Roche's Beach, Inc. v. Commissioner of Internal Revenue

• Decision Date: 09 May 1938
• Docket Number: No. 165.,165.
• Citation: 96 F.2d 776
• Parties: ROCHE'S BEACH, Inc., v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

96 F.2d 776 (1938)

ROCHE'S BEACH, Inc., v. COMMISSIONER OF INTERNAL REVENUE.

No. 165.

Circuit Court of Appeals, Second Circuit.

May 9, 1938.

Davies, Auerbach & Cornell, of New York City (Jacob Mertens, Jr., Orrin G. Judd, and Emelyn L. Mackenzie, all of New York City, of counsel), for petitioner.

James W. Morris, Asst. Atty. Gen., and Sewall Key, Norman D. Keller, and John J. Pringle, Jr., Sp. Assts. to Atty. Gen., for respondent.

Before MANTON, L. HAND, and SWAN, Circuit Judges.

SWAN, Circuit Judge.

The sole question presented for decision is whether Roche's Beach, Inc., a corporation formed under the Stock Corporation Law of New York, Consol.Laws N.Y. c. 59, was exempt from taxation upon its income for the year 1931 by virtue of section 103 of the Revenue Act of 1928, 26 U.S.C.A. § 103 and note. The corporation was organized by Edward Roche shortly before his death for the purpose of being the medium through which a charitable foundation created by his will could operate his property and collect the income therefrom after his death. The property conveyed to it in exchange for all of its stock, other than three shares issued to the incorporators for cash, consisted of real estate facing on the Atlantic Ocean near Far Rockaway, Queens county, N. Y., the equipment of the bathing beach business operated thereon by Mr. Roche, and a claim against the city of New York for compensation for property taken by condemnation. The upland portion of the tract was improved with six houses, a garage, and an unused hotel which had been partially destroyed by fire. Although the property was deeded to the corporation on August 26, 1930, the day on which Mr. Roche executed his will, his intention was to continue to operate the property so long as he should live; and he did so, receiving all the income therefrom until his death. This occurred December 28, 1930. By his will the residue of his estate, including the capital stock of Roche's Beach, Inc., was bequeathed to testamentary trustees for the purpose of establishing a fund for the relief of destitute women and children, to be known as "The Edward and Ellen Roche Relief Foundation" and to be administered by the trustees. After his death the trustees operated the property through the medium of the corporation, which turned over any excess of income over expenses to the foundation for the charitable purposes outlined in the will. In the year 1931 the gross income of the corporation was $99,947 and its net income $23,243. Its income was derived from bathhouse, suit and towel rentals; concessions given out for restaurants and refreshments; rent from a portion of the beach occupied by a club; and rentals of the houses and garage. The corporation filed an income tax return for 1931 and paid the indicated tax. Thereafter it duly filed a claim for refund on the ground that it was exempt from taxation. The Commissioner denied the claim for refund and assessed an additional tax. The Board of Tax Appeals sustained the Commissioner's ruling that the petitioner was not entitled to exemption.

It is conceded that the Relief Foundation, for whose purposes the stock of the petitioner was bequeathed to his testamentary trustees, is a charitable organization exempt from income taxation; that the testator organized the petitioner to be the medium through which this foundation could operate his real estate and bathing beach business after his death; and that the net income collected by the petitioner has been devoted to the purposes of the foundation. Exemption from taxation of income is claimed by virtue of subdivisions 6 and 14 of section 103 of the Revenue Act of 1928, 45 Stat. 813, 814, 26 U.S.C.A. § 103(6) note, (14) and note, which read as follows:

"(6) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual; * * *

"(14) Corporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt from the tax imposed by this title chapter."

The Board of Tax Appeals held that the corporation was not within either subdivision because its certificate of incorporation gave it broad powers related to carrying on various kinds of business and said nothing of the charitable purposes which it was to serve.

In our opinion the petitioner cannot bring itself within section 103(14), 26 U.S. C.A. § 103(14) and note, as a corporation "organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses," to an exempt organization. Assuming that the charitable purpose for which it was organized may be found from evidence outside the corporate charter, the purpose of creating the petitioner was broader than merely to have it hold title to property and collect income therefrom. It was to operate the testator's bathing beach business, as well as to collect rentals from the houses and garage. Even if the latter was within subdivision 14, we do not think the operation of the bathing beach can be so held. This business was quite extensive. There were 3,000 bath houses to be let to transient bathers; 34 employees were engaged during the summer; as many as 6,000 persons might patronize the beach on pleasant days; suits and towels were rented; caps, belts and shoes were sold; and restaurant, soda and candy concessions were given out. In 1931 income from the beach property, exclusive of rentals from the other real estate, was more than $85,000, and expenses, omitting taxes, ran to nearly $40,000. To call the operation of a business of these proportions merely "holding the title" and "collecting income therefrom" would be a forced construction of the language of the statute. Gagne v. Hanover Water Works Co., 1 Cir., 92 F.2d 659, is directly in point as to the nonavailability of the exemption of section 103(14). That case involved a water company, whose capital stock was owned by a college and a village, both of which were exempt from income tax. In denying exemption to the water company, the court said (92 F.2d 659, at page 661): "The powers granted by its charter and the acts done under them disclose that it was authorized to engage and engaged in business activities like any domestic business corporation operating a water works plant for profit. It surely was not organized for the exclusive purpose of holding title to property and in fact it did not limit its activities to such purpose."

To gain exemption under subdivision 6 of section 103, 26 U.S.C.A. § 103(6) note, the petitioner must be a corporation "organized and operated exclusively for * * * charitable * * * purposes * * * no part of the net earnings of which inures to the benefit of any private shareholder or individual." This does not mean that to come within the exemption a corporation may not conduct business activities for profit. The destination of the income is more significant than its source. See Trinidad v. Sagrada Orden, 263 U.S. 578, 44 S.Ct. 204, 68 L.Ed. 458; Sand Springs Home v. Commissioner, 6 B.T.A. 198, 214; Appeal of Unity School of Christianity, 4 B.T.A. 61. In the case at bar counsel for the Commissioner conceded during the trial that the petitioner turned over all the proceeds of its activities to the charitable foundation established by Edward Roche's will. The Board made a finding that Roche organized the corporation for the purpose of being the medium through which this foundation could operate the property and collect income after his death. His will referred to the corporation and made manifest that the income produced by it could not be used for other than charitable purposes without a perversion of the testamentary trust. Cf. Leubuscher v. Commissioner, 2 Cir., 54 F.2d 998, 1000. As a question of fact, it seems clear that the corporation was organized and operated exclusively for charitable purposes;...