Lesavoy Found. v. Comm'r of Internal Revenue
| Decision Date | 31 January 1956 |
| Docket Number | Docket No. 51940. |
| Citation | 25 T.C. 924 |
| Parties | THE LESAVOY FOUNDATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Held, petitioner is not exempt from income taxes as a corporation organized and operated exclusively for charitable purposes. Sec. 101(6), I.R.C. 1939.
2. Petitioner is taxable as a trust, and not as a corporation.
3. Petitioner has failed to prove error in the disallowance by respondent of certain amounts claimed by petitioner as charitable contributions for the taxable years 1947 and 1948.
4. Additions to tax for delinquency and negligence were proper, under the facts. Sec. 291(a), 293(a), I.R.C. 1939.
William F. Snyder, Esq., and Clendon H. Lee, Esq., for the petitioner.
Stanley W. Herzfeld, Esq., for the respondent.
The respondent has determined deficiencies in income tax and additions to tax for delinquency and negligence pursuant to sections 291(a) and 293(a) of the Internal Revenue Code of 1939 against the petitioner for the calendar years 1946, 1947, 1948, and 1950. The tax and additions are in the total amount of $903,755.86. Petitioner claims to be exempt from income tax for the above taxable years by virtue of section 101(6) of the Internal Revenue Code of 1939. The principal issues are, (1) whether petitioner was so exempt, (2) if not exempt, whether it is taxable as a trust or as a corporation, and (3) whether respondent properly determined that petitioner is liable for the additions to the tax for delinquency and negligence.
A stipulation of facts filed by the parties is incorporated by this reference as a part of our findings.
Petitioner was formed on or about August 10, 1944, by deed of trust by and between I. Lawrence Lesavoy (hereinafter sometimes called Lesavoy) as settlor, and Murray Landy, Lesavoy, and David Getz, as trustees. Petitioner has at all material times maintained an office in Allentown, Pennsylvania.
The trust was expressly stated to be irrevocable, and the trust instrument left Lesavoy no power to amend or otherwise interfere with the trust or its assets in his capacity as settlor.
The purposes of petitioner were set forth in the deed of trust as ‘wholly charitable, educational, religious and scientific.’ In furtherance of the above general purposes and not in limitation thereof, a number of specific purposes were mentioned. The deed provided that the trust should be fully administered and terminated in accordance with its purposes not later than 25 years following Lesavoy's death. The trustees were given the discretionary power to terminate the trust at an earlier date.
Petitioner received contributions during the years 1944 to 1950, inclusive, in amounts as follows:
+-----------------+
¦1944¦1 $40,050 ¦
+----+------------¦
¦1945¦32,850 ¦
+----+------------¦
¦1946¦90,625 ¦
+----+------------¦
¦1947¦15,700 ¦
+----+------------¦
¦1948¦9,439 ¦
+----+------------¦
¦1949¦400 ¦
+----+------------¦
¦1950¦2,750 ¦
+-----------------+
Petitioner filed a United States Treasury Department Form 990 for each of the taxable years 1944 to 1949, inclusive, and Form 990-A for 1950 with the collector of internal revenue for the first district of Pennsylvania. Petitioner did not file for any of the years involved a corporate income tax return, excess profits tax return, or a fiduciary income tax return.
On or about June 4, 1945, petitioner submitted to the respondent a written request for a ruling that it was exempt under section 101(6) of the Internal Revenue Code of 1939. David Getz submitted an Exemption Affidavit in support of such application. Petitioner submitted a statement of receipts and disbursements to December 31, 1944, and thereafter, upon respondent's request, a statement covering the period August 1944 to June 30, 1945. On July 31, 1945, the respondent ruled that petitioner was exempt under the provisions of section 101(6) of the Internal Revenue Code of 1939. The ruling was expressly stated as being based upon the evidence presented by petitioner, and informed the trustees that they would not be required to file income tax returns for petitioner ‘unless its character, the purposes for which it was organized or its method of operation is changed.’ The ruling provided that any such changes should be reported immediately to the collector at Philadelphia for determination of their effect upon petitioner's exempt status.
At the time of the above request and ruling petitioner had not acquired any operating property of a kind customarily owned and operated by nonexempt commercial organizations for profit. Nothing then submitted by or on behalf of petitioner indicated that such action was contemplated. In answer to a request on the affidavit form to state all activities in which petitioner was at that time engaged, Mr. Getz stated ‘Making charitable contributions.’
I. Lawrence Lesavoy and members of his family were interested in a number of business enterprises, predominantly in the textile field. He was president and majority stockholder of Blossom Products Corporation (hereinafter sometimes referred to as Blossom), which was engaged in the business of manufacturing textile products; the other stockholders were members of his family. Lisle Mills was a textile manufacturing enterprise, owned and controlled by a brother and brother-in-law of Lesavoy; it was originally operated as a partnership, but was later incorporated. Fabrics Corporation, Paper Corporation of America, Perkiomen Mills, Inc., and Rayon Corporation of America were corporations owned or controlled by Lesavoy or by Blossom. As of January 1, 1949, Penn State Mills, which was controlled by brothers of Lesavoy, became the successor to Blossom, which no longer remained in active business.
Cotton yarn was a basic material used by Blossom and Lisle Mills in their operations. In 1945 and early in 1946 cotton yarn was in very short supply. Although Blossom had priorities in 1945 and 1946 in respect of cotton yarn for its Government or military contracts, it had no similar priorities for yarn in connection with its production for the civilian market. Blossom was in a position to use any additional yarn it might acquire for nongovernmental purposes, and its needs were, in effect, all it could get. At that time there was a so-called black market in which cotton yarn was sold at higher prices than were permitted by law; as a consequence, the amount of cotton yarn available at legal prices was greatly reduced, and such yarn was very difficult to obtain.
Clover Spinning Mills, Inc., was a corporation engaged in the business of producing cotton yarn in Clover, South Carolina. Its stock was owned or controlled by two brothers, Cary and Henry M. Boshamer. From at least several years prior to 1946 Blossom and Lisle Mills had been purchasing some cotton yarn from Clover Spinning Mills, Inc., and representatives of Blossom had made various attempts to obtain greater amounts of cotton yarn from it.
On or about March 18, 1946, petitioner acquired the properties formerly used in the business of Clover Spinning Mills, Inc. The dominant purpose of such acquisition was to provide a source of supply of cotton yarn for Blossom and any other textile enterprise owned or controlled by Lesavoy or members of his family. On or about January 15, 1946, David Getz, one of the trustees of petitioner and an attorney, acting on petitioner's behalf, entered into a contract to purchase all of the outstanding stock in Clover Spinning Mills, Inc., from the Boshamers for $822,847. The price was determined by arm's-length bargaining. The contract provided for a downpayment of $100,000 with two series of notes to the Boshamers for the remaining $722,847. Before March 18, 1946, a payment of $50,000 was made on the notes. Petitioner acquired the assets of the enterprise on or about March 18, 1946, after several intermediate conveyances and liquidations more fully described in the stipulation. In addition to the unpaid obligations on the notes, which petitioner assumed, there was also a preexisting first mortgage in the amount of $45,500 upon the Clover properties.
Petitioner received contributions in the amount of $80,500 on or about March 15, 1946, and it obtained loans from Blossom in the amount of $170,000 and from Lisle Mills in the amount of $25,000. It was as a result of these contributions and loans that petitioner was able to make the initial payments for the acquisition of the Clover enterprise and to finance its initial operations. The parties have stipulated that the contributions in the amount of $80,500 consisted of the following items.
+---------------------------------------------------------+
¦A check from Penn State Underwear Mills¦ ¦$20,000¦
+---------------------------------------+---------+-------¦
¦being designated as contributions from ¦ ¦ ¦
+---------------------------------------+---------+-------¦
¦David A. Lesavoy (brother) ¦$6,666.67¦ ¦
+---------------------------------------+---------+-------¦
¦Harry Lesavoy (brother) ¦6,666.67 ¦ ¦
+---------------------------------------+---------+-------¦
¦Eugene Lesavoy (brother) ¦6,666.66 ¦ ¦
+---------------------------------------+---------+-------¦
¦ ¦_ ¦ ¦
+---------------------------------------+---------+-------¦
¦Blossom Products Corp. ¦ ¦25,000 ¦
+---------------------------------------+---------+-------¦
¦Perkiomen Mills, Inc. ¦ ¦2,000 ¦
+---------------------------------------+---------+-------¦
¦Rayon Corp. of America ¦ ¦2,500 ¦
+---------------------------------------+---------+-------¦
¦Fabrics Corp. of America ¦ ¦3,000 ¦
+---------------------------------------+---------+-------¦
¦Lisle Mills...To continue reading
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