Docket No. 28088.
Jay O. Kramer, Esq., for the petitioner. Joseph F. Rogers, Esq., for the respondent.
Petitioner corporation engaged in the real estate business, paid sums to Sydenham Hospital, to Jewish Agency for Palestine and to Men's Group Godmothers League, Inc., all exempt organizations under section 23(o) and (g), Internal Revenue Code. Held, following C. F. Mueller, 14 T.C. 922,revd. 190 F.2d 120, and United States v. Community Services, Inc., 189 F.2d 421, that the petitioner is not exempt from taxation under section 101(6), Internal Revenue Code. Jay O. Kramer, Esq., for the petitioner. Joseph F. Rogers, Esq., for the respondent.
This case involves income tax for the calendar year 1946. Deficiency was determined in the amount of $345.06 and the entire amount is in issue. The sole question presented is whether the petitioner corporation is exempt from taxation within the provisions of section 101(6) of the Internal Revenue Code.
FINDINGS OF FACT.
The petitioner is a corporation, organized under the law of Delaware on July 11, 1946, and qualified in the State of New York on July 22, 1946. The petitioner's president was Frederick Brown. His grandson Jack M. Brown was vice president. The stockholders were Frederick Brown and Rose Brown, his wife, each holding 25 shares of capital stock, of no par value. Capital was $1,000. The incorporators in Delaware were dummies. Frederick Brown was the controlling influence in the corporation. He was and had for years been very prominently engaged in the purchase and sale of real estate. He had been charitably inclined over the years, and was anxious to give as much as he could to charity. Petitioner was formed for the purpose of enabling him to give the most money to charity without the money being taxed. He always selected the recipients of petitioner's charity. Petitioner was not organized to take over any predecessor business.
The certificate of incorporation of petitioner provided, inter alia, as follows:
THIRD: The nature of the business, or objects or purposes to be transacted, promoted or carried on are:
To take, buy, purchase, exchange, hire, lease, or otherwise acquire, real estate and property, either improved or unimproved, and any interest or right therein, and to own, hold, control, maintain, manage and develop the same in any state of the United States.
To purchase, exchange, hire or otherwise acquire such personal property, chattels, rights easements, permits, privileges and franchises as may lawfully be purchased, exchanged, hired or acquired under the General Corporation Law of the State of Delaware.
To erect, construct, maintain, improve, rebuild, enlarge, alter, manage and control, directly or through ownership of stock in any corporation, any and all kinds of buildings, houses, hotels, breweries, stores, offices, warehouses, mills, shops, factories, machinery and plants, and any and all other structures and erections which may at any time be necessary, useful or advantageous in the judgment of the board of directors for the purposes of the corporation and which can lawfully be done under the General Corporation Law.
To sell, manage, improve, develop, assign, transfer, convey, lease, sublease, pledge or otherwise alienate or dispose of, and to mortgage or otherwise encumber the lands, buildings, real property, chattels real, and other property of the company, real and personal, and wheresoever situate, and any and all legal and equitable rights therein.
To transact the business of buying and selling, dealing in, leasing, renting and managing real estate and any interest therein for its own account as agent or broker, or upon commission.
To purchase, sell and manufacture, and deal in building materials and goods, wares and merchandise, and to carry on any other lawful trade or business incident to or proper or useful in connection with the purchase, sale, ownership, construction, maintenance and management of real property.
To borrow money, with or without pledge of or mortgage upon all or any of its property, real or personal, as security, and to loan and advance money upon mortgages on personal and real property, or on either of them.
To buy, sell and deal in, with or without guaranty of payment thereof, bonds and mortgages and other like securities and other kinds of properties whether real or personal, not prohibited or specially excepted by any law, and to do and prosecute any acts and things incident to or proper in connection with the carrying on of the business of this company.
To purchase, acquire, hold, sell, assign, and transfer, mortgage, pledge, and otherwise dispose of the shares of the capital stock, bonds, debentures or other evidences of indebtedness of any corporation, domestic or foreign, and while the holder thereof, to exercise all the rights and privileges of ownership, including the right to vote thereon.
To purchase or otherwise acquire, undertake, carry on, improve and develop all or any of the business, good will, rights, assets or liabilities of any person, firm, association or corporation carrying on any kind of business the same as or of a similar nature to that which this corporation is authorized to carry on pursuant to the provisions of this certificate.
To do all such acts and things as are conductive to the premises. And this corporation shall have the power to conduct its business in all its branches in the State of Delaware and any other state or states of the United States and ultimately to hold, purchase, mortgage, lease, convey, manage and control, real and personal property therein as above provided and generally to do all acts and things and to exercise all the powers now or hereafter authorized by law necessary to carry on the business of the said corporation, or to promote any of the objects for which the company is formed.
To distribute its income to corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary or educational purposes, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation.
The objects and purposes specified in the foregoing clauses shall, except where otherwise expressed, be in nowise limited or restricted by reference to, or inference from, the terms of any other clause in this certificate of incorporation, but the objects and purposes specified in each of the foregoing clauses of this article shall be regarded as independent objects and purposes.
FIFTH: None of the profits or surplus of the corporation shall be used as distribution for dividends. None of the capital, profits or surplus of the corporation shall enure to the benefit of any stockholder or individual. All profits and surplus shall be used for the business of this corporation or for distribution to, and upon dissolution, or distribution of the capital of the corporation, all of its capital shall be distributed amongst, corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary or educational purposes, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation.
TENTH: In furtherance and not in limitation of the powers conferred by statute, the board of directors is expressly authorized;
To make, alter or repeal the by-laws of the corporation.
TWELFTH: The corporation reserves the right to amend, alter, change or repeal any provision contained in this certificate of incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation.
On July 22, 1946, petitioner by Frederick Brown as president filed in the Department of State of the State of New York a ‘STATEMENT AND DESIGNATION‘ in order to secure a Certificate of Authority to do business in New York. The statement and designation recited:
SECOND: That the business which it proposes to carry on within the State of New York is as follows: General Real Estate Business.
No stockholder, officer or director has ever received from the petitioner any compensation, salary or dividend.
During 1946 petitioner engaged in two transactions involving property, as follows: In July 1946 it contracted to purchase 1625-27 University Avenue, Bronx, and sold the contract on August 22, 1946, at a profit of $3,850, being purchased for $3,000 and sold for $6,850; and on December 6, 1946, petitioner acquired title to 1081 Fifth Avenue, New York City. From its incorporation to the time of trial petitioner had engaged in five or six transactions.
Petitioner was during the taxable year engaged in the real estate business. Its business was to purchase and sell property, at a profit if possible. It was in competition with other real estate firms. It was in business to buy at the lowest possible price and to sell at the highest possible price. If it holds real estate for any length of time, it manages such real estate. That is an ordinary duty of a real estate office. Petitioner's income is from the purchase and sale of property.
Frederick Brown was in the real estate business dealing constantly with brokers offering property. He was interested in about 75 corporations. If he was interested in a property offered, to the extent of entering into a purchase contract, he allocated it to one of the companies to handle. Petitioner acquired its property in that manner. After property was acquired it was listed with brokers for sale.
Petitioner has distributed to charitable organizations amounts in excess of its net income and its capital has been impaired and the company now has a deficit on its books. That has been the condition at the end of each taxable year.
During 1946 petitioner paid $1,000 to Sydenham Hospital, New York City, to Jewish Agency for Palestine $1,000, and $250 to Men's Group Godmothers League, Inc., New York City. The three organizations are exempt organizations under section 23(o) and (g) of the Internal Revenue Code.
For the year 1946 petitioner filed a corporation return recited under ‘Kind of business‘ as follows: ‘Charitable Corporation under U.S. Code 101(6).‘ It reported a net gain of $3,850, explained as the purchase and sale of the contract upon 1625-27 University Avenue, and listed deductions totaling $4,370.88, consisting of $833.12 taxes paid, $2,250 contributions, to the three organizations above named, and $1,287.26 ‘Other deductions authorized by law,‘ with a net income of $520.38 loss. The $1,287.26 consisted of $138.15 insurance, $324.50 recording, title insurance, etc., $524.61 miscellaneous operating, and $300 legal fees. Such expenses were incurred. Petitioner attached to its income tax return for the year 1946 the ‘Exemption Affidavit,‘ Form 1023, and the claim of exemption, Form 990, and during the year 1947 and thereafter sought to obtain a ruling that it was exempt under section 101. Petitioner is not an exempt corporation under section 101(6) of the Internal Revenue Code.
Was the petitioner exempt from Federal income taxation under the language of section 101(6), Internal Revenue Code? The petitioner seeks to distinguish C. F. Mueller Co., 14 T.C. 922, revd. 190 F.2d 120, by pointing out that only a few real estate transactions had been engaged in by it whereas C. F. Mueller Co. was in business on a large scale; also because here there was not predecessor business. Petitioner's briefs were filed prior to reversal of the Mueller case. The decision of the District Court in Community Services, Inc. v. United States (E.D., S.C., August 11, 1950), was contrary to the view taken by us in the Mueller case. However, that decision also, since filing of briefs herein has been reversed, United States v. Community Services, Inc., 189 F.2d 421. The respondent, on his part, in addition to reliance on the Mueller case as decided by this Court, because of petitioner's competitive real estate business, suggests that this case is stronger that Mueller because under its certificate of incorporation petitioner was not required to distribute its profit to charity but could use it in its business, further, that the charter's provisions, including those providing for distribution to charity, could be altered, changed or repealed.
SEC. 101. EXEMPTIONS FROM TAX ON CORPORATIONS.The following organizations shall be exempt from taxation under this chapter—(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;
We think none of the differences between this case and C. F. Mueller, suggested by either party here, are material to the prime consideration decided by us in C. F. Mueller, supra, and disapproved in the reversal by the United States Court of Appeals, Third Circuit, but approval by the United States Court of Appeals, Fourth Circuit, in the Community Services case. That prime consideration is, in effect, whether the destination of the income is more important that source. Despite reversal in the Mueller case, we have recently, in Joseph B. Eastman Corporation, 16 T.C. 1502, adhered to our views on the question, (though because of section 601, Revenue Act of 1951, it has since been disposed of by stipulation). Following the Mueller case and with all due respect to the United States Court of Appeals, Third Circuit, we conclude and hold that the petitioner is not exempt from taxation under section 101(6), Internal Revenue Code.
Decision will be entered for the respondent.