Ralph H. Eaton Foundation v. Commissioner of Int. Rev., 14047.

• Decision Date: 15 February 1955
• Docket Number: No. 14047.,14047.
• Citation: 219 F.2d 527
• Parties: RALPH H. EATON FOUNDATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Ninth Circuit

219 F.2d 527 (1955)

RALPH H. EATON FOUNDATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 14047.

United States Court of Appeals, Ninth Circuit.

February 15, 1955.

Martin H. Webster, Los Angeles, Cal., for appellant.

H. Brian Holland, Asst. Atty. Gen., S. Dee Hanson, Louise Foster, Ellis N. Slack, Sp. Assts. to Atty. Gen., Kenneth W. Gemmill, Acting Chief Counsel, I. R. S., Washington, D. C., for respondent.

Before HEALY, BONE, and POPE, Circuit Judges.

HEALY, Circuit Judge.

This is a proceeding to review an order of the Tax Court determining deficiencies in petitioner's income tax for the period beginning March 1947 and ending January 31, 1949. The question presented is whether a corporation engaged in ordinary business activities for profit is entitled to exemption from income tax under § 101(6) of the Internal Revenue Code, 26 U.S.C.A., solely by reason of the fact that its profits are payable to religious, charitable or educational enterprises.

Petitioner was organized under the laws of Arizona in March, 1947. Its incorporators and directors are Ralph H. Eaton and wife and one Kent. It has no capital stock and its articles prohibit the issuance of any. The articles state that the purpose of the corporation is to foster and promote religious, charitable and educational enterprises, and that it does not contemplate pecuniary gain or profit to the members thereof. Clearly, however, the corporation itself was not intended to operate and did not operate as a religious, educational or charitable institution. What was purposed was only that the profits from its various business activities would be turned over to such institutions. In a word, petitioner is a "feeder" corporation whose principal activities have not the remotest connection with any religious, charitable or educational enterprise. The record shows that it engaged actively and exclusively in various commercial or business enterprises, namely farming, selling of real estate lots, the selling of sport clothes, and in a construction business.

At the beginning petitioner adopted a list of 26 named beneficiaries engaged in charitable or religious work to whom its funds would, at its discretion, be made available. Later seven additional named beneficiaries were added to its list. These lists were compiled after investigation of each of the organizations. All of the latter had to be and were engaged in activities which carried out the purposes and ideas for which petitioner had been established. None of them had any private, beneficial or personal interest in the petitioner. During the period in controversy petitioner had net income in excess of $80,000 and made contributions to beneficiaries in the total amount of $6,550. The good faith or the benign objective of petitioner's founders is not questioned, nor is it disputable that land and other valuable property interests, plus personal services, were donated to petitioner by the Eatons. Nevertheless we may note the obvious possibility that petitioner's net earnings may in the future inure to private individuals or heirs of its founders. There is no prohibition in the corporate articles against the ultimate reversion of its undistributed earnings or assets in event petitioner is liquidated at the end of its corporate life of 25 years.

Petitioner's reliance is on § 101(6) of the Code. During the tax years in question that statute provided in material part as follows: "Exemptions from tax on corporations. The following organizations shall be exempt from taxation under this...