Variety Club Tent No. 6 Charities, Inc. v. Commissioner
| Decision Date | 31 December 1997 |
| Docket Number | Docket No. 9045-90. |
| Citation | 74 T.C.M. 1485 |
| Parties | Variety Club Tent No. 6 Charities, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
Deborah J. Nicastro, for the petitioner. Katherine Lee Wambsgans, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies in Federal corporate income tax against petitioner as follows:
Year1 Deficiency
1984 ........................ $17,957
1985 ........................ 19,719
1986 ........................ 3,818
1 Taxable years ending September 30 of each of the years in
issue. References in this opinion to petitioner's fiscal years
are to years ending on September 30 of the indicated years
After concessions1 the issues for decision are as follows:
(1) Whether any part of petitioner's net earnings inured to the benefit of private shareholders or individuals, within the meaning of section 501(c)(3).2
(2) If the answer to issue (1) is "yes", then whether the retroactive revocation of the favorable ruling letter was an abuse of discretion.
Some of the facts have been stipulated; the stipulation and the stipulated exhibits are incorporated herein by this reference.
When the petition was filed in the instant case, petitioner was an Ohio not-for-profit corporation, and its principal office was in Cleveland, Ohio.
The Variety Club charities were founded in 1936 to raise money for disabled or handicapped children. At the time of the trial, there were about 80 Variety Club tents (chapters) in the United States, Australia, France, Israel, Mexico, and Switzerland.
Petitioner was incorporated in Ohio on December 17, 1970. Variety Club of Northern Ohio Tent No. 6 () was originally formed in the late 1930's in northern Ohio to benefit handicapped and disadvantaged children. The Club is an Ohio not-for-profit corporation. Petitioner was organized by the Club for the specific purpose of raising funds from the general public for various activities including the supporting of Ohio Boys Town and other charities which deal primarily with underprivileged children. As of the time of the trial in the instant case, Ohio Boys Town was an organization which respondent determined was exempt under section 501(c)(3).
Petitioner applied for a favorable charitable exemption ruling by an application dated January 27, 1971. In this application petitioner represented that no part of its net income would inure to the benefit of any private shareholder or individual. To this application petitioner attached a copy of its articles of incorporation, which provide in pertinent part as follows:
Petitioner's articles of incorporation also provide as follows with regard to petitioner's indemnifying its officials for legal expenses:
NINTH: (A) The Corporation [petitioner] shall indemnify a trustee, officer or employee or a former trustee, officer or employee or any person who is serving or has served at its request as a trustee, director, officer or employee of another corporation (whether nonprofit or for profit) against expenses actually and necessarily incurred by him in connection with the defense of any pending or threatened action, suit or proceeding, criminal or civil, to which he is or may be made a party by reason of being or having been such trustee, director, officer or employee, provided:
1. He is adjudicated or determined not to have been negligent or guilty of misconduct in the performance of his duty to the Corporation of which he is a trustee, director, officer or employee;
2. He is determined to have acted in good faith in what he reasonably believed to be the best interest of such corporation;
3. In any matter the subject of a criminal action, suit, or proceeding, he is determined to have had no reasonable cause to believe that his conduct was unlawful. The determination as to (2) and (3) and, in the absence of an adjudication as to (1) by a court of competent jurisdiction, the determination as to (1) shall be made by the trustees of the indemnifying corporation acting at a meeting at which a quorum consisting of trustees who are not parties to or threatened with any such action, suit or proceeding is present. Any trustee who is a party to or threatened with any such action, suit or proceeding shall not be qualified to vote and, if for this reason a quorum of trustees cannot be obtained to vote on such indemnification, no indemnification shall be made except as provided for in Paragraph (b) or (C) of this Section.
(B) The Corporation may, pursuant to these articles, its regulations or any agreement authorized or a resolution adopted by the voting members at a meeting held for such purpose by the affirmative vote of a majority of the voting members present if a quorum is present, indemnify or agree to indemnify such trustee director, officer or employee against expenses, judgments, decrees, fines, penalties or amounts paid in settlement in connection with the defense of any pending or threatened action, suit or proceeding, criminal or civil, to which he is or may be made a party by reason of being or having been such trustee, director, officer or employee, provided a determination is made by the trustees in the manner set forth in Paragraph (A) of this Section or by a majority of the voting members present at a meeting held for such purpose if a quorum is present (a) that such trustee, director, officer or employee was not, and has not been adjudicated to have been, negligent or guilty of misconduct in the performance of his duty to the corporation of which he is a trustee, director, officer or employee (b) that he acted in good faith in what he reasonably believed to be the best interest of such corporation, and (c) that, in any matter, the subject of a criminal action, suit or proceeding, he had no reasonable cause to believe that his conduct was unlawful.
(C) Such indemnification shall not be deemed exclusive of any other rights to which such trustee, director, officer or employee may be entitled under the articles, the regulations, any agreement any insurance purchased by the Corporation, vote of members or otherwise.
By letter dated February 18, 1971, respondent ruled that petitioner was exempt from Federal income tax under section 501(c)(3) and that donors may deduct contributions made to petitioner.
Petitioner's articles of incorporation authorize its trustees to adopt a code of regulations. The trustees promptly did so. Petitioner's code of regulations creates two classes of members: Charter members and associate members (individuals or organizations chosen by the board of trustees). The Club is the sole charter member of petitioner.3 The Club elects petitioner's board of trustees at the Club's annual meeting. The board of trustees, which could range in size from 3 to 15 members, manages the business of petitioner. The board of trustees chooses officers, including chairman of the board, executive director, assistant director, secretary, treasurer, and one or more assistant directors, assistant secretaries, and assistant treasurers, who are responsible for petitioner's day-to-day affairs. The board of trustees makes decisions for petitioner at monthly meetings. The board of trustees makes expenditure decisions at its meetings; petitioner's code of regulations does not authorize individual officers or members — not even the treasurer — to make expenditure decisions.
Petitioner had 11 officers during the tenure of Lawrence C. Plants (hereinafter sometimes referred to as Plants), who was petitioner's president4 during its fiscal year 1984 through January 1, 1985, and was a member of the board of trustees from January 1, 1985, through January 1, 1987. Thomas Wilkens (hereinafter sometimes referred to as Wilkens) was petitioner's president from January 1, 1985, through September 30, 1986. Ernest Zeve (hereinafter sometimes referred to as Zeve), a former president of petitioner, was petitioner's treasurer during the years in issue. Zeve died before the trial in the instant case.
Petitioner reported on its Forms 990 for the years in issue fundraising revenues, expenses, net income, and other income as shown in table 1.
Fiscal Gross Direct
Year Fundraising Revenues Expenses Net Income
1984 Bingo ............................ $473,956.63 $402,474.28 $ 71,482.35
Luncheons ........................ 14,795.00 3,043.63 11,751.37
Reverse raffle ................... 12,170.00 6,551.75 5,618.25
Other events ..................... 22,074.06 12,614.73 9,459.33
___________ ___________ ___________
Total fundraising ............... 522,995.69 424,684.39 98,311.30
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Other income $ 17,013.75
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Fiscal Gross Direct
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