Greater United Navajo Dev. Enters., Inc. v. Comm'r of Internal Revenue, Docket No. 378-79X.

• Decision Date: 16 April 1980
• Docket Number: Docket No. 378-79X.
• Citation: 74 T.C. 69
• Parties: GREATER UNITED NAVAJO DEVELOPMENT ENTERPRISES, INC., PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

74 T.C. 69

GREATER UNITED NAVAJO DEVELOPMENT ENTERPRISES, INC., PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 378-79X.

United States Tax Court

Filed April 16, 1980.

P is a corporation organized to benefit the poor of the Navajo Nation by assisting in the organization and operation of businesses that employ or are owned by residents of the Navajo Reservation. In 1974, P received a large grant from the Federal Government, although no further grants have been received; currently, P's most substantial source of revenue is the leasing of oil well drilling equipment, an enterprise operated outside the Navajo Reservation through a private, independent for-profit organization, Madar, Inc. The record does not show that any members of the Navajo Nation are employed in this venture. Held: Notwithstanding that P also engages in other activities which could be classified as charitable at least to some extent, it is not operated exclusively for exempt purposes by reason of its participation in the equipment leasing enterprise in the circumstances of this case. Accordingly, the Commissioner's denial of P's application for exemption from taxation under secs. 501(c)(3) and 501(a), I.R.C. 1954, is approved. Albert R. Vermeire, for the petitioner.

Barry D. Lederman, for the respondent.

RAUM, Judge:

The Commissioner has ruled that petitioner does not qualify for exemption from income taxation under section 501(c)(3), I.R.C. 1954. Petitioner invokes the jurisdiction of this Court pursuant to section 7428 to obtain a declaratory judgment as to its exempt status.¹ The question presented is whether petitioner is organized and operated exclusively for charitable purposes within the meaning of section 501(c)(3), I.R.C. 1954.

FINDINGS OF FACT

This case was submitted on the basis of the stipulated administrative record, which is hereby incorporated in these findings by reference. Pursuant to Rule 217(b), Tax Court Rules of Practice and Procedure, the factual representations contained in the administrative record must be assumed to be true.

Petitioner Greater United Navajo Development Enterprises,² Inc., is a public service nonprofit corporation organized under the laws of Arizona on June 20, 1972. Its principal place of business is Fort Defiance, Ariz. Petitioner also “controls” an affiliated or “subsidiary” corporation, Greater United Navajo Construction Co., Inc. (GUNCO), by virtue of the fact that the two corporations have the same officers, directors, and staff. GUNCO was incorporated to operate as a public service nonprofit corporation under the laws of Arizona on November 19, 1973. An application for recognition of exemption under section 501(c)(3) on behalf of petitioner and GUNCO was filed on September 29, 1977. A final adverse ruling on that application was issued on October 11, 1978, and the present litigation ensued.

Petitioner's articles of incorporation, as amended on January 5, 1973, state that its incorporators have associated themselves together “for the purpose of forming a non-profit 501(c)(3) tax-exempt community economic development corporation without capital stock.” The articles further provide that petitioner is organized for the following purposes:

To operate exclusively for charitable and educational purposes, including but not limited to, improvement of the condition of the Navajo Nation poor as is more specifically set forth hereinafter.

To organize, exist and function as a charitable, non-profit, tax-exempt 501(c) (3) organization and to qualify, if possible, as a code section 509(a)(1) non-private foundation, an organization described in Section 170(b)(1)(A) of the Internal Revenue Code as a “publicly supported charitable organization”.

To further economic development among the Navajo Nation poor, and to promote, encourage and assist the growth and development of business concerns within the Navajo Nation, including but not limited to small business concerns.

To engage in the business of establishing business opportunities and operating said businesses and projects in order to create employment opportunities for residents of the Navajo Reservation, and to stimulate and add to the flow of private equity capital and long-term loan funds for small business enterprises located within the Navajo Nation.

In addition, the articles further provide that “specific and primary” purposes of petitioner are “To raise the economic, welfare, educational and social levels of the Navajo Nation poor, which have substantial unemployment and low-income families, to foster and promote national interest and concern for the problems of said Navajo Tribe to the end that (A) prejudice and discrimination, economic and otherwise, may be eliminated; (B) sickness and proverty (sic) may be lessened; and (C) educational opportunities may be expanded among the members of such Tribe.” The articles specify that these purposes are to be accomplished by the following activities to benefit the Navajo Nation poor: expanding opportunities for Navajo ownership of and employment in small businesses; assistance to poor Navajo property owners in the development of their property; encouraging development of local businesses which employ, train, and educate residents of economically depressed areas of the Navajo Reservation; aiding underprivileged Navajos in developing management skills and obtaining business financing, although no direct financial assistance in the form of guarantees, investments, or loans is to be provided unless financing is unavailable from conventional sources; and assisting by contributions or otherwise the operation of charitable entities organized to carry on activities similar to those of petitioner. To further its charitable purposes, petitioner's articles authorize it to provide management or technical advice and financial support to Navajo business, to conduct research and educational programs, and operate small businesses that provide employment to Navajos and that advance economic development of the Navajo Nation.

GUNCO's articles of incorporation provide that the corporation is to engage in the construction business and is to exercise all lawful corporate powers necessary to further this business or any other business the corporation enters. GUNCO is also empowered “to take such actions * * * as may be beneficial to any community, state or country in which the Corporation has * * * business interests or investments.” The articles further provide that all its stock is to be issued to a corporation or corporations qualifying for exemption under section 501(c), I.R.C. 1954. With the exception of these latter provisions, GUNCO's articles of incorporation otherwise contain no provisions which indicate that GUNCO is organized differently from an ordinary business corporation.

Petitioner characterizes GUNCO as a wholly owned subsidiary, although GUNCO has in fact never issued any stock. GUNCO was established as a separate corporation in order to satisfy the criterion for receipt of training and technical assistance funds from the Office of Native American Programs, a Federal agency now a part of the Office of Human Development in the Department of Health, Education, and Welfare. Petitioner's application for exemption applied for a “group exemption” for itself and GUNCO and the activities of both entities are difficult to separate. The Government has been content to accept petitioner's treatment of GUNCO as its wholly owned subsidiary and has attached no particular importance to the independent corporate existence of GUNCO. Accordingly, for purposes of this opinion, the activities of petitioner will be considered to include the activities of GUNCO.

Petitioner's exemption application indicates that it engages in a wide range of activities. The beneficiaries of petitioner's activities are limited to Navajo Reservation residents. Petitioner's application for exemption represents that it contributes to charitable organizations and the Navajo School of Medicine,³ grants educational scholarships,⁴ and assists athletic events. The petitioner also assists small businesses and provides employment opportunities and job training to Indians. In cooperation with its subsidiary, GUNCO, petitioner constructs Government-subsidized low-cost housing for the poor and other facilities on the Navajo Reservation. Construction operations by petitioner and its subsidiary have produced 96 homes; a 10,000-square-foot annex to the Navajo Arts and Crafts Building, Window Rock, Ariz.; a 50-unit mobile home park and two athletic fields for the Navajo Community College; and extensive renovations to the Lupton Chapter Rodeo Grounds. Petitioner and GUNCO also supplied concrete to the Navajo Housing and Development Enterprise for its use in constructing 25 homes.

In addition to the construction business, petitioner engages in a number of ostensibly commercial activities. Petitioner at some time received from the Government a quantity of surplus oil drilling and mining equipment, as well as several large trucks and trailers, and expended some $286,519 to place such equipment in usable condition. Various entities lease the equipment for a fee. The oil and gas drilling equipment is leased in the first instance to Madar, Inc., a private New Mexico corporation, which in turn leases the equipment to other businesses not on the Navajo Reservation. Madar receives a management fee based on the gross rental income obtained from the lease of the equipment, and is responsible for storing, operating, and maintaining the equipment. Petitioner reimburses Madar for the equipment maintenance and operation costs, and also pays for insurance. The trucks and trailers and other miscellaneous items are leased to other enterprises. At various times since its organization, petitioner has also leased school buses and automobiles, provided garbage collection services, operated a service station and garage, and a concrete and cement batch...