Commissioner of Internal Revenue v. Orton, 10679.

• Decision Date: 28 March 1949
• Docket Number: No. 10679.,10679.
• Citation: 173 F.2d 483
• Parties: COMMISSIONER OF INTERNAL REVENUE v. ORTON et al.
• Court: U.S. Court of Appeals — Sixth Circuit

173 F.2d 483 (1949)

COMMISSIONER OF INTERNAL REVENUE v. ORTON et al.

No. 10679.

United States Court of Appeals Sixth Circuit.

March 28, 1949.

Louise Foster, of Washington, D. C., (Theron Lamar Caudle, George A. Stinson, Robert N. Anderson and Louise Foster, all

of Washington, D. C., on the brief), for petitioner.

Clarence D. Laylin, of Columbus, Ohio (Joseph P. Eagleson, John H. Eagleson and Clarence D. Laylin, all of Columbus, Ohio, on the brief), for respondents.

Before HICKS, Chief Judge, and McALLISTER and MILLER, Circuit Judges.

HICKS, Chief Judge.

The Commissioner of Internal Revenue petitions for a review of the Tax Court's decision that the taxpayer, Edward J. Orton, Jr., Ceramic Foundation, had overpaid its income tax for the year 1940 in the sum of $337.84. The Commissioner asserted a deficiency of $648.38. The facts were stipulated.

The question is, whether the taxpayer's income is exempt from taxation under Sec. 101(6) of the Internal Revenue Code, 26 U.S.C.A. § 101(6). The pertinent portions of this Section read as follows:

"Sec. 101. Exemptions from tax on corporations.

"The following organizations shall be exempt from taxation under this chapter —

"(6) Corporations, and any * * * fund, or foundation, organized and operated exclusively for * * * scientific, * * * or educational purposes * * * no part of the net earnings of which inures to the benefit of any private shareholder or individuals * * *."

The Foundation was established by the will of Edward Orton, Jr., executed October 6, 1928, and probated February 28, 1932. Orton had devoted much of his life to the improvement of ceramic arts and processes. He was a graduate in mining engineering of Ohio State University and later became a member of its faculty and was instrumental in establishing there the Department of Ceramics, of which he became the head. He inaugurated the manufacture in this country of pyrometric cones, which were slender pyramids composed of minerals similar to those in the ceramic bodies, which through standardization of their melting points were of great aid to the firing processes in the ceramic industry. Prior thereto such cones had been imported from Germany. Orton successfully developed a complete series of superior cones which, through his efforts, were standardized by the Bureau of Standards. Ultimately, he established a laboratory of his own near the Ohio State University campus and privately conducted the business of manufacturing cones. Shortly before Orton's death these activities were housed in new quarters on a new site.

Orton earnestly desired that his endeavors on behalf of the ceramic industry should be continued after his death, and to that end, by his will, he divided his estate into two parcels. Parcel I, consisting of the new quarters and the old plant, buildings, supplies, etc., was devised to a Board of Trustees of seven men, to be known as the Edward Orton, Jr., Ceramic Foundation. The Trustees, for the most part, were designated according to the positions they held and included the President of the Ohio State University; a representative from the Bureau of Standards; the heads respectively of the Ohio State Engineering Experiment Station, and of its Department of Ceramic Engineering; the Secretary and another representative from the American Ceramic Society; and an attorney to be chosen by the Probate Court of Franklin County, Ohio. Except for the attorney, who would be paid reasonable compensation for legal services, the Trustees were to receive for their services $1.00 a year and expenses.

The purposes of the trust, as set forth in the will (Item 2, Sub-item 2), were two-fold. Quoting, —

"* * * The first and principal purpose is to provide a stable and dependable organization for continuing the manufacture and sale of Standard Pyrometric Cones of the highest quality and most exact accuracy that is commercially feasible, at a reasonable price. The second and subsidiary purpose of this trust is to provide a Research Organization for the prosecution of studies and researches for overcoming technical and manufacturing difficulties, and for thus advancing the ceramic arts and industries in the United States."

And with the approval of the Probate Court, the Trustees were authorized "* * * to cease manufacture and to close up the cone manufacturing business, if, for any reason the same has become unable to longer function successfully, or if scientific progress makes it no longer necessary or desirable to continue" — and to dispose of the assets to the Ohio State University.

The will, Item 2, Sub-item 3, after setting out a historical statement concerning the manufacture of pyrometric cones, continued:

"In this enterprise while manufacturing profit is essential to permit its continuance, it has from the first been my purpose to make financial profit incidental to the principal idea of furnishing to ceramic manufacturers, a mode of controlling or regulating the firing process of their wares with the highest attainable degree of dependability at the lowest reasonable cost. Having been successful in obtaining the confidence of manufacturers of ceramic products, in standard pyrometric cones, it is my desire to assure myself that the manufacturing establishments which I have built up shall continue to fulfill this same useful purpose, upon the same high plane and with the same ideals of public service, after my death." (Italics ours.)

The will, Item 2, Sub-item 6, further stated:

"It is my intention, in this trust, to provide an organization not for profit whose real or ultimate objects are altruistic and wholly devoted to producing industrial, scientific and social betterments, without any personal or private gain to any one, other than as wages paid for services rendered. To this end it is my will that the surplus produced by the manufacturing and vending organization known as the Standard Pyrometric Cone Company, shall be expended by the research organization whose product is knowledge given free to all who are interested. * * *" (Italics ours.)

By clause (d) of Sub-item 6, the will provided that:

"* * * the price at which cones shall be sold shall be set to produce a gross income, of which approximately eighty percent will be required to meet the manufacturing costs, including sales, overhead, and the maintenance of proper capital reserves or extensions, depressions, or disasters, and including the cost of experimental work undertaken specifically for the needs of the cone manufacturing process itself. The remainder of the gross receipts of the cone manufacturing business being approximately twenty percent of the same, should be expended upon research."

In the will Orton recommended to the Trustees that salaries be liberal, that profit-sharing be continued and that the price of cones be kept lower than those from other countries.

The Tax Court adopted the written stipulation of facts as its own Findings of Fact and held that the taxpayer was a "foundation" as the term is used in the statute. This finding is not seriously controverted but the Tax Court, five Judges dissenting, went further and found that the predominate purpose for which the taxpayer was organized was, in its broadest sense, to promote the science or art of ceramics. The petitioner attacks this conclusion and insists that the taxpayer was neither organized nor exclusively operated for such purpose but was engaged in the manufacture and sale of the cones for profit as a competitive business. We think that upon the stipulated facts adopted by the Tax Court there was a rational basis for its conclusion. See Dobson v. Com'r, 320 U.S. 489, 501, 64 S.Ct. 239, 88 L.Ed. 248, and the cases there cited. The taxpayer was a foundation without members or stockholders whose activities were directed by high placed trustees who received only a nominal return for their services. It is clear that ceramic engineering is widely recognized as a subject of research. It is regarded as an applied science in fifteen institutions of higher education in the United States and Canada, and most of these grant degrees in the field. In several institutions the ceramics art is recognized as a fine art and in others there is research in the field of ceramics. Whether considered from the viewpoint of Sec. 1141, Title 26 U.S.C.A. as amended by the Act of June 25, 1948, or from the more limited right of review established in Dobson v. Com'r, supra, we think that under either limitation the conclusion of the Tax Court is justified.

The record is replete with references to Orton's interest in the basic study of ceramics and to the fact that almost all of his mature life had been devoted to that interest. It is true that in his will he stated that the "principal purpose" was to provide a suitable organization for the manufacture and sale of high quality cones but in a following part of the will he stated it was his intention to provide an organization not for profit "whose real or ultimate objects are altruistic and devoted to producing industrial, scientific and social betterments without any personal or private gain. * * *" It seems obvious that he considered the plant the source of income for the promotion of research and studies in that field. It seems equally true that because of...