Midwest Solvents Co. v. State Commission of Revenue and Taxation

Decision Date10 May 1958
Docket NumberNo. 40929,40929
Citation325 P.2d 311,183 Kan. 104
PartiesMIDWEST SOLVENTS COMPANY, Inc., a Corporation, and Atchison Hospital Association, a Corporation, Appellees, v. The STATE COMMISSION OF REVENUE AND TAXATION of The State of Kansas and J. E. Kirchner, Director of Revenue of The Department of Revenue, Appellants.
CourtKansas Supreme Court

Syllabus by the Court.

1. The requirements of statute exempting from income taxes a corporation which (1) is organized and operated exclusively for religious, charitable, scientific, literary or educational purposes, and (2) no part of whose net earnings inures to the benefit of any private shareholder or individual, constitute separate conditions precedent to exemption, both of which must be met. G.S.1949, 79-3204(5).

2. Where a corporation claims immunity from the common burdens of taxation which rest equally upon all, such corporation must bring itself clearly within the exemption, and the language relied upon as creating such exemption must be strictly construed.

3. A corporation organized for and engaged only in commercial enterprises, all of whose net profits are destined for a charitable organization, was not 'organized and operated exclusively for * * * charitable purposes' so as to be exempt from income tax under G.S.1949, 79-3204(5).

4. The charitable nature of the recipient of the net income of a corporation organized for commercial purposes cannot be attributed to such corporation so as to exempt it from payment of income tax as a corporation organized and operated exclusively for charitable purposes, but the corporation earning the income and claiming the exemption, rather than the recipient of the income, must be organized and operated exclusively for charitable purposes to warrant the exemption.

5. A corporation whose net earnings inure to the benefit of a charitable institution but whose charter authorizes it to engage in commercial enterprises is not entitled to exemption from income tax as a corporation organized and operated exclusively for charitable purposes. G.S.1949, 79-3204(5).

Clarence J. Malone and Dean Burkhead, Topeka, argued the cause and were on the briefs for appellants.

Mark L. Bennett, Topeka, argued the cause, and John E. DuMars and Clayton M. Davis, Topeka, were with him on the brief for appellees.

WERTZ, Justice.

This is an appeal from a judgment entered by the district court of Atchison county reversing an order of the state commission of revenue and taxation sustaining an assessment made by the director of revenue against Midwest Solvents Company, Inc., for income taxes for the years 1951 to 1954, inclusive, in the amount of $18,839.77 and costs.

The pertinent portions of the stipulated facts are as follows:

Prior to May 26, 1949, plaintiff-appellee Midwest Solvents Company, Inc., hereinafter called 'Midwest,' was a corporation organized for profit with general charter powers. On that date all outstanding shares of the corporation were sold to plaintiff-appellee the Atchison Hospital Association, a corporation, hereinafter referred to as 'hospital,' for $8.50 per share. A payment of two dollars per share was made and the balance was secured by a promissory note and paid out of the hospital's earnings through its operation of Midwest.

The hospital was organized in 1912 as a non-profit, benevolent and charitable association and has been exempt from the payment of income taxes as a charitable and benevolent institution since the passage of the income tax act in 1933 (G.S.1949, Ch. 79, Art. 32).

On June 7, 1949, the old Midwest was dissolved by the hospital, the then owner of all the shares of stock of the corporation. Upon dissolution, the assets were transferred to the hospital.

On May 29, 1949, a new Midwest Solvents Company, Inc., was organized not for profit and its articles of incorporation were filed with the secretary of state. All of the stock of the new Midwest is owned by the hospital and the directors of Midwest are chosen by the trustees of the hospital. Upon the organization of the new Midwest the hospital leased all of the physical assets owned and used by the old Midwest to the new corporation so that its commercial activities could be continued.

Midwest's new charter sets out that it was organized not for profit, and the objects and purposes to be transacted and carried on are to manufacture, compound, purchase or otherwise acquire goods, wares, merchandise and personal property of every class and description, tangible and intangible, and to hold, own, well or otherwise dispose, trade, deal in and deal with the same, both within and without the state of Kansas; and, among other things, to purchase or otherwise acquire real property and rights therein, and to hold, own, sell or otherwise dispose of, trade, deal in, and deal with the seme, both within and without the state of Kansas; to purchase or otherwise acquire, apply for, register, hold, use, sell or in any manner dispose of and to grant licenses or other rights in and in any manner deal with patents, inventions, improvements, processes, formulae, trade-marks, trade names, rights and licenses secured letters patent, copyrights or otherwise. It further provides that the foregoing shall be construed both as purposes and powers, and the enumeration thereof shall not be held to limit or restrict in any manner the general powers conferred on this corporation by the laws of the state; that all profits of the corporation shall belong to and be the property of the hospital and no part of the income of Midwest shall ever be used for private profit to any person or corporation; and that upon dissolution all assets remaining after debts are met shall be distributed to the hospital.

It is admitted that no part of Midwest's net earnings during the period involved herein inured to the benefit of any private individual or corporation. Midwest's application for exemption discloses that it is engaged in the manufacture of alcohol in leased facilities owned by the hospital.

The only question presented is whether Midwest is exempted from paying state income tax by G.S.1949, 79-3204(5), which reads:

'The following organizations shall be exempt: * * * (5) corporations and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual.'

It is Midwest's contention that this section was an adoption of the same provision of the internal revenue act (26 U.S.C.A. § 101(6)). Midwest also contends that prior to the passage of this provision by the Kansas legislature the United States supreme court held in Trinidad v. Sagrada Orden, 263 U.S. 578, 44 S.Ct. 204, 68 L.Ed. 458, that this provision makes destination of income and not the source thereof the ultimate test of exemption and that this court is bound by that interpretation. Our statute contains two requirements which Midwest must meet in order to come within the exemption provision: (1) It must be organized and operated exclusively for religious, charitable, scientific, literary or educational purposes; (2) no part of its net earnings may inure to the benefit of any private individual or shareholder.

In view of these requirements, the Sagrada case, supra, is not in point here. There, the first requirement was ment, in that the corporation seeking to avoid the tax was itself a religious organization engaged primarily in direct religious activities, and its commercial activities were found to be incidental to its religious work. Midwest is organized for and engaged only in commercial activities, serving as a 'feeder' corporation for a charitable organization, i.e., the hospital. Trinidad v. Sagrada Orden, supra, has previously been distinguished in 'feeder' corporation cases. United States v. Community Services, 4 Cir., 1951, 189 F.2d 421, certiorari denied 342 U.S. 932, 72 S.Ct. 375, 96 L.Ed. 694; Universal Oil Products Co. v. Campbell, 7 Cir., 1950, 181 F.2d 451, certiorari denied 340 U.S. 850, 71 S.Ct. 78, 95 L.Ed. 623.

Midwest further contends that the courts of the United States continued to apply the test of destination of income in determining exemptions under the aforementioned provision until the revision of the exemption by Congress in 1950 (26 U.S.C.A. § 101(6)). It is claimed that there is no real conflict among the decisions of the circuit courts of appeal upon this matter. On the other hand, the director contends there is a conflict among the decisions of the various circuits. Some of these courts themselves support the contention of the director. In United States v. Community Services, supra , the court said...

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