C.F. Mueller Co. v. Comm'r of Internal Revenue

• Decision Date: 09 November 1970
• Docket Number: Dockets Nos. 3734-65,1985-66.
• Citation: C.F. Mueller Co. v. Comm'r of Internal Revenue, 55 T.C. 275 (T.C. 1970)
• Parties: C. F. MUELLER COMPANY, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

55 T.C. 275

C. F. MUELLER COMPANY, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Dockets Nos. 3734-65

1985-66.

United States Tax Court

Filed November 9, 1970.

Robert E. Frisch and Charles A. Simmons, for the petitioner.

Owen A. Knopping, for the respondent.

The stock of C. F. Mueller Co. (Mueller) was held in trust for the exclusive benefit of the School of Law of New York University. During the years in issue, Mueller made payments, which it characterized as ‘charitable contributions' to Law Center Foundation, an exempt organization which was organized and functioned solely for the benefit of the school of law. Held, the purported charitable contributions were made for the benefit of the only entity having a beneficial interest in Mueller and are, in the circumstances of this case, nondeductible dividend distributions. Crosby Valve & Gage Co. v. Commissioner, 380 F.2d 146 (C.A. 1), affirming46 T.C. 641; United States v. Knapp Brothers Shoe manufacturing Corp., 384 F.2d 692 (C.A. 1), certiorari denied390 U.S. 989; Sid Richardson Carbon & Gasoline Co. v. United States, 416 F.2d 867 (C.A. 5).

The Commissioner determined the following deficiencies in petitioner's Federal income tax for the calendar years 1959 through 1963:

+--------------------+
                ¦Year  ¦Deficiency   ¦
                +------+-------------¦
                ¦1959  ¦$44,200      ¦
                +------+-------------¦
                ¦1960  ¦44,200       ¦
                +------+-------------¦
                ¦1961  ¦39,000       ¦
                +------+-------------¦
                ¦1962  ¦44,200       ¦
                +------+-------------¦
                ¦1963  ¦59,800       ¦
                +--------------------+
                

The only question presented for decision is whether certain payments made by petitioner to the Law Center Foundation were deductible as charitable contributions or whether they were in substance nondeductible dividend distributions to or for the benefit of New York University.

FINDINGS OF FACT

The parties have stipulated certain facts, which, together with the attached exhibits, are incorporated herein by this reference. Among the stipulated facts are those set forth in the opinions in C. F. Mueller Co. v. Commissioner, 190 F.2d 120 (C.A. 3), reversing14 T.C. 922, which was litigated by the parties herein. The facts as found in that case are also incorporated by reference and will be reiterated here where helpful to a better understanding of the issue presently under consideration.

Petitioner C. F. Mueller Co. (Mueller) is a corporation organized under the laws of the State of Delaware. At all times relevant to the proceedings herein, it has maintained its principal place of business in Jersey City, N.J. Mueller filed corporate income tax returns for the calendar years 1959 through 1963 with the district director of internal revenue at Newark, N.J.

Mueller was incorporated on August 21, 1947, for the purpose of benefiting the School of Law of New York University (the law school). On August 28, 1947, Mueller acquired, with borrowed funds, all of the outstanding stock of C. F. Mueller Co., a New Jersey corporation, hereinafter referred to as the old company. The old company had been a taxable business corporation, successfully engaged in the manufacture and sale of macaroni and similar products. On the date of its acquisition, the old company merged into Mueller, and since that time Mueller has carried on the business formerly conducted by the old company. ¹

The incorporation of Meuller and the acquisition of the old company were carried out by H. T. Sorg, representing Arthur T. Vanderbilt, then dean of the law school, and a group of other persons interested in the school. Vanderbilt and his associates expected that Mueller would be a steady source of income in the future which would be of great benefit to the law school and to a number of related programs.

Mueller's certificate of incorporation, as modified on March 25, 1948, provided in part as follows:

First: The name of the corporation (hereinafter sometimes referred to as the ‘Foundation’) is

C. F. Mueller Company

Third: The Foundation is organized exclusively for charitable, scientific, literary and/m r educational purposes and no part of its income or property shall individual or corporation other than New York University for the exclusive benefit of its School of Law. The directors shall from time to time distribute to New York University for the exclusive benefit of its School of Law such part of the property and/or net income of the Foundation as they may determine and as may legally be distributable. The Foundation shall not in any way directly or indirectly engage in carrying on propaganda or otherwise attempt to influence legislation.

Fourth: The objects for which the Foundation is formed:

To manufacture, buy, sell, deal in and deal with, import and export macaroni, spaghetti (sic), vermicelli, alphabets, fancy pastes, noodles, egg noodles, biscuits, crackers, cakes, pastry, confections and all like and kindred food products, to manufacture, prepare for market, market and sell the same; including the acquisition by purchase, manufacture or otherwise of all materials, supplies and other articles necessary or convenient for use in connection with and in carrying on the business herein mentioned or any part thereof;

To produce, purchase, sell and deal in butter, cheese, eggs, milk, grain and cereals of every kind and to manufacture, buy and sell flour and other food articles manufactured from grain and cereals; and

To buy and sell, can, preserve, prepare for market and market all kinds of fruits and vegetables and to manufacture and sell all kinds of food articles made therefrom.²

Fifth: The amount of the total authorized capital stock of the Foundation is $1,000 divided into 10 shares of the par value of $100 each. The amount of capital with which it will commence business is $1,000.³

Ninth: (a) The directors shall have power by the affirmative vote of a majority of the board, included in which majority shall be at least two of the Class A directors, to make and to alter or amend the by-laws; to fix the amount to be reserved as working capital; and to authorize and cause to be executed, mortgages and liens without limit as to the amount, upon the property and franchises of the Foundation.

(b) The directors shall have authority, with the consent in writing, and pursuant to a vote of the holders of two-thirds of the capital stock issued and outstanding to dispose, in any manner, of the whole property of the Foundation.

(e) Distributions of income or property of the Foundation may be made to New York University although one or more of the stockholders, directors or officers of the Foundation may be connected or associated with New York University in some capacity.

(g) No stockholder shall at any time be entitled to dividends on his shares; nor shall he at any time be entitled to any of the profits or assets of the Foundation. The profits or assets of the Foundation available for distribution shall be paid from time to time, at the discretion of the directors, to New York University for the exclusive benefit of its School of Law; and in the event of the liquidation, dissolution, or winding up of the Foundation, whether voluntary, involuntary or by operation of law, except as may otherwise be provided by law, the directors of the Foundation shall, after payment of all creditors, distribute the assets of the Foundation to New York University for the exclusive benefit of its School of Law.⁴

Mueller's bylaws, as effective on September 9, 1964, made the following provisions with regard to directors:

Section 1. The direction and management of the affairs of the Foundation and the control and disposal of its property and funds shall be vested in a board of directors which shall consist of seven members. The board of directors shall have, in addition to the powers and authority expressly conferred upon it by the Certificate of Incorporation and these By Laws, the right and power and authority to exercise all such powers and do all such acts and things as may be exercised or done by the Foundation as a corporation organized under the Delaware Corporation Law.

Section 2. The board of directors shall consist of seven persons elected annually by the stockholders; four of the directors shall be Class A directors and three shall be Class B directors. Any director elected by the directors as in these By Laws provided shall serve until the next annual election or until his successor shall have been elected and shall qualify, or until his death, or until he shall resign.

Section 3. Each director shall hold office until his successor shall have been elected and shall qualify, or until his death, or until he shall resign.

Section 4. Vacancies among the Class A directors, whether caused by death, resignation or any other reason, shall be filled by the affirmative vote of two-thirds of the Class A directors.

Vacancies among the Class B directors, whether caused by death, resignation or any other reason shall be filled by the affirmative vote of two-thirds of the Class A directors.

Section 5. Each Class A director shall be a student, a former student, or a graduate, or a member or former member of the faculty, or an officer or former officer of administration of the School of Law of New York University.⁵

By virtue of a voting trust agreement, dated August 28, 1947, and modified on March 25, 1948, all 10 shares of Mueller stock were held by a voting trust. Pertinent provisions of the agreement, as modified, were as follows:

WHEREAS, C. F. Mueller Company has been organized for charitable and educational purposes and for the exclusive purpose of benefiting the School of Law of New York University, a charitable and educational institution in the City of New York, State of New York; and

WHEREAS, the Stockholders acquired their shares only to further the purposes of the C. F. Mueller Company and not for their own private gain; and

WHEREAS, on August 28, 1947 the parties hereto entered into a Voting Trust Agreement in order to better...