United States v. La Société Française de Bien. Mut.

• Decision Date: 02 January 1946
• Docket Number: No. 11029.,11029.
• Parties: UNITED STATES v. LA SOCIETE FRANCAISE DE BIENFAISANCE MUTUELLE.
• Court: U.S. Court of Appeals — Ninth Circuit

152 F.2d 243 (1945)

UNITED STATES v. LA SOCIETE FRANCAISE DE BIENFAISANCE MUTUELLE.

No. 11029.

Circuit Court of Appeals, Ninth Circuit.

December 3, 1945.

Rehearing Denied January 2, 1946.

Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key, A. F. Prescott, and Paul S. McMahon, Sp. Assts. to Atty. Gen., and Leonard Sarner, Sp. Asst. to Atty. Gen. (Frank J. Hennessy, U. S. Atty., and Robert B. McMillan, Asst. U. S. Atty., both of San Francisco, Cal., of counsel), for appellant.

P. A. Bergerot and A. P. Dessouslavy, both of San Francisco, Cal., for appellee.

Before DENMAN, BONE and ORR, Circuit Judges.

ORR, Circuit Judge.

We have for consideration the question of whether appellee, La Societe Francaise de Bienfaisance Mutuelle, is exempt from social security taxes as a corporation organized and operated exclusively for charitable purposes within the meaning of § 811 (b) (8) of the Social Security Act, 42 U.S. C.A. § 1011(b) (8). The provision reads:

"(b) The term `employment' means any service of whatever nature, performed within the United States by an employee for his employer, except —

* * * * * *

(8) Service performed in the employ of a corporation, community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, 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. * * *"

Appellant contends that the district court erred in its judgment holding appellee's hospital enterprise within the exemption of that section and awarding appellee a repayment of social security taxes, because the record shows that a "part of the net earnings of . . . (the hospital) inures to the benefit of . . . individual" members of the appellee corporation, and that the hospital is not "operated exclusively" for charitable purposes.

In this opinion appellant will be referred to as the Government and appellee as the Society.

The Society operates a large general hospital in San Francisco to which the general public, as well as members, is admitted, a school for nurses, and a home for aged members.

Membership in the Society is limited to those "of French birth, or descendants of French or speaking French, sound in mind and in body, and less than 50 years old." Members pay an admission fee and monthly dues and in return receive medical treatment and hospital care gratuitously or at less than the normal cost charged non-member paying patients admitted to the Society's hospital. Only members in good standing receive these privileges and if a member is six months in arrears on his dues he loses his privileges although some indigent members and their families may be treated free of charge at the discretion of the board of directors.

The Society in 1940 received a total income of $409,630.17; approximately 37% was received from fees paid by non-members for hospitalization and the balance was received from members' dues, admission fees charged members, fees charged members for hospitalization, dividends, interest, and rent on investments owned by the Society, and gifts and bequests to it. Disbursements exceeded receipts by approximately $2,900 in 1940 and had exceeded receipts by much larger sums in the three years preceding 1940.

In 1944 the total income of the Society was $680,448.56. Of this approximately 67% represented fees paid by non-members for hospitalization and the balance represented income from sources detailed hereinbefore. In 1944 receipts exceeded disbursements by nearly $70,000. Net earnings are credited to a surplus depreciation fund which has been used for the improvement, enlargement and betterment of its plant and facilities; also to meet any deficiency that may occur in any year.

The Society has never had any capital stock nor has it paid out any dividends or other pecuniary benefits. It is managed by a board of fifteen directors who serve without compensation.

The Society engages in some purely charitable activities such as the free emergency treatment of all necessary deserving cases in its immediate neighborhood. Two free beds for indigent persons sponsored by another French Society are maintained, and fifteen beds are provided for aged members admitted in the discretion of the board of directors.

The Society's by-laws permit it to accept donations and since 1851 legacies, devises and gifts totalling over $360,000 have been received. However, in recent years such gifts amounted to less than one per cent of the Society's annual gross income. The Society acquired its present hospital plant largely through testamentary and other gifts and the income therefrom. Receipts from members have not been sufficient for such purpose.

On July 14, 1937, the Government, through its then Collector of Internal Revenue, officially notified the Society that it was exempt from payment of social security taxes under §§ 811(b) (8) and 907 (c) (7) of the Social Security Act, 42 U.S. C.A. §§ 1011(b) (8), 1107(c) (7), and also that it was exempt from payment of income taxes. After receipt of that notification the Society refunded to its employees all the contributions which it had theretofore deducted from their wages pursuant to the Social Security Act, and made no further deductions until April 3, 1939.

On February 24, 1939 the Society was officially notified that it had lost its income tax exemption as a corporation operated exclusively for charitable purposes, although it would be granted an exemption under another section. This communication also stated that "the status of your organization for social security tax purposes will be made the subject of a separate communication."

On April 3, 1939 the Government, by letter, revoked the exemption previously granted the Society from taxation under the Social Security Act. The Society thereupon, under protest, paid a total of $35,269.85 to the Government representing taxes, penalties and interest for the years 1936 to 1942, inclusive.

The Society instituted suit in the District Court to recover the amount paid under protest and recovered judgment for the full amount claimed, based upon a finding that the Society was organized and operated exclusively for charitable purposes, no part of the net earnings of which inures to the benefit of any private shareholder or individual within the meaning of §§ 811(b) (8) and 907(c) (7) of the Social Security Act.

In the case of Better Business Bureau of Washington v. United States, 66 S.Ct. 112, 114, the Supreme Court of the United States construed the statute under consideration here. In Better Business Bureau v. United States, supra, the Supreme Court was concerned with the word "educational" as it appears in § 811(b) (8) of the Social Security Act. We...