CIR v. John Danz Charitable Trust

• Decision Date: 26 November 1960
• Docket Number: No. 16729.,16729.
• Citation: 284 F.2d 726
• Parties: COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. JOHN DANZ CHARITABLE TRUST, Respondent.
• Court: U.S. Court of Appeals — Ninth Circuit

284 F.2d 726 (1960)

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. JOHN DANZ CHARITABLE TRUST, Respondent.

No. 16729.

United States Court of Appeals Ninth Circuit.

November 26, 1960.

Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, Harry Baum, Helen A. Buckley, Attys., Department of Justice, Washington, D. C., for petitioner.

F. A. LeSourd, LeSourd, Patten & Adams, Seattle, Wash., for respondent.

Before CHAMBERS, Chief Judge, and JERTBERG and KOELSCH, Circuit Judges.

JERTBERG, Circuit Judge.

Before us is a petition to review a decision of the Tax Court of the United States, 1959, 32 T.C. 469, which ordered and decided that there were no deficiencies in income tax for the taxable years 1948, 1950, 1953 and 1954. The proceedings in the Tax Court were instituted by the respondent to review a determination by the Commissioner of Internal Revenue that respondent had an income tax deficiency of $57,553.88 for the tax years above noted. The Tax Court held that the respondent was organized and operated exclusively for charitable purposes within the meaning of the statute, and that respondent is entitled to exemption from tax during the years in question.

The Tax Court had jurisdiction to review the Commissioner's determination of income tax deficiencies under Section 7442 of the Internal Revenue Code of 1954, 26 U.S.C. § 7442. Jurisdiction of this Court to review is conferred by Section 7482 of the Internal Revenue Code of 1954, 26 U.S.C. § 7482.

This is the second time that the tax exempt status of respondent charitable trust has been involved in litigation in this Court. The first litigation, decided adversely to the trust respondent by the Tax Court, 18 T.C. 454, 1952, was affirmed by this Court, 9 Cir., 1955, 231 F.2d 673, one Judge dissenting. Certiorari was denied 1956, 352 U.S. 828, 77 S.Ct. 43, 1 L.Ed.2d 50.

The facts before the Tax Court were all stipulated and found as stipulated, which included the findings of fact in the prior litigation.

The facts relevant to this review are as follows: The John Danz Charitable Trust, hereinafter referred to as the Trust, is an irrevocable trust created by agreement executed December 31, 1942, between John and Jessie Danz (husband and wife), as grantors, and John Danz, Fred and William Danz, as trustees. The latter two are children of the grantors. At the time of the creation of the trust the grantors transferred to the trust shares of common stock in a corporation.

The trust filed fiduciary income tax returns for the years here involved with the District Director at Tacoma, Washington.

During the years involved in the prior case, 1943 to 1947, inclusive, the trust operated two businesses which accounted for the larger part of the income of the trust. The most substantial one of these businesses was the Savoy Hotel in the City of Seattle, including furniture and fixtures therein, owned by the trust and operated by it from the date of its acquisition, September 15, 1943, until January 1, 1948. During that period, the trust received business income and incurred business expenses in connection with its operation of the hotel. The average of the annual gross receipts from the Savoy Hotel for the years 1943 through 1947 was approximately $141,000, the operating expenses approximately $96,400, and the net income approximately $44,600. The intention of the trustees in purchasing the Savoy Hotel property in 1943 was to operate it, through a real estate company as agent, only until the personal property could be sold and the real property leased to a hotel operator.

By lease effective January 1, 1948, the trust leased the Savoy Hotel to Northwest Operating, Inc., a hotel operator. The lease was for a term of ten years, commencing January 1, 1948. The rental provided for the hotel was a minimum monthly rental of $1,800, together with 25 per cent of the gross income derived from hotel operations in excess of $7,200 per month. With respect to the store space in the building, the lease provided a minimum monthly rental of $500, together with 75 per cent of the gross income derived from its subrental. Northwest Operating, Inc. simultaneously purchased from petitioner the furniture and equipment in the Savoy Hotel for the price of $60,000. The trust simultaneously assigned to Northwest Operating, Inc., its lessor's interest in a five-year lease of a certain storeroom and its lessor's interest in month-to-month tenancies of certain other storerooms, all located in Seattle, Washington. Neither the grantors nor any of the trustees of the trust had or have an interest in Northwest Operating, Inc. The sale price of the furniture and fixtures and the rental agreement for the hotel property were reasonable.

The other business operated by the trust during the years at issue in the prior case involved three retail candy shops. One of these was acquired on September 10, 1943, for $1,514.75, another on September 22, 1943, for $875, and a third on January 31, 1944, for $1,500. The total sales of the candy shops from 1943 through 1947 were $329,233.95, net sales $158,689.10, and expenses $106,435.75. The total net profit from the operation for the same period was $52,650.44. The candy stores were operated in 1948 with net sales of $22,666.95 and a net profit of $1,384.29. Each candy shop was adjacent to a theater owned or managed by Sterling Theaters, Inc. Jessie wife of donor managed the three candy shops without pay because she wanted to make a contribution in that fashion to the acquisition of funds for the trust.

The candy shops were all sold by the trust in June, 1949.

No amendments were made to the trust agreement creating the trust during the years involved in the prior case. However, two amendments were made during the period here involved. On June 15, 1948, an amendment provided that "No funds of these trusts may be loaned directly or indirectly to grantors or either of them." In fact, neither prior to that amendment nor subsequent thereto have any of the funds of the trust been loaned directly or indirectly to the grantors. On March 21, 1949, a further amendment was made to the trust agreement adding the Seattle Trust & Savings Bank, a national banking corporation of Seattle, Washington, as a fourth trustee of the trust. This amendment stated that none of the powers of the trustees of the trust shall be exercised except with the affirmative approval of the Seattle Trust & Savings Bank or unless the bank is one of the trustees voting in favor of the action.

John, William and Fred served as trustees of the trust from the time of its inception until March 21, 1949, at which time the Seattle Trust & Savings Bank was added as trustee by the second amendment described above. These four trustees served until May 21, 1952, when Albert D. Walderon was elected as an additional trustee in place of William, who resigned. The trust has paid no compensation to any of the trustees with the exception of the Seattle Trust & Savings Bank which received compensation in accordance with its usual fee schedule for acting as trustee of trusts of this type. John and Jessie are not stockholders, directors, officers or otherwise interested in Seattle Trust & Savings Bank.

No part of the income or principal of the trust has inured directly or indirectly to the benefit of the grantors, John and Jessie. No joint investments nor any commingling of assets or income have been made with any other trusts created under the trust instrument or with any other person, trust or corporation.

The investments of the trust during each of the years in issue in the instant case consisted entirely of listed securities (except for the donated stock of Sterling Theaters, Inc., which was only a small part of the total outstanding stock of that corporation and played no part in the control or management of the corporation) and improved real property. Two of the four pieces of real property held by petitioner through 1949, and three of the four pieces of real property held from 1950, were for the primary use of the Humanist Societies of Washington, San Francisco and Los Angeles. In 1948, the trust also had inventories of $1,659.03 and equipment costing $5,312.92 in connection with the three small candy stores operated by the trust until they were sold in June, 1949.

The net worth of the trust was $65,862.62 at the end of 1943, $448,420.09 at the end of 1947, $500,070.25 at the end of 1948, and $451,646.79 at the end of 1954. The accumulated net income from the beginning of the trust in 1943 to the end of the year 1947 was $338,888.75, to the end of 1948, $390,528.25; however, at the end of 1954 it had decreased to $273,879.79. Capital gains accounted for $246,999.73 of the accumulated net income from the beginning of the trust in 1943 through 1954; capital gains for the years 1948 through 1954 amounted to $198,346.25. For the seven years 1948 through 1954, there was a decrease in accumulated net income.

The net income during the years before us consisted entirely of rents, dividends, interest and gains on sales of securities and real property, except for the year 1948 when $1,384.29 net profit was received from the operation of the three candy stores.

The investment activity of the trust consisted of seven purchases of various stocks during the year 1948; the purchase of the Hoover Street property in Los Angeles for the Humanist Society of Los Angeles, and one stock purchase, and the sale of one piece of real property and three stocks during 1950; no purchases or sales during 1953; and twelve stock purchases and six stock sales during 1954. All capital transactions were long term.

The trust has not made any purchase of securities or other property for more than an adequate consideration in money or money's worth. All purchases have been from outside persons and have constituted arms-length transactions. Securities have been purchased on the public stock exchanges. No securities or other property have been...