Hammerstein v. Kelley, 62 C 174(1).

• Decision Date: 02 October 1964
• Docket Number: No. 62 C 174(1).,62 C 174(1).
• Citation: 235 F. Supp. 60
• Parties: Robert W. HAMMERSTEIN, Executor and Trustee under Will of Katherine B. Schlueter, a/k/a Katheryne B. Schlueter, deceased, Plaintiff, v. Alvin M. KELLEY, District Director of Internal Revenue, St. Louis, Missouri, Defendant.
• Court: U.S. District Court — Eastern District of Missouri

235 F. Supp. 60

Robert W. HAMMERSTEIN, Executor and Trustee under Will of Katherine B. Schlueter, a/k/a Katheryne B. Schlueter, deceased, Plaintiff, v. Alvin M. KELLEY, District Director of Internal Revenue, St. Louis, Missouri, Defendant.

No. 62 C 174(1).

United States District Court E. D. Missouri, E. D.

October 2, 1964.

Lackland H. Bloom and Robert W. Hammerstein, Jr., St. Louis, Mo., for plaintiff.

Richard D. FitzGibbon, Jr., U. S. Atty., John A. Newton, Asst. U. S. Atty., St. Louis, Mo., for defendant.

HARPER, Chief Judge.

Plaintiff, as Successor Trustee under the will of Katherine B. Schlueter, deceased, brought this suit for a refund of a part of the federal estate taxes paid by the executor of the estate. Under Section 2055 of the Internal Revenue Code the value of the estate to be taxed is determined by deducting those amounts bequeathed to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, and no part of which inures to the benefit of any private stockholder or individual and if no substantial part of the activities of the corporation is carrying on propaganda, or otherwise attempting, to influence legislation.

After providing for certain specific legacies, Mrs. Schlueter provided in her will under provision SIXTEEN that the entire residue of her estate go to Robert W. Hammerstein, original trustee, to be held in trust for the benefit of the St. Louis Medical Society, with the annual income of the trust to be paid to the society and to be used for library purposes. This trust was to continue for twenty-five years, or it could be ended sooner, in the sole discretion of the trustee. In either event, the entire principal and accrued income was to be paid over to the St. Louis Medical Society.

When the executor filed the estate tax return on Mrs. Schlueter's estate, the value of the residue under provision SIXTEEN was $400,914.19, which was claimed as a charitable deduction. The Internal Revenue Service disallowed the deduction and assessed an additional estate tax, which was paid. Plaintiff in this action claims that $88,449.53, plus interest of $15,977.81, assessed on the residue of the estate left in trust, was wrongfully assessed by defendant as an additional tax due, and seeks a refund of $104,427.34. The basis of the suit is that defendant wrongfully disallowed the charitable deduction taken by the executor on the residue of the estate left in trust, in that the bequest in trust is for the benefit of the St. Louis Medical Society to be used for library purposes and qualifies under Section 2055 Internal Revenue Code of 1954 as an allowable charitable deduction in the payment of estate taxes. The defendant contends that the St. Louis Medical Society does not qualify under the applicable section as a charitable organization and, therefore, plaintiff is not entitled to a refund of the taxes paid.

There has always been a recognition of the importance of charities in this country by Congress and it has usually exempted them from the tax laws it has enacted. These exemptions have almost consistently been worded alike and in language similar to that found in Section 2055. The same wording is used to exempt the income of charities from income taxes, payment of Social Security taxes, and to allow deductions from personal income, gift, and estate taxes. The courts have interpreted this language in cases dealing with these many types of taxes and the interpretations have been fairly consistent. Some of the cases discussed involve different types of taxes, but treatment of the charitable deductions of the courts have been the same regardless of the type of tax involved.

The Internal Revenue Service and the Tax Courts have clearly established their position in regard to medical societies as charities. In Colonial Trust Co. v. Commissioner, 1930, 19 B.T.A. 174, a local medical society with almost identical purposes and activities as the St. Louis Medical Society was denied a charitable status. Later came I.T. 3182, C.B. 1938-1, p. 168, based on the Colonial Trust case, and denying exemption to another medical association.

Relying on other authorities, there are two ways to approach the first question proposed in this case; one would be to evaluate the activities of the Medical Society in light of the activities of other organizations which courts have held to constitute charitable activities and thus entitled to an exemption. There are cases of this type, mainly involving bar associations, where the specific activities involved are discussed, and those organizations were held to be charitable. The plaintiff takes the position that those cases are similar to this case. The applicable cases will be discussed later. However, the preferred method to settle this problem is to first consider the basic idea or concept of a charity, apply the activities of the St. Louis Medical Society to it and determine whether they constitute it a charity. The determination of the charitable status is a factual one and each case is decided on its own merits. First, it is interesting to note what the courts have said as to the existence of a charity. In United States v. Proprietors of Social Law Library, 1 Cir., 102 F.2d 481, 483, it was said: "The term `charitable' is a generic term and includes literary, religious, scientific and educational institutions."

The United States Supreme Court has said very little in this area of exempt charities and there are few clear decisions on it from other courts. In Duffy v. Birmingham, 190 F.2d 738, 740, the court considered exempting a charity from income taxation, and said:

"The reason underlying the exemption granted by section 101(6) (1946 Code) to organizations organized and operated for charitable purposes is that the exempted taxpayer performs a public service. The common element of charitable purposes within the meaning of the section is the relief of the public of a burden which otherwise belongs to it. Charitable purposes are those which benefit the community by relieving it pro tanto from an obligation which it owes to the objects of the charity as members of the community."

In an earlier case, the same court was considering an estate tax deficiency in St. Louis Union Trust Co. v. Burnet, 8 Cir., 59 F.2d 922, 926, and there adopted the definition of a legal charity from Jackson v. Phillips et al., 14 Allen (Mass.) 539, 556, as follows:

"A charity, in the legal sense, may be more fully defined as a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds or hearts under the influence of education or religion, by relieving their bodies from disease, suffering or constraint, by assisting them to establish themselves in life, or by erecting or maintaining public buildings or works or otherwise lessening the burdens of government. It is immaterial whether the purpose is called charitable in the gift itself, if it is so described as to show that it is charitable in its nature."

And further, 59 F.2d at page 927:

"A charitable use, where neither law nor public policy forbids, may be applied to almost any thing that tends to promote the well-doing and well-being of social man. (Citing Authority)"

Underwriters' Laboratories v. Commissioner of Internal Revenue, 7 Cir. 135 F.2d 371, 373, dealt with corporate income taxes, and held: "An institution that operates primarily for the benefit of private parties and only incidentally for the public is not a charitable institution in fact or within the meaning of the statute under consideration." The court also denied claims of scientific and educational features, since any of these that did exist were not for the benefit of the public, but were only incidental to the organization's main concern, the interests of its members.

In tax exemption cases, the taxpayer-plaintiff carries the burden of proof on all issues: First, that it was organized exclusively for charitable purposes; second, that it was operated exclusively for charitable purposes; third, that no part of its net earnings inured to the benefit of any private shareholder or individual; and fourth, that no substantial part of its activities consist of carrying on propaganda or otherwise attempting to influence legislation. Universal Oil Products Co. v. Campbell, 7 Cir., 181 F.2d 451; Duffy v. Birmingham, supra.

One of the few United States Supreme Court cases in this area is Better Business Bureau v. United States, 326 U.S. 279, 66 S.Ct. 112, 90 L.Ed. 67, which dealt with social security taxes and a claimed charitable existence because petitioner was organized and operated exclusively for scientific and education purposes. The claim was denied in an opinion by Murphy, J., where it was said, at page 283, 66 S.Ct. at page 114:

"In this instance, in order to fall within the claimed exemption, an organization must be devoted to educational purposes exclusively. This plainly means that the presence of a single non-educational purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly educational purposes."

The cases hold a charity is a broad term, conveying more an idea than a specific meaning; it relates to the social good, the welfare of the community, existing for the good of the people as a whole. In this regard the facts disclose that the St. Louis Medical Society is not a true charitable organization, but rather, is an organization composed of members of a particular profession who have common interests and aims, and an organization which has one prime concern and purpose — the welfare of that profession. The purpose for which the Society was organized and is operated escapes the general good required by the authorities, and instead, becomes of a limited interest and purpose, serving only individuals, or at most a specific group, rather than the general...