Weingarden
v.
Comm'r of Internal Revenue

United States Tax CourtApr 14, 1986
86 T.C. 669 (U.S.T.C. 1986)
86 T.C. 669T.C.86 T.C. No. 42

Docket No. 1864-84.

1986-04-14

EARL WEINGARDEN and SHIRLEY WEINGARDEN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Robert W. Siegel, for the petitioners. Daniel M. Carr, for the respondent.


The organization to which petitioners made a charitable contribution, a local post of the Veterans of Foreign Wars, met the financial support requirements of sec. 509(a)(2), I.R.C. 1954. HELD, the deduction to which petitioners are entitled with respect to that charitable contribution is governed by the 20-percent limitation of sec. 170(b)(1)(B), I.R.C. 1954, not by the 50-percent limitation of sec. 170(b)(1)(A), I.R.C. 1954. Robert W. Siegel, for the petitioners. Daniel M. Carr, for the respondent.

OPINION

SWIFT, JUDGE:

In a statutory notice of deficiency dated November 25, 1983, respondent determined deficiencies in petitioners' Federal income tax liabilities for the years 1979 and 1980 in the amounts of $32,793 and $104,669, respectively.

Following concessions by the parties, the only issue for decision is whether the charitable deduction to which petitioners are entitled for a contribution of real estate to a local post of the Veterans of Foreign Wars is governed by the limitation of 50 percent of petitioners' contribution base, pursuant to section 170(b)(1)(A), or by the limitation of 20 percent of petitioners' contribution base, pursuant to section 170(b)(1)(B). In the event that the charitable deduction is held to be governed by section 170(b)(1)(A), as petitioners contend, the parties agree that the deduction allowable to petitioners in 1979 will be limited by section 170(b)(1)(C) to 30 percent of petitioners' contribution base (because of the capital gain nature of the property contributed), and that the portion of the contribution not allowed as a deduction in 1979 will be available for a carryover to subsequent taxable years. In the event that the charitable deduction is held to be governed by section 170(b)(1)(B), as respondent contends, the parties agree that the deduction allowable in 1979 will be limited to 20 percent of petitioners' contribution base and no carryover to subsequent years will be allowed of the portion of the contribution not allowed as a deduction in 1979.

This case was submitted fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The facts set forth in the stipulation are incorporated herein by this reference. The pertinent facts are summarized below.

Petitioners, Earl and Shirley Weingarden, are husband and wife and resided in Franklin, Michigan, at the time their petition was filed herein. Petitioners timely filed their joint Federal income tax returns for the years 1979 and 1980.

On November 9, 1979, petitioners conveyed, as a charitable contribution, title to certain real estate to the Southgate, Michigan Post of the Veterans of Foreign Wars (hereinafter referred to as the ‘Southgate Post‘). The real estate consisted of land and a building and was located in the city of Southgate, Michigan. The parties have stipulated that the value of the real estate was $435,000 on the day of the contribution.

On November 9, 1979, the Southgate Post was a nonprofit Michigan corporation in good standing and was exempt from Federal income tax pursuant to the provisions of section 501(c)(19). The Southgate Post accepted the contribution and agreed to occupy and use the real estate for purposes consistent with its corporate bylaws and national charter.

The Southgate Post routinely filed its Federal income tax returns on Form 990 (Return of Organization Exempt from Tax) and on Form 990-T (Exempt Organization Business Income Tax Return). The Forms 990-T filed for each of the years 1976, 1977, and 1978 indicate that no unrelated trade or business gross income was received during those years. The Forms 990 filed on behalf of the Southgate Post for its taxable years 1976, 1977, and 1978 indicate the following sources and amounts of income:

+--------------------------------------------------------+ ¦Sources of income ¦1976 ¦1977 ¦1978 ¦ +-----------------------------+------+---------+---------¦ ¦Interest ¦$3,967¦0 ¦0 ¦ +-----------------------------+------+---------+---------¦ ¦Poppy sales, bingo, dances ¦35,315¦--- ¦--- ¦ +-----------------------------+------+---------+---------¦ ¦Contributions, gifts, grants ¦2,161 ¦$2,000.00¦$994.00 ¦ +-----------------------------+------+---------+---------¦ ¦Rent ¦0 ¦4,747.00 ¦2,745.00 ¦ +-----------------------------+------+---------+---------¦ ¦Bingo 2 ¦0 ¦14,050.00¦14,676.21¦ +-----------------------------+------+---------+---------¦ ¦Poppy sales 2 ¦0 ¦634.19 ¦315.85 ¦ +-----------------------------+------+---------+---------¦ ¦Raffles ¦0 ¦195.50 ¦0 ¦ +-----------------------------+------+---------+---------¦ ¦Dance 2 ¦0 ¦105.50 ¦706.00 ¦ +-----------------------------+------+---------+---------¦ ¦Lottery ¦0 ¦800.00 ¦0 ¦ +-----------------------------+------+---------+---------¦ ¦Coin machine ¦0 ¦25.52 ¦48.42 ¦ +-----------------------------+------+---------+---------¦ ¦Refunds/misc. ¦0 ¦533.83 ¦180.33 ¦ +-----------------------------+------+---------+---------¦ ¦Dues and assessments from ¦ ¦ ¦ ¦ +-----------------------------+------+---------+---------¦ ¦members and affiliates ¦0 ¦3,824.45 ¦1,456.75 ¦ +-----------------------------+------+---------+---------¦ ¦Miscellaneous ¦0 ¦0 ¦2,995.11 ¦ +-----------------------------+------+---------+---------¦ ¦Total ¦41,443¦26,915.99¦24,117.67¦ +--------------------------------------------------------+

The primary source of income received by the Southgate Post was the bingo games operated by unpaid volunteers. Michigan law provides that a ‘qualified organization‘ (as defined in Mich. Stat. Ann. section 18.969(103) (Callaghan 1980), including a veterans' organization which operates without profit to its members, may be licensed to conduct bingo games one night per week without losing its exemption from state tax. Mich. Stat. Ann. section 18.969(105) (Callaghan 1980). Section 513(f), with certain limitations, provides that bingo games will not be treated as an unrelated trade or business. See also sec. 1.513-5, Income Tax Regs.

Section 170(a) allows a deduction for any charitable contribution made within the taxable year. The term ‘charitable contribution‘ includes a donation to or for the use of a post or organization of war veterans organized in the United States where no part of the net earnings of the organization inures to the benefit of any private shareholder or individual. Sec. 170(c)(3).

Certain dollar limitations apply to tax deductions allowed for charitable contributions made by individuals. The limitation that applies to a particular contribution depends on the nature of the donee and on the type of property contributed. Section 170(b)(1)(A) sets forth the general rule with regard to contributions made to eight categories of charitable donees. That rule provides that tax deductions available to an individual taxpayer in any one year with respect to contributions made to the charitable donees described in the eight clauses of section 170(b)(1)(A) are limited to 50 percent of the taxpayer's contribution base, and carryovers are allowed to subsequent years of excess contributions. Sec. 170(d).

A further limitation on tax deductions allowed individuals with regard to contributions of property to the categories of donees described in the eight clauses of section 170(b)(1)(A) is set forth in section 170(b)(1)(C)(i) and relates to the type of property contributed. That limitation provides generally that the tax deduction allowed to an individual in any one year with respect to charitable contributions of ‘certain capital gain property‘ (where the donees otherwise qualify under section 170(b)(1)(A)) shall be limited to 30 percent of the taxpayer's contribution base for each year.

If contributions are made to a charitable donee that does not qualify under any of the eight clauses of section 170(b)(1)(A), the tax deductions allowed to an individual in any one year with respect thereto are limited by section 170(b)(1)(B) to 20 percent of the taxpayer's contribution base, and no carryover of the excess contribution is allowed in subsequent years.

Petitioners contend that the Southgate Post qualifies under the eighth clause of section 170(b)(1)(A) and that the 50-percent limitation therefore is applicable. Respondent contends that the Southgate Post does not qualify under the eighth clause of section 170(b)(1)(A) and that the 20 percent limitation, therefore, is applicable to the contribution in question.

Section 170(b)(1)(A)(viii) provides simply as follows:

(A) GENERAL RULE.—Any charitable contribution to

* * *

SECTION 113. PURPOSES OF CORPORATION

The purposes of this corporation shall be fraternal, patriotic, historical, and educational; to preserve and strengthen comradeship among it members; to assist worthy comrades; to perpetuate the memory and history of our dead, and to assist their widows and orphans; to maintain true allegiance to the Government of the United States of America, and fidelity to its Constitution and laws; to foster true patriotism; to maintain and extend the institutions of American freedom; and to preserve and defend the United States from all her enemies, whomsoever. (May 28, 1936, c. 471, section 3, 49 Stat. 1391.) In considering this issue we recognize that it has been stated that veterans' organizations (including posts of the Veterans of Foreign Wars) serve ‘unique and compelling societal and governmental goals * * *.‘ Taxation with Representation v. United States, 585 F.2d 1219, 1224 (4th Cir. 1978), cert. denied 441 U.S. 905 (1979).

Having explained the overlap that often exists among various categories of exempt organizations under section 501(c) and having reviewed some of the background concerning veterans' organizations, the relevant portions of the confusing statutory scheme must be analyzed in order to determine whether veterans' organizations can qualify as 50-percent organizations under section 170(b)(1)(A)(viii). As explained earlier, respondent asserts that even though a particular veterans' organization meets the financial tests of section 509(a)(2), as those tests are incorporated into section 170(b)(1)(A)(viii), it cannot qualify thereunder unless it received its tax exempt status under section 501(c)(3). Petitioner asserts that section 170(b)(1)(A)(viii) was intended to qualify as 50-percent organizations all exempt organizations (regardless of the particular provision of section 501(c) under which they claim their exempt status) that are eligible to receive tax deductible contributions under section 170(c) to the extent such organizations meet the financial support tests of section 509(a)(2).

Prior to adoption of the Tax Reform Act of 1969, Pub. L. 91-172, 83 Stat. 487, among the five types of organizations recognized as qualified donees of tax deductible contributions there were six categories of exempt organizations, donations to which were deductible up to 30 percent of the donors' contribution base. Those six categories of organizations, with minor changes, survived the changes made by the Tax Reform Act of 1969 and are reflected today in the first six clauses of section 170(b)(1)(A). The percentage limitation for such organizations was increased to 50 percent of the donor's contribution base (see flush language of section 170(b)(1)(A)), and two additional categories of exempt organizations were added to those that would qualify as 50-percent organizations. See sec. 170(b)(1)(A)(vii) and (viii).

Before analyzing specifically what qualified donee organizations were added to the favored 50-percent group by clauses (vii) and (viii) of section 170(b)(1)(A), it is appropriate to recognize which qualified donee organizations were already in the 50-percent group under clauses (i) through (vi) of section 170(b)(1)(A). Those provisions provide generally that churches (see sec. 170(b)(1)(A)(i)), educational and medical institutions (see sec. 170(b)(1)(A)(ii) and (iii)), government-affiliated organizations that support educational institutions (see sec. 170(b)(1)(A)(iv)), and governmental entities (see sec. 170(b)(1)(A)(v)), will fall into the 50-percent group.

Clause (vi) of section 170(b)(1)(A), the last of the six categories of exempt organizations in the 50-percent (then 30- percent) group under section 170(b)(1)(A) as it existed prior to the changes made by the Tax Reform Act of 1969, was a catchall provision intended to qualify as 50-percent (then 30-percent) organizations those exempt organizations described in section 170(c)(2) that receive a substantial part of their support from governmental entities or from the general public. Detailed and longstanding financial support requirements are set forth in section 1.l70A-9(e), Income Tax Regs., describing the financial tests that an organization must satisfy in order to meet the requirements of section 170(b)(1)(A)(vi). The exempt organizations covered by clause (vi) (by its cross reference to the exempt organizations referred to in section 170(c)(2)) are essentially the same exempt organizations referred to in section 501(c)(3) (i.e., religious, charitable, scientific, literary, educational, amateur sports, and animal care organizations). Petitioners argue that this coverage of section 501(c)(3) organizations in clause (vi) of section 170(b)(1)(A) is support for their position that clause (viii) of section 170(b)(1)(A), when it was added to the Code in 1969, was not intended to apply to section 501(c)(3) organizations, but that clause (viii) was intended as a catchall provision to include therein other exempt organizations that generally qualify for their exempt status under provisions of section 501(c) other than section 501(c)(3), if they are eligible to receive tax deductible contributions under section 170(c) and if they meet the financial support requirements of section 509(a)(2).

The legislative history of the relevant provisions of the Tax Reform Act of 1969 is not helpful. The reason for the addition of clause (vii) to section 170(b)(1)(A) (namely, to qualify certain private foundations as 50-percent donee organizations) is explained. See S. Rept. No. 91-552 (1969), 1969-3 C.B. 423, 474; Conf. Rept. No. 91-782 (1969), 1969-3 C.B. 644, 653. No mention, however, is made anywhere in the legislative history as to the reason clause (viii) of section 170(b)(1)(A) was added to section 170(b)(1)(A), and no description or explanation was provided as to which exempt organizations might qualify thereunder as 50-percent donee organizations.

The Tax Reform Act of 1969 also made substantial changes to the tax treatment of private foundations. In explaining the definition of private foundations set forth in new section 509, the legislative history of that section explains the reason for the exception to private foundation status reflected in section 509(a)(2), as follows:

The organizations which usually will be excluded from the definition of private foundations if they satisfy this provision include symphony societies, garden clubs, alumni associations, Boy Scouts, Parent-Teacher Associations, and MANY OTHER MEMBERSHIP ORGANIZATIONS. (S. Rept. No. 91-552 (1969), 1969-3 C.B. 423, 461. Emphasis added.) In light of the above quote and in light of the fact previously mentioned that, for example, symphony societies and garden clubs would qualify for exempt status generally under section 501(c)(4) or (c)(7), and further in light of the fact that veterans' organizations in 1969 also qualified for their exempt status under section 501(c)(4) or (c)(7), petitioners argue that it is clear that, at least in 1969, veterans' organizations were to be treated as one of the ‘many other membership organizations‘ which Congress had in mind in enacting the financial requirements of section 509(a)(2). Having reached that conclusion in the context of section 509, petitioners argue that veterans' organizations were among the organizations Congress intended to include in the category of publicly supported exempt organizations that, under section 170(b)(1)(A)(viii), would qualify as 50-percent organizations if they meet the financial support requirements of section 509(a)(2).

STERRETT, SIMPSON, GOFFE, CHABOT, PARKER, WHITAKER, KORNER, SHIELDS, HAMBLEN, COHEN, CLAPP, JACOBS, WRIGHT, PARR, and WILLIAMS, JJ., agree with this opinion.

WILBUR, NIMS, and GERBER, JJ., did not participate in the consideration of this case.