Sun-Herald Corporation v. Duggan

• Decision Date: 05 November 1934
• Docket Number: No. 40.,40.
• Citation: 73 F.2d 298
• Parties: SUN-HERALD CORPORATION v. DUGGAN, Collector of Internal Revenue.
• Court: U.S. Court of Appeals — Second Circuit

73 F.2d 298 (1934)

SUN-HERALD CORPORATION v. DUGGAN, Collector of Internal Revenue.

No. 40.

Circuit Court of Appeals, Second Circuit.

November 5, 1934.

Martin Conboy, U. S. Atty., of New York City (Ralph E. Stone, Asst. U. S. Atty., of New York City, of counsel), for defendant- appellant.

DeForest, Cullom & Elder, of New York City (Neil P. Cullom and Oliver H. Payne, both of New York City, of counsel), for plaintiff-appellee.

Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

The question raised by this appeal is whether, within the meaning of section 103 (14) of the Revenue Act of 1928 (26 USCA § 2103 (14), the plaintiff Sun-Herald Corporation was "organized for the exclusive purpose of holding title to property" and on that ground exempt from income taxes during the years 1928 and 1929.

The statute invoked provided that:

"The following organizations shall be exempt from taxation under this title — * * * (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."

On January 28, 1920, the Sun-Herald Corporation was organized under the Business Corporations Law of the state of New York (Consol. Laws, c. 4) to conduct a general newspaper publishing business. On March 17, 1924, it sold the New York Herald which it then owned and the publishing business connected therewith to the New York Tribune, Inc., receiving therefor notes of the latter company in the sum of $3,150,000 bearing interest at the rate of 5 per cent. and payable over a series of years ending in 1939.

Frank A. Munsey at the time of his death on December 22, 1925, owned all the stock of the Sun-Herald Corporation through the medium of a holding company wholly owned by him. He bequeathed his entire residuary estate to the Metropolitan Museum of Art, and on March 1, 1928, all of the stock of the Sun-Herald Corporation was turned over by his executors to Museum Estates, Inc., a holding company organized by the Museum of Art for the sole purpose of taking over, holding, and liquidating for its account the various assets of the Munsey residuary estate. Both the Metropolitan Museum of Art and Museum Estates, Inc., are exempt by law from income taxes.

The Sun-Herald Company had wholly discontinued any publishing business prior to March 1, 1928, and it received no income in the year 1928 prior to March 1. All income received by it during 1928 after March 1 of that year and all income received by it during 1929 was immediately paid over by it to its sole stockholder Museum Estates, Inc. On and after March 1, 1928, the Sun-Herald Company had no property except the notes that it received upon the sale of its newspaper property, it had no business, no bank account and no employees, and its officers, who served without compensation, performed no duty except to indorse over to Museum Estates, Inc., the checks which it received as principal and interest on the notes of the New York Tribune, Inc., which it held. The plaintiff paid income taxes to the defendant collector on the interest which it received on these notes during 1928 and 1929 under protest, and thereafter filed claims for refund and brought this action against the collector to recover because of the alleged unlawful exaction. The District Court sustained the cause of action and judgment was entered that plaintiff recover all the taxes paid under protest, with interest. It reached this conclusion by holding that the word "organized" used in section 103 (14) of the Revenue Act of 1928 related to the actual activities of the Sun-Herald Corporation which were limited during the taxable periods in question to holding title to property and collecting income therefrom and turning over the entire amount to an organization (in this case Museum Estates, Inc.), which was itself exempt from taxes, and did not relate to the charter powers of that corporation. Inasmuch as during the taxable period the Sun-Herald Corporation was not "equipped" or "manned" in such a way as to do more than hold title to property and turn it over to Museum Estates, Inc., an exempt organization, the trial court held that its power to conduct a newspaper publishing business was to be regarded as "outside the scope of its organization" for the purposes of the Revenue Act. In effect it treated the word "organized" as meaning "operated."

We think it clear that "organized" means incorporated and not "operated." Such seems to have been the meaning given to the word in Trinidad v. Sagrada Orden, 263 U. S. 578, 580, 44 S. Ct. 204, 68 L. Ed. 458; Von Baumbach v. Sargent Land Co., 242 U. S. 503, 514, 37 S. Ct. 201, 61 L. Ed. 460; Eliot v. Freeman, 220 U. S. 178, 186, 31 S. Ct. 360, 55 L. Ed. 424. The use of the word "operated" in addition to the word "organized" in subdivisions (4), (6), (9), and (12) of section 103 of the Revenue Act of 1928 (26 USCA § 2103 (4, 6, 9, 12), indicates that "organized" was not intended to have the meaning of "operated" but further to interpret the exemption. In cases of doubt, an exemption provision in a general tax law is to be construed strictly and to be resolved in favor of the taxing power. Cornell v. Coyne, 192...