Broadway Theatre League of Lynchburg, Va. v. United States

• Decision Date: 23 October 1968
• Docket Number: Civ. A. No. 67-C-27-L.
• Court: U.S. District Court — Western District of Virginia
• Parties: BROADWAY THEATRE LEAGUE OF LYNCHBURG, VIRGINIA, INC., Plaintiff, v. UNITED STATES of America, Defendant.

293 F. Supp. 346

BROADWAY THEATRE LEAGUE OF LYNCHBURG, VIRGINIA, INC., Plaintiff, v. UNITED STATES of America, Defendant.

Civ. A. No. 67-C-27-L.

United States District Court W. D. Virginia, Lynchburg Division.

October 23, 1968.

Edward S. Graves, Edmunds, Baldwin & Graves, Lynchburg, Va., for plaintiff.

Robert S. Irons, Asst. U. S. Atty., Roanoke, Va., for the United States.

OPINION and JUDGMENT

DALTON, Chief Judge.

The Broadway Theatre League of Lynchburg, Virginia, Inc., hereinafter referred to as the League, brings this action pursuant to the provisions of 28 U.S.C.A. § 1346(a) (1), seeking to recover income taxes including interest and penalties imposed, alleged to have been erroneously and illegally assessed and collected by the Internal Revenue Service for the fiscal years ending April 30, 1963, and April 30, 1964. The basis of the claim is that the defendant wrongfully refused to grant the League exemption from federal income taxes under Section 501(a) of the Internal Revenue Code of 1954 as an organization described in Section 501(c) (3) of the United States Code.¹ Also, as a result of this action, it is alleged that the penalties assessed were without authority.

Generally, in order to sustain a claim for exemption under Section 501 (c) (3), the taxpayer must prove: "(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." Huron Clinic Foundation v. United States, 212 F.Supp. 847 at 850 (D. South Dakota 1962) rev'd on other grounds 324 F.2d 43 (8th Cir. 1963). There is no dispute as to (4), and this court need only resolve the issues concerning (1), (2) and (3). Both parties, pursuant to Rule 56 of the Federal Rules of Civil Procedure, have moved for summary judgment. The facts relating to this case are not in dispute and are as follows:

The League was organized in 1962 in Lynchburg, Virginia, by a group of citizens interested in the theatre. Its purposes, as originally stated in its charter, were set forth in Article B:

"B. The purposes for which the corporation is formed are:

1. To promote and cultivate in the citizens of Lynchburg, Virginia, and its surrounding area, an interest in good theatrical performances of all kinds;

2. To provide for the citizens of Lynchburg, Virginia, and its surrounding area, an opportunity to enjoy professional theatrical performances;

3. To build and maintain, through a non-profit plan, a permanent theatre audience; and,

4. To foster and encourage the public appreciation and study of drama and the other fine arts in general."

The League is a non-stock, non-profit corporation organized under Virginia state law, with no members. It is governed by a self-perpetuating Board of Directors who serve without compensation, donating their services as a civic contribution. Workers, who solicit memberships by the sale of seasonal tickets during membership campaigns, receive no compensation. Students interested in the theatre are used as ushers and receive free admission to the plays, but no compensation.

The League has engaged and continues to engage services of various persons and organizations on a contractual basis in its operation. Such services include legal services, secretarial and clerical services, rental services of the E. C. Glass High School Auditorium, services of the local newspaper to publish publicity and the services of a booking agent. The League, in its first year of operation negotiated a contract with United Performing Arts, Inc., (hereinafter referred to as United), a booking agent. The contract was for a term of one year, with an option for renewal by the plaintiff.

Because the contract and its terms are germane to the present controversy they are set forth in some detail. The contract consists of a printed form provided by United, with an addendum modifying some items appearing on the face of the printed form and adding other items. The major provisions of the contract provide that: the League shall annually conduct a membership campaign of at least a week's duration to sell seasonal tickets to a theatre series of not less than four attractions; the price of the seasonal tickets is to be mutually determined by United and the League; United is to provide campaign and promotional material for the membership drive; United is to endeavor to make available at least four high quality theatrical attractions during the theatrical season; the League shall deal exclusively with United for the term of the contract; no single admission tickets shall be sold to the general public; the League shall prepare and distribute suitable programs to the audiences with any monies received for the sale of advertising space belonging exclusively to the League; the League shall bear the expense of such things as local musicians, piano rental, transfer men, salaries of stage hands, cost of campaign dinners, cost of programs, etc., provided that no expense shall be incurred by United for the League without the League's prior written approval; the League shall pay United, as compensation for its services, fifteen percent (15%) of the aggregate membership dues; the League shall maintain accurate books and records of accounting open to United upon request; the agreement is for a term of one year with an option for one-year renewal by the League; the League acknowledges that United has an interest in the continuance of the League and that United shall have the right to attempt reorganization of the League if any or all of the officers resign or the League's continuance and permanence is for any other reason threatened; in the event that the funds raised by the League shall exceed its expenses, including the service fee to United, the League may use the funds as it so desires within its corporate structure as a non-profit organization; in the event a show fails to appear, and a mutually agreed upon substitute show cannot be acquired, or a show is not presented because of the League's inability to obtain the E. C. Glass Auditorium, then United will reimburse the League twenty-five percent (25%) of the service fee paid to United by the League for each show not presented in a four show series or twenty percent (20%) of such fee for each show not presented of a five show series; that if the initial membership campaign should fail to enroll sufficient members, then the membership dues are to be refunded and in the event that less than $23,405.00 is raised by the membership dues, then United shall not be entitled to any compensation, the membership dues shall be refunded and no play shall be contracted for, or presented on behalf of the League; excepting the special provisions of first campaign drive for the first year, the campaign expenses shall be paid by the League. The contract was executed on April 9, 1962, and signed by a representative of United and by an officer of the League.

The League's first fiscal year ended on April 30, 1963. On June 4, 1963, the League submitted an application for exemption from federal income tax to the District Director in Richmond, Virginia. The application was forwarded to the National Office of the Internal Revenue Service (hereafter IRS) in Washington, D. C. and by letter dated January 9, 1964, the League was notified that it did not meet the organizational or operational requirements under Section 501(c) (3) of the Internal Revenue Code of 1954 for exemption from federal taxation under Section 501(a). The reasons stated for the denial of exemption were that the stated purposes for which the League was organized were broader than the charitable, educational or literary purposes specified in Section 501(c) (3) and that the operations, as indicated from the financial statements, do not qualify as being in furtherance of exempt purposes.

A protest to this ruling was filed by the League on February 7, 1964. In its protest the League argued that its purposes were charitable and educational since the promotion of theatrical performances had traditionally been so regarded. It also argued that all charitable organizations had to obtain and pay for services and commodities from profit-making organizations, but that this in no way defeats the purposes of a charitable organization. In addition it was pointed out that the IRS letter denying exemption had incorrectly stated that the contract with United was a three year contract, when in fact, by virtue of the addendum executed simultaneously, it was a one year contract with a renewal option by the League.

By a letter dated February 17, 1965, the IRS reaffirmed its earlier ruling denying the exemption. The letter stated that cultural organizations devoted to the promotion of the arts which otherwise meet the statutory requirements for exemption under Section 501(a) of the Code of 1954 may qualify for exemption as educational or charitable. Rev.Rul. 64-174, 1964-1 Cum.Bull. 183; Rev.Rul. 64-175, 1964-1 Cum.Bull. 185. The letter further stated that the presentation of theatrical productions for the benefit of the community is included within the promotion of the arts; but that the promotion of the arts does not include aid to commercial theatre or other private interests. Because of the contractual relationship with United, the IRS ruled that the League was providing substantial aid to United in its commercial operation as a booking agent and therefore was not operated exclusively in furtherance of any of the purposes specified in Section 501(c) (3). In denying the exempt status, the IRS suggested that if the contract with United were terminated and the articles of incorporation of the League were amended to include only purposes within the provisions of Section 501(c) (3), that upon reconsideration an...