People's Educ. Camp Soc'y, Inc. v. Comm'r of Internal Revenue
| Decision Date | 12 February 1963 |
| Docket Number | Docket No. 82223. |
| Parties | PEOPLE'S EDUCATIONAL CAMP SOCIETY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
I. Herman Sher, Esq., for the petitioner.
Robert A. Trevisani, Esq., and Joseph Wilkes, Esq., for the respondent.
The petitioner corporation which was organized in 1920 under the Membership Corporation Law of New York, operated during the taxable year 1956 the largest and one of the most modern vacation resorts in the Commonwealth of Pennsylvania. It charged its guests substantial rates for the accommodations and activities there provided. Its total revenues for the taxable year, derived principally from the operation of the resort, were more than $940,000; and only a relatively small portion of the same was used for the promotion of social welfare. It had net assets, represented principally by accumulated earnings, of more than $2 million. Held, that the operation of said resort did not constitute the ‘promotion of social welfare’ within the meaning of section 501(c)(4) of the 1954 Code; that said operation was petitioner's primary activity; and that for the taxable year, petitioner was not exempt from income tax under said statute, as an organization ‘operated exclusively for the promotion of social welfare.’
Respondent determined a deficiency of $25,784.43 in the income tax of the above-named petitioner corporation for its fiscal year ended September 30, 1956.
The sole issue for decision is whether, for said taxable year, the petitioner corporation is entitled to exemption from Federal income tax under section 501(c)(4) of the 1954 Code. This section, in material part, provides exemption for:
(4) Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare * * * .
Some of the facts have been stipulated. The written stipulation of facts, including all exhibits made a part thereof, is incorporated herein by reference.
The petitioner, People's Educational Camp Society, Inc., is a New York membership corporation with principal office in New York, N.Y. It filed a corporation income tax return for the taxable year here involved, with the district director of internal revenue for the Lower Manhattan district of New York.
In 1920 and for several years prior thereto, the American Socialist Society, which was a New York membership corporation, operated a school in New York City that was known as the Rand School of Social Science. (As hereinafter shown, both said American Socialist Society and said school have since ceased to exist.) The Rand School at that time conducted classes for adults, composed principally of wage earners and immigrants; and it also presented lectures and programs related to the development and dissemination of liberal and progressive views pertaining to the so-called labor movement and to socialist principles.
During said year 1920, officials and friends of the Rand School learned that a tract of 2,196 acres of mountainous and wooded land, located in the Pocono Mountains of Pennsylvania near Bushkill, Pike County, Pa., was for sale. This acreage had theretofore been part of a larger tract which, prior to the outbreak of World War I, had served as a summer camp and recreation area for German-Americans; and subsequently, a portion of this larger tract had been acquired by the International Ladies Garment Workers Union as a summer vacation area for its members. The officials of Rand School immediately became interested in buying said 2,196 acres, with a view to developing a campsite thereon where its faculty, students, and friends might gather during summer periods, and there carry on their studies and continue their development of the liberal and progressive social programs in which they were interested.
Pursuant to such objective, Bertha Howell Mailly who was the executive secretary of the Rand School, thereupon obtained an option to purchase said 2,196 acres for a price of about $21,000. And then on December 6, 1920, the petitioner corporation was organized under the Membership Corporation Law of the State of New York, to take title to said property and develop thereon the contemplated summer camp and recreation area. This plan was given effect. The camp was named ‘Tamiment,‘ after the name of a lake that adjoined the property.
Petitioner's certificate of incorporation stated that the objects of the corporation were to be as follows:
To organize, conduct and maintain summer camps and centers for instructive and recreative purposes; to build, purchase, own, lease, manage and operate camps, dormitories, dining halls, recreation rooms, play grounds, reading rooms, halls, and other buildings for the purpose of said corporation as herein set forth; to diffuse a general knowledge of literature, art and science through the medium of lectures, publications and dramatic performances; to borrow money for the corporate purposes of the corporation and to issue bonds, notes or other evidences of indebtedness therefor; to assist other educational, civic, political and economic movements and organizations; to cooperate with such organizations and movements and to initiate such movements, but said purposes shall not extend to those objects for which corporations may be formed pursuant to the Education Law, nor shall any activities of the said corporation be conducted for pecuniary profit to its members.
The latter limitation relating to the Education Law was inserted at the direction of the secretary of state of New York in order to make clear that petitioner had no power or authority to operate a school.
Petitioner, having been organized as a membership corporation, has never issued any shares of stock or had any stockholders. It is controlled by not more than 35 individuals, known as members, who from time to time are elected in accordance with the following provision of its bylaws, as amended:
Section 1. Any person may be elected to membership in the Society, provided that he has publicly subscribed to the principles of Socialism for a period of at least two years, and provided that his admission to such membership has been recommended by the Board of Directors acting as Membership Committee and has been approved by a vote of at least two-thirds of all members present and voting at a regular meeting or at a special meeting called for that purpose.
Section 3. The membership of the Society shall at no time exceed thirty-five.
The day-to-day operations of petitioner are conducted by a managing director and an associate director, who are hired by a board of five directors. The individuals comprising this board of directors are elected by the members; and said members also elect the officers of petitioner, who are: A president, a vice president, and a secretary and treasurer. None of the officers or directors receive any salary or other compensation for their services; but the managing director, associate director, and other employees do receive salaries.
Petitioner's bylaws contain the following provision with respect to dissolution of the corporation:
Section 1. The Society cannot be dissolved as long as there are seven (7) members who desire to maintain the organization.
Section 2. In the event of dissolution of the Society the property of the Society shall revert to the American Socialist Society of New York.
Said American Socialist Society ceased to exist in March 1956; but thereafter, no steps were taken to amend the above provision or to designate how petitioner's properties will be disposed of in the event of dissolution. No plan for dissolution was ever contemplated.
Camp Tamiment was opened for occupancy, on a modest scale, in July 1921; and during the 20-year period that followed, the camp experienced a steady though moderate growth. Beginning with the first fiscal year, and for all subsequent years except 1925 and 1932 when small operating losses were incurred, Tamiment has produced substantial profits. And, except during the initial period from 1921 through 1923, petitioner has never solicited or received any contributions, but has been entirely self-sustaining. By the end of said 20-year period ended in 1941, the amount of petitioner's fixed assets (substantially all of which represented buildings and facilities at Tamiment) increased to approximately $398,600; and also the amount of its annual gross income increased to approximately $281,600.
In January 1936, petitioner obtained a ruling from the Commissioner of Internal Revenue that, on the basis of the facts then available, it was exempt from Federal income taxation under section 101(8) of the Revenue Act of 1934. And in January 1939, it obtained a similar exemption ruling, with respect to those provisions of the 1939 Code which are cognate to section 501(c)(4) of the 1954 Code that is here involved.
In 1942, which followed the outbreak of World War II, both the guest occupancy at Tamiment, and also the amount of petitioner's gross income therefrom, began to increase substantially. And beginning in 1946 (following the end of World War II), the amounts of petitioner's fixed assets, operating expenses, and accumulated surplus (designated in its books and records as ‘Reserves'), likewise all began to increase rapidly. The extent of the increases in these items per books, during the period from 1922 through 1957, are shown in the following table:
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