CIR v. Lake Forest, Inc.

• Decision Date: 26 June 1962
• Docket Number: No. 8542.,8542.
• Citation: 305 F.2d 814
• Parties: COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. LAKE FOREST, INC., Respondent.
• Court: U.S. Court of Appeals — Fourth Circuit

305 F.2d 814 (1962)

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. LAKE FOREST, INC., Respondent.

No. 8542.

United States Court of Appeals Fourth Circuit.

Argued April 2, 1962.

Decided June 26, 1962.

Fred E. Youngman, Attorney, Department of Justice (Louis F. Oberdorfer, Asst. Atty. Gen., and Lee A. Jackson and Melva M. Graney, Attorneys, Department of Justice, on brief), for petitioner.

Wallace C. Murchison, Wilmington, N. C. (Carter, Murchison, Fox & Newton, Wilmington, N. C., on brief), for respondent.

Before SOPER, BOREMAN and BRYAN, Circuit Judges.

ALBERT V. BRYAN, Circuit Judge.

"Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare" are exempt from Federal income taxes.¹ Lake Forest, Inc., the Tax Court held, is such an organization. Thus defeated in his claim for taxes in the years 1948 to 1956, the Commissioner of Internal Revenue appeals. The taxpayer operated low-cost housing units — formerly a Government defense housing project — in Wilmington, North Carolina.

We find Lake Forest, Inc., however, is not "civic", but simply a private cooperative organization; its operation is not a work of "social welfare" but a private economic enterprise albeit in the interest of some of the citizens; and even if its objects include a contribution to social welfare, that is not its aim "exclusively". These conclusions are contrary to the judgment of the Tax Court and require us to reverse.

In March 1947 taxpayer Lake Forest, Inc. entered into an agreement with the Federal Public Housing Authority, succeeded by the Public Housing Administration (both are generally known as PHA) for the purchase of two United States defense housing projects. These projects consisted of 249 one-story residential buildings divided into three, four and five-room apartments, a total of 584 dwelling units. The corporation proposed to devote these properties to a cooperative, nonprofit use as homes for its members.

The price was $1,797,000, payable 5% upon delivery of the deed and the balance in monthly installments over the following twenty-five years. The unpaid purchase money was to be secured by a first mortgage on the property to PHA. Possession under the contract was delivered to the taxpayer on April 1, 1947, and the project was operated by the taxpayer from then until April 1, 1948 as PHA's agent. The initial year was allowed the taxpayer as an interim period to permit it to obtain members, gain experience in running the project and secure funds for the required down payment.

Lake Forest, Inc., organized by World War II veterans and others, had been chartered under the laws of North Carolina with the view of buying the housing project. Indeed, the charter was rigidly drawn as required by the PHA: "To assist veterans of the World Wars to purchase and finance their own homes through acquisition of Lake Forest Projects * * * according to priorities defined by the Federal Public Housing Authority. * * *" It was expressly stipulated that the corporation was "not organized for profit and no capital stock is required nor shall any capital stock be issued". The purchase agreement bound the taxpayer to procure PHA approval before amending its charter, bylaws or regulations, and to maintain its status as a nonprofit corporation. Until 1952 one of its 5-member directorate was required to be a representative of PHA.

Membership in the corporation was established by the purchase of "a perpetual use of a dwelling in the Project pursuant to a Mutual Ownership Contract", the number of members being limited to the number of dwellings available. Preference in membership was extended, first, to veterans of World War II presently living in the project and other such veterans who were not then adequately housed; secondly, to veterans of World War I not then adequately housed; thirdly, to veterans of World Wars "regardless of present housing accommodations"; and, fourth, to "other eligible persons".

Each mutual ownership contract was in a form dictated by PHA and substantially provided: acknowledgment of the receipt of $10 membership fee; conferral of the rights and privileges of membership; an agreement by the corporation to sell, and the member to buy, a right of perpetual use and enjoyment of a particular unit at the price as fixed by PHA; and that the right of use would issue if and when taxpayer received a deed to the project. For this right the member promised to pay immediately five per centum of the price, and the balance — with interest — in equal monthly installments.

The members' monthly principal and interest payments were computed so as to be at an end in twenty-five years. But of each member there was also required a monthly operating payment to defray the cost to the taxpayer of operating services and utilities, and to establish reserves therefor. In return, the taxpayer would provide management for the project, pay property taxes and provide insurance, establishing reserves for these items as well as for vacancy and collection costs, repairs and replacements. Contributions to the reserves were set by PHA. The overall plan was that the aggregate of the prices assigned for the 584 units would amount to the purchase price of the project; the total initial deposits of the members would equal the down payment to PHA; and the monthly installments under the membership contracts would satisfy the monthly principal and interest payable to PHA under the mortgage.

A member could transfer his perpetual use to any member of his family, but to no one else without taxpayer's approval. Should a member desire to leave the project, taxpayer had the option to repurchase the perpetual use, but if the option were not exercised, the member could sell the use to any person acceptable to the taxpayer.

About April 1, 1948 the taxpayer received a deed to the project in fee simple, at the same time making the down payment and executing the requisite note and mortgage. Besides authorizing foreclosure for default, the mortgage stipulated that the taxpayer should not dispose of any interest in the property except by mutual ownership contract and, in furtherance of the security of the debt, included the general operating provisions of the charter and by-laws.

From the very first, and with more particularity since a charter amendment in 1954, each member has been credited on the taxpayer's books with his down payment and entire principal payments under his contract. The principal balance due under his mutual ownership contract and his "net equity" in the perpetual use of his unit were made known or available to each member periodically. Generally, transfers of uses back to the corporation or to other purchasers were handled on the basis of return to the seller of his cash payment and all principal payments under the contract (less a monthly depreciation charge upon the buildings and equipment) plus his proportionate shares of the reserve accounts.

Upon dissolution, members who had paid for them in full would receive conveyances of their respective units; those members who had not fully settled for their uses would receive a fair and equitable adjustment in the distributable assets; all membership dues would be returned without dividend or interest; and the community buildings and all parks and playgrounds would be conveyed to a successor nonprofit corporation, municipal corporation, or eleemosynary corporation, or otherwise disposed of as determined by a majority vote of the membership.

For the years in suit the corporation's gross income has been derived from the monthly operating and principal and interest payments by members. By October 1, 1954 the members' equities amounted to $305,968.45. The corporation's gross income during the years in question ranged from $268,000 to $320,000, net figures after expenses varying from a $19,000 loss to an $18,000 profit.

I. Of course, a taxpayer must bring himself substantially within the terms of a statute granting exemption from taxation to claim the benefit it affords. Madison Newspapers, Inc. v. Comm'r., 253 F.2d 129, 130 (7 Cir. 1958); Producers' Creamery Co. v. United States, 55 F.2d 104 (5 Cir. 1932). Taxpayer insists that "civic" in the statute refers only to "leagues", not to "organizations"; that Lake Forest is not a league; and, ergo, for exemption it need not be a civic body. Whether or not "civic" modifies "organizations", its spirit certainly permeates the entire section. But syntax is not determinative in our conclusions and we treat the adjective as qualifying both "leagues" and "organizations".

"Civic" means" according to the Oxford English Dictionary, Vol. II (1933 ed.):

"1. Of, pertaining, or proper to citizens. 2. Of or pertaining to a city, borough, or municipality. 3. Of or pertaining to citizenship."

The advantages offered by Lake Forest, Inc. do not fulfill this definition. While they are available to all citizens eligible for membership, the benefits are not municipal or public in their nature. Nor are they bestowed upon the commonalty as such. United States v. Pickwick Electric Membership Corp., 158 F.2d 272, 276 (6 Cir. 1946). Lake Forest, Inc. is not a movement of the citizenry or of the community. Rather, at most it is a venture — unquestionably praiseworthy — for securing its members living quarters.

II. Nor is "social welfare" the beneficence sponsored by Lake Forest, Inc. In this context "social" is defined as: "Concerned with, interested in, the constitution of society and the problems presented thereby * * *". Oxford Dictionary, supra, Vol. IX. "Society" is "the aggregate of persons living together in a more or less ordered community. * * * A collection of individuals composing a community or living under the same organization or government." Ibid. "Welfare" means "Wellbeing (of a person, community, or thing)." Id., Vol. XII. In short, "social welfare" is the well-being of persons as a community.

That...