Stevens Bros. Foundation, Inc. v. CIR
| Decision Date | 15 November 1963 |
| Docket Number | No. 17332.,17332. |
| Citation | 324 F.2d 633 |
| Parties | STEVENS BROS. FOUNDATION, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Eighth Circuit |
COPYRIGHT MATERIAL OMITTED
Frank J. Hammond, of Briggs & Morgan, St. Paul, Minn., John M. Sullivan and John J. King, St. Paul, Minn., on the brief, for petitioner.
Ralph A. Muoio, Attorney, Dept. of Justice, Washington, D. C., Louis F. Oberdorfer, Asst. Atty. Gen., Washington, D. C., and Meyer Rothwacks, Attorney, Dept. of Justice, Wash., D. C., on the brief, for respondent.
Before SANBORN and MATTHES, Circuit Judges, and ROBINSON, District Judge.
This case is before us on petition to review a decision of the Tax Court which sustained, to a large extent, the Commissioner's assessment of deficiencies in corporate income and personal holding company taxes, and penalties against Stevens Bros. Foundation, Inc. (Foundation). The questions on review are whether the Tax Court erred in holding that:
(1) Foundation had —
(a) not been operated exclusively for charitable purposes during its taxable years 1948 through 1955;
(b) unreasonably accumulated income during its taxable years 1952 through 1958;
and therefore that Foundation was not exempt from taxation as a charitable organization during its taxable years 1948 through 1958.
(2) The Commissioner did not abuse his discretion in retroactively revoking a 1947 ruling exempting Foundation from taxation as a charitable organization.
(3) Foundation was a personal holding company for the taxable years 1952 through 1954, and 1956 through 1958.
(4) Foundation was subject to additions to tax for failure to file corporation income tax returns for its taxable years 1948 through 1954, and for failure to file personal holding company tax returns for its taxable years 1952, 1953, and 1954.
(5) Foundation failed to prove that it incurred capital losses of $9,849.40 due to the worthlessness of certain securities it held.
(6) Foundation received ordinary income of $25,778.24 from the Cheatham Lock project in 1955, rather than a long-term capital gain of $48,306.44 and an ordinary loss of $22,528.20.
The basic facts, in the main stipulated and undisputed, are set forth at length in the Tax Court's opinion, 39 T.C. 11 (1962). Certain background features of this controversy are stated in Stevens Brothers & Miller-Hutchinson Co. v. Commissioner, 24 T.C. 953 (1955). Rather than reiterate the facts in detail, we need only restate those necessary to highlight the nature of the issues now before us.
Foundation was incorporated under the laws of Delaware on December 31, 1942, by Edward Fenton Stevens (Stevens), his wife, and two of his brothers, and maintains its principal office in St. Paul, Minnesota. Six other persons — related to Stevens either by blood or marriage — were subsequently admitted to membership in Foundation.
In 1943, Foundation applied for exemption from federal income taxes as a charitable corporation, and by letter of May 1, 1947, was granted exempt status by the Commissioner, subject to redetermination if Foundation should change its character or purpose or its method of operation. There is no doubt that Foundation was organized for charitable purposes and that its charter so provided.
The four founders of Foundation were also partners in Stevens Bros. Contractors (Partnership), and shared equally in Partnership's profits until the death of one partner in 1955; thereafter, the remaining three persons shared equally. During the years here involved, Partnership owned two-thirds of the stock of a construction company known as Stevens Bros. & Miller-Hutchinson Company, Inc. (Corporation). Stevens was president of Corporation and R. C. Hutchinson — who had no interest in Foundation or Partnership — was its secretary-treasurer.
In 1947, Hutchinson, who was then in active charge of Corporation, consulted with Stevens about bidding on a contract to build the floor at the Algiers Locks in Louisiana. The Government required a bid bond, and the surety company had informed Hutchinson that it would not issue a bond on Corporation's bid unless an additional $50,000 in cash was absolutely subordinated to the contract. "Corporation's funds were pretty well tied up" at that time in other jobs, and the bank with which Corporation normally did its business refused to lend it the additional money. On May 29, 1947, Foundation's board of directors agreed to advance $50,000 to Corporation in return for one-third of the profits from the job, plus repayment of the advance.
Shortly thereafter, Hutchinson advised Foundation that the surety company now insisted on having $75,000 subordinated to the contract instead of the previous $50,000 requirement. On July 1, 1947, the earlier agreement was cancelled, and Foundation agreed to advance the larger amount to Corporation in return for one-half of the profits from the contract, plus repayment of the advance. Corporation's bid was accepted, and Foundation advanced the $75,000.
In 1948, Foundation advanced an additional $40,000 to Corporation to pay for certain material required before further work could be done on the project. No additional consideration was received by Foundation for this $40,000, but the sum was ultimately returned.
Before the Algiers Lock floor contract was completed, Corporation bid on the contract for erection of the walls at the same lock, received the award, and unsuccessfully attempted to secure a bond for the contract bid without being required to furnish additional funds. After Corporation's bank once again would not advance the funds, the agreement between Foundation and Corporation covering the floor contract was extended to the wall contract, and the $75,000 previously advanced was left with Corporation.
Before the wall contract was completed, Corporation was invited by T. L. James & Company, Inc. (James) to bid on the contract for the Cheatham Lock project in Tennessee. James and Corporation were awarded the contract and agreed to divide the profits from the project equally. Since Foundation then extended the financial terms of the Algiers Lock project agreement to cover the Cheatham Lock project, half of Corporation's share of the profits under the Cheatham contract was to go to Foundation. In addition to the $75,000 covered by the extended agreement, Foundation also advanced $25,000 on August 20, 1951, and $50,000 on October 4, 1951 for use on the Cheatham Lock project.
The $75,000 original advance and the $75,000 additional investment in the Cheatham Lock project in 1951 were returned to Foundation about 1953, and its construction project relationship with Corporation was terminated in 1954. Foundation was adequately compensated for its involvement in the construction projects, and no part of the profits it derived from them was diverted to its members.
Sometime in 1947 or 1948, Stevens secured a patent for a therapeutic heating device for Foundation. The costs of developing and manufacturing the heaters were incurred by Partnership and treated as a gift by it to Foundation. Foundation distributed free of charge to hospitals, old folks' homes, and individuals about 100 heaters worth approximately $4,510.25.
About 1952, Foundation began making educational loans to college students. Repayment was waived in the case of most or all of the 32 loans, totaling $4,605, made during Foundation's taxable years 1953 through 1955. For its taxable years 1956 through 1958, Foundation made 36 loans, totaling $7,496, which are extended without question when a student advances a good reason for delay in payment.
Foundation's books indicate receipts, disbursements and student loans as follows:
Contributions Contributions
Fiscal received Gifts
Year and Grants, Student Surplus
Through other income Expenses Etc. Loans Balance
1947 $105,611.75 139.87 4,227.50 -0- 101,244.38
1948 87,810.98 27.00 1,245.25 -0- 187,783.11
1949 35,024.83 19,315.75 235.00 -0- 203,257.19
1950 181,471.85 24,715.33 1,825.00 -0- 358,188.71
1951 94,967.41 19,237.00 1,000.00 -0- 432,919.12
1952 73,782.91 19,230.00 1,250.00 -0- 486,222.03
1953 38,317.89 19,295.00 2,090.00 -0- 503,154.92
1954 19,741.79 9,630.00 3,931.64 -0- 509,335.07
1955 20,680.41 1,450.00 2,015.00 -0- 526,550.48
1956 14,331.00 1,392.20 2,150.00 770.00 537,339.28
1957 24,278.26 3,571.00 1,600.00 1,725.00 556,446.54
1958 49,014.52 2,050.55 1,725.00 5,001.00 601,685.51
___________ ___________ __________ _________
Total $745,033.60 $120,053.70 $23,294.39 $7,496.00
Partnership loaned certain sums of money to Foundation from February, 1946, to October, 1953. The total outstanding on the first day of any month during that period ranged from $496,973.71 to $969,211.62, and averaged $783,266.59 for that period. Foundation paid no interest on these loans through 1948, and thereafter until 1954 paid various rates of interest. Since 1954 Foundation has not borrowed funds from Partnership or from any other source and has not paid any interest to Partnership.
At the time of trial herein, Foundation's investments had a total value of $950,000.
On or before August 20, 1953, Foundation's members determined a plan to accumulate $1,000,000 in Foundation, from which they calculated an annual income of $50,000 could be derived. They deemed this income sufficient to...
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