, since service of food and refreshments is discontinued at the time each performance begins.

The restaurant is a cabaret within the meaning of section 4231(6) of the Internal Revenue Code of 1954 and the minimum charge required to be paid by each patron is treated as a charge subject to the cabaret tax. The specific question presented is whether additional amounts (over and above the minimum charge) paid by patrons for food, refreshment, service, or merchandise are subject to tax when ordered or served either before or after the entertainment.

Section 4231(6) of the Code provides, in relevant part, that a tax is imposed 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.

As indicated in Revenue Ruling 63-154, amounts paid at an establishment for food, refreshment, etc., ordered or served during the time the establishment is in a cabaret status are subject to the tax. It follows, then, that actual payment of the charges may be made before or after the time the establishment is in a cabaret status and still be subject to the tax.

The period of time during which an establishment is in a cabaret status will encompass, but not necessarily coincide with, the period of time during which a performance or other form of taxable entertainment is presented. In this connection, a cabaret status will also be attained whenever an admission, minimum, or similar charge is imposed by the establishment, payment of which affords the patrons the right to witness or participate in any form of taxable entertainment.

In the instant case, patrons are aware of two significant policies of the management of the establishment: (1) The establishment makes a designated minimum charge, payment of which confers upon patrons the right to remain in the room to witness the performance, and (2) the management recommends that all patrons who desire service should arrive well before the entertainment begins, since the serving of food and refreshments ceases once the performance commences.

Based upon all the facts and circumstances here present, it is held that the establishment attains cabaret status at the earlier of either (1) the time the entertainment starts, or (2) the time any charge (such as an admission, entertainment, minimum, cover, or similar charge) is imposed upon the patrons which affords them the right to be present during the entertainment. That status is retained until the termination of all taxable entertainment for each day's operation. Accordingly, the tax imposed by section 4231(6) of the Code attaches to all amounts paid for admission, refreshment, service, or merchandise ordered or served from the time this establishment is opened for business until the entertainment ends each day.

Revenue Ruling 63-154 is clarified.