De La Salle Institute v. United States

• Decision Date: 24 July 1961
• Docket Number: Civ. No. 7499.
• Citation: 195 F. Supp. 891
• Parties: DE LA SALLE INSTITUTE, a membership corporation, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Northern District of California

195 F. Supp. 891

DE LA SALLE INSTITUTE, a membership corporation, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. No. 7499.

United States District Court N. D. California, N. D.

July 24, 1961.

Valentine Brookes, Paul E. Anderson, John W. Broad and John A. Busterud, San Francisco, Cal., for plaintiff.

Laurence E. Dayton, U. S. Atty., San Francisco, Cal., Robert E. Woodward, Asst. U. S. Atty., Sacramento, Cal., and Jerome Fink, Trial Atty., Tax Division, Dept. of Justice, Washington, D. C., for defendant.

HALBERT, District Judge.

Plaintiff has commenced this action to compel refunds of sums paid by it on account of certain corporate income taxes which plaintiff has allegedly paid in error, together with the interest provided by law. These taxes were for plaintiff's fiscal years ended March 31, 1952, March 31, 1953 and March 31, 1956. Jurisdiction of this Court is predicated upon Title 28 U.S.C. §§ 1331, 1340 and 1346. Defendant filed a counterclaim in this action, for certain alleged deficiencies for the years at issue, in accordance with the provisions of Title 26 U.S.C. § 7422(e). The Court ordered the issues of the counterclaim to be tried separately after the resolution of the issue presented by the complaint as twice amended and the answer (Federal Rules of Civil Procedure, Rule 42(b), 28 U.S.C.).

Succinctly stated, the issue presented by the complaint and answer is this: Does plaintiff fall within the exemption granted a church or a convention or association of churches (Title 26 U.S.C. § 511 (a) (2) (A))?

This issue has been tried before the Court, sitting without a jury. Each side has extensively briefed its position, and the issue is now submitted to the Court for its decision.

Plaintiff is a membership, nonprofit corporation organized under the laws of the State of California, characterized by its by-laws (adopted in 1940) as "an educational and benevolent institution." The members of plaintiff are all members of the San Francisco Province of the Institute of the Brothers of the Christian Schools, a Religious Institute of Pontifical Right of the Roman Catholic Apostolic Church. This Institute is commonly known as the Christian Brothers Order.

Plaintiff, during the fiscal years in issue, owned and operated (in addition to some miscellaneous property) the following:

(1) A novitiate at which postulants and novices of the Christian Brothers Order were trained to play their part in the Order;

(2) Certain Catholic schools, at or below high school age level;

(3) Homes for the Brothers, including a home for retired Brothers; and

(4) A winery and distillery.

The winery and distillery were transferred to a corporation sole during the second fiscal year in issue, and leased back to plaintiff. The corporation sole involved was the legal entity which had been established under California law to represent the head of the San Francisco Province of the Christian Brothers Order.

During the fiscal years involved, plaintiff had a very substantial income from the operation of a large commercial wine and brandy production business. It is said that Christian Brothers is the largest selling domestic brandy in the United States. It is undisputed that this business was principally an "unrelated business" and that plaintiff had an "unrelated business net income" during the fiscal years in question, within the meaning of those terms as employed in the 1939 Internal Revenue Code, § 421, 26 U.S.C.A. § 421, and in the 1954 Internal Revenue Code, § 511 (Title 26 U.S.C. § 511). The taxes in dispute were computed on the basis of such unrelated business net income, the 1939 Code applying to the first two fiscal years in suit, and the 1954 Code applying to the third. These taxes, plus interest, amount to $489,800.83.

Plaintiff filed timely claims for refund of the sums in question, on the grounds that plaintiff is a church and an integral part of a church, and thus exempt from the taxes in question (See Title 26 U.S.C. § 511(a) (2) (A); and 1939 Internal Revenue Code, § 421(b) (1) (A)). These claims were not allowed. It is admitted that plaintiff has exhausted its administrative remedies, except that defendant contends that plaintiff has never properly presented its claims for administrative action, insofar as they are based upon the missionary activities carried out in the Philippines by the San Francisco Province of the Christian Brothers Order.

Admissibility of Evidence.

Plaintiff has offered a great deal of evidence to which defendant has objected. The Court has reserved ruling upon the admissibility of this evidence. In the meantime, defendant has been allowed to cross-examine, amplify, explain or rebut this evidence without prejudice to its general objection that the evidence is irrelevant and therefore not admissible.

The evidence objected to by defendant on the ground of irrelevance for the most part falls into two categories:

(1) Evidence relating to the canon law of the Roman Catholic Apostolic Church, together with the rules of the Christian Brothers Order, and the interpretation of this law and these rules by which the San Francisco Province of the Christian Brothers Order abides.

(2) Evidence of those activities of the San Francisco Province of the Christian Brothers Order which are not carried out through the instrumentality of plaintiff.

Where the canon law and other rules under which plaintiff's members operate are in conflict with the civil law, they are not binding here. Plaintiff does not contend that they are. Notwithstanding this rule, it is patent that an understanding of these laws and rules will be helpful in deciding what activities plaintiff is engaged in; whether plaintiff fulfills church functions; and whether plaintiff is an integral part of a church.

It is important to know what rules the Christian Brothers live by in this province. Their interpretation of the rules is what is at issue, and it is not necessary for this Court to decide for example whether they have or have not correctly interpreted the document which they consider to be permission from Rome to operate a winery. They also believe that they live according to the directions of the Bible, but it is not necessary for this Court to decide here whether or not they actually do. For the reasons noted, all of the evidence in the first category is admissible. Defendant's objection thereto will therefore be overruled.

The activities of the San Francisco Province of the Christian Brothers Order which are not carried out by plaintiff may throw light on the purposes of the activities which are carried out by plaintiff. The evidence of such activities is certainly not prejudicial, and should be admitted if it throws any light at all on the issues of this case. Such evidence is particularly relevant when considered in terms of the third fiscal year involved in this suit and in the light of 26 CFR § 1.511-2(3) (I.R.C.1954). All evidence in the second category is admissible. Defendant's objection to this evidence will be overruled.

Plaintiff's exhibit 5 for identification is an extract from an unpublished ruling that since Loyola University is owned and controlled by the Society of Jesus, it need not pay tax on its unrelated business net income. This ruling is an interpretation by the Internal Revenue Service of 26 CFR § 1.511-2 (I.R.C.1954). The ruling does throw some light on the issues of this case. Defendant was duly warned that the exhibit in question would be regarded as accurate unless defendant produced better evidence of the contents of the ruling (See pp. 14-15 of the trial transcript; and See the Memorandum and Order filed on this point by the Court on October 17, 1960). Defendant does not in fact challenge the accuracy of the extract, but only its relevance. While the ruling of the Service is considered relevant, it is not necessarily controlling here. Plaintiff's exhibits 3 and 4 for identification, which deal with the same subject, and plaintiff's exhibit 5 for identification will be received in evidence.

Defendant has objected to much evidence on the ground that it is hearsay. Exceptions to the hearsay rule have virtually swallowed the rule. When it is impracticable to put before the Court direct evidence on intricate points which have relevance, and there exists a publication covering those points, such a publication is admissible hearsay if a witness can be produced to vouch for the general authenticity of such publication. This situation is analogous to that presented by the business records exception to the hearsay rule.

Defendant has failed to show that any of the exhibits or testimony now at issue should be excluded. It may be noted that defendant's objections to the introduction of such evidence were mostly of a vague, general character a situation which the Court, at the time of the objections, invited in order to speed up the trial. Moreover, defendant has failed adequately to support by argument its position against the introduction of such evidence this being a situation the Court did not invite. In fairness to defendant, its failure to make more precise objections at the time of the trial should not be held against it. Accordingly, this facet of the matter will be overlooked. The Court cannot, however, overlook the failure of defendant properly to brief its objections. This failure is fairly interpreted by plaintiff as an abandonment of those objections. This is, therefore, an independent reason why all the testimony and exhibits to which defendant objected should be, and will be, received in evidence.

Summary of Facts Found by the Court.

The Christian Brothers Order was founded by St. Jean Baptiste de la Salle in 1680. It was established as an Institute of Pontifical Right by a Bull issued by Pope Benedict XIII in 1725. The purpose of the Christian Brothers Order is to furnish a religious education for children and youth. The local operations, with which we are primarily concerned, are carried...