Board of Publication of Methodist Church v. State Tax Commission

Citation396 P.2d 212,239 Or. 65
PartiesBOARD OF PUBLICATION OF THE METHODIST CHURCH, a not for profit corporation, Respondent, v. Oregon STATE TAX COMMISSION, Appellant.
Decision Date04 November 1964
CourtSupreme Court of Oregon

Gerald F. Bartz, Asst. Atty. Gen., Salem, argued the cause for appellant. With him on the briefs were Robert Y. Thornton, Atty. Gen., and Carlisle B. Roberts, Asst. Atty. Gen., Salem.

Randall S. Jones, Portland, argued the cause for respondent. With him on the brief was Frank Phelps, Portland.

Before McALLISTER, C. J., and ROSSMAN, PERRY, SLOAN, O'CONNELL, GOODWIN and DENECKE, JJ.

SLOAN, Justice.

It is necessary to decide, in this case, if plaintiff is exempt from Oregon corporation excise taxes as permitted by ORS 317.080(4). The Tax Court held that it was, the Commission appeals.

Plaintiff is a non-profit corporation organized under the laws of Illinois. Plaintiff is wholly owned and controlled by the Methodist Church. Plaintiff was organized by the Methodist Church to consolidate its printing, publishing and sales efforts that had previously been divided between four predecessor corporations. Plaintiff prints, publishes and sells all types of religious publications, such as Sunday School lessons, magazines, church programs and the like, all of which are sold to churches and, presumably, church officials, teachers and the public generally. It sells Bibles, of course, but these are printed by others. In addition plaintiff publishes and sells popular and nonreligious books and magazines of various kinds. The books of general interest are published under the labels of Abingdon Press and Apex Paperbacks. These books provide a variety similar to that of any other publisher of books intended for sale to the public. Plaintiff also sells movie film, furniture, jewelry, toys and a variety of other products. Most of the selling of the materials described is by outlets bearing the name of Cokesbury Book Stores.

There is a Cokesbury Book Store in Portland. This store, located in the heart of downtown Portland, is not unlike any other commercial book store in appearance or in the goods offered for sale. The evidence reflects that the merchandise in the store suggests a little more flavor of relatious significance than other stores but any unknowing customer would find little difference between plaintiff's store and other book stores in the same business area. The store does a large volume of business. It is said that about 85 percent of plaintiff's Portland sales are to churches and church organizations. The remaining 15 percent of its sales plaintiff is unable to account for. Some of the sales are, of course, of material strictly religious in character. Some of the sales are of materials having no direct relationship to religion in any form.

For our purposes we think it is immaterial to what extent its sales may be related to church activity or in the furtherance of particular religious beliefs. All of plaintiff's business is for profit. It is commercial. It is of little consequence whether it sells Bibles for a profit or whether it sells pianos or tractors. It is in business to profit. It is in direct competition with other privately owned publishers and retail stores doing a similar business.

Plaintiff's total national receipts for the fiscal year ending May 31, 1961, were in excess of $26,000,000. This is roughly segregated by plaintiff with five categories of receipts: 1. Sunday School materials. 2. Magazines. 3. Printing for other organizations. 4. Books and supplies. 5. Sales of materials not produced or published by plaintiff.

Plaintiff's net proceeds after deductions for expenses, costs and revenues, are paid to the Methodist Church and are used to apply on or pay pensions for retired ministers, widows of ministers and their children. Plaintiff, therefore, contends that inasmuch as the fruits of plaintiff's business are eventually destined for a charitable or religious purpose plaintiff's business income is therefore exempt from taxation.

ORS 317.080 provides:

'The following corporations are exempt from the taxes imposed by this chapter:

* * *

* * *

'(4) 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 stockholder of individual.'

The first question to consider is presented by plaintiff's argument that in cases involving religions or charities the statutes specifying the exemptions are to be liberally construed. In support of this argument plaintiff cites cases decided by the Federal courts interpreting similar exemptions allowed by the Internal Revenue Code. The cases cited clearly say that the Federal courts will liberally construe an exemption statute for the purpose mentioned. Oregon from the first interpretive decision of this court until the last has held exactly the opposite. Portland Hibernian Benevolent Society v. Kelly, 1895, 28 Or. 173, 196, 42 P. 3, 30 L.R.A. 167, to Santiam Fish & Game Ass'n v. Tax Comm., 1962, 229 Or. 506, 516, 368 P.2d 401. And this has been true whether the court was concerned with the taxation of property. Multnomah School of Bible v. Multnomah County, 1959, 218 Or. 19, 343 P.2d 893, or of income, Oregon Physicians' Serv. v. State Tax Comm., 1960, 220 Or. 487, 493, 349 P.2d 831. Regardless of some of the decisions by the Federal courts, the rule of strict construction is established in Oregon tax law.

It is equally true that the Oregon decisions already cited, and other similar cases, deny plaintiff corporation, as such, an exempt status. The theory underlying exemption has been no better expressed anywhere than by Mr. Justice Wolverton in Willamette University v. Knight, 1899, 35 Or. 33, 44, 45, 56 P. 124, 128:

'This brings us to the second question--whether plaintiff has brought itself within the purview of the statute. If we keep in mind the cardinal principles forming the basis of the doctrine which we have adopted, it will aid us materially in applying the facts to the law. These are that a literary, benevolent, charitable, or scientific institution of the character contemplated by the statute renders such a service to the public that it is entitled to the exemption; and it is because it is capable of and is presumed to render such a service that it is upheld under the constitution, and is permitted to form an exception to the just and equitable principle that all taxes should be equal and uniform, and that property so occupied by such an institution does not come in competition with the property of other owners or with those embarked in other occupations or pursuits.'

This idea has permeated all of our later decisions above cited. The competitive, commercial nature of its business precludes exemption to plaintiff.

However, plaintiff's primary contention has been that the State of Oregon has adopted what has become known as the 'destination of income' theory for determining the right to exemption. It has been argued that it is the destination of the income not the source thereof that eventually determines the right to exemption.

This theory of exemption developed from a decision of the Federal Supreme Court in Trinidad v. Sagrada Orden, 1924, 263 U.S. 578, 44 S.Ct. 204, 68 L.Ed. 458. In that case, at 263 U.S. 581, 44 S.Ct. 205, the Court in referring to the Federal Exemption Statute stated that: '[the statute] says nothing about the source of the income, but makes the destination the ultimate test of exemption.' This language was later used in the case of Roche's Beach, Inc. v. Commissioner of Internal Revenue (2nd Cir.1938), 96 F.2d 776, to enable a corporation organized for profit but where the income therefrom was used for the benefit of charities, to be declared exempt from federal income tax. In the Roche's Beach case Judge Learned Hand dissented. The case has been followed by some of the other circuit courts but not in all. For reasons later stated it is not necessary to make further reference to these cases. They are examined in Blodgett, Tax Status of Business Activities of Charities Prior to the Revenue Act of 1950, Proc. of NYU 9th Ann.Inst. on Fed. Taxation, 885 (1951), and the cases are also dissected in United States v. Community Services (4th Cir. 1951), 189 F.2d 421. We have mentioned these federal cases because plaintiff's basic assumption has been that the destination of income doctrine was, prior to 1950, firmly established as the federal rule of exemption. We think the cases cited indicate that the federal rule was not firmly established but was in conflict.

It is well known, of course, that prior to 1950, and because of these federal decisions (most of which did not receive Internal Revenue acquiescence) many valuable and profitable businesses and properties were transferred to various exempt institutions for income tax advantages. In the Revenue Act of 1950 Congress adopted various statutes to avoid this practice. Here we are concerned with two of the sections of that Act. One of these, § 301(b), of the Revenue Act of 1950, was designed to avoid the federal exemption for so-called 'feeder' corporations. The other, § 301(a), we are concerned with, imposed the income tax on a business conducted by an otherwise exempt organization which was 'unrelated' to its principal function. The nature and purpose of these acts was explained in Senate Report ...

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