Stevens Bros. Found., Inc. v. Comm'r of Internal Revenue

• Decision Date: 16 October 1962
• Docket Number: Docket No. 89120.
• Citation: 39 T.C. 93
• Parties: STEVENS BROS. FOUNDATION, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

39 T.C. 93

STEVENS BROS. FOUNDATION, INC., PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 89120.

Tax Court of the United States.

Filed October 16, 1962.

[39 T.C. 94]

John M. Sullivan, Esq., and Frank J. Hammond, Esq., for the respondent.

Donald W. Wolf, Esq., for the petitioner.

1. Under section 302(b), Revenue Act of 1950, filing of exempt organization information return constitutes filing of a return for statute of limitations purposes only if the organization loses its exemption because it engages in a trade or business for profit.

2. Except where section 302(b), Revenue Act of 1950, applies, exempt organization information returns are not ‘returns' for statute of limitations purposes under the 1939 Code.

3. The Commissioner is not estopped from revoking an exemption ruling retroactively to the time of a material change in the relevant facts or applicable law occurring after issuance of that ruling.

4. When one major purpose for an organization's entry into a substantial long-term business transaction is to benefit the organization's founders, then that organization is not operating exclusively for tax-exempt purposes, even though the organization also benefits from that transaction.

5. An accumulation for the purpose of accumulating a certain dollar amount, constitutes an unreasonable accumulation under sections 3814(1) of the 1939 Code and 504(a)(1) of the 1954 Code, where no specific project has been determined for the use of that amount and where the current charitable expenditures of the organization are a small fraction of the ‘excess accumulations.’

6. Accumulations out of income are unreasonable under sections 3814(1) of the 1939 Code and 504(a)(1) of the 1954 Code, unless for each taxable year both current accumulations and accumulations out of the income of prior years are supported by a currently existing program justifying such accumulations.

7. Memberships in a nonstock corporation are equivalent to stockholdings for personal holding company purposes if they include the right to share in the corporation's profits, either currently (as by distribution or diversion of profits) or ultimately (as on dissolution).

8. Petitioner advanced funds to canal lock construction projects in exchange for repayment of advances plus a share of the profits. Held: A joint venture was created, taxable as a partnership. Petitioner's profits retain the same taxable characteristics as they had to the joint venture.

9. Belief of petitioner's president as to the worthlessness of securities held by petitioner, together with slight evidence of unsuccessful efforts to sell the securities, held, insufficient to carry the burden of proving worthlessness.

10. Deductibility of interest payments by a cash basis taxpayer is not affected by the payee's members' subsequent promise to repay part of those payments where repayment is not actually effected.

11. A joint venturer's income includes its share of the joint venture's profit for the taxable year of the joint venture ending within the taxable year of joint venturer.

12. Evidence does not establish that certain property used in canal lock construction projects was subject to an allowance for depreciation or that it was held more than 6 months. Held, the property is not shown to be ‘section 1231 assets' and profit on its sale is not treated as being derived from sale or exchange of capital assets.

13. Petitioner's exemption certificate was revoked in 1954 retroactive to its 1948 taxable year. Because of petitioner's failure to show reliance upon the timely advice of competent, informed tax counsel that no returns should be filed after the revocation for the earlier years, held, additions to tax for failure to file timely returns are upheld despite petitioner's not unreasonable argument on the issue of tax liability.

TRAIN, Judge:

respondent determined deficiencies in income and personal holding company taxes and additions to tax of the petitioner as follows:

+------------------------------------------------------------------+
                ¦ ¦ ¦Addition to the tax ¦
                +--------------------------+------------+--------------------------¦
                ¦Fiscal year ended Mar. 31—¦Deficiency ¦ ¦ ¦
                +--------------------------+------------+------------+-------------¦
                ¦ ¦ ¦Sec. 291 (a)¦Sec. 6651 (a)¦
                +--------------------------+------------+------------+-------------¦
                ¦ ¦ ¦I.R.C. 1939 ¦I.R.C. 1954 ¦
                +--------------------------+------------+------------+-------------¦
                ¦ ¦Income tax ¦ ¦ ¦
                +--------------------------+------------+------------+-------------¦
                ¦1948 ¦$21,634.48 ¦$5,408.62 ¦ ¦
                +--------------------------+------------+------------+-------------¦
                ¦1949 ¦5,013.28 ¦1,253.32 ¦ ¦
                +--------------------------+------------+------------+-------------¦
                ¦1950 ¦28,025.41 ¦7,006.35 ¦ ¦
                +--------------------------+------------+------------+-------------¦
                ¦1951 ¦5,258.17 ¦1,314.54 ¦ ¦
                +--------------------------+------------+------------+-------------¦
                ¦1952 ¦2,135.97 ¦533.99 ¦ ¦
                +--------------------------+------------+------------+-------------¦
                ¦1953 ¦1,623.29 ¦405.82 ¦ ¦
                +--------------------------+------------+------------+-------------¦
                ¦1954 ¦1,300.55 ¦325.14 ¦ ¦
                +--------------------------+------------+------------+-------------¦
                ¦1955 ¦44,158.44 ¦ ¦$11,039.61 ¦
                +--------------------------+------------+------------+-------------¦
                ¦1956 ¦8,372.55 ¦ ¦2,093.14 ¦
                +--------------------------+------------+------------+-------------¦
                ¦1957 ¦15,541.64 ¦ ¦3,885.41 ¦
                +--------------------------+------------+------------+-------------¦
                ¦1958 ¦15,188.93 ¦ ¦3,797.23 ¦
                +------------------------------------------------------------------+
                

 Personal holding
                 company surtax
                1948 $73,308.62 18,327.16
                1952 39,960.04 9,990.01
                1953 30,462.05 7,615.51
                1954 23,591.88 5,897.97
                

Respondent has conceded the inapplicability of the additions to tax under section 6651(a) of the Internal Revenue Code of 1954 for petitioner's taxable years 1955 through 1958.

The issues remaining¹ to be decided are:

(1) Whether respondent is barred by the statute of limitations from asserting deficiencies and additions to tax for each of petitioner's taxable years 1948 through 1954;

(2) Whether respondent is estopped from retroactively revoking in 1954 his 1947 ruling that petitioner was exempt from taxation as a charitable organization;

(3) Whether petitioner was exempt from taxation as a charitable organization under section 101(6) of the Internal Revenue Code of 1939 during each of its taxable years 1948 through 1954 and under section 501(c)(3) of the Internal Revenue Code of 1954 during each of its taxable years 1955 through 1958;

[39 T.C. 95]

(4) Whether petitioner is liable for personal holding company surtax pursuant to section 500 of the Internal Revenue Code of 1939 for each of its taxable years 1948, 1952, 1953, and 1954, and for personal holding company tax pursuant to section 541 of the Internal Revenue Code of 1954 for each of its taxable years 1955 through 1958;

(5) Whether a claimed capital loss on account of worthlessness of securities in the amount of $9,849.40 was properly disallowed for petitioner's taxable year 1949;

(6) Whether interest expense in the amount of $5,308.33 was properly disallowed for petitioner's taxable year 1950;

(7) Whether income from the Algiers Lock projects should have been reported in the amounts of $34,252.39, $87,203.91, and $31,153.01 in petitioner's taxable years 1949, 1950, and 1951, respectively, rather than in the amounts of $128,410.60 and $24,198.71 in petitioner's taxable years 1950 and 1951, respectively;

(8) Whether, in its taxable year 1955, petitioner received from the Cheatham Lock project ordinary income of $25,778.24 rather than a long-term capital gain of $48,306.44 and an ordinary loss of $22,528.20; and

(9) Whether petitioner is liable for additions to tax under section 291(a) of the 1939 Code for failure to file income tax returns for each of its taxable years 1948 through 1954 and for failure to file personal holding company tax returns for each of its taxable years 1948, 1952, 1953, and 1954.

FINDINGS OF FACT.

The facts stipulated to by the parties are incorporated herein by reference and found as stipulated.

Stevens Bros. Foundation, Inc., the petitioner herein, was incorporated under the laws of Delaware on December 31, 1942. Its principal office is located in St. Paul, Minnesota.

Petitioner's fiscal years and each of its taxable years before us end on March 31. Petitioner keeps its books and records on the cash basis, except as to its profits on the Cheatham Lock project, infra. It timely filed a Form 990 (exempt organization information return) for each of its taxable years 1948 through 1951 with the collector of internal revenue for the district of Minnesota; it filed a Form 990-A for each of its taxable years 1952 through 1954 with the collector of internal revenue, director of internal revenue, and district director of internal revenue for the district of Minnesota, respectively; and it filed a timely corporation income tax return for each of its taxable years 1955 through 1958 with the district director of internal revenue for the district of Minnesota. Each of the above-mentioned Form 990 and Form 990-A returns lacked data necessary for the computation and assessment of deficiencies.

[39 T.C. 96]

Stevens Bros. & Miller-Hutchinson Co., Inc. (hereinafter sometimes referred to as Corporation), and petitioner filed a partnership information return for the calendar year 1949 with the collector of internal revenue for the district of Louisiana and for each of the calendar years 1950 through 1954 with the appropriate collector, director, or district director of internal revenue for the district of Tennessee.

Petitioner's certificate of incorporation, which was not amended between the time of its issuance and the end of the last taxable year before the Court, reads, in pertinent part, as follows:

FIRST. The name of this corporation is STEVENS BROS. FOUNDATION INC.

THIRD. The...