United States v. Community Services

Decision Date05 May 1951
Docket NumberNo. 6230.,6230.
CourtU.S. Court of Appeals — Fourth Circuit


Harry Baum, Sp. Asst. to Atty. Gen. (Theron Lamar Caudle, Asst. Atty. Gen., Ellis N. Slack, Sp. Asst. to Atty. Gen., Ben Scott Whaley, U. S. Atty., and Russell D. Miller, Asst. U. S. Atty., Charleston, S. C., on the brief), for appellant.

Fleming Bomar, Washington, D. C., for appellee.

Before PARKER, Chief Judge, and SOPER and DOBIE, Circuit Judges.

DOBIE, Circuit Judge.

Community Services, Inc., (hereinafter called taxpayer) filed employment tax returns under the Federal Insurance Contributions Act, subchapter A of chapter 9 of the Internal Revenue Code, 26 U.S.C.A. § 1400 et seq., for the period July 23, 1945, to December 31, 1947, and paid employment taxes totaling $3,910.16 for this period. Thereafter it filed, in the United States District Court for the Eastern District of South Carolina, a claim for refund on the ground that it was exempt from tax under Section 1426(b) (8) of the Internal Revenue Code, 26 U.S.C.A. § 1426(b) (8). The claim for refund was denied, and taxpayer instituted suit for refund. The District Court held "as a matter of law" that taxpayer was exempt from employment taxes under Section 1426(b) (8), on the theory that taxpayer is "organized and operated exclusively for * * * charitable * * purposes" within the meaning of Section 1426(b) (8) if its profits are destined for charitable organizations. The case is before us on appeal by the United States.

The only question before us is whether a corporation engaging in ordinary business activity for profit is exempt from employment taxes under Section 1426(b) (8) of the Internal Revenue Code solely by reason of the fact that its profits are payable to exempt charitable organizations.

The material facts were stipulated and may be briefly summarized.

Taxpayer corporation was organized on July 23, 1945, as a non-stock membership corporation under the laws of South Carolina. Its charter states: "Fourth: The purpose of the said proposed corporation is to receive donations of cash and properties through gift, bequest, devise or otherwise, and to own and operate a canteen refreshment service and other business ventures for the convenience of the employees of Graniteville Company and the people of the communities in which its mills are operated, and to conduct other businesses in order to earn profits, to the end that all funds, properties, and all profits so earned and derived therefrom shall be devoted exclusively to religious, charitable, scientific, literary and/or educational purposes."

The by-laws of the corporation recite the same purposes and further provide: "The nature, extent and location of the canteen refreshment service, other business ventures and businesses of the Corporation, and the details of the devoting of its net profits to the objects set out in the charter of the Corporation and the choosing of such objects and the beneficiaries of the bounty of the corporation; and all details connected with the operations and activities of the Corporation are to be determined from time to time, as the exigencies of the business of the Corporation require, by the Board of Directors, subject always to the provisions of Section 2 of this Article."

The members of the corporation throughout the taxable period (July 23, 1945-December 31, 1947), who also constituted its board of directors, were the president, vice-president, and two other executives of the Graniteville Company, and a civic leader in the community. The Graniteville Company is a textile manufacturing corporation having its principal office and plants in Graniteville, South Carolina, and employs about 5,000 persons.

Prior to taxpayer's formation, the Graniteville Company operated a canteen refreshment service in its various plants, and also sold coal and ice to its employees. On the day taxpayer was organized the Graniteville Company donated to it $25,000, and authorized it to operate all concessions previously operated by Graniteville. Thereafter and during the taxable period taxpayer operated a canteen refreshment service, a coal and wood yard, a filling station, and an electrical appliance store. Eighty-five per cent of its gross receipts was derived from the sale of soft drinks, milk, candy, sandwiches and similar items to employees of Graniteville Company. The balance of its gross receipts was derived from the sale of coal, ice, gasoline, and home appliances to Graniteville Company's employees and their families. No sales were made to the general public. Taxpayer also leased from the Graniteville Company at a nominal rental a filling station and a dining room, both of which were operated by taxpayer during 1945. Thereafter, taxpayer sublet the filling station and dining room at a profit to one Reeves, who operated them as tenant of taxpayer. All of taxpayer's operations were conducted on properties owned by or leased from Graniteville Company. Taxpayer's officers and directors received no compensation. To carry on its business taxpayer employed about 50 persons, who received salaries and wages of $26,658 in 1945, $85,765 in 1946, $92,051 in 1947, and $102,853 in 1948.

From the date of its incorporation in July of 1945, to the end of that year taxpayer had a small ($482) operating loss. For 1946 its net profits amounted to $3,492, no part of which was contributed to charitable or like institutions. For 1947 its net profits amounted to $19,381, of which $3,696 was contributed to charitable and educational institutions. For 1948 its net profits amounted to $37,738 (including contributions totaling $550), of which $9,865 was contributed to charitable institutions. Taxpayer's total receipts exceeded total disbursements by $24,517 in 1945, by $3,492 in 1946, by $15,865 in 1947, and by $27,873 in 1948. It retained this excess as a reserve against taxes which might be adjudged due to the Government.

Code Section 1426(b) (8), dealing with exemptions from employment tax, is drawn from and contains the same language as Section 101(6), dealing with exemptions from income tax. It exempts from tax a corporation which (1) is "organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes"; (2) "no part of the net earnings of which inures to the benefit of any private shareholder or individual"; and (3) "no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation". The long-standing implementing Treasury Regulations (Sec. 402.215 of Regulations 106) make it clear that these requirements constitute separate conditions precedent to exemptions, each of which must be met.

Taxpayer admittedly meets the second and third conditions. No part of its net earnings inures to the benefit of any private shareholder or individual, since its charter and by-laws both provide that its net earning shall inure to the benefit of charitable institutions. Nor does any part of its activities consist of attempting to influence legislation. It is the first condition, namely, that the corporation be "organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes" with which we are concerned.

We think the District Judge erred in his interpretation of the tax-exemption statute, and, therefore, the judgment below must be reversed.

There is no merit in taxpayer's contention that it is entitled to the claimed exemption because it was incorporated under the charitable corporation laws of South Carolina. We are here construing and applying the terms of a federal statute. This contention was effectively disposed of in Better Business Bureau of Washington, D. C., v. United States, 326 U.S. 279, 285, note 3, 66 S.Ct. 112, 90 L.Ed. 67.

Taxpayer was, in effect, organized and operated for two purposes: (1) to engage in commercial business, for profit, and (2) to turn over the profits realized from its commercial activities to charitable organizations. The second purpose is charitable; the first purpose clearly is not. To qualify for the exemption here, the corporation must be "organized and operated exclusively for * * * charitable * * * purposes". As was said by Mr. Justice Murphy in the Better Business Bureau case. 326 U.S. at page 283, 66 S.Ct. at page 114: "This plainly means that the presence of a single non-educational purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly educational purposes."

This language is even more strongly applicable to the instant case, for not one of taxpayer's activities was charitable. On the contrary, these activities were all commercial.

For tax-exemption purposes, the charitable nature of the distributees of its income cannot be attributable to the taxpayer. The corporation earning the income and claiming the exemption, rather than the recipients of the income, must be organized and operated exclusively for charitable purposes. Otherwise a purely commercial corporation could claim the exemption, if all its stock were owned by an exempt corporation, which would receive, as dividends, all the net earnings of the commercial corporation. Clearly this is not the law. National Carbide Corporation v. Commissioner, 336 U.S. 422, 69 S.Ct. 726, 93 L.Ed. 779; Moline Properties v. Commissioner, 319 U. S. 436, 63 S.Ct. 1132, 87 L.Ed. 1499; Burnet v. Commonwealth Improvement Co., 287 U.S. 415, 53 S.Ct. 198, 77 L.Ed. 399; Bear Gulch Water Co. v. Commissioner, 9 Cir., 116 F.2d 975; certiorari denied, 314 U.S. 652, 62 S.Ct. 99, 86 L.Ed. 523; Gagne v. Hanover Water Works Co., 1 Cir., 92 F.2d 659; C. F. Mueller Co. v. Commissioner, 14 T. C. 922, pending on appeal to U. S. Court of Appeals, Third Circuit.

For purposes of tax-exemption, it is quite immaterial that taxpayer's charter authorized it...

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