Retailers Credit Ass'n v. Commissioner of Internal Rev.

• Decision Date: 10 May 1937
• Docket Number: No. 8229.,8229.
• Citation: 90 F.2d 47
• Parties: RETAILERS CREDIT ASS'N OF ALAMEDA COUNTY v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

90 F.2d 47 (1937)

RETAILERS CREDIT ASS'N OF ALAMEDA COUNTY v. COMMISSIONER OF INTERNAL REVENUE.

No. 8229.

Circuit Court of Appeals, Ninth Circuit.

May 10, 1937.

COPYRIGHT MATERIAL OMITTED

John L. Reith, of Oakland, Cal., for petitioner.

Robert H. Jackson, Asst. Atty. Gen., and Sewall Key, J. Louis Monarch, Howard P. Locke, and Francis I. Howley, Sp. Assts. to the Atty. Gen., for respondent.

Before GARRECHT and HANEY, Circuit Judges, and NETERER, District Judge.

HANEY, Circuit Judge.

By a petition we are asked to review a decision of the Board of Tax Appeals sustaining respondent's determination that petitioner was not exempt from taxation upon its net income for the year 1931.

Petitioner was organized in May, 1917, under title 20, Division 1, part 4 of the Civil Code of California which provided for the organization of co-operative associations to operate on either a profit or non-profit basis. The articles of incorporation state the purposes of the corporation and they are set out in full in 33 B.T.A. 1166, 1167. Summarized, the purposes are: To furnish reports on the credit rating of individuals, firms, and corporations; to act as the agent of members of petitioner in collections; to act as the assignee of claims due such members, and in its own name to sue on, collect, and compromise such claims; to carry on the business of a general mercantile credit agency; to encourage prompt payment of accounts and to promote more efficient credit business; to gather information affecting the credit standing of persons, firms, and corporations and to report it to members; to assist in securing legislation which will encourage better credit conditions, and to aid enforcement thereof; to acquire, own, hold, lease, mortgage, and sell real and personal property desirable or convenient to carry out the purposes of the corporation; and to acquire, own, hold, sell, transfer, and pledge stock or other securities of any other corporation necessary, convenient, or desirable for the furthering of the best interests of the corporation.

Petitioner has no stockholders but is composed of members who pay a fee of $5 each to join. The members are retailers, dentists, doctors, and other professional men.

Petitioner furnishes credit reports on natural persons, only, and to members, only, and makes a charge for such services. The charge may be and has been changed from time to time by petitioner. Petitioner also makes collections for its members, only, receiving for its services a commission.

Non-income producing services rendered by petitioner include: advertising campaigns advocating prompt payment of debts; arranging and executing group settlements; furnishing "reciprocal reports" for members; minimizing competition among retailers; reporting to members information affecting credit, including marriages, divorces, deaths, bankruptcies, and other matters; conducting classes for the education of members' employees on credit practices; and actively supporting or opposing legislation affecting credit matters.

There were no corporations similar to petitioner furnishing all the services petitioner provided, in the locality it served during 1931. However, there were privately owned corporations, organized for profit, furnishing credit reports and collection services for which charges were made, in the same locality, during the same time.

The by-laws of petitioner provide that any profits shall be used to, first, pay the debts of petitioner; second, improve the plant, equipment, and service of petitioner; third, pay dividends in equal amounts to the members.

Petitioner had accumulated profits of $32,587.53 from its operations prior to 1931, which were used to enlarge and expand its business. It was the intention of petitioner to make charges for its services which would return to it only enough profit to care for the expanding needs of the business.

Petitioner reported a net profit in its return for 1931 of $6,878.61. It paid no tax, but claimed exemption pursuant to § 103(7) of the Revenue Act of 1928, 26 U.S.C.A. § 103(7) and note, which provides:

"The following organizations shall be exempt from taxation under this title chapter — * * * (7) Business leagues * * * not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual."

Respondent determined that petitioner was not exempt, and assessed a deficiency in the sum of $465.43. This determination was sustained by the Board on petition to redetermine the tax.

Article 528 of Regulations 74, promulgated under the Revenue Act in question, is in part as follows: "A business league is an association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit. It is an organization of the same general class as a chamber of commerce or board of trade. Thus its activities should be directed to the improvement of business conditions or to the promotion of the general objects of one or more lines of business as distinguished from the performance of particular services for individual persons. An organization whose purpose is to engage in a regular business of a kind ordinarily carried on for profit, even though the business is conducted on a co-operative basis or produces only sufficient income to be self-sustaining, is not a business league."

Whether or not petitioner is exempt from the taxes imposed is the sole question before us.

It should be noted that a statute creating an exemption must be strictly construed, and any doubt must be resolved in favor of the taxing power. Sun-Herald Corporation v. Duggan (C.C.A.2) 73 F.(2d) 298, 300, and cases cited.

The provision of the regulations has been in force since the enactment of the Revenue Act of 1918 (40 Stat. 1057), except for a minor modification therein made September 10, 1927, which was in effect until February 15, 1929. Under such circumstances, re-enactment of the statute carried with it the executive interpretation thereof as expressed in the regulations. Sunset Scavenger Co. v. Commissioner (C.C.A.9) 84 F.(2d) 453, 457, and cases cited; Uniform Printing & S. Co. v. Commissioner (C.C.A.8) 33 F.(2d) 445, 447.

Reading the statute and the provision of the regulations together, we find that, in determining whether an organization is exempt from tax, three things are to be considered: (1) The kind or type of organization; (2) the purpose of the organization; and (3) the actual operations of the association.

1. One kind of organization which is exempt (if other conditions are met) is a business league. "A business league is an association of persons having some common business interest."

There is no special significance to the words "business League." If the persons of an association have some common business interest, then the association is a "business league." The common business interest of the members of petitioner is the betterment of credit conditions. Therefore it is a business league. All business leagues are not exempt, however. Only those having particular purposes, which do not have the prohibited purposes, and which operate in the prescribed way are exempt.

2. Before discussing the purpose of an organization which is exempt we note a provision of the regulations stated "It a business league is an organization of the same general class as a chamber of commerce or board of trade." In Produce Exchange Stock Clearing Ass'n v. Helvering (C.C.A.2) 71 F.(2d) 142, 144, it is said: "Under the familiar doctrine of noscitur a sociis, a business league to be exempt must possess the general characteristics of these other organizations with which the statute groups it." The characteristics of a chamber of commerce or board of trade here important are the purposes and operation thereof. The statute and regulations so construed mean, therefore, that the purposes of the league must be "to promote such common interest," must be similar to those "of a chamber of commerce or board of trade," and must not be "to engage in a regular business of a kind ordinarily...