Docket No. 576.
I. Herman Sher, Esq., for the petitioner. Sidney B. Gambill, Esq., and Laurence F. Casey, Esq., for the respondent;
1. A New York stock corporation, the successor of an unincorporated association organized as a memorial and operating a radio as a free public forum for the dissemination of liberal and progressive social views, but organized as a business corporation with wide business purposes and actually operating a commercial business in a competitive field, the income of which was used in part to pay interest on loans, which loans were payable out of surplus, and the profits of which were used and destined to support its commercial as well as welfare functions, is not tax exempt as a civic organization not organized for profit but operated exclusively for the promotion of social welfare, even though its profits were not distributed as dividends and its civic functions were regarded by its management as of primary importance.
2. An amount merely pledged or promised to be paid to a corporation, to be repaid out of surplus, with the understanding that a failure of surplus would avoid the liability, is not a part of equity invested capital defined as ‘Money previously paid in for stock, or as paid-in surplus, or as a contribution to capital‘ under section 718, Internal Revenue Code, even though the pledgor by regarded as the owner of all the outstanding shares of the taxpayer corporation. I. Herman Sher, Esq., for the petitioner. Sidney B. Gambill, Esq., and Laurence F. Casey, Esq., for the respondent;
The Commissioner determined a deficiency of $4,750.85 in 1940 excess profits tax. The petitioner claims (1) exemption from taxation, or, (2) in the alternative, the inclusion of $250,000 in invested capital;
FINDINGS OF FACT.
The petitioner was organized on March 15, 1928, under article 2 of the Stock Corporation Law of the State of New York, for the following stated purposes:
(a) To engage in the business of broadcasting and/or radio-casting by means of radio broadcasting machines or any other devices, machinery, or equipment whatsoever. To own, sell, hold, lease, equip, maintain and operate broadcasting and receiving stations and any connections between such stations;
(b) To transmit, send and broadcast over the radio, news, talks, speeches, lectures, musical concerts, plays, theatricals, recitals, programs, revues, readings, reports, signals, and all matter and things of any kind, nature and description whatsoever that may be transmitted, sent, and broadcast by radio;
(c) To apply for, obtain, purchase, or otherwise acquire, and to register, hold, own, use, sell, assign, or otherwise dispose of any and all trademarks, trade- names, processes, formulas, trade secrets, inventions, improvements and devices of all kinds whether secured under letters patent of the United States or of any foreign country, and to use, exercise, develop, assign, or grant licenses in respect thereto, or to otherwise turn to account, any such trade secrets, trademarks, patents, licenses, processes or formulas;
(d) To purchase or otherwise acquire real estate and leaseholds or any interest therein such as may be necessary and incidental for the purposes hereinbefore expressed; and to own, hold, improve, sell, or encumber the same as may be necessary for the purposes hereinbefore expressed. To purchase personal property of any and all kinds that may be lawfully acquired and held by a business corporation, in particular— shares of stock, mortgages, bonds, merchandise necessary to the purposes hereinbefore expressed, book debts, and claims, copyrights, manuscripts, trademarks, tradenames, grants, patents, patent rights, licenses, concessions, or any other interest whatsoever in real or personal property;
(e) To enter into, make, form and carry out contracts of every sort and kind which may be necessary or convenient for the business of this company, or business of a similar nature with any person, firm, corporation, private, public or municipal, body politic under the government of the United States or any state, territory or county thereof, or any foreign government, so far as, and to the extent that the same may be done and performed by corporation organized under the Business Corporation Law.
(f) To do all and everything necessary, suitable and proper for the accomplishment of any of the purposes, or the attainment of any of the objects, or the furtherance of any of the powers hereinbefore set forth, either alone or associated with other corporations, firms or individuals, and to do any other act or acts, thing or things incidental or pertaining to or growing out of or connected with the aforesaid business or powers or any part or parts thereof, provided that the same be not inconsistent with the law under which this corporation is organized.
(g) To borrow money, to issue bonds, debentures, promissory notes, and other obligations secured or unsecured of the corporation from time to time for monies borrowed, or in payment for property acquired, or for any of the other objects or purposes of the corporation, or for any of the objects of its business; to secure the same by mortgage or mortgages or deed or deeds of trust, or pledge or other lien upon any or all property, rights, privileges or franchises of the corporation wheresoever situate or acquired or to be acquired; to sell, pledge, or otherwise dispose of any and all debenture or other bonds, promissory notes and other obligations in such manner and upon such terms as the Board of Directors may deem best.
The certification of incorporation also provided:
The total number of shares that may be issued by the said corporation is one hundred (100). All of said shares are to be common and with no nominal or par value. The capital of the corporation shall be at least equal to the sum of the aggregate par value of all issued shares having a par value plus the aggregate amount of consideration received by the corporation for the issuance of shares without par value plus such amounts as from time to time by resolution of the Board of Directors may be transferred thereto.
On March 27, 1928, bylaws were adopted, including:
ARTICLE VI. DIVIDENDS. Section 1. The Board of Directors shall by vote declare dividends from the surplus profits of the Company whenever in their opinion the condition of the Company's affairs will render it expedient for such dividends to be declared by them.
Petitioner's sole activity has always consisted of the ownership and operation of the radio station WEVD; It has filed income tax returns for all years and has paid income taxes for years when it had taxable income. In its returns for 1928 to 1931, its business was described as ‘Radio Broadcasting—Educational—Non Profit Basis‘ and in later returns its business was described as ‘Radio Broadcasting,‘ or ‘Operation of radio station,‘ or ‘Public Utility.‘ Its return for 1940, on an accrual basis, was filed in the third district of New York, and its business was described as ‘Owners & Operators of Radio Station.‘
The petitioner succeeded an unincorporated association called Debs Memorial Radio Fund, organized in about February 1927, the members of which included, among others, Norman Thomas, Morris Hillquit, John Haynes Holmes, Clarence Darrow, Theodore Debs, Adolph Held, Joseph Baskin, Julius Gerber, Gustave A. Gerber, Arthur Garfield Hays, and Roger Baldwin. After the death of Eugene Victor Debs in November 1926, the national executive committee of the Socialist Party decided upon a memorial to him. It was thought that a radio station from which ‘progressive social viewpoints‘ might be broadcast would be a fitting memorial. As New York City was considered the logical place for such a station, the New York members undertook the responsibility and in February 1927 the association was organized.
In August 1927 a contract was made for the purchase of a 500-watt part-time station known as WSOM for a down payment of a couple of thousand dollars and monthly payments thereafter. The letters of the station were changed to WEVD, upon application to and permission of the Federal Radio Commission, now Federal Communications Commission, about October 1927. Operation of WEVD was commenced in November 1927. In the beginning there were no commercial or sponsored broadcasts; but expected contributions failed to materialize and contributions were insufficient for the operation of the station. Commercial broadcasts were then begun and were gradually increased; but the income therefrom was not sufficient to cover the cost of operation of WEVD. In the early part of 1928, in order to limit the personal liability of the individuals responsible for the operation of WEVD and to provide a better form of management and control, the corporate form was adopted. On March 27, 1928, the petitioner issued its 100 shares of authorized capital stock to Norman Thomas, chairman of the Debs Memorial Radio Fund, for and on behalf of the trustees of that fund, for the radio broadcasting station WEVD, together with all equipment and other assets, but subject to its liabilities up to $10,000. Norman Thomas personally paid nothing for the shares. The balance sheets of petitioner as of October 31, 1928 to 1933, inclusive, and as of December 31, 1933 to 1942, inclusive, show ‘Capital‘ of $6,064.31, and this is shown on the 1940 tax return as item 14, ‘Capital stock: * * * (b) Common Stock.‘
During the years ended October 31, 1928 to 1931, inclusive, the petitioner's receipts from commercial broadcasting and donations, and its net income or losses were as follows:
+------------------------------------------------+ ¦Year ended ¦Commercial ¦Donations¦Net income ¦ +-------------+------------+---------+-----------¦ ¦ ¦broadcasting¦ ¦or (loss) ¦ +-------------+------------+---------+-----------¦ ¦Oct. 31, 1928¦$4,222.00 ¦$1,654.00¦($1,641.79)¦ +-------------+------------+---------+-----------¦ ¦Oct. 31, 1929¦8,951.93 ¦11,351.93¦4,338.45 ¦ +-------------+------------+---------+-----------¦ ¦Oct. 31, 1930¦16,873.05 ¦3,706.97 ¦(1,675.80) ¦ +-------------+------------+---------+-----------¦ ¦Oct. 31, 1931¦22,238.95 ¦9,487.98 ¦(4,873.89) ¦ +------------------------------------------------+
In 1931 the petitioner was in a ‘distressed‘ financial situation. An order of the Federal Communications Commission was pending to show cause why the WEVD license should not be canceled upon the ground that its equipment and management did not meet prescribed requirements, and extended hearings took place. The petitioner sought the financial assistance of the Forward Association, a New York corporation, hereinafter called Forward, from which a contribution had been expected at the time of the purchase of WSOM. Forward agreed to give financial assistance to petitioner under certain conditions set forth in resolutions adopted by its board of directors in August 1931, as follows:
WHEREAS, the Debs Memorial Radio Fund, Inc. is the owner of a license from the Federal Radio Commission to operate a Radio Station known as WEVD, operating on 1300 Kc.
WHEREAS, the station is being operated as a free and public forum.
WHEREAS, it is desired to improve and extend the facilities of the station and to increase its educational, cultural and public welfare service and it has no means for financing the said activity.
Be it resolved that the Forward Association advance all monies necessary to improve and extend the said activities up to the sum of $250,000. The moneys are to be advanced as and when necessary in the discretion of the Board of Directors of the Debs Memorial Radio Fund, Inc.
The stock of the Debs Memorial Radio Fund, Inc. is to be issued to the nominees of the Forward Association and held by them until the amounts advanced shall be repaid;
The Forward Association shall not be entitled to repayment of any of the sums advanced until the station is able to pay all necessary running expenses and earn a surplus. Only such surplus shall be used for repayment.
When all the moneys advanced shall be repaid the stock shall be held in trust by the directors who shall carry out the educational and cultural activities of WEVD. In case of death or resignation of a director the remaining directors shall elect a successor.
When a director fails to attend three consecutive meetings the Board may declare his place vacant and elect a successor.
That as soon as it shall be deemed advisable the stockholders and directors shall take all the necessary action to amend the certificate of the corporation of the Debs Memorial Radio Fund, Inc. or take such other necessary steps to reorganize the Debs Memorial Radio Fund, Inc. so that it shall become a membership corporation to exist and operate as a non-profit sharing corporation and to use its resources and its surplus for the development and extension of the radio facilities and for such other educational, social and civic purposes.
None of the directors and/or stockholders of the Debs Memorial Fund, Inc. as at present constituted, or under any reorganization plan shall be entitled to any of the profits, surplus or property of the Debs Memorial Radio Fund, Inc. and none of the directors or officers receive any salary for the services they render to the station WEVD except such who may be called upon to do any specific work and such special engagement shall be approved by the Board of Directors.
In January 1932 Forward deposited $70,000 in the Amalgamated Bank & Trust Co. of New York for the benefit of petitioner, the certificate of deposit for which was immediately filed with the Commission to show that petitioner had the means to continue operation of WEVD. This amount was set up on the books of petitioner in an account entitled ‘Forward Donated Surplus‘ and so carried through December, 1934. In 1935 this amount was transferred to ‘Loans‘ account.
On January 25, 1932, the certificate for 100 shares was surrendered by Norman Thomas without consideration, and in its place 24 certificates for four shares each were issued in the names of 24 individuals, 17 of whom were connected with Forward. They were assigned in blank. When any such persons died or resigned, new certificates were issued in the names of other persons nominated by Forward and elected by the shareholders of petitioner. All of the certificates have been assigned in blank except two, and it is expected that they will also be so assigned soon;
At a special meeting of petitioner's shareholders held February 23, 1932, it was reported that Forward had ‘agreed to finance the improvement and expansion of the station up to the sum of $250,000‘ and that at an earlier meeting of Forward such a resolution had been adopted. The above resolution of August 1931 was read and approved and confirmed. At the same meeting the certificate of incorporation was amended to increase the number of directors from 10 to 25, and thereupon 14 additional directors were elected. Twenty-three shareholders were made directors. At the same meeting the bylaws were amended to omit the provisions of article VI relating to the payment of dividends and to add to article VIII the following:
2. None of the profits or surplus of the corporation shall be used for distribution as dividends. All profits or surplus shall be used for the improvement of the services of radio stations owned by the corporation or for civic, educational and cultural purposes.
3. None of the holders of the stock of the corporation shall have the right to assign, transfer or sell the same without the consent of a majority of the rest of the stockholders. He shall be the holder and owner of the stock with the right to vote on it during his life and upon his death the majority of the stockholders shall have the right to designate a successor.
So amended, the bylaws have been in effect since, including 1940.
The certificate of incorporation was never amended as required by the above resolution as it was deemed that any change in the structure or character of petitioner at that time ‘would complicate the issues before the Commission‘ and because petitioner was almost continuously before the Commission upon applications, among others, for renewal of license, for an increase in its operating power of 500 watts, for change of frequency of 1300 to 1400, or for more time.
At a special meeting of the directors February 23, 1932, held after the shareholders' meeting, it was reported that Forward had deposited $70,000 in the Amalgamated Bank to the credit of petitioner, that about $10,000 to $12,000 of that sum had been used to settle obligations of WEVD and the balance was being kept in the name of petitioner for the use of WEVD. Upon motion, the following resolution was adopted:
Whereas, the Forward Association has advanced to the Debs Memorial Radio Fund, Inc;, the sum of $70,000.00 and has undertaken and agreed to advance additional sums of money as in its discretion may be required.
RESOLVED, that the said $70,000 and such additional sums as may be advanced by the Forward Association to the Debs Memorial Radio Fund, Inc., shall be repaid to the Forward Association with interest at 6% per annum as soon as the Board shall deem it safe and expedient.
At a regular monthly meeting of the board of directors March 31, 1932, it was reported:
* * * that the former owners of the stock of the Debs Memorial Radio Fund, Inc. have agreed with the Forward Association, publishers of the Jewish Daily Forward, that in consideration of the transfer of the stock to the twenty-five trustees, the former owners and the Forward Association consent and agree that the Debs Memorial Radio Fund, Inc. shall be operated as a non0profit sharing corporation, and that any surplus or profit that may arise shall be used for the purpose of extending and improving the facilities of the station, and that the surplus, after all the debts have been fully paid, shall be used for civil, educational and cultural purposes.
Upon motion the ‘said agreement was declared satisfactory and approved.‘
Thereafter, Forward advanced additional amounts to petitioner, which were entered on the books in an account payable to Forward. As of December 31, 1938 and 1939, the amount owing in such account to Forward was $295,000 and as of December 31, 1940, $325,000; The petitioner has always paid interest at 6 percent to Forward on the amounts in this account except for the first year or two, when it was forgiven. The interest paid to Forward during 1940 was $17,875.
In 1935 Forward ‘pledged‘ to the petitioner the amount of $250,000. On the books of petitioner the item was recorded as an account receivable entitled ‘Forward Pledge Receivable‘ and offset an account entitled ‘Forward Donated Surplus.‘ The $70,000 which had been credited to the latter account in 1932 was transferred in 1935 to the loans account. The only writing in respect of the 1935 pledge of $250,000 is contained in a letter from Forward to petitioner, dated July 15, 1940, as follows:
We have pledged and set aside out of our surplus the sum of $250,000 to be sued by you for the operation and maintenance of Station WEVD.
This amount is in addition to the loan of $295,000 which we have made to you;
It is understood that should the station at any time earn a surplus over and above its necessary fair expenses you may use that surplus for the purpose of repaying any advances made by us against our pledge. Should there be no surplus at any time then the said advance need not be considered a liability by you.
No part of the $250,000 had been advanced to the petitioner by December 31, 1940. The first payment, $100,000, was made in 1941 and the remainder, $150,000, was paid in 1942. The $250,000 was not shown on the books of Forward until January 2, 1937, when the capital account was charged with $250,000 and account payable to WEVD was credited. No entry of an account receivable from WEVD was made in 1941 by Forward when it made the payment of $100,000 to petitioner. From 1937 to 1942 Forward had approximately half a million dollars cash on hand or in bank.
The above letter of July 15, 1940, was written by Forward because additional money was required for building a new transmitter and had to be guaranteed. To the Federal Communications Commission the ‘pledge‘ of Forward was reported as a gift or donation and as an asset of the petitioner, in order to obtain permission to build a new transmitter.
From 1932 to 1942, both inclusive, petitioner's income, other than a few small items of interest and miscellaneous income and $2,731.87 received in 1942 as gain on the sale of a mortgage, was from commercial broadcasting over WEVD. Its gross income from broadcasting, commissions paid, and net income or loss as shown by its Federal income tax returns were as follows:
+-----------------------------------------------------------+ ¦Year ended ¦Gross in- ¦Commissions¦Net income ¦ +---------------------+------------+-----------+------------¦ ¦ ¦come from ¦paid ¦or (loss) ¦ +---------------------+------------+-----------+------------¦ ¦ ¦broadcasting¦ ¦ ¦ +---------------------+------------+-----------+------------¦ ¦Oct. 31, 1932 ¦$18,421.16 ¦$957.85 ¦($27,043.72)¦ +---------------------+------------+-----------+------------¦ ¦Oct. 31, 1933 ¦42,273.40 ¦6,530.23 ¦(33,502.23) ¦ +---------------------+------------+-----------+------------¦ ¦Dec. 31, 1933 (2 mo.)¦13,103.54 ¦2,978.24 ¦(4,059.63) ¦ +---------------------+------------+-----------+------------¦ ¦1934 ¦83,939.73 ¦18,483.01 ¦(21,703.00) ¦ +---------------------+------------+-----------+------------¦ ¦1935 ¦173,449.10 ¦ ¦(980.96) ¦ +---------------------+------------+-----------+------------¦ ¦1936 ¦189,948.03 ¦ ¦3,841.27 ¦ +---------------------+------------+-----------+------------¦ ¦1937 ¦225,040.95 ¦34,847.41 ¦15,042.33 ¦ +---------------------+------------+-----------+------------¦ ¦1938 ¦183,034.69 ¦35,898.90 ¦(2,627.33) ¦ +---------------------+------------+-----------+------------¦ ¦1939 ¦284,294.41 ¦52,855.47 ¦9,221.69 ¦ +---------------------+------------+-----------+------------¦ ¦1940 ¦323,834.16 ¦52,955.36 ¦30,700.57 ¦ +---------------------+------------+-----------+------------¦ ¦1941 ¦290,385.69 ¦55,631.10 ¦6,053.68 ¦ +---------------------+------------+-----------+------------¦ ¦1942 ¦294,466.11 ¦50,411.44 ¦7,449.18 ¦ +-----------------------------------------------------------+
The petitioner sold time to sponsors by solicitation and by presenting salable programs. In 1940 it had in its employ four salesmen and also sold time through sales and advertising agencies. The salesmen were paid on a commission basis. In 1940 petitioner had 110 hours of broadcasting time a week, of which 50 hours were after 6 p.m. and 60 hours before 6 p.m. Of the 50 hours, 24 hours were after midnight. It had a broken schedule, i.e., on some days it had the hours from 7 to 10 a.m., 12 noon to 6 p.m. and 8 p.m. to 4 a.m. It had no evening hours on Monday.
In 1935 WEVD had 58 hours a week, of which 67 percent was devoted to sustaining programs and 33 percent to commercial broadcasting. The petitioner has still considerable time to sell and its salesmen are attempting to sell more time. Whatever time is not sold must be filled in with sustaining programs, as the Commission requires all time to be filled. Its sustaining programs are ‘educational, civic, and cultural‘ in nature. Sustaining programs are such as create listening appeal, and thus they attract advertisers or sponsors of commercial programs. The proportion of commercial time has increased. Some of the increase in income is due to an increase in rates effective as soon as petitioner acquired more time through the purchase at a cost of from $100,000 to $150,000 of station WFAB and an increase in power. The increase in time and power of WEVD made its facilities more attractive to sponsors.
Since its organization no salaries or other compensation have been paid to any of the officers, directors, members of its executive committee, or shareholders. The general business manager was paid a salary of $259.61 a week during 1940, and he devoted his full time to this employment. He was a director and shareholder after 1932, but resigned April 1, 1940. Prior to becoming manager of petitioner he had been advertising manager of the Jewish Daily Forward.
The petitioner has never paid any dividends or made any other distribution to shareholders.
In its 1940 Federal excess profits tax return petitioner reported $400,080.71 as its invested capital for purposes of the excess profits credit, in which the amount of $250,000 had been included as ‘Property paid in for stock, or as paid-in surplus, or as a contribution to capital.‘ In determining the deficiency the Commissioner reduced invested capital by $250,000 as ‘the amount of $250,000.00 pledged by the Forward Association but not received by you.‘
On March 18, 1936, the Commissioner held that, ‘based upon the facts presented,‘ Forward (1) was ‘entitled to exemption as an association not organized for profit but operated for the promotion of social welfare under section 101(8) of the Revenue Act of 1934 and the corresponding provisions of prior revenue acts‘; (2) that it was not, therefore, ‘required to file returns for 1934 and prior years,‘ and (3) that ‘future returns will not be required so long as there is no change in your organization, your purposes or method of operation.‘ On April 10, 1936, the Commissioner held that Forward was also exempt from capital stock tax.
1. The petitioner claims exemption from excess profits tax by virtue of section 727, Internal Revenue Code, as a corporation exempt from income tax under section 101(8): ‘Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare * * * . ‘ Regulations 103, section 19.101(8)-1, provides: ‘Civic leagues entitled to exemption under section 101(8) comprise those not organized for profit but operated exclusively for purposes beneficial to the community as a whole, and, in general, include organizations engaged in promoting the welfare of mankind * * * .‘ In the notice of deficiency the Commissioner held ‘your organization is not an exempt corporation as defined by section 101 of the Internal Revenue Code.‘
Thus, the petitioner is required to prove that it was not organized for profit and that it is operated exclusively for the promotion of social welfare. Adopting the propositions that incorporation under the New York Stock Corporation Law is not itself preclusive of a claim for exemption ( Anderson Country Club, Inc., 2 T.C. 1238, 1242) and that the corporation may properly be regarded as a civic organization (cf. Amalgamated Housing Corporation, 37 B.T.A. 817, 825; affirmed per curiam, 108 Fed.(2d) 1010), we are of opinion that the evidence fails to show that the corporation was not organized for profit. Doubt on that point operates to defeat the claim for exemption. There is nothing in the stated purposes set forth in the articles of incorporation to suggest that profit is not among the purposes, while on the other hand there is much to indicate business and financial purposes which can only be fulfilled by seeking profit. The first purpose states is not merely to broadcast, but to engage in the business of broadcasting, and the corporation may broadcast matter of every kind and any description available. All of the purposes are stated in language carefully drawn consistently with the promotion of business purposes and are in some instances expressly stated in terms of business purpose.
The petitioner often, in its argument, departs from the statutory language by treating the question as if it were, whether the corporation is a ‘nonprofit sharing‘ corporation, which may be more than a linguistic difference since a corporation may be organized for profit and yet not have or intend to have its profits shared.
In considering copyright infringement, the District Court, in 1942, while recognizing the radio station in 1940 as a nonprofit station, held a particular broadcast on a sustaining program to be for profit since both the commercial and the sustaining program were part of the general business and:‘ * * * all must be considered in ascertaining the character of the station. In the present case, the station is operated in much the same way as a commercial station, and I can see no good reason why it should be shielded from copyright infringement insofar as performances on sustaining programs are concerned. The commercial broadcasts occupy at least one-third of the station's available time, and this purely commercial business determines the character of the performance on the sustaining programs as being for profit.‘ Associated Music Publishers v. Debs Mem. Radio Fund, 46 F.Supp. 829.
The petitioner urges that the statement of purposes of the charter is unimportant in view of the fact that it is the successor of an unincorporated membership association which was organized as a memorial to the late Eugene V. Debs by his friends, with the idea of conducting a free public radio forum for the dissemination of liberal and progressive social views, and that the corporation should be recognized as organized to carry on that purpose. An answer to this is that if that had been the sole purpose and there was no purpose of profit, the organizers of the corporation could have made that clear in the articles and would not have left it to construction, or could have organized a nonstock corporation under the ‘Membership Corporation Law.‘ When this corporation was organized in 1928, the income tax law had been in operation for fifteen years, and the exact words of this exemption had been used since the first revenue act. (Revenue Act of 1913, sec. II(G)(1).) Also, it was clear in extant decisions that, although an exemption was not lost by a corporation engaging in business for profit, this was only when such business operations for profit were merely incidental to the promotion of a grand charitable purpose and activity. Trinidad v. Sagrada Orden de Predicadores, 263 U.S. 578; Unity School of Christianity, 4 B.T.A. 61. See also Hanover Improvement Society, Inc. v. Gagne, 92 Fed.(2d) 888. Under such circumstances, the decision of the question whether the corporation was organized for profit may not be rested upon the testimony that the founders originally intended only to establish a free public forum for educational, cultural, and civic purposes without financial gain in total disregard of the carefully drawn expression of business purposes contained in the articles. Nor is the decision greatly influenced by the provision of the bylaws after the change of 1932 that profits would not be distributed but would be used for the improvement of the radio service or for the civic, educational, and cultural purposes. The use of profits for the improvement of the radio service is consistent with a profit purpose, and it is only jointed with the civic, cultural, and educational purposes by the disjunctive ‘or‘ and therefore not restricted to such nonprofit purposes. Since the language used in respect of the corporation's rights, powers, and activities was deliberately chosen, there is little reason to deflect its meaning for a liberal effect.
There is no restriction in this section of the statute, as in some of the other exemption sections— i.e., subsections 6 and 7— that no part of the income shall inure to the benefit of any private shareholder or individual; the restriction stated is that the corporation must be ‘not organized for profit.‘ This does not permit the exemption of any corporation organized for profit, even though such corporation be inhibited from distributing its profits to individuals. The statutory exemption precludes any corporation unless it is not organized for profit, and it matters not that, being organized for and having profits, it chooses to use them for one purpose rather than another. Amalgamated Housing Corporation, 37 B.T.A. 817. This corporation, as permitted by its charter, had profits and chose by its amended bylaw of February 23, 1932, to restrict itself in their use to the improvement of its radio service or for its civic, educational and cultural purposes. In the tax year it had gross income from broadcasting amounting to $323,834.16 and net income of $52,955.36; It does not appear in the evidence just what was done with this income, although it is clear that no dividends have at any time been distributed. The omission to distribute dividends is however not an indication that the corporation itself was not organized for profit, for it is not unreasonable to infer that profits were used to enlarge, expand, and improve the radio facilities and service for both commercial and sustaining programs. The station was in business competition with other radio stations in its commercial broadcasting, and it was required to maintain its equipment and service adequately to enable it to meet that competition. This commercial broadcasting was important and took a large part of the time allotted to the corporation, from which it derived a substantial and increasing income. It can not be said that, despite the profit sought and obtained from it, the corporation was not organized for profit, even though its civic function was regarded by its management as more important.
We think that the evidence fails to show that the corporation meets the first requirement for exemption, that it be not organized for profit.
The evidence was also largely directed to the second requirement of the statute, that the corporation be operated exclusively for the promotion of social welfare. We may not consider this requirement too literally as involving a definitive meaning of ‘promotion of social welfare‘ or requiring a strict application of the word ‘exclusively‘; nevertheless the extent of the operations of the corporation and its radio station for profit on an ordinary commercial basis in promotion of other ends than social welfare prevent even a liberal application of the statutory exemption. Clearly the doctrine of the Trinidad case, the Roche's Beach case (96 Fed.(2d) 776), the Hanover case, and the Unity School case, can not be applied to this corporation. Its activities are too great an extent those of a commercial broadcasting station for profit (Associated Music Publishers v. Debs Mem. Radio Fund, supra) and the profits of that part of its business are not required to be devoted to the support of its cultural sustaining program or to the promotion of social welfare. So far as appears, the income is devoted to the maintenance and improvement of the broadcasting facilities and the enlargement of the sale of its commercial time, and as a result these are improving and growing. It would not be correct to say that the station is operated principally for social welfare and only incidentally as a small business for the support of its welfare activities. One-third in 1935 and probably more now of its allotted time is devoted to its operation as a purely commercial station for a substantial income, and the destination and use of that income is not only in support of its welfare function, but also in support of its commercial function. Other than the payment of its debt and interest to the Forward Association, it does not distribute its profits to that association as if to an affiliated charitable organization. Forward is a creditor which actually owns petitioner's shares, but its exempt status does not influence the petitioner's right to exemption as if petitioner's income were being distributed to Forward for use in a charitable purpose.
The evidence shows a corporation created to fulfill the motive and desires of its founders to promote civic, educational, and cultural purposes, but organized as a business corporation with wide business powers and no charter expression of the welfare purpose of its founders, and actually engaging to a great extent in the operation of a business in a competitive commercial field. Although it has also adhered to the welfare purpose expressed by its founders and may have operated to a greater extent in that field than in the field of business, and although the welfare purpose may predominate in the time and nature of its activities, the evidence does not show a corporation not organized for profit, but operated exclusively or almost exclusively for the promotion of social welfare. To make such a finding would not be supported by the record. The exemption has therefore not been established, and the Commissioner's determination must be sustained.
2. The petitioner makes an alternative claim in the event that it is held not entitled to exemption. It claims that its equity invested capital, which is defined in the statute to include ‘MONEY PAID IN.— Money previously paid in for stock, or as paid-in surplus, or as a contribution to capital‘ (Internal Revenue Code, sec. 718(a)(1)), shall include the $250,000 pledged by Forward and so referred to in its letter of July 15, 1940. We think that the evidence shows that this amount was not money previously paid in for stock, was not paid-in surplus, and was not a contribution to capital. Indeed, it was not money at all. It was only a promise by Forward to advance this amount to petitioner in consideration that petitioner should repay it out of surplus and with the understanding that a failure of surplus would avoid the liability. In 1940 no payment was made, and there was in that year no money on that account actually paid in. Clearly no money had on that account been previously paid in for stock, as paid in surplus, or as a contribution of capital. The first payment of the amount pledged was of $100,000, paid in 1941, the following year, and the next of $150,000 in 1942, and it is difficult to see how these payments can be fitted into the statutory provision, even though Forward, the pledgor, be regarded as the owner of all petitioner's shares. It appears only that Forward promised to make a loan to petitioner, which in the taxable year had not yet been made, and there is no ground upon which to hold that the amount had been invested by Forward in petitioner's capital. The dividends paid credit cases cited by the petitioner are not in point, for they involve dividends declared and credited to the shareholders and withdrawals by them. Here the $250,000 was not definitely placed to the credit of the petitioner so that under the circumstances it could be regarded as constructively paid to petitioner in the taxable year of ‘previously paid.‘ We see nothing in the scheme of the statute to justify including the pledge in petitioner's equity invested capital. The Commissioner's determination is sustained.
Reviewed by the Court.
Decision will be entered for the respondent;
ARNOLD, J., concurs only in the result.
OPPER, J., dissenting: It is not at all clear to me whether the recognized activities of petitioner are such as to bring it within the meaning of a social welfare organization; That presumably involves a consideration of the definition of that term as it is used in section 101(8). The opinion, however, does not purport to discuss or dispose of any such theory, but, on the contrary, it appears to be assumed that petitioner's ultimate function was civic, educational, and cultural, and hence that it was devoted to objects included in ‘social welfare.‘
Once it is further conceded that organization under a business corporation act does not characterize a social welfare enterprise as ‘organized for profit,‘ it seems to me impossible to find anything in the declared purpose or actual operation of this petitioner to eliminate it from the designated exemption. The basic purpose of ‘conducting a free public radio forum for the dissemination of liberal and progressive social views‘ could obviously be promoted only through the medium of the physical facilities of a radio broadcasting station. It is easy to see that the unrestricted realization of that aim might be regarded as more readily feasible if the station were owned outright. An undertaking so designed, however, would naturally entail expenses of considerable magnitude both for capital investment and for maintenance, or even for improvement and expansion. But to say that the use of earnings to those ends indelibly ascribes the profit purpose overlooks the necessity of ascertaining the basic object for which such maintenance and expansion is undertaken.
If the earnings were being reinvested with a view to increasing profits which would eventually become separated from the business and find their way as income to private interests, it might be possible to arrive at the conclusion that the exemption should be denied. But the record is clear and uncontradicted that, as the petitioner is organized and as it is operated, that result is impossible. The figures indicate that operations as a whole have up to now been conducted at a loss, so that apparently profitable years merely make good the deficits of others. But if we speculate that in the future over-all profits may arise, the facts as demonstrated by the record leave only two possibilities open. Either these profits can be devoted to an amplified pursuit of petitioner's basic purpose, possibly be reducing the amount of value of commercial time in favor of educational programs, in which event there would be no profit in the tax sense and the subordination of the commercial to the welfare object would require our recognition, Trinidad v. Sagrada Orden de Predicadores, 263 U.S. 578; or the proceeds as the one who ‘owns petitioner's shares,‘ which, being itself exempt, would then endow petitioner with a corresponding immunity. Roche's Beach, Inc. v. Commissioner (C.C.A., 2d Cir.), 96 Fed.(2d) 776. In neither event could the proceeds possibly inure to private profit. Indeed, even though the modifying language appearing in some other subdivisions prohibiting ‘the benefit of any private shareholder or individual‘ were applicable here, which it is not, petitioner's exemption, would, it seems to me, remain inescapable.
In Roche's Beach, Inc. v. Commissioner, supra, the commercial operation of a bathing beach was found to be exempt as a consequence of the devotion of its proceeds to the charitable foundations established in the will of its former owner. Declaring that ‘the destination of the income is more significant that its source,‘ the court further characterized as ‘too narrow a view‘ the ‘theory that the stated purposes for which a corporation is organized are to be found in its beach proceeds the ultimate aims of the commercial corporation itself had been to provide beach facilities to the poor without charge, and it had used its commercial income only for improving its facilities, increasing its own charitable operations, and furthering the charitable work of the foundations, the case would obviously have been more favorable to that petitioner. Yet, in principle, that is the situation we have here.
Anderson Country Club, 2 T.C. 1238, involved an organization apparently dedicated to the development of physical rather than mental benefits. Arguments were made there by respondent similar to those advanced here. We said:
Respondent feels that the enhancement of the club's facilities, the retirement of its indebtedness, and the possibility of gain upon dissolution by reason of the receipt and application of the profits to such uses require us to hold that the profits inured to the benefits of the shareholders (who were private individuals). No authorities are cited to that effect. The record shows that no dividends were ever paid to the shareholders * * * and that dissolution has not been and is not contemplated * * * .
* * * such advantages as these do not constitute the profits inuring to the benefit of a private shareholder, within the meaning of the statute.
I am at a loss to see how the development of this radio station for the greater and more effective presentation of programs of social benefit can be the kind of profit which the statute presupposes. Under circumstances much less favorable the exemption has been granted; Garden Homes Co. v. Commissioner (C.C.A., 7th Cir.), 64 Fed.(2d) 593; Anderson Country Club, supra; Roche's Beach, Inc. v. Commissioner, supra. Equal treatment of taxpayers similarly situated seems to me to require it here.