Boman v. Commissioner of Internal Revenue

• Decision Date: 22 January 1957
• Docket Number: No. 15644.,15644.
• Citation: 240 F.2d 767
• Parties: Paul G. BOMAN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

240 F.2d 767 (1957)

Paul G. BOMAN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 15644.

United States Court of Appeals Eighth Circuit.

January 22, 1957.

John W. Hughes, Chicago, Ill. (John E. Hughes and Harold R. Burnstein, Chicago, Ill., were with him on the brief), for petitioner.

Marvin W. Weinstein, Atty., Dept. of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., and Lee A. Jackson, Harry Baum, and Melvin L. Lebow, Attys., Dept. of Justice, Washington, D. C., were on the brief), for respondent.

Before GARDNER, Chief Judge, and VAN OOSTERHOUT and WHITTAKER, Circuit Judges.

VAN OOSTERHOUT, Circuit Judge.

Dr. Paul G. Boman, hereinafter called taxpayer, has petitioned this court to review the decision of the Tax Court upholding the Commissioner's determination disallowing taxpayer's charitable contributions deductions for gifts he made to Duluth Clinic Foundation, hereinafter called Foundation, in the years 1946 to 1949, inclusive.

The sole issue involved in this appeal is whether the Foundation qualifies as an organization to which deductible contributions may be made under the provisions of section 23(o) of the Internal Revenue Code of 1939, as amended, 26 U.S.C.A. § 23(o). The facts are stipulated and are not in dispute. They are set out quite fully in the Tax Court's decision reported at 26 T.C. 660, and will not be repeated in detail.

During all times here material taxpayer has been a physician, practicing his profession at Duluth, Minnesota, and a member of the Duluth Clinic, a partnership of practicing physicians at Duluth. In 1919 the Clinic organized Octagon Investment Company, a corporation. Octagon stock was purchased by members of the Clinic and also by outsiders. Octagon, with the aid of a $165,000 bank loan, in 1926, built and leased to the Clinic the building in which the Clinic conducts its business. All Octagon stock, except qualifying shares held by three members of the Clinic as trustees, was retired and replaced by Octagon notes.

On July 18, 1945, the Foundation was incorporated under Minnesota law as a corporation exclusively for charitable, scientific, and educational purposes. On September 15, 1945, the Clinic transferred by gift to the Foundation all its furniture, fixtures, and tangible personal property used in the Clinic. The Foundation then leased all this property to the Clinic on a year to year basis, renewable for ten years, at an annual rental of 16 per cent of the cost or fair market value of the property, whichever might be greater.

On December 1, 1945, Octagon executed an irrevocable lease of the building housing the Clinic to the Clinic for a period of 15 years at a rental of $2,600 per month. The lease contains a provision that rental can be reduced by agreement between the Clinic and the Foundation, but not below an amount sufficient to pay mortgage principal installments, interest, operating expenses, and taxes. In 1946 all of the Octagon stock was transferred to the Foundation. On December 27, 1947, Octagon conveyed title to the building housing the Clinic to the Foundation. The Foundation assumed the balance due on the building mortgage in the amount of $148,500 and liability on Octagon's notes, aggregating $104,500, which had been issued in exchange for Octagon stock.

The Tax Court found that contributions of members of the Clinic to the Foundation during the 1946 to 1949 period amounted to $185,198.98 in cash and property. The charitable deductions claimed by taxpayer did not exceed his proportionate share of the gift to the Foundation.

Taxpayer contends that his share of the Clinic's gifts to the Foundation is deductible as charitable contributions under section 23(o) of the Internal Revenue Code of 1939, as amended, which provides:

"In computing net income there shall be allowed as deductions:

* * * * * *

"(o) Charitable and other contributions. In the case of an individual, contributions or gifts payment of which is made within the taxable year to or for the use of:

* * * * * *

"(2) A corporation, trust, or community chest, fund, or foundation, created or organized in the United States or in any possession thereof or under the law of the United States or of any State or Territory or of any possession of the United States, 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 * * *."

Section 101(6) of the Internal Revenue Code, 1939, 26 U.S.C.A. § 101(6), relating to corporations exempt from taxation, contains very similar language.

All parties agree that the tests to be applied in determining whether the contributions here involved are exempt under section 23(o) are those stated by this court in Duffy v. Birmingham, 190 F.2d 738, at page 740, as follows:

"To sustain its claim, taxpayer carried the burden of proving (1) that it was organized exclusively for charitable purposes, (2) that it is operated exclusively for charitable purposes, (3) that no part of its net earnings inured to the benefit of any private shareholder or individual, and (4) that no substantial part of its activities consist of carrying on propaganda or otherwise attempting to influence legislation. * *"

See Treasury Regulations 111, Section 29.101(6) as amended by T.D. 5928, 1952-2 Cum.Bull. 181; Merten's Law of Federal Income Taxation, Section 34.15.

The Tax Court agreed with the Commissioner's contention that taxpayer had not carried the burden of proving that the Foundation met the tests set out in the Duffy case. In order to determine whether such conclusion is clearly erroneous, we shall separately consider each element of proof stated to be essential in the Duffy case.

We are satisfied that the Foundation was organized exclusively for charitable purposes. The Tax Court so found, stating:

"The provisions of the charter of Foundation are quite adequate for a charitable corporation but they, alone, are not determinative of the issue here. * * *"

The certificate of incorporation includes the following:

"2. This corporation is organized and shall be operated exclusively for charitable, scientific and educational purposes, including, among other things, the aid of the sick and disabled, the study of the causes, characteristics, prevention and cure of human ailments and injuries, and problems of general public hygiene and health, and the promotion of medical, surgical and scientific research, knowledge, skill and education.

"* * * All net income from any property, and all the proceeds of any disposition thereof, and all its net earnings and income shall be used exclusively for the promotion of its charitable, scientific and educational purposes. * * *"

The certificate also provides that, upon dissolution or termination of the Foundation, all of its assets, after payment of its obligations, shall be delivered to such nonprofit organization for medical education or research as may be designated by resolution of the directors, or, in default of such resolution, to the University of Minnesota for the benefit of its College of Medicine.

The Foundation also met the requirement that it be operated exclusively for charitable purposes. The Commissioner in his argument emphasizes the word "exclusively" in the exemption statute, heretofore quoted, and insists that the Foundation was not operated exclusively for charitable purposes, contending that the Foundation was a mere adjunct of the Clinic and a business enterprise.

The Commissioner and the Tax Court relied upon the Tax Court's decision in C. F. Mueller Co. v. Commissioner, 14 T.C. 922, reversed 3 Cir., 190 F.2d 120, and Lesavoy Foundation v. Commissioner, 25 T.C. 924, reversed 3 Cir., 238 F.2d 589. Reliance is also placed upon Eaton Foundation v. Commissioner, 9 Cir., 219 F.2d 527, and United States v. Community Services, 4 Cir., 189 F.2d 421.

The two cases last cited support the Commissioner's position. Duffy v. Birmingham, supra, cited by the Commissioner, is of no help to him, as in that case we expressly stated that we did not reach the issue we are now considering.

Better Business Bureau of Washington, D. C. v. United States, 326 U.S. 279, 66 S.Ct. 112, 90 L.Ed. 67, is clearly distinguishable from our present case, as there the Court found petitioner's activities were largely animated by commercial purposes and were directed to ends other than education.

Many courts have held that the destination of income, rather than the source of income, is the ultimate test of exemption under the statute we are considering. Trinidad v. Sagrada Orden, 263 U.S. 578, 44 S.Ct. 204, 68 L.Ed. 458; C. F. Mueller Co. v. Commissioner, supra; Roche's Beach, Inc., v. Commissioner, 2 Cir., 96 F.2d 776; Debs Memorial Radio Fund v. Commissioner, 2 Cir., 148 F.2d 948; Commissioner of Internal Revenue...