Argued June 5, 1956.
Decided July 6, 1956.
The fact that the Institute for Trend Research was organized exclusively for scientific or educational purposes did not entitle it to exemption from payment of unemployment compensation contributions (RSA 282:1 (H) (4) (h)) where the total activities of the Institute were directed fundamentally to private research for scientific industries rather than to basic trend research available generally to the public.
In determining whether a voluntary organization meets the statutory requirements for exemption from unemployment compensation contributions as a corporation organized and operated exclusively for scientific or educational purposes, it is the destination of the income and not the source thereof which is determinative of the exemption.
PETITION, for declaratory judgment to determine whether the plaintiff is exempt from the payment of contributions on the wages of its employees under the Unemployment Compensation Act. RSA 282:1 (H) (4) (h). The plaintiff was organized in 1948, under the voluntary corporation law (RSA 292:1) to "aid and advance the scientific study and investigation of economic, sociological and historical trends. . . ." It has no capital stock and its articles of agreement provide that no part of its net earnings shall inure to the benefit of any private individuals. Its articles of agreement specifically provide that it shall not, and it does not, engage in propaganda activities or attempt to influence legislation, and the articles provide that all corporate property shall be used for the furtherance of its general purposes. The Court made the following ultimate findings and rulings: "The Court finds that substantially all of the income of the Institute has been derived from research conducted for private companies, the specific results of such research being available only to the corporation or company which has engaged the Institute to perform the research. The Court rules that does not change the status of the Institute as an educational foundation for taxation purposes and that the Institute is not subject to the unemployment tax.
The defendant's motion to reopen the case was allowed and the Court made the additional findings and ruling: "The Court finds that there was in existence on the date of the hearing an agreement between Chapin Hoskins and the Institute which provided: `1. Hoskins agrees to sell and convey to the Institute all research records which he owned on December 31, 1948, and which are now extant, including series of figures, computations, charts, analyses, comments and reports on business volume, prices, and other aspects of human activity and natural phenomena, but excluding all records pertinent to or concerning trading in commodities or commodity futures contracts. 2. The Institute agrees to pay Hoskins One Hundred Thousand Dollars ($100,000) for the aforesaid records, in twenty (20) annual instalments [installments] of five thousand dollars ($5,000) each, payable on December 1, 1953, and annually thereafter on the first day of December until the entire purchase price is paid. 3. Until the purchase price has been paid in full Hoskins shall have the right to use said records at reasonable times and in a manner which will not interfere with the Institute's use of said records. 4. The Institute agrees that it will not sell reproductions of all or any part of said records, without Hoskins' written consent, as long any of the purchase price remains unpaid.'
"The Court rules that there has been no evidence that this agreement provides for purchase at a price in excess of the fair value of the materials being sold by Chapin Hoskins to the Institute and therefore rules that this additional finding of fact does not change the rulings of law which the Court has previously made in this case."
The factual situation has been summarized by the Court as follows: "At the time of its original organization the only physical assets it possessed had been loaned to it by Chapin Hoskins, its original founder. Chapin Hoskins is a business consultant with offices in New York and Hopkinton, New Hampshire, and also a member of the New Orleans Cotton Exchange and a registered cotton operator. For many years Chapin Hoskins has been engaged as a business consultant advising companies of future trends of market conditions. The Institute presently has an endowment of some Forty-three hundred dollars, the majority of which has been obtained from Chapin Hoskins and his immediate family. The stated purposes for which the Institute was organized is to further develop by way of research certain laws predicting market price and economic conditions which Chapin Hoskins asserts he has discovered in the course of his private work.
"Subsequent to the creation of the Institute Chapin Hoskins has continued private work and the particular difference between the type of work done by Chapin Hoskins personally and by the Institute aside from any question of profit to Chapin Hoskins is that the work done by Chapin Hoskins individually would be based upon Mr. Hoskins' general knowledge of conditions while that of Trend Research would include original research on the problem.
"Trend Research presently has a Board of ten Trustees who receive no compensation and seven paid employees. Since its foundation the funds of the corporation have been entirely derived except for the endowment funds previously mentioned, from research undertaken under contracts with various industries, including Southern States Cooperative, Ensign-Bickford Company, American Can Company and United States Rubber Company. Typical of the work undertaken would be that for the Southern States Cooperative, which involves the question of future prices of broiler chickens. All of these contracts, or the results or the answers to any questions inquired into under these contracts by the Institute of Trend Research became the property of the company for whom the work was performed and the only benefit derived by the Institute from such contracts was financial profit to the Institute and a claimed increase in the Institute's general knowledge in the field of trend research together with further training and methods of working out such problems. From time to time the Institute has conducted some research without cost to the people requesting it, including work in the Fall of 1954 performed at the request of James Barry, Director of New Hampshire Department of Welfare. Such research has constituted a very minor portion of the Institute's work. The net earnings of the Institute have accumulated and have been used for its general purposes and the Institute has not engaged in propaganda activities and has not attempted to influence legislation.
"On January 20, 1949 the. Institute entered into an agreement with Chapin Hoskins by which it agreed to pay Chapin Hoskins a royalty of ten percent on revenues received from clients by the Institute and in the event of the death of Chapin Hoskins to pay these royalties to the wife of Chapin Hoskins during her lifetime and to their three children during their lifetime. There was a limitation in this agreement of payments to Mrs. Hoskins of ten thousand dollars in any calendar year and five thousand dollars in any calendar year to the three children, with no limitation on payments to Chapin Hoskins. The consideration recited for the agreement was the use of methods originated by Chapin Hoskins. This agreement was in effect until April 10, 1953 and under this agreement Mr. Hoskins has received no payment for services from the Institute during the period of its existence.
"The Court rules that although this agreement was a questionable method from a taxation standpoint of providing for payment of Mr. Hoskins for his services, the sums actually paid under the agreement have not been in excess of proper compensation for services performed and that in view of the fact that the agreement is no longer in effect, it is not considered by the Court to be a determining factor in the present case."
The defendant's bill of exceptions was allowed and transferred by Griffith, J. Additional facts appear in the opinion.
Orr Reno (Mr. Reno orally), for the plaintiff.
Winslow H. Osborne, James M. Riley, Jr. and Edward F. Smith (Mr. Osborne orally), for the defendant.
The question presented is whether or not the Institute is exempt from payment of unemployment compensation contributions as ". . . a corporation . . . organized and operated exclusively for . . . scientific . . . or educational purposes . . . no part of the net earnings of which inures to the benefit of any private shareholder or individual" under RSA 282:1 (H) (4) (h).
An examination of the articles of agreement, the by-laws and the records of the Institute support the Court's finding that it was organized exclusively for scientific or educational purposes. While this type of evidence is not conclusive in determining the character of its operations, it was sufficient to establish its organizational exempt status. Henry v. American Kennel Club, 53 N. Y. S. (2d) 878; Benton County v. Allen, 170 Ore. 481. Cf. Consumers' Research, Inc. v. Evans, 128 N. J. L. 95, 132 N.J.L. 431.
The operational status of the Institute is more troublesome. California Employment Com. v. Betthesda Foundation, 54 Cal.App. (2d) 348. In considering whether a corporation is operated for scientific or educational purposes, we are more concerned with what it did rather than what it was authorized to do by its articles of agreement. In re Constitutional Gov. League, 23 Wn.2d 792. It appears from the special findings of fact made by the Trial Court that "no substantial part of the income of the Institute . . . has been used for research or other services contemplated in. . . ." the exemption section of the statute (RSA 282:1 (H) (4) (h)) and that "less than 10 per cent of the income . . . has been used for research outside of the specific research undertaken for private business organizations." Thus more than 90 per cent of the Institute's research was paid for by and became the exclusive property of the private business organizations for whom the work was performed.
It is recognized that a corporation does not lose its exempt status under a statute which requires the payment of contributions or taxes merely because it has a net income (Trinidad v. Sagrada Orden, 263 U.S. 578) or makes a profit (Roche's Beach, Inc. v. Commissioner, 96 F.2d 776) or charges fees for its services. Debs Memorial Radio Fund v. Commissioner, 148 F.2d 948. The destination of the income, and not the source of the income, determines the exemption. American Legion v. Williamson, 73 S.D. 250; Scripture Press Foundation v. Annunzio, 414 Ill. 339. However in a more recent federal case it was said: "the presence of a single noneducational purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly educational purposes." Better Business Bureau v. United States, 326 U.S. 279, 283. See anno. 90 L. ed. 73. Cf. Commissioner v. Orton, 173 F.2d 483.
In view of the Institute's limited endowment of approximately $4,000, it may have been necessary for it to operate the way it did in order to produce income but the small percentage of its income devoted to non-private research makes it difficult to reconcile its practice with the statutory requirement that it be operated exclusively for educational or scientific purposes. Willcox, The Coverage of Unemployment Compensation Laws, 8 Vand. L. R. 245, 273 (1955). The total activities of the Institute were directed fundamentally to private research for scientific industries rather than to basic trend research available generally to the public. Here, as in Better Business Bureau v. United States, supra, there was a "commercial hue permeating petitioner's organization" even though that may not have been the founder's intent or desire. There are some indications from the record that future plans of the Institute encompass activities of a more public nature but this does not control its present exemption status under the Unemployment Compensation Law. It may be that the Institute has made or will make a substantial contribution to trend research but it has not operated exclusively for scientific or educational purposes in its attempt to do so within the meaning of the Unemployment Compensation Law. See Institute for Trend Research v. United States, 230 F.2d 611.
Since the plaintiff is not exempt from payment of unemployment contributions under RSA 282:1 (H) (4) (h) it is unnecessary to consider whether any part of the net earnings of the corporation "inure[s] to the benefit of any private . . . individuals" (Virginia Mason Hosp. Ass'n v. Larson, 9 Wn.2d 284) or to pass on the other exceptions which have been raised by the defendant.