author:
Arnold :
      Muedock,

text:
    Underwriters’ Laboratories, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 101684, 104234.
    Promulgated February 26, 1942.

      Myron M. Oowen, Esq., Pressley B. Baldridge, Esq., and J. <7-Halls, Esq., for the petitioner.

      Franklm F. Korell, Esq., and Arthur Clark, Esq., for the respondent.
   OPINION.

Arnold :

It is contended by petitioner that it is exempt from Federal income and excess profits taxes and surtax on undistributed profits either as a nonprofit corporation organized and operated exclusively for charitable, educational, or scientific purposes or as a business league, no part of the net earnings of which inures to the benefit of any private stockholder or individual. Sec. 101 (6) and (7), Revenue Acts of 1936 and 1938.

It is not controlling that the petitioner was organized under the laws of Delaware as a nonprofit corporation, that it represented or aimed to furnish services at cost, and that its charter prohibited the distribution of dividends, Medical Diagnostic Association, 42 B. T. A. 610, 615. The actual purposes and functions of the corporation as disclosed by all the evidence are material. Roche's Beach, Inc. v. Commissioner, 96 Fed. (2d) 776. Each case must stand upon its own facts. “No rigid rule may be established as a gauge.” Retailers Credit Assn. of Alameda County v. Commissioner, 90 Fed. (2d) 47. To qualify as an exempt corporation under the statute, a corporation must be both organized and operated exclusively for the purposes specified in the statute.

We think petitioner was not organized and operated exclusively for charitable, educational, or scientific purposes.

Fire insurance companies were concerned about the hazards and risks assumed under policies of insurance issued by them to their patrons. They formed the National Board of Fire Underwriters in 1866 to promote their general interest. The National Board conducted investigations and research work to reduce hazards and minimize risks. In 1893 fire insurance companies were concerned about additional fire hazard resulting. from the installation of electrical lighting systems. Through their representative, the National Board, investigations and research were initiated in Chicago. This led in 1901 to the organization by them through the National Board of the Illinois company, which they financed to the extent of approximately $300,000. This company continued the research work theretofore done by the National Board. They caused petitioner to be organized through the same medium on October 31, 1936, and on November 5, 1936, petitioner acquired the assets and assumed the liabilities of the Illinois company and carried on the research work theretofore carried on by the National Board and later by the Illinois company. Petitioner was managed and controlled by 15 trustees, all of whom except two, the president and general manager of the National Board, are officers of stock fire insurance companies. Voting control is vested in the representative of stock fire insurance companies, the National Board.

The trustees had the power, under petitioner’s bylaws, to levy an assessment for dues and fix the amount thereof to be paid by each regular member other than the National Board, and it was to pay as many times that amount as it bad members at the date of the last annual meeting. It was not necessary, however, to levy assessments to carry on the work of petitioner as petitioner’s receipts from other sources not only paid its operating costs but resulted in a profit and the accumulation of a large surplus.

The petitioner entered into contracts for the testing, inspection, and label services with manufacturers only. Manufacturers are in business for profit and do not usually enter into contracts involving the expenditure of considerable money without some expected return. This is particularly true as to manufacturers which had testing laboratories of their own and to whom a contract with petitioner meant a duplication of expense. It is a matter of common knowledge that many manufacturing concerns operate testing laboratories in conjunction with and as a part of the business enterprise. The chief concern of manufacturers is a purchasing public. The publications issued by petitioner, its radio programs, and its motion picture films, while educational to a certain extent, also explain and emphasize the significance of petitioner’s labels and call attention, directly or indirectly, to the products inspected and approved by it and to the manufacturers of such products. The president of petitioner testified that it invited a wide distribution of the lists of inspected and approved products without cost as a part of its service. These lists and the publications were widely distributed. Their picture films are in constant circulation. The efficiency of the testing and inspection work of the petitioner was made known to the general public in order to inculcate a feeling of confidence in petitioner’s labels appearing on manufactured products offered for sale to the public. It created a sales appeal for the articles bearing its labels. These activities made petitioner’s contracts attractive to manufacturers. It is to be noted that petitioner, in its pamphlet “Testing for Safety”, distributed in particular to manufacturers to be read prior to the signing of an application for examination, test, report, and listing, states in part as follows:

; The long experience and methods employed for keeping in close touch with manufacturers, users, inspection authorities, and other similar sources of practical information have resulted in a wide recognition of the standards and recommendations of Underwriters’ Laboratories, Inc.
*******
The majority of underwriters in the United States, and many federal, state, and municipal authorities, plant operators, and architects, building owners and users either accept or require listing by Underwriters’ Laboratories, Inc., as a condition of their recognition of devices, systems, and materials having a bearing upon life and fire hazards, and upon theft and accident prevention.

Petitioner in other ways solicited business from manufacturers.

The petitioner was authorized to and did carry on scientific investigations, study, experiments, and tests to determine the relation of various materials and devices to life, fire, crime, and casualty hazards. The employment of scientific methods was inherent in the services it contracted to perform for manufacturers. Scientific methods were essential to. the proper performance of its contractual obligations. Except in a few instances the testing services were rendered to manufacturers only. The inspection and label service were given to manufacturers only. These services were not performed gratuitously, they were performed for a money consideration. The manufacturers were not members of petitioner. Their relations with petitioner were upon a strictly business basis. All manufacturers were required to pay for the tests made, whether or not they resulted in the approval of the product tested. Factory inspection and label services required the payment of an additional charge. The right to listings and labels was forfeited immediately upon failure to pay the required fees to petitioner. The petitioner made refunds to its label service clients aggregating $80,834.86 in 1937 and $25,303.43 in 1938. . These amounts were not included in gross income. The refunds were made upon recommendation to and with the approval of the board of trustees. Notwithstanding such refunds, petitioner realized very substantial profits. The refunds made in 1937 amounted to about one-third of its net income for that year, and in 1938 amounted to only about one-fifth of its net income for that year, inclusive of the refunds. The record fails to disclose why the entire profits were not refunded or the reason for the retention and accumulation of the remaining substantial profits, which, except for a comparatively small amount, were derived from its contracts with manufacturers. When the petitioner took over the research work conducted by the Illinois company it acquired that company’s accumulated operating surplus in excess of $1,000,000. Its personnel was also taken over by petitioner. The petitioner had therefore a background of extensive operating experience. Above petitioner’s name in all its publications the following appears: “Founded in 1894.” In other ways it called attention to its many years of operation and experience. Undoubtedly it could have established prices which would not have resulted in such substantial profits. Not having done so, it is reasonable to assume that it intended to operate for profit. West Side Tennis Club, 39 B. T. A. 149, affd., 111 Fed. (2d) 6,-certiorari denied, 311 U. S. 674. Its operation as a commercial enterprise was within the. powers enumerated in its charter as follows: “To contract with manufacturers and others for the examination, classification, testing and inspection of buildings, materials, devices and methods with reference to life, fire and casualty hazards, appurtenances thereto or the use thereof.” Its so-called educational work, its scientific activities, and even its so-called charitable work, the purpose of which was to keep trained and efficient personnel in its employment, all made petitioner’s contracts of value to manufacturers and were necessary and essential in the proper performance of its contracts and its continued successful operation. From one of its radio interviews contained in a “Bulletin of Education” it appears that petitioner had about 3,000 manufacturers under contract which operated more than 4,000 factories in all parts of the country and represented more than one hundred industries, and that such manufacturers submitted over 200,000 articles to the petitioner. Its list, published May 1939, of inspected electrical equipment alone is contained in a volume approximately six hy nine inches in size containing 430 pages. Its testing activity other than for manufacturers was infinitesimal as compared with the work done for manufacturers. It conducted some tests and research in collaboration with the Federal Bureau of Standards. This work was incidental and much of it pertinent to its work for manufacturers.

It claimed that no part of petitioner’s net earnings inured to the benefit of any private shareholder or individual. The petitioner’s charter provides that no distribution of any of its property or income shall be made to its members by way of dividends or distributions in liquidation or otherwise. “Profits may inure to the benefit of shareholders in other ways than in dividends.” Northwestern Municipal Assn., Inc. v. United States, 99 Fed. (2d) 460. In Northwestern Jobbers’ Credit Bureau v. Commissioner, 37 Fed. (2d) 880, affirming 14 B. T. A. 362, the court, after reviewing the services rendered by the bureau to its shareholders and other individuals, which services were reasonably necessary to the proper conduct of their business, stated: “To the extent that they [services] are provided at the cost of appellant [the bureau] and not compensated for by the recipients, they are a burden and loss to the net profits accrued and accruing to appellant. The net earnings of appellant in this way inure to the benefit of its shareholders and to private individuals.” To the same effect, see Adjustment Bureau of St. Louis Association of Creditmen, 21 B. T. A. 232. The following stated in Durham Merchant’s Association v. United States, 34 Fed. Supp. 71, is apposite here:

* * * It cannot be successfully maintained that this is a company whose net earnings do not inure to the benefit of private individuals because it has no capital stock and stockholders. Undoubtedly the growth and success of the enterprise render its usefulness greater to each of its membership. If its profits are used to expand and enlarge its activities, its members profit thereby. And this increased service and activity inures to the profit of its members.

It is not controlling that petitioner did not distribute its profits to its members. Berkeley Hall School, Inc., 31 B. T. A. 1116; affd., 84 Fed. (2d) 539. Article 101-1 of Regulations 94 and 101 and corresponding articles in prior regulations provide that the words “private shareholder or individual” refer to “individuals having a personal and private interest in the activities of the corporation.” The words “private individual” used in the statute are “broad enough to embrace private corporations, as well as natural persons.” Louisville Credit Men’s Adjustment Bureau v. United States, 6 Fed. Supp. 196.

The members of petitioner received the card system classifying the products tested and the annual lists and supplements thereto of manufacturers and their products approved by petitioner and subject to its inspection service and other publications. The cost of these publications were a part of the operating cost of the petitioner which was paid for by the manufacturers and not the members. Obviously the work of petitioner, the results of which were communicated to its members by means of its publications and otherwise, relieved them of making such tests in their own behalf and were of great benefit to them and saved them considerable expense and effort. As stated in Produce Exchange Stock Clearing Association, Inc. v. Helvering, 71 Fed. (2d) 142, no reason “is apparent for exempting an association which merely serves each member as a convenience or economy in his business.” The information given to members was related and germane to their own business endeavors. Most of the members, because of their business interests, received a peculiar, and additional benefit which was different from that received by the public in general. Although a reduction in rates for fire insurance resulted from the activities of petitioner and its predecessors, such reduction undoubtedly led to an increased volume of business and thereby greater earnings for the insurance companies. Through their membership in the National Board they managed and controlled the petitioner, since the National Board had a vote for each of its members. If petitioner’s operations were not for the special benefit of the insurance companies involved, it is not likely that they would have financed the National Board originally in doing research work of the character involved and would not have obligated themselves to pay assessments and dues to defray petitioner’s operating expenses when that activity was taken over by petitioner, particularly since the National Board was retained to promote their interests generally. They were benefited even more by the activities of petitioner than by its predecessors, since the activities originally carried on by the National Board had grown into a large and profitable’ enterprise wholly supported by revenue from other sources, thus giving them the benefit of petitioner’s investigation and research without cost. Petitioner’s charter implies that the members had a personal and private interest. It provides that in case of expulsion, death or resignation the members’ interest “in the corporation, its assets or property or the use and application thereof” terminates. Under the circumstances here, it can not be said that the earnings of petitioner did not inure to the benefit of any of petitioner’s members, even though they were not distributed. Retailers Credit Association of Alameda County., supra.

The petitioner argues that the term “charitable” clearly comprehends the establishment and maintenance of its pension and disability fund. It is not sufficient that the activities of petitioner may be classified as charitable in the broad sense that they tend to promote the well-doing and well-being of social men. See Ould v. Washington Hospital for Foundlings, 95 U. S. 303, cited by petitioner, which so defines a charitable use. Furthermore, this fund was not established by petitioner. It was established by the Illinois company. The petitioner since its organization in 1936 contributed a portion of the amount necessary for the maintenance of the pension plan. This is no more than many organizations engaged in business for profits are doing and it is not generally considered a charity. Cf. Harrison v. Barker Annuity Fund, 90 Fed. (2d) 286; and Young Men's Christian Association Retirement Fund, Inc., 18 B. T. A. 139, which are distinguishable on the facts. It is done not only as a protection for the employees, but more particularly as an inducement to trained and efficient employees to continue in their employment. It is in the nature of compensation for services rather than charity. That the pension plan was originally proposed as a means of reducing the constantly increasing number of men who had been trained by the Illinois company from leaving their employment with that company appears from the “Chronological listing of the Pension Plan”, petitioner’s exhibit numbered 92. Thus the pension plan was an aid to its business, an outgrowth of a business necessity rather than a charitable intent or purpose. Even if considered as charitable, it was merely incidental to its main purpose.

The petitioner relies upon Trinidad v. Sagrada Orden de Predicadores, 263 U. S. 578. In that case the corporation derived a substantial amount of income from rents, dividends, and interest from real estate and securities and from sales of wine, chocolate, and other articles. However, it was stipulated therein that the corporation was both organized and operated for religious, charitable, and educational purposes, that none of its income was applied to the benefit of any stockholder or individual member, and that all of its income was devoted to the purposes for which it was organized. The Court held that in view of the stipulated facts and in particular the stipulated fact that all of the income was devoted to the purposes for which the corporation was organized, it was not engaging in a business pursuit in using the properties to produce income to carry out its purposes. In that case the essential requirements of the statute for exemption were stipulated in taxpayer’s favor. That case is distinguishable on its facts.

It is true that the public received benefits by the elimination of certain hazards and resulting safety. That is the general effect of science, discovery, and invention, but statutory exemption of business concerns engaged therein and profiting therefrom is not justified on the ground that the public shares in the benefits resulting therefrom. The users of approved appliances forming a large part of the public ultimately paid for the benefits they receive, as the cost of petitioner’s services to manufacturers was reflected in the price of the appliances.

The evidence shows that the Commissioner of Internal Bevenue advised the -National Board in a letter dated January 10, 1940, that it was exempt from Federal income tax under section 101 (7) of the Revenue Act of 1988 and the corresponding provisions of prior revenue acts. The mere fact that the National Board, an exempt organization, controlled the petitioner by reason of its voting rights does not determine the status of petitioner under section 101 (6) and (7). See Sand Spring Railway Co., 21 B. T. A. 1291. The petitioner was not “organized and operated exclusively to feed” the National Board. See Roche's Beach, Inc. v. Commissioner, supra, in which a corporation engaged in business for profit was held exempt because it was organized and operated as a medium through which an exempt charitable foundation could operate, all its profits being used for the charitable purpose of the foundation. The general manager of the National Board testified that the National Board received its revenue from assessments on its membership and from subscriptions from nonmembers and that on several occasions when the petitioner rendered services to it, petitioner was compensated and paid therefor, it being understood that the services were rendered upon a cost basis. Hence the National Board used none of the profits of petitioner for its purpose as an exempt corporation.

The petitioner was a “business league” in the sense that its members had a common interest, but that is not sufficient to entitle it to exemption from tax under section 101 (7) of the Revenue Acts of 1936 and 1938. Retailers Credit Association v. Commissioner, supra; Northwestern Municipal Association, Inc. v. United States, supra. In order to be exempt no part of its net earnings may inure to the benefit of private shareholders or individuals. “Its activities should be directed to the improvement of business conditions in one or more lines of business as distinguished from the performance of particular services for individual persons”; and it should not “engage in a regular business of a kind ordinarily carried on for profit even though the business is conducted on a cooperative basis or produces only sufficient income to be self-sustaining.” . Art. 101 (7) — 1, Begulations 94 and 101. As heretofore stated, in our opinion, a part of petitioner’s net earnings inured to the benefit of private shareholders and individuals. It was also engaged in a regular business of a kind ordinarily carried on for profit. Fort Worth Grain & Cotton Exchange, 27 B. T. A. 983. The operation of its laboratories for manufacturers was its principal activity. It is therefore not a “business league” exempt from taxation within the meaning of section- 101 (7) of the Revenue Acts of 1936 and 1938. Art. 101 (7)-l, Regulations 94 and 101; Northwestern Jobbers' Credit Bureau v. Commissioner, 37 Fed. (2d) 880; Retailers Credit Association v. Commissioner, supra; Northwestern Municipal Association, Inc. v. United States, supra.

The remaining question to be determined is whether the petitioner is entitled to the deduction of $39,497.36 as an ordinary and necessary expense paid or incurred by it during the period from November 5 to December 31, 1936, under section 23 (a) of the Revenue Act of 1936.

The Illinois company paid $463,144.36 to the Equitable Life Assurance Society of the United States for the purchase of pension and disability policies of insurance for the benefit of its ofiicers and employees, effective as of January 1,1936. Subsequently it was determined that the premium cost of such policies was only $412,063.24. The Illinois company therefore had overpaid the premium and was entitled to a credit in the amount of such overpayment. Thereafter, and on or before September 25, 1936, the Illinois company and the insurance company agreed to the application as of October 1, 1936, of $39,497.36 of such credit to the purchase of additional annuity benefits for a certain class of employees of the Illinois company. The petitioner was incorporated on October 31, 1936, and it acquired the assets and assumed the liabilities of the Illinois company on November 5, 1936. Obviously the $39,497.36 had been paid by the Illinois company and applied by the insurance company to the supplemental contract prior to the existence of the petitioner. The expense of the supplemental contract was therefore neither incurred nor paid by the petitioner.

It was stipulated that the additional insurance contract was delivered to the petitioner sometime after November 5, 1936, and that on December 8, 1936, the petitioner agreed that this $39,497.36 was to be credited to premium annuity for approximately 140 of its employees. The contention of petitioner, based upon such stipulation, that the supplemental contract was not definitely consummated until December 8, 1936, and that the transaction was clearly one between the.petitioner and the insurance company, is untenable. Apparently the organization of the petitioner and its acquisition of the assets of the Illinois company effected no change in the personnel or the nature of the business as conducted by the Illinois company. In one of the pamphlets issued August 1937 by petitioner, setting forth the nature of its organization and service to and cost thereof to manufacturers, it is stated as follows:

Underwriters Laboratories, Inc., charged as a non-profit organization without capital stock, under the laws of the State of Delaware, was established to maintain and operate laboratories for the examination and testing of devices, systems and materials. Founded in 1894, the enterprise is sponsored by the National Board of Fire Underwriters, and is operated for service, not for profit.

Nevertheless the petitioner was legally an entity separate and distinct from the Illinois company. Cannon Manufacturing Co. v. Cudahy Packing Co., 267 U. S. 333; Peterson v. Chicago, Rock Island & Pacific Railway Co., 205 U. S. 364. The mere fact that the supplemental contract was delivered to petitioner and it agreed to accept it is not determinative of the question involved, since the liabiliy for the premium thereof had been incurred and paid prior to the existence of petitioner. Furthermore, since the petitioner agreed to assume all the liabilities of the Illinois company and since it took over the employees of the Illinois company to whom the supplemental contract applied, it followed as a matter of course that petitioner indicate in some formal way its acceptance, not only of the supplemental contract, but of the original contract as well.

It is alleged in the petition, but denied by respondent, that among the assets of the Illinois company taken over by the petitioner there was a credit balance with the insurance company of $39,497.36. There is no evidence as to the nature or character of the assets of the Illinois company acquired by the petitioner except that the principal assets consisted of cash, invesments, and plant and equipment. It does appear, however, that the Illinois company definitely agreed to the application of $39,497.36 of the overpayment credit with the insurance company to the supplemental contract. A liability of the Illinois company for the payment of the premium therefor was created. Whether or not such liability was set up on the books of the Illinois company or offset against its overpayment credit is immaterial. Even if petitioner had paid the premium by an offset against the credit it alleges to have received as an asset, it is not entitled to the deduction. The payment of a liability assumed upon the acquisition of assets is a capital expenditure and is not deductible as an expense of doing business. Athol Manufacturing Co., 22 B. T. A. 105; affd., 54 Fed. (2d) 230; Caldwell & Co., 26 B. T. A. 790; affirmed without opinion, 65 Fed. (2d) 1012.

The action of respondent in disallowing the claimed deduction of $39,497.36 is approved.

Keviewed by the Board.

Decision will be entered for the resfondent.

SteeNhageN and Mellott concur only in the result.

Muedock,

dissenting: I am impressed by tbe broad, general public service rendered by this corporation. It was organized by the National Board, itself an exempt corporation. The organization and operation of the petitioner was for a combination of educational, scientific, and charitable purposes. It was charitable, in the broad sense of that term, since it tended to promote the well-doing and well-being of social man. Ould v. Washington Hospital, 95 U. S. 303. The word “charitable” is used in the act in its broadest sense and includes scientific and educational activities. United States v. Proprietors of Social Law Library, 102 Fed. (2d) 481. Exemption is granted in recognition of the benefit derived by the public and is intended to aid the exempt corporation when it is not conducted for private gain. Trinidad v. Sagrada Orden de Predicadores, 263 U. S. 578. This corporation was rendering a tremendous service to the public.

The primary purpose of this corporation was to advise and safeguard the public so that hazards to which people and property are subjected would be avoided or minimized. The activities of the petitioner were directed to a very broad purpose, to the investigation and study of the relation of various materials, devices, systems, conditions, etc., to certain life and property hazards, in an effort to ascertain and publish for public use and benefit information that would advise the public how best to avoid or minimize such hazards. That, to my mind, is a charitable purpose. Without that purpose, in fact unless it was successful in that purpose, the petitioner could in nowise serve any other purpose. That is, any benefit which it may have been to the manufacturers or to insurance companies necessarily depended upon the accomplishment of this broad, general purpose of serving the public. Any benefits to manufacturers or insurance companies were purely incidental and not the primary purpose of this corporation. Cf. Northwestern Municipal Association, Inc. v. United States, 99 Fed. (2d) 460; Crooks v. Kansas City Hay Dealers’ Assn., 37 Fed. (2d) 83; Mutual Aid & Benefit Assn. v. Commissioner, 42 Fed. (2d) 619; Young Men's Christian Association Retirement Fund, Inc., 18 B. T. A. 139.

Obviously, the petitioner operated at a profit, but there would be no point to the exemption if the statute did not exempt corporations which operated at a profit. Evidence that a particular corporation made charges for its services which resulted in a large unneeded profit might tend to show that it was organized and operated for profit, but only if the destination of - those profits was some private stockholder or individual. Sand Springs Home, 6 B. T. A. 198. The petitioner ■tried to limit its charges for testing to cost, even to the extent of refunding a part of the amount originally collected. This, to me, indicates a corporation not organized for profit rather than otherwise. It tool? over a large surplus of its predecessor, and about half of that surplus was used to give its employees some social security. That use of its profits did not take it without the exempting provisions of the statute. The rest of its surplus for the most part was apparently invested in plant and equipment with some reserve funds.

No cash earnings ever inured or could inure to the benefit of any private stockholder or individual. It is said, however, that the profits inure to the benefit of the insurance companies and manufacturers, since they are used in expanding the plant which performs services for the insurance companies and maufacturers for which they would otherwise have to pay. In the first place, there is no evidence to support this argument and I don’t think we have a right to speculate that the services performed by the petitioner relieved the members or the manufacturers from “making such tests in their own behalf and were of great benefit to them and saved them considerable expense and effort.” The manufacturers were not “private stockholders or individuals” within the meaning of the act. The benefits to insurance companies inured to nonmember insurance companies, the Federal Government, states, municipalities, and the public, as well as to the members. General benefits of that kind are inherent in many cases that arise under this statute and their existence does not defeat the right to exemption. United States v. Proprietors of Social Law Library, supra. Once the broad, public, and charitable purpose of the petitioner is recognized, the incidental benefits pale into relative insignificance.

It seems quite clear to me that the petitioner was not operated for the benefit of manufacturers. Testing was only one of the services performed by the petitioner. It made many studies which were purely for the benefit of the public, were unrelated to the testing of any articles submitted by manufacturers, and were performed free without any possibility of profit to the petitioner. Furthermore, the testing of articles was done, not to serve the convenience of the manufacturers and as a substitute for testing which they themselves would have done, but to safeguard the public. The petitioner established its own tests for its own purposes. It did not test articles as a mere service to manufacturers to determine the general desirability of the articles or to satisfy the desire of the manufacturer for any particular kind of a test. It was in no sense enployed by the manufacturer and was not under the control of the manufacturer. The latter had no choice in the kind of test made or in the use made of the information obtained from the test. The petitioner tested only for certain hazards of its own selection and for the single purpose of safeguarding the public. The charges for testing- were not fixed upon a competitive basis, but upon cost. The labels’ were ’ designed as a part of the" educational system of the petitioner and' not as a m'oney making seheme.- • Commercial laboratories might be expected to perform such tests as the manufacturer desired, solely for the purpose of the manufacturer and under some control and direction of the manufacturer. Thus, the petitioner differs materially from any commercial testing laboratory which I can imagine.

I do not think exemption may be denied because of the interest of insurance companies in this petitioner and its activities. It is pretty well insulated from insurance companies by the National Board, which is itself an exempt corporation. No doubt the selfish interests of insurance companies were at least partly responsible for the formation of predecessors of the petitioner, but a broad, charitable purpose is apparent throughout. Exemption should not be denied because insurance companies may reap some incidental benefit from the activities of the petitioner, and it should be borne in mind that those insurance companies which may be represented in some way in the membership of the petitioner receive absolutely no benefits which are not received in equal measure by insurance companies which have no connection whatsoever with the petitioner. This fact distinguishes cases like Northwestern, Mwnicipal Assn., Inc. v. United States, 99 Fed. (2d) 460; Northwestern Jobbers' Credit Bureau v. Commissioner, 37 Fed. (2d) 880; Adjustment Bureau of St. Louis Association of Credit Men, 21 B. T. A. 232; and Durham Merchant's Assn. v. United States, 34 Fed. Supp. 71. All data obtained by the petitioner are just as readily available to nonmember insurance companies, to public officials, and to the public generally as they are to insurance companies which may happen to have representation in the membership of the petitioner. All services, so far as the public was concerned, were rendered free of charge and were available to all alike, whether members or not. The benefit to the insurance companies is said to be through a reduction of hazards and a consequently lower rate for insurance, which must result in increased business. Is it reasonable to believe that this indirect, remote, and doubtful benefit was the purpose for which the petitioner was organized and operated?

Furthermore, I think the petitioner would be exempt as a business league under section 101 (7) even if it were not exempt under 101 (6). Some of the requirements for exemption under (7) are the same as those for exemption under (6) and need no further discussion here. The majority opinion concedes that the petitioner meets a number of the requirements of a business league and those requirements need no discussion. But it is said that the petitioner is not a business league because it engaged in a regular business of a kind ordinarily carried on for profit. The petitioner has offered some proof to show that it was not engaged in that kind of business and to show that its nearest counterpart is found in the Bureau of Standards and in the Bureau of Mines, rather than in any commercial laboratory. The respondent says that the petitioner is like many commercial laboratories, but he has failed to offer any proof to show what commercial laboratories do or wherein they are like the petitioner. Furthermore, I have pointed out above a number of particulars in which the activities of this petitioner are shown to be different from those of a commercial nature which are competitive and engaged in for profit. The petitioner was not a competitor and was not offering services designed to meet the desires of manufacturers. Exemption is not to be denied the petitioner because it found a way to become self-supporting and carry on its great public work at the expense of manufacturers who derived an incidental benefit from its activities. There is no evidence that the public paid for the services of the petitioner through higher prices charged for approved and labeled goods. The public derived the chief benefit at no cost whatsoever. It seems to me that the petitioner meets the statutory requirements of a business league and should be exempt from tax, either on that ground or under 101 (6), or under both.

Smith and Leech agree with this dissent.

       SEC. 101. EXEMPTIONS EROM TAX ON CORPORATIONS.
      The following organizations shall be exempt from taxation, under this title— *******
      (6) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation;
      (7) Business leagues, chambers of commerce, real-estate boards, or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.


source: Caselaw Access Project

author: OppeR : Leech, Van Fossan,

license: Public Domain

text:
    Estate of F. S. Bell, Deceased, Laird Bell, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent. Frances L. Bell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 105150, 105151.
    Promulgated February 27, 1942.

      William N. Haddad, Esq., for the petitioners.

      John D. Kiley, Esq.,, for the respondent.
   OPINION.

OppeR :

It is not open to question that the interest of a life tenant limited to the right to receive income is taxable in full as such. Irwin v. Gavit, 268 U. S. 161. The Court there found “no doubt in our minds that if a fund were given to trustees for A for life with remainder over, the income received by the trustees and paid over to A would be income of A under the statute.” The question we have to decide is whether the price paid in one sum for that interest, arrived at by the parties for all practical purposes by computing the present value of a life estate for the life of a person of the age of the life tenant, can be made to partake of the nature of capital and the gain be limited as though a capital transaction had taken place by the mere process of concentration and anticipation. We do not think it can.

In Hort v. Commissioner, 313 U. S. 28, the Supreme Court had before it a similar question. There, by way of a compromise settlement, the taxpayer had required its lessee to make a cash payment in order to obtain the cancellation of the lease. In reaching the conclusion that the entire amount received was taxable as ordinary income, the Court said of the definition of gross income:

* * * Plainly this definition reached tbe rent paid prior to cancellation just as it would have embraced subsequent payments if the lease had never been canceled. It would have included a prepayment of the discounted value of unmatured rental payments whether received at the inception of the lease or at any time thereafter. * * * So far as the application of § 22 (a) is concerned, it is immaterial that petitioner chose to accept an amount less than the strict present value of the unmatured rental payments rather than to engage in litigation, possibly uncertain and expensive.

The latter consideration, of course, need not concern us here. As we have noted, the selling price was a close approximation of the discounted value of the probable future payments.

We are not unmindful of the observation in Irwin v. Gavit, supra, that “a gift of the income of a fund ordinarily is treated by equity as creating an interest in the fund”; nor that in Blair v. Commissioner, 300 U. S. 5, it was held that the assignment of income from a trust fund carried with it such a property interest in the fund that the transferee and not the transferor was taxable upon the income as received. Cf. Harrison v. Schaffner, 312 U. S. 579. But the statement quoted did not prevent the Court in the Go/oil case from holding that all of the payments received were taxable as ordinary income; and in the Blair case the question was not whether income from a life estate could be saved from the burden of the income tax but only the person upon whom that payment should be charged. We think the point is sufficiently answered by a further quotation from Hort v. Commissioner, supra:

The consideration received for cancellation of the lease was not a return of capital. We assume that the lease was “property”, whatever that signifies abstractly. * * * Simply because the lease was “property” the amount received for its cancellation was not a return of capital, quite apart from the fact that “property” and “capital” are not necessarily synonymous * * *. Where, as in this case, the disputed amount was essentially a substitute for rental payments which § 22 (a) expressly characterizes as gross income, it must be regarded as ordinary income, and it is immaterial that for some purposes the contract creating the right to such payments may be treated as “property” or “capital”.

See also Swastika Oil & Gas Co., 40 B. T. A. 798, affd. (C. C. A., 6th Cir.), 123 Fed. (2d) 382.

Even more than in Maass v. Higgins, 312 U. S. 443, where it was said that “conceding that the ownership of a bond involves both the right to receive principal and the right to receive income, it is a highly artificial concept that an interest payment is a disposition pro tanto of the latter right * * * ”; here transfer of the life estate, consisting only of the right to receive the income, should not be thought of as a diminution of capital merely because the income is lumped together and collected in a single payment.

These petitioners have no such right in the principal of the trust as would entitle them to any return of capital through deductions for the exhaustion or “shrinkage” of the interest represented by their life estates. Codman v. Miles (C. C. A., 4th Cir.), 28 Fed. (2d) 823; certiorari denied, 278 U. S. 654; Milton H. Friend et al., Trustees, 40 B. T. A. 768, 771; affd. (C. C. A., 7th Cir.), 119 Fed. (2d) 959; certiorari denied, 314 U. S. 673. The failure to give them an opportunity to recover any capital interest by offsetting a basis against the receipt of discounted income accordingly imposes no unfair burden. It is not as though they had bought the life interest, and thus had a cost basis of that right by virtue of the purchase. Such basis in the trust corpus as might otherwise have existed has been transferred to the trust, Revenue Act of 1936, sec. 113, or to the remainderman. Rodman E. Griscom, 22 B. T. A. 979; William H. Slack, Jr., 36 B. T. A. 105. It has not been lost. Its benefits will be recovered by one or the other of those transferees. If it is no longer available to petitioners, that is only because of the voluntary act by which they accomplished the transfer to the trust.

On the other hand the vendee of a life estate has a capital investment exhaustible by charges against income over its duration. Elmer J. Keitel, 15 B. T. A. 903; Floyd M. Shoemaker, 16 B. T. A. 1145. Cf. Citizens National Bank of Kirksville, Mo., 42 B. T. A. 539; affd. (C. C. A., 8th Cir.), 122 Fed. (2d) 1011. That this purchaser happened also to be the remainderman can not affect the principle and may even lack significance. See Elmer J. Keitel, supra, p. 907. Certainly nothing in section 24 (b) would stand in his way since its operation is limited to an “interest acquired by gift, bequest or inheritance”. See Ways & Means Committee Report, Revenue Act of 1921, 67th Cong., 1st sess., H. Rept. 350, p. 12. If that is so and these petitioners escape the tax upon this income whether received in due course or by anticipation, the payment of tax upon it will have been completely avoided, and we can eliminate the distinction from the Eort case, which petitioners seek to draw when they say that:

* * * The $140,000 paid by the tenant in that ease was clearly income (and was presumably deductible by the tenant); and if it was not taxable to the landlord, it was not taxable to anyone. * * *

We conclude that the payments received by petitioners in anticipation of their right to receive taxable income continued to partake of that character; that the transfer of their life estate had therefore the result merely of replacing taxable income; and that accordingly the consideration received was taxable in its entirety, as income from the life estate would have been.

We need not consider the further possible contention that assignment of the life estate to the owner of the remainder was in effect nothing more than a release of an outstanding interest and that it should not be treated as a sale or exchange. Hale v. Helvering (App. D. C.), 85 Fed. (2d) 819.

Reviewed by the Board.

Decision toill he entered wider Bule 50.

Leech,

concurring: Since the facts here support the same distinction from those in Lehman v. Commissioner, 109 Fed. (2d) 99, as was drawn in Marrs McLean, 41 B. T. A. 1266, I concur. Cf. Moses L. Parshelsky, 46 B. T. A. 456.

Van Fossan,

dissenting: I am of the opinion that the sale of the life interests in the two trusts should be treated as a saJe of property and taxed as capital gain.

Under Blair v. Commissioner, 300 U. S. 5, the life interest so created was “present property alienable as any other” and the assignment of such a beneficial interest is the assignment of the “right, title and estate in and to property.” There would- seem to be no ground to question that the sale for cash and its equivalent of the life interest was a sale of property. See also Commissioner v. Field, 42 Fed. (2d) 820.

The property was acquired by virtue of transfers in trust after December 31, 1920. Section 113 (a) (3) is, therefore, pertinent and petitioners5 bases are the same as those of the grantors of the trusts, adjusted as provided in section 113 (b). The parties stipulate that the adjusted bases of the grantors for the Thorncroft stock, as of the date of creating the trusts, are $461,327.96 as to Frederic S. Bell and $461,315.47 as to Frances L. Bell.

The life interests which were sold being property held by the taxpayers and their grantors under the trusts, for more than ten years (section 117 (c) (2)) and not falling in a category excluded from the capital gains provisions, it follows that the profit is to be treated as capital gain, taxable as such.

Hort v. Commissioner, 313 U. S. 28, on which the author of the prevailing opinion relies, is not authority to the contrary. That case involved the relinquishment of a lease in consideration of receipt of $140,000. The payment was held to be income because the relinquishment of future rents was in return for present payment. No sale or disposition of property was involved. The lessor merely got rid of the lease and was free to lease again. The payment was clearly a substitute for the rentals reserved in the lease. In the instant case the property was sold. The statute provides the basis for determining gain. To deny the application of the statute and hold the entire proceeds ordinary gain brings about a result which is at once unjustified in law and arbitrary in fact.

       SEC. 24. ITEMS NOT deductible. [Revenue Act of 1936.]
      » * 4 * * * V
      (b) Holders of Life or Terminable Interest. — Amounts paid under the laws of any State, Territory, District of Columbia, possession of the united States, or foreign country as income to the holder of a life or terminable interest acquired by gift, bequest, or inheritance shall not be reduced or diminished by any deduction for shrinkage (by whatever name called) in the value of such interest due to the lapse of time, nor by any deduction allowed by this Act (except the deductions provided for in subsections (1) and (m) of section 23) for the purpose of computing the net income of an estate or trust but not allowed under the laws of such State, Territory, District of Columbia, possession of the united States, or foreign country for the purpose of computing the income to which such holder is entitled.


author: SteRNHagen :

text:
    William E. Boeing, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 94779, 95704.
    [Entered March 9, 1942.]
   OPINION.

SteRNHagen :

This is a motion of the respondent for leave to file an amended answer. The substantive law of the case is now settled. The Circuit Court of Appeals for the Ninth Circuit has decided that, although the number of $5,000 exclusions, if any were allowable, is governed by the number of beneficiaries and not by the number of trusts, none whatever is allowable to this petitioner because the gifts were of future interests, Boeing v. Commissioner, 123 Fed. (2d) 86.

The petitioner took two exclusions, the Commissioner disallowed one and determined the deficiency on that ground, the taxpayer contested the disallowance in his petition to the Board and the Commissioner took issue on this point of law. The case was presented in October 1939, and both parties orally stated in open hearing that the issue as to whether the number of exclusions was governed by the number of beneficiaries was the only issue and that the deficiency depended on that alone. Briefs were filed on that issue. No suggestion was made at any time that because the gifts in question were of future interests no exclusions whatever were allowable, although that proposition was within the field of the respondent’s knowledge and was adumbrated in his brief by his reference to Commissioner v. Wells, 88 Fed. (2d) 339.

The Board decided the issue pleaded and reversed the Commissioner’s determination, entering a decision of no deficiency. No claim for an increased deficiency was made at or before the hearing and no motion was made for leave to amend the answer to make such a claim. No motion was madé for a rehearing on any ground, although by the Board’s Rule 19 such a motion was available. A petition for review was filed in the Circuit Court of Appeals for the Ninth Circuit and the future interest question was raised. The Court, on that ground, reversed the opinion and remanded the cause for further proceedings in harmony with the opinion, expressly stating that opportunity should be given the petitioner to present evidence on the future interest issue if he so desired. The Court also stated that it was not considering or deciding whether a decision should be entered for an increased deficiency “since no assertion of an additional deficiency has yet been made by the Commissioner in conformity with the statute.”

The mandate was filed in the Board November 29, 1941, and the Board, on December 3,1941, ordered “that the parties submit forthwith either their agreed final decision or their several memoranda in respect of the final decision to be entered.” The respondent, on December 11,1941, filed a motion (1) to vacate and set aside the Board’s report of February 1, 1940, (2) to permit him to file an amended answer claiming an increase in the deficiency, and (3) to grant the petitioner opportunity to present further evidence if desired. The petitioner, on January 20,1942, filed objection to the motion in which he stated that he did not desire to present evidence on the future interest issue, and asked for argument or an opportunity to file a brief. Briefs were ordered and have now been filed.

Section 1012 (e), Internal Revenue Code, which dates back to the Revenue Act of 1932, section 513 (e), and is similar to the Revenue Act of 1926, section 274 (e), relating to income taxes, provides:

(e). Incbease of Deficiency after Notice Mailed. — The Board shall have jurisdiction to redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount of the deficiency, notice of which has been mailed to the taxpayer, and to determine whether any penalty, additional amount or addition to the tax should be assessed — if claim therefor is asserted by the Commissioner at or before the hearing or a rehearing.

In Moise v. Burnet, 52 Fed. (2d) 1071, this provision of the 1926 Act was considered by the Circuit Court of Appeals for the Ninth Circuit. The Commissioner in the answer had alleged an error in the determination of the deficiency, the plain effect of which was that the deficiency determined was too small. The Board held that by necessary implication the answer must be read as the assertion of a claim for increased deficiency, and determined an increased deficiency. The Court reversed, saying (p. 1073) :

The Commissioner did not properly “assert” “claims” for additional deficiencies, in the amended answers filed by him before the Board. The rule that tax statutes should be liberally construed in favor of the taxpayer clearly requires that a claim should be actually and definitely made, and not left to conjecture, inference, or interpretation. No words of claim, request, or demand were used by the Commissioner. He must be bound by his pleadings, and cannot be assumed to have intended to present a claim that he did not actually assert.

In the present case the answer contained nothing which by its terms or by implication intimated an error in the deficiency determination or an assertion of claim for increased deficiency, and counsel expressly agreed at the hearing that the issue was as narrow as it was framed in the pleadings. .The Moise decision therefore prohibits an increase in the deficiency under the pleadings now on file. See also Fifth Avenue Bank of New York, Executor, 32 B. T. A. 701; affd., 84 Fed. (2d) 787; John Gerber Co., 44 B. T. A. 26, 31; Cascade Milling & Elevator Co., 25 B. T. A. 946. Cf. Kottemann v. Commissioner, 81 Fed. (2d) 621.

No claim was asserted by the respondent at or before the hearing. No motion was made for a rehearing and therefore no rehearing was had, so no claim was asserted at or before a rehearing. By Bule 19 a motion for rehearing must, except by special leave, be filed within thirty days, so the time for such a motion has expired. If the present motion of respondent be considered as a motion for rehearing, although it is not couched in those terms, it is plainly not a timely motion.

The present motion is for leave, after the mandate of the appellate court and more than two years after the hearing before the Board, to amend the answer to assert a claim for increased deficiency. If such leave may be granted, it would be in defiance of the statute which, while giving the Board jurisdiction to increase the deficiency, expressly imposes the condition that claim therefor shall be asserted at or before the hearing or a rehearing. Apparently it is thought that the condition may be disregarded when the claim for increased deficiency is founded upon an intervening decision. But this would be a constructive insertion in the statute of an exception and should be impelled by clear necessity. It would prevent finality of decision in many cases in which are lurking questions which have not been raised but are pending in other cases. It is trite to say that if, at this late stage of the proceeding, the respondent may amend the answer to raise such a question which has emerged from another case, the taxpayer in many cases can be expected to seek to amend the petition, with the resulting projection of the proceeding into new fields for an uncertain period. This is no more permissible on one side than the other, and we think it should be prevented before it gets a start.

There is no need to be concerned now by cases in which the present question of procedure has not been raised.

The law of the case as laid down by the Circuit Court of Appeals for the Ninth Circuit is that the petitioner is entitled to no exclusions and the deficiency was therefore correctly determined, and decision of such deficiency will therefore be entered.

The respondent’s motion for leave to claim an increased deficiency is denied.

ENTERED Mar. 9,1942.