Associated Master Barbers & Beauticians of America, Inc. v. Comm'r of Internal Revenue
| Decision Date | 20 October 1977 |
| Docket Number | Docket Nos. 2501-75,604-77. |
| Citation | 69 T.C. 53,48 A.L.R. Fed. 165 |
| Parties | ASSOCIATED MASTER BARBERS & BEAUTICIANS of AMERICA, INC., PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Held: 1. During the years in issue petitioner did not qualify as a tax-exempt trade association or business league within the provisions of sec. 501(c)(6), I.R.C. 1954, and sec. 1.501(c)(6)-1, Income Tax Regs. It engaged in a regular business of a kind ordinarily carried on for profit and its activities were directed to the performance of particular services for individual members. Therefore, respondent properly revoked petitioner's tax-exempt status for such years.
2. Petitioner is a membership organization operated primarily to furnish services or goods to its members and it therefore subject to the provisions of sec. 277, I.R.C. 1954. Accordingly, petitioner had taxable income of $23,064.89 for its taxable year ended Sept. 30, 1973, and is not entitled to a net operating loss carryback of $46,109.87 to its taxable years ended Sept. 30, 1970, and Sept. 30, 1971. William M. Claytor, for the petitioner.
Eric B. Jorgensen, for the respondent.
In these consolidated cases respondent determined the following deficiencies in petitioner's Federal income taxes:
+-------------------------------+
¦TYE Sept. 30— ¦Deficiency ¦
+------------------+------------¦
¦ ¦ ¦
+------------------+------------¦
¦1967 ¦$7,789.25 ¦
+------------------+------------¦
¦1970 ¦591.96 ¦
+------------------+------------¦
¦1971 ¦3,697.60 ¦
+------------------+------------¦
¦1973 ¦5,067.00 ¦
+-------------------------------+
The issues presented for decision are (1) whether the petitioner qualified as an organization exempt from taxation under section 501(c)(6)1 during the years in question and (2) if the petitioner was not exempt from taxation, whether it was a membership organization within the meaning of section 277, so as to prevent the carryback of its net operating loss incurred in its taxable year ended September 30, 1973, to its taxable years ended September 30, 1970, and September 30, 1971.
Some of the facts are stipulated. The stipulation of facts and exhibits attached thereto incorporated herein by this reference.
Associated Master Barbers & Beauticians of America, Inc. (petitioner), is an Illinois corporation whose principal place of business and principal office was located at 219 Greenwich Road, Charlotte, N. C., when the petition was filed in this case.
For all times pertinent herein, the petitioner prepared its Return of Organization Exempt From Income Tax (Form 990) and kept its books and records on the accrual method of accounting. Petitioner's tax return (Form 990) for its taxable year ended September 30, 1967, was filed with the District Director of Internal Revenue at Greensboro, N. C. Petitioner's tax returns (Forms 990) for its taxable years ended September 30, 1968, September 30, 1969, September 30, 1970, September 30, 1971, September 30, 1972, and September 30, 1973, were filed with the Internal Revenue Service Center, Philadelphia, Pa. Petitioner filed an Exempt Organization Income Tax Return (Form 990-T) for its taxable year ended September 30, 1971, with the Internal Revenue Service Center, Philadelphia, Pa.
Petitioner was incorporated on December 13, 1924, in the State of Illinois as a nonprofit organization with its headquarters in Chicago. In August 1967, it moved to its present headquarters located in Charlotte, N. C. From 1927 to the present, it has filed as a tax-exempt organization.
According to petitioner's articles of incorporation, the stated purpose for which petitioner was formed was “to found and conduct an association of Master Barbers for mutual co-operation in business and not for profit.” In its original constitution and bylaws, adopted in November 1924, petitioner's purpose for organization was stated in the preamble as follows:
WHEREAS, Unity guided by intelligence is a source of strength that can withstand all attacks, and that without intelligent organization we cannot acquire the advantages of standardization which will enable us to act together, for without organization we cannot concentrate our strength and direct our efforts toward the desired end, that we may elevate the standard of the Barber Profession.
THEREFORE, For the purpose of promoting such unity of sentiment and action among the Master Barbers throughout America, joining them closer together for united protection:
BE IT RESOLVED, That such an organization be created and known as the Associated Master Barbers of America.
On March 31, 1927, petitioner was originally determined by the respondent to be an organization exempt from tax under section 231(7), Revenue Act of 1926, now section 501(c)(6). This exempt status was subsequently reaffirmed on June 13, 1938, May 20, 1941, and December 16, 1944. On January 24, 1947, the petitioner's subordinate chapters were found to be exempt from tax under section 101(7), I.R.C. 1939, now section 501(c)(6). Their exempt status was subsequently reaffirmed in 1957, 1958, 1960, 1961, 1963, 1965, 1966, 1967, and 1976.
Respondent revoked the petitioner's exempt status by determination letter dated February 28, 1973. Its exempt status was revoked effective October 1, 1966. As of the present time, respondent has not revoked the exemptions for petitioner's subordinate chapters.
At various times during its existence the petitioner has instituted certain insurance programs and made them available to its members. At its national convention held in November 1927, the petitioner's members adopted a resolution establishing the basic death benefit plan, which became effective as of January 1, 1928. At its national convention held in 1931, the petitioner's members adopted a resolution establishing the basic sick benefit plan, which became effective as of January 1, 1932. A voluntary supplemental benefit plan, known as the blue plan, was initiated as of March 1, 1955.
During the period from October 1, 1966, through September 30, 1971, the petitioner administered and self-insured the death benefits and basic sick plans and the blue plan.
A new basic benefit program was approved by a referendum conducted with individual members and concluded August 15, 1972, providing death benefits as follows: through age 35, $3,000 in death benefits; ages 36 through 55, $2,000 in death benefits; ages 56 through 65, $1,000 in death benefits. Those members age 66 and above as of January 1, 1972, were eligible to receive any sick and death benefits according to the schedule of the old basic benefit program. The new basic benefit program was underwritten by Globe Life Insurance Co.
A major benefit program of insurance, underwritten by Zurich Insurance Co., was initiated as of July 1, 1967. It is a voluntary program for certain classes of the petitioner's membership. Petitioner annually receives a 1 dollar fee for administrative services from Zurich for each participating member.
In May 1959, a hospitalization insurance plan providing benefits of $100 per week, and in August 1959, a comprehensive hospitalization insurance plan, were initiated and underwritten by Craftsman Life Insurance Co. and later Hanover Insurance Co. which purchased Craftsman Life Insurance Co. The petitioner annually received a fee of 50 cents for administrative services from Craftsman and Hanover for each participating member. The fee received by petitioner was for in-house administrative services consisting of minor recordkeeping duties.
In 1964, malpractice and personal liability insurance underwritten by Lloyds of London and later by National Fire & Marine Insurance Co. of Omaha, Nebr., was initiated. It was discontinued around April 1975.
As of January 1970, the petitioner discontinued the monthly publication of its magazine known as Master Barber and Beautician Magazine. The Professional Men's Hairstylist and Barber's Journal owned and published monthly by Service Publications became the petitioner's official journal in January 1970. Each month the magazine carries about 16 pages of news and information concerning and affecting the petitioner and its members. The journal also carries news and information concerning the barbering and beautician professions as a whole. Such information consists of general articles on hairstyling, hair and scalp care, shampooing methods, shaving techniques, hair coloring, hair piece design and placement, and shop management. In addition, the journal carries articles dealing with various benefits, goods, services, and insurance programs offered by the petitioner to its members. The petitioner received income from advertising for its magazine in the amounts of $17,803.09 and $4,532 for its taxable years ended September 30, 1967, and September 30, 1970, respectively.
The average total membership of the petitioner during its taxable years 1967, 1970, and 1971 was 9,041, 6,832, and 5,964, respectively. For each of its taxable years ended September 30, 1967, September 30, 1970, and September 30, 1971, the average number of petitioner's members by membership category was as follows:
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