Oregon Physicians' Service v. Horn

• Decision Date: 02 March 1960
• Citation: 220 Or. 487,349 P.2d 831
• Parties: OREGON PHYSICIANS' SERVICE, a nonprofit corporation, Appellant, v. S. W. HORN, Carl Chambers and Samuel B. Stewart, constituting the State Tax Commission of the State of Oregon, Respondents.
• Court: Oregon Supreme Court

Page 831

349 P.2d 831

220 Or. 487

OREGON PHYSICIANS' SERVICE, a nonprofit corporation, Appellant, v. S. W. HORN, Carl Chambers and Samuel B. Stewart constituting the State Tax Commission of the State of Oregon, Respondents.

Supreme Court of Oregon, Department 2.

Argued Nov. 18, 1959.

Decided March 2, 1960.

Charles P. Duffy, Portland, argued the cause for appellant. Carl E. Davidson, Portland, was with him on the brief.

T. W. DeLooze, Asst. Atty. Gen., argued the cause for respondents. With him on the brief were Robert Y. Thornton, Atty. Gen. of Oregon, Donald J. Griswold and Carlisle B. Roberts, Asst. Attys. Gen.

Before McALLISTER, C. J., and ROSSMAN, PERRY, SLOAN and KING, JJ.

ROSSMAN, Justice.

This is an appeal by the plaintiff, Oregon Physicians' Service, from a decree which the circuit court entered in favor of the defendants after it had sustained their demurrer to a petition for review filed by the plaintiff pursuant to ORS 306.545. The demurrer challenged the petition upon the ground that it did not state a cause of suit. The plaintiff is an organization which was incorporated under the Oregon non-profit statute, ORS chapter 61. The defendants are the three members of the Oregon Tax Commission. ORS 306.010. The petition sought an order vacating and setting aside the assessment of a corporation excise tax (ORS chapter 317) imposed upon the plaintiff by the defendants after a hearing. The plaintiff contends that it is exempt from the corporation excise tax. Following the imposition of the tax the plaintiff filed in the circuit court the aforementioned petition. The defendants then presented the demurrer which we have also mentioned; and after the court had sustained it the plaintiff appealed. The plaintiff attached to and made a part of its petition the opinion of the commission adverse to the plaintiff and also the findings of fact entered by the commission. It makes no contention that the findings of fact do not correctly state the facts which govern this case, nor does it contend that a trial is necessary to bring forth some fact or other essential to a correct decision of this case. The plaintiff argues that the commission misapplied the facts and argues matters of law.

Based upon ORS 317.080(6) the plaintiff claims that it is exempt from the excise tax. The section of our laws just cited reads as follows:

'The following corporations are exempt from the taxes imposed by this chapter:

* * *

* * *

'(6) Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employes, the membership of which is limited to the employes of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes, and no part of the net earnings of which inures to the benefit of any private stockholder or individual.'

The plaintiff argues that it is a 'civic league or organization' within the purview of that section.

The plaintiff was incorporated on December 6, 1941, apparently as the medical profession's response to the growing popularity of prepaid medical service. As early as 1936 there were five privately operated insurance companies in Oregon which employed physicians on a 'contract' basis to supply medical services to their members. Some large business concerns also employed physicians on a contract basis to furnish medical service to their employees. The medical profession opposed the contract practice on both monetary and ethical grounds and for a few years waged a vigorous but unsuccessful campaign against it. Finally, in 1941, the profession changed its tack and established its own insurance plan, Oregon Physicians' Service. Amended and supplemental articles of incorporation and by-laws were adopted March 7, 1953, in order to permit the plaintiff to reorganize under the Oregon non-profit statute. At the time of the Tax Commission hearing the membership of the Oregon Physicians' Service was approximately 1,300 physicians and 130,000 laymen. The facts which we just mentioned were taken from the record in this case and from United States v. Oregon State Medical Society, 343 U.S. 326, 72 S.Ct. 690, 92 L.Ed. 978. That decision affirmed D.C., 95 F.Supp. 103. The facts taken from that case are set forth as background information, but for no other purpose.

The plaintiff's corporate excise tax return for the fiscal year beginning July 1, 1953, and ending June 30, 1954, showed a net income of $51,875.18 on which no taxes were computed or paid. September 13, 1955, a hearing was held before the Tax Commission to settle the exemption claim made by the plaintiff. January 30, 1957, the commission entered findings of fact and conclusions of law which denied the claim of exemption and ordered that all arrears of taxes be paid. The decision of the commission was a two-to-one vote.

If the demurrer filed in the circuit court is to be sustained on appeal, it must be because the facts alleged by the plaintiff in its petition for review in themselves affirmatively defeat the claimed exemption. The allegations of the petition show that Oregon Physicians' Service was organized with a view to avoid the excise tax, if possible. That objective was entirely lawful and in mentioning it we imply no censure or disapproval.

Membership in the plaintiff is divided into three classes designated as Class A, Class B and Class C. Class A membership is limited to participating physicians who pay annual fees of $25 or $50, depending upon the population of the city in which the physician practices. Class B membership is composed of 'civic minded persons who are willing to serve in carrying out its purposes without remuneration.' Who those persons are and what responsibilities they assume does not appear from the record before us. Class C members are insured lay beneficiaries who pay monthly regular dues in order to obtain the medical benefits called for in their individual or group contracts with the plaintiff. The plaintiff has contracts with its participating physicians (Class A members) for services to the Class C members. It also has contracts with cooperating hospitals.

The petition alleges that most of the plaintiff's income is derived from the dues paid by Class C members. The funds so obtained are 'expended in defraying the cost of medical, surgical, hospital, nursing, ambulance, dental, first aid and other related services for the 'Class C' members and for administration expenses.' The fees paid to participating physicians are determined by a fee schedule. It is important to note that while the plaintiff may pay its physicians less than the prescribed fee, it may not pay more.

Net income of the plaintiff above all expenses and reserve requirements may be distributed, in the discretion of a board of trustees, in one of several ways described in the petition. Such income may be 'retained as a reserve fund, distributed to participating physicians who have received less than the full fees scheduled in any prior accounting period, or used to increase the benefits or decrease the costs to Class C members.'

The plaintiff's articles of incorporation provide that in the event of liquidation, dissolution, or winding up its net assets are to be distributed to the Oregon State Medical Society or a successor for use exclusively in 'medical research, medical education or the development and establishment of non-profit medical care plans and for the promotion of social welfare.'

In determining whether or not the circuit court was correct in dismissing the complaint we start with the well settled rule that tax exemption statutes are strictly construed against the individual who claims their benefit. Methodist Book Concern v. State Tax Commission, 1949, 186 Or. 585, 208 P.2d 319; Helvering v. Ohio Leather Co., 1942, 317 U.S. 102, 63 S.Ct. 103, 87 L.Ed. 113; New Colonial Ice Co. v. Helvering, 1934, 292 U.S. 435, 54 S.Ct. 788, 78 L.Ed. 1348. The reason underlying this rule of construction goes deeper than mere protection of the public fisc. Not uncommonly, charitable and other non-profit associations compete actively with private business. To the extent that a charitable corporation is relieved of the tax burden it gains a competitive advantage. To the extent that such tax relief is not based on reasonable classification for sound public ends it is a denial of equal protection of the laws. Strict construction of exemption statutes thus with us has constitutional overtones. Behnke-Walker Business College v. Multnomah County, 1944, 173 Or. 510, 146 P.2d 614; Corporation of Sisters of Mercy v. Lane County, 1927, 123 Or. 144, 261 P. 694. See Industrial Addition Association v. Commissioner, 1942, 1 T.C. 378, 384.

ORS 317.080(6) was drawn verbatim from the federal Internal Revenue Code of 1924, sec. 231(8), 43 Stat. 282, which became sec. 101(8) of the Internal Revenue Code of 1939, and is now sec. 501(c)(4) of the 1954 code, 26 U.S.C.A. § 501(c)(4). However, the Oregon statute concludes with a clause which is not in the federal act:

'* * * and no part of the net earnings of which inures to the benefit of any private stockholder or individual.'

The state contends that this final clause modifies 'civic leagues or organizations' and hence, it argues that the clause makes the test for exemption extremely restrictive. We are convinced that all of the modifying language of ORS 317.080(6) which follows the phrase 'local associations of employes' refers only to such associations and has no bearing on what goes before. The genesis of the present act was in Oregon Laws 1929, ch. 427, § 11, which exempted only 'civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.' The remainder of the present section, beginning with the disjunctive 'or' was added in its present form by Oregon Laws 1939, ch. 489, § 5....