Riker v. Commissioner of Internal Revenue

• Citation: 244 F.2d 220
• Decision Date: 17 June 1957
• Docket Number: No. 15072.,15072.
• Parties: Peggy Lou RIKER and Freda H. Grassmee, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

244 F.2d 220 (1957)

Peggy Lou RIKER and Freda H. Grassmee, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

No. 15072.

United States Court of Appeals Ninth Circuit.

April 12, 1957.

Rehearing Denied June 17, 1957.

Howard B. Crittenden, Jr., San Francisco, Cal., for petitioner.

Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, Hilbert P. Zarky, George F. Lynch, David O. Walter, John Potts Barnes, Chief Counsel, I. R. S., Washington, D. C., for respondent.

Before DENMAN, Chief Judge, FEE, Circuit Judge, and ROSS, District Judge.

ROSS, District Judge.

This is an appeal from a decision of the United States Tax Court in the consolidated cases of Freda H. Grassmee, and Peggy Lou Riker, under 26 U.S.C.A. § 7482. We will develop the factual background, first as to Freda Grassmee, second as to Peggy Lou Riker, and third as to Christ's Church of the Golden Rule. Mrs. Grassmee will be referred to as Grassmee, Peggy Lou Riker as Riker, and Christ's Church of the Golden Rule simply as the Church.

Grassmee

Grassmee and her eighty-four year old mother were members of the Church group. She was employed in a law office during the tax years in question, 1948 and 1949, and during that period contributed her entire salary to the Church. She and her mother lived in a housing project maintained by the Church, and the entire subsistence of both mother and daughter was furnished by the Church. In short, Grassmee contributed all her earnings to the Church and the Church in return took care of all of the subsistence needs of herself and mother. The mother, due to her age, contributed nothing to the Church by way of money or services. The contributions made by Grassmee to the Church were accompanied by Church Form 399, which specified that the donations were to be used exclusively for the religious purposes of the Church.

In making her income tax returns Grassmee claimed credit for the 15% deduction permitted by Section 23(o), Title 26 U.S.C.A. (1939 Internal Revenue Act, as amended), on her entire earnings contributed to the Church for religious use, and claimed two personal exemptions, one for herself and one for her mother.

The Commissioner disallowed the deductions claimed under Section 23(o). Grassmee then filed her petition with the United States Tax Court seeking a redetermination of her tax liability. In his answer and amended answer to the petition the Commissioner took the position she was not entitled to the Section 23(o) deduction, and also asserted that she was not entitled to a dependency deduction for her mother. The Tax Court sustained the Commissioner.

So far as Grassmee is concerned this Court must determine the following questions:

1. Was the Church, or the Elected Delegates Committee, hereinafter referred to as the Committee, the temporal agency of the Church, such a religious organization as to come within the provisions and meaning of Section 23(o), thus permitting her as the donor of her salary to claim the 15% deduction.

2. Was she entitled to the dependency deduction provided for in Section 25, T. 26 U.S.C. (1939 Revenue Code, as amended).

3. Was the Church such a religious organization as to come under the provisions of Section 101(18), Title 26 U.S.C. (1939 Internal Revenue Act, as amended), allowing her to make her tax return on that basis, namely, by showing her individual portion of the Church income by way of dividend.

Riker

Peggy Lou Riker and her husband were also members of the Church group, having joined the San Bernardino group in 1947. Prior to joining they operated a drug store in partnership with Mr. Riker's parents. On the termination of the partnership business the Rikers took the store equipment and made a cash settlement with Riker's parents. They then acquired a parcel of real estate and on it with their fixtures, opened up a restaurant under the name of "Your Food Fountain" which was conducted as a Church project. The business was operated by Riker as a project manager and was staffed by a group of Church members known as "Student Ministers." During all of the time the business was operated no salaries were paid to the student ministers nor did Riker draw a salary or retain any of its receipts.

The record indicates that Riker paid the entire gross receipts of the business over to the Committee, and the Committee in turn set up a fund from the general Church treasury from which all of the cost and operating expense of the restaurant was paid. The Rikers and the student minister group were furnished living quarters and subsistence by the Church.

The situation surrounding the ownership and operation of "Your Food Fountain" is somewhat confused by reason of the fact that the Church went into bankruptcy in 1945 and was being so administered during the tax years here in question. Respondent's brief points out that "it is a fundamental assumption of the Tax Court that the restaurant business, Your Food Fountain, was an asset of the bankrupt Church." Like counsel, we take the view that if such was the assumption of the Tax Court then it is error, for we are of the opinion that the record leads to the opposite conclusion, namely, that the business as well as the physical properties of the business was at all times owned by Riker. That everyone concerned were also in confusion see the agreement with the trustees in Bankruptcy. The Referee in Bankruptcy authorized the trustees to enter into an agreement with Riker for the operation of the restaurant business during the pendency of litigation "to determine the ownership thereof." The agreement was approved by the Referee in his order of May 15, 1947, and reads in part as follows:

"To the end that provisions may be made for the operation of Your Food Fountain * * * so as to preserve the said business and its good will during the pendency of the summary proceedings in the United States District Court relative to the conflicting claims of ownership, the trustees propose the following arrangement: * * *"

Pursuant to this preamble the agreement provided that Riker was to continue to operate the business for her own profit until such time as the ownership thereof was determined, paying all expenses incident thereto, and depositing a certain amount monthly in a trust fund to be maintained by the trustees to be paid over to such of the parties as might finally be determined to be the owner. The agreement became effective April 15, 1947, and was to continue until such time as terminated by the parties or until such time as the Court might determine the matter of ownership, and was to be without prejudice as to the rights of either party on the question of ownership. The record bears out the following recital of Riker's operations.

From May 1947, the restaurant was operated under this management (referring to the plan agreed upon between Riker and the trustees). Of this period from May 1947 until January 1948, the restaurant was run as a "Church project," and the earnings were turned over to the Committee by Riker. From January 1948 until June 1948, Riker ran the business in partnership with persons who were not members of the Church, and from June until September 1948, she operated the business on a percentage basis with a prospective purchaser. Her partnership share of the restaurant's earnings was contributed to the Committee. For five months of her fiscal year 1948, January 20 to June 30, Riker filed partnership returns for three different partnerships that operated the restaurant in this period. In July 1948, the assets of the restaurant were sold to the Committee for $1,500. Riker consented to the sale.

Riker filed an income tax return for her fiscal year 1948 (October 1, 1947, until September 30, 1948), which disclosed a net profit of $7,568.25 from the operation of a restaurant business under the name of "Your Food Fountain." A memorandum attached to the return reads as follows:

"Item 2. Wages, etc. Taxpayer was employed by Own Business for a gross income of $8959.11 during the taxable year. However, under the rules of the apostolic society (of which taxpayer is an associate) that all in the society share their income, $8959.11 was contributed to and became a part of the income for the apostolic society, and is reported as part thereof. Taxpayer would therefore, be taxed twice on the same income by reporting it as wages and also as a dividend. For this reason, this latter sum is reported only as part of the dividend or taxpayer\'s pro rata share of the net income of said apostolic religious society. (See Item No. 3 Dividends.)

"Item 3. Dividends. 1/575 interest in $217,001.54 net income of the Elected Delegates\' Committee of the Ecclesiastical Society of Christ\'s Church of the Golden Rule, an Apostolic Religious Association, for its accounting period of Oct. 1, 1947 to Oct. 1, 1948. This was not received as a dividend, but is reported under Sec. 101(18) — Per person in Association $377.39.

"Number of persons in taxpayer\'s family who were in association and obtained support from Society during Period:

"2 times $377.39 . . . (mother and daughter) . . . $754.78."

In her return for 1948, Peggy Lou claimed the sum of $8,959.11 as a deductible contribution to the Church. This claim was disallowed by the Commissioner and this action was alleged as error in the original petition. In an amended petition, it was prayed that the income of the Fountain be found to be the income of the Church.

The Tax Court sustained the Commissioner's determinations and held (1) that the income derived from the operation of the Fountain by Peggy Lou was her income and not that of the Church organization to which she contributed it; (2) that no part of the amounts contributed to the Church by the taxpayer was deductible as a contribution to a religious organization since the Church was not organized and operated exclusively for religious purposes within the meaning of Section 23(o) of the Internal Revenue Code of 1939; * * *."

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