San Francisco Infant Sch., Inc. v. Comm'r of Internal Revenue, Docket No. 4246-77X.

• Decision Date: 20 March 1978
• Docket Number: Docket No. 4246-77X.
• Parties: SAN FRANCISCO INFANT SCHOOL, INC., PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

69 T.C. 957

SAN FRANCISCO INFANT SCHOOL, INC., PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 4246-77X.

United States Tax Court

Filed March 20, 1978.

Petitioner was formed as a nonprofit corporation to provide educational day care for children between the ages of 6 months and 3 years. An application for determination of qualification and exemption under sec. 501(c)(3), I.R.C. 1954, was filed with the Internal Revenue Service on petitioner's behalf. The Internal Revenue Service determined that petitioner did not qualify for tax-exempt status since petitioner's services were primarily custodial. Thereafter petitioner filed a petition with this Court for a declaratory judgment pursuant to sec. 7428, I.R.C. 1954. Held, petitioner's custodial services were incidental to its educational purpose and it therefore qualified for exemption from taxation pursuant to sec. 501(a) as an organization described in sec. 501(c)(3). Harold J. McElhinny, for the petitioner.

Kevin M. Bagley, for the respondent.

OPINION

DAWSON, Judge:

Respondent determined that petitioner does not qualify for exemption from Federal income tax under section 501(c)(3).¹ Petitioner challenges respondent's determination and has invoked the jurisdiction of this Court for a declaratory judgment² pursuant to section 7428. The issue for our decision is whether petitioner was operated exclusively for educational or charitable purposes within the meaning of section 501(c)(3)

This case was submitted for decision on the stipulated administrative record under motions by both parties for summary judgment under Rule 121, Tax Court Rules of Practice and Procedure.³ The evidentiary facts and representations contained in the administrative record are assumed to be true for purposes of this proceeding. The pertinent facts are summarized below.

San Francisco Infant School, Inc. (petitioner)),is a California nonprofit corporation with its principal place of business in San Francisco, Calif. Petitioner filed its application for recognition of exemption under section 501(c)(3) with the San Francisco Office of the Internal Revenue Service, Exempt Organization Branch.

Petitioner was founded by Kathleen Murray and John Curran Ladd, attorneys, who perceived a need to provide their daughter with education-oriented child care which was unavailable to them on a commercial basis or elsewhere, since they did not qualify for publicly-assisted child care or for child care provided at schools or colleges. To fulfill this need they joined with Sharon Glos, a teacher specializing in infant education, and organized petitioner as a nonprofit corporation as required for day care centers under California law. Petitioner's initial articles of incorporation stated its purpose as follows:

(1) to provide a comprehensive early childhood education program and day care service for young children and to serve as a model and agent for change in the improvement and expansion of similar services in the community.

(2) to receive contributions and to make donations to, dispense contributions through, and otherwise aid and support those organizations qualified for exemption from federal income tax under the Internal Revenue Code of 1954, as now in effect or as subsequently amended, that are organized and operated exclusively for religious, charitable, scientific, testing for public safety, 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, no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation, and that do not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of or in opposition to any candidate for public office;

During the process of seeking administrative determination of exempt status petitioner amended the first of these purposes to comply with respondent's interpretation of the organizational requirements for a section 501(c)(3) exemption. As amended the first purpose is:

(1) to further charitable and educational purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code, more specifically by providing a comprehensive early childhood education program for young children, by serving as a model for the improvement and expansion of similar services in the community, and by providing such incidental day care services as are necessary in furtherance of the said early childhood education program.

To cover organizational costs John Curran Ladd loaned $1,000 without interest to petitioner with repayment contingent on the financial viability of petitioner. Petitioner's school operations were located in a ground floor rental unit in the home of John Curran Ladd and Kathleen Murray for which petitioner was charged rent at not more than a fair market rental value.

Petitioner employed Sharon Glos as the head teacher for $600 per month and another full-time teacher, Kathleen Wolf, for $500 per month. Each of these teachers had specialized in providing educational child care to infants and young children. Kathleen Wolf has a bachelor of science degree in elementary education and meets the qualification for a California Children's Center Permit. She attended workshops on infant education. Previously she had served as head infant teacher at the Child Care Center of the Hastings College of Law.

Sharon Glos attended City College of San Francisco and took courses related to early childhood development and education. She qualified for the California Children's Center Permit. She attended workshops in infant education and parent effectiveness. Her professional experience included service as the assistant director and head teacher of the Child Care Center of the Hastings Law School, and as a consultant for Phoenix House (a mental health day treatment center for adults with a drop-in infant-toddler program) of Napa State Hospital.

Petitioner set a maximum enrollment of eight students, one of which was the daughter of Kathleen Murray and John Curran Ladd, to maintain a student/teacher ratio of 4 to 1. This ratio was considered ideal for infant care and education. Enrollment was limited to infants between the ages of 6 months and 3 years. The school was supported by a tuition charge of $225 per month for full-time students. Part-time students were accepted on a temporary basis for those openings not filled by full-time students.

Petitioner's method and philosophy of infant education were described in its statement of educational policy as follows:

CURRICULUM

The San Francisco Infant School has a developmentally-oriented program which focuses on the various developmental areas to enhance each child's growth and learning.

A. INFANT PROGRAM:

For children between the ages of six months and eighteen months, the programming consists of the following areas of emphasis, with examples of specific teaching techniques.

1) Language Development: A child learns to talk by hearing others talk to and around him/her. The teachers like to talk to the babies and to encourage them to talk themselves. Examples: A teacher (talks) to a baby, enunciating carefully, e.g., “Here is a ball, Anne,” and the child repeats, or attempts to repeat, the words. Or, a child and teacher sit in front of a low mirror touching parts of faces and naming them.

2) Sensory/Cognitive Development: A baby's understanding of the world comes through the senses. A child learns by examining objects (toys) through touch, sound, sight and taste. As the baby explores different colors, shapes, textures, movements and sounds he learns not only the relationship between the parts of objects, but also how to learn more about the world. To promote this development, the School has acquired, and will continue to acquire, interesting objects to stimulate the interest and curiosity of each child. Example: A child lying on and playing with a “feely quilt”—-a quilt made of many different types of fabric to allow the baby to explore the variety of textures.

3) Gross Motor Development: Most infants start out crawling and need a safe and baby-designed space in which to move about freely and exercise their muscles. Examples: The School provides three large, sunny, baby-safe rooms where the children can crawl and explore as much as they choose. Playpens are not used. A low railing along one of the walls helps children pull and support themselves when they leave the crawling stage and start walking.

4) Fine Motor Development: Children need opportunities to develop visual skills and hand-eye coordination. Example: The teacher shows an object to a child and moves it so that the child's eyes and head turn to follow the object. Hand-eye coordination is enhanced by such tasks as feeding self first with fingers, and later with a spoon and drinking from a cup. Even our youngest baby (6 months) likes to hold a spoon and tries to feed herself.

5) Individual Self-Awareness: It is important that each infant be respected as an independent and unique human being. A sense of self-identification is encouraged at the School by frequent verbalization of the child's name, teaching the child parts of the body, and by respecting each child's feelings. Example: We talk to the children about their fears, such as, “Your Mommy and Daddy are going to work now. That is hard for you but you will see them again soon. I will be here for you until they come back.” Small children may not always understand each word, but the meaning that it is OK for them to feel sad, and that the teacher will be there to care for them, is a first lesson of trust.

6) Social Development: A unique and important aspect of the San Francisco Infant School program is the infants' ability and interest in relating to other infants and adults at the School. Today's child often comes from a single-child home....