National Chiropractic Ass'n v. Birmingham

• Decision Date: 10 April 1951
• Docket Number: Civ. A. No. 608.
• Citation: 96 F. Supp. 874
• Parties: NATIONAL CHIROPRACTIC ASS'N, Inc. v. BIRMINGHAM et al.
• Court: U.S. District Court — Northern District of Iowa

96 F. Supp. 874

NATIONAL CHIROPRACTIC ASS'N, Inc. v. BIRMINGHAM et al.

Civ. A. No. 608.

United States District Court N.D. Iowa, W.D.

April 10, 1951.

Orville L. Dykstra, Walter R. Brown, Stratton R. Eller, Des Moines, Iowa, for plaintiff.

Tobias E. Diamond, U.S. Atty., Sioux City, Iowa, Paul S. McMahon, Sp. Asst. to Atty. Gen., for defendants.

GRAVEN, District Judge.

The plaintiff, National Chiropractic Association, is a Delaware corporation maintaining an office for the transaction of its business in Webster City, Iowa. Plaintiff brought this action against E. H. Birmingham, a resident of Sioux City, Woodbury County, Iowa, the duly qualified and acting Collector of Internal Revenue for the District of Iowa, to recover capital stock taxes, ad valorem penalties and interest which it claims were erroneously and illegally assessed and collected. E. H. Birmingham died November 18, 1950, and William E. Birmingham and Mildred L. Birmingham, the duly appointed executors of his estate, were substituted as parties defendant.

Section 1200 of the Internal Revenue Code prior to its repeal by the Revenue Act of 1945 imposed a capital stock tax on corporations but Section 1201 of the Internal Revenue Code exempted therefrom all corporations exempt from income tax under Section 101 of the Internal Revenue Code. It is the contention of the plaintiff that it was exempt from income tax for the fiscal years ending June 30th from 1933 through 1945 by reason of Section 101(7) of the Internal Revenue Code which exempts business leagues from income taxation and therefore it is exempt from the capital stock tax for those years. In the latter part of 1944, or early in 1945, the Bureau of Internal Revenue indicated exception to the plaintiff's operation as a tax exempt organization. Plaintiff later filed capital stock tax returns for the years ended June 30, 1933, to June 30, 1945, inclusive, and claims for exemption from such tax based on the contention that it was an exempt organization. Thereafter, by letter dated October 21, 1947, the Commissioner of Internal Revenue rejected plaintiff's claims that it was exempt from capital stock tax and assessed the tax and penalties.

On or about February 12, 1948, plaintiff received a demand for payment of capital stock taxes from E. H. Birmingham in the amount of $1,531.25, with penalties in the amount of $382.83 and interest in the amount of $563.67, based upon the holding of the Commissioner of Internal Revenue that the plaintiff was not an organization exempt from federal income tax and, therefore, was not exempt from the capital stock tax. On February 25, 1948, and May 27, 1948, $2,101.92 and $304.33 respectively was paid to the Collector of Internal Revenue by the plaintiff in settlement of the demand received by the plaintiff on or about February 12, 1948. On or about May 6, 1948, plaintiff filed claims for refund which were rejected by the Commissioner of Internal Revenue by letter dated July 28, 1948. Thereafter, plaintiff instituted this action for the recovery of the tax, penalties and interest.

The plaintiff corporation, the National Chiropractic Association, was formed in 1930 by the amalgamation of the American Chiropractic Association and the Universal Chiropractic Association. Prior to 1930 both of these associations were national in scope and had similar objectives and purposes. The articles of incorporation of the National Chiropractic Association provide that the nature of the business of the corporation and the objects or purposes proposed to be transacted, promoted or carried on by it are as follows:

"To protect in every way not contrary to law, the philosophy, science and art of Chiropractic and the professional welfare of its members.

"To maintain the highest standards of morals and of practice in the Chiropractic profession.

"To secure for the Chiropractic profession that recognition to which its importance in the conservation of life and health justly entitles it. To protect Chiropractors from unjust attacks and unfair discrimination.

"To conduct research work and experiments with the view of advancing the profession.

"To gather and disseminate reliable information as to the exactness of its science, the truth of its philosophy and the benefits derived from the application of its art.

"To establish research, publicity, legal, legislative or other departments for the service of its members.

"To work unitedly for the enactment of statutes defining Chiropractic and legalizing its practice.

"To increase educational requirements for Chiropractors to the end that those practicing Chiropractic shall be eminently qualified by broad experience, technical knowledge and personal efficiency to uphold the dignity and honor of the profession.

"To establish a code of highest ethics for the regulation of the professional conduct of those practicing Chiropractic.

"To bring about a closer cooperation among Chiropractors, in every honorable way to promote and protect the social, intellectual and professional welfare of every member of this corporation in particular, and of all members of the profession in general.

"To bring about a more general understanding of the true principles of Chiropractic and the benefits to be derived from their application.

"To familiarize the general public with Chiropractic as a means of removing the cause of human ailments and to secure the rights of the Chiropractors and their patients.

"In general, to promote the philosophy, science and art of Chiropractic.

"To do everything to bring about a complete development of Chiropractic.

"To advocate and encourage honest professional advertising and publicity.

"To effect the organization of Chiropractors in district and state organizations throughout the United States."

Dr. B. A. Sauer, former secretary of the American Chiropractic Association, was appointed executive secretary of the National Chiropractic Association upon its formation in 1930. The national office of the Association was located at Syracuse, New York, during Dr. Sauer's term as executive secretary. In 1932 Dr. Sauer resigned and Dr. Loran M. Rogers was appointed executive secretary. Dr. Rogers has served in this capacity from 1932 to the present. Upon Dr. Rogers appointment the national office was moved to Webster City, Iowa. Dr. Rogers testified that his predecessor had informed him that during the years in question the Association had operated under the assumption that it was exempt from income tax and therefore exempt from the capital stock tax.

At the time Dr. Rogers commenced his duties as executive secretary in 1932, the National Chiropractic Association had a membership of 848 out of a potential of approximately 20,000 chiropractors and was $18,000 in debt. At its inception the dues collected from the members were the only source of income. Subsequently some income has been derived from the publication and sale of the National Chiropractic Journal. In 1945 the plaintiff Association had approximately 6,800 members out of a potential of 20,000 and was in sound financial condition. In each of the years here in question the income of the plaintiff Association has exceeded the disbursements.

The by-laws of the plaintiff Association during the years here in question provided for several classes or types of memberships. Generally, these classes or types and the dues for each class or type were as follows: 1. the "General," "Associate," or "Public Health" membership, for qualified chiropractors desiring to be associated with the general activities of the National Chiropractic Association, the dues for which varied from $10 to $20; 2. the "Class A" membership for chiropractors licensed in the states in which they practiced, the dues for which were $40; 3. the "Class B" membership for chiropractors not licensed in the states in which they practiced, the dues for which were $60. For a period of time during the years here in question the dues of the Class A and B members were reduced to $35 and $55 per year respectively if they were members in good standing of an affiliated state chiropractic association. The Association also has usually provided for some type of membership at a reduced rate for students enrolled in chiropractic colleges.

A membership of any class in the National Chiropractic Association entitled the member to the literature published by the Association and the various other benefits extended. The Class A and B members were in addition eligible to receive payments from the Association to reimburse them for the expenses incurred in defending and paying judgments rendered in malpractice suits and resisting legal action for practicing medicine, surgery or osteopathy without a license. The by-laws of the Association were amended from time to time and there was some variation in the language used in the articles of the by-laws pertaining to the legal benefits extended to the members. Article X of the by-laws as revised August 15, 1939, is typical of the provisions relating to those benefits.

"Article X.

"Legal Benefits of Active Membership.

"Section 1. The chief aim of the NCA is to promote the development of the philosophy, science and art of Chiropractic, and protect the welfare of its members in the practice of Chiropractic. To that end any active member who is wrongfully, unjustly or illegally prosecuted for practicing medicine, surgery or osteopathy without a license shall be defended by the legal department of the NCA. It will also defend any active member when sued for malpractice in the practice of Chiropractic.

"Section 2. The NCA will undertake to defend any active member when wrongfully, unjustly or illegally prosecuted for any offense immediately resulting from the practice of Chiropractic, providing, of course, that it can do so without violating any law.

"Section 3. When an action is commenced against any active member for practicing medicine, surgery or osteopathy without a license or for...