Veterans Found. v. Comm'r of Internal Revenue, Docket No. 81916.

• Citation: 38 T.C. 66
• Decision Date: 17 April 1962
• Docket Number: Docket No. 81916.
• Parties: VETERANS FOUNDATION, A NONPROFIT CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: United States Tax Court

38 T.C. 66

VETERANS FOUNDATION, A NONPROFIT CORPORATION, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 81916.

Tax Court of the United States.

Filed April 17, 1962.

Gaylen S. Young, (an officer) for the petitioner.

Richard G. Worden, Esq., for the respondent.

Petitioner corporation was organized as a ‘nonprofit’ membership corporation under the laws of Utah. During its fiscal year ended February 28, 1958, petitioner operated two ‘Veterans Thrift Stores' where it sold, at wholesale and retail, used clothing, furniture, and household appliances contributed to it by members of the public. Petitioner turned over that portion of its profits, which exceeded the amounts paid on its obligation for purchase of the two stores, to the Utah Department of the Disabled American Veterans which was exempt from income taxation under sec. 501(c)(4), I.R.C. 1954. Petitioner also gave an inconsequential amount of used clothing and other articles to certain veterans recommended to it by the D.A.V.

1. Held, that petitioner operated a business for profit during its taxable year ended February 28, 1958; that it was a ‘feeder organization’ within the meaning of sec. 502, I.R.C. 1954; and accordingly, that it was not exempt from income taxation as a ‘social welfare organization,‘ under sec. 501(c)(4).

2. Held, that the used articles of clothing, furniture, and household appliances contributed to petitioner during said taxable year, were contributions to its capital in the form of inventory; and that, under sec. 362(c)(1), I.R.C. 1954, petitioner's basis for computing gain on its sales of said articles was zero.

2. Held, that petitioner's failure to file its income tax return within the time prescribed by law was not due to reasonable cause; and accordingly, that imposition of an addition to tax under sec. 6651(a) for such late filing was proper.

PIERCE, Judge:

The respondent determined a deficiency of $8,442.96 in income tax against the petitioner corporation for its fiscal year ended February 28, 1958; and also an addition to tax of $844.30 under section 6651(a) of the 1954 Code, because of its failure to file a return for said fiscal year within the time prescribed by law.

Petitioner, as hereinafter more fully shown, operated two stores wherein it sold at retail and wholesale, used clothing, furniture, and appliances which it had received free of charge from members of the public; and it then turned over portions of its profits to a ‘social welfare’ organization which was exempt from taxation. There are three questions presented for decision:

(1) Was petitioner, during its fiscal year ended February 28, 1958, an organization ‘not organized for profit but operated exclusively for the promotion of social welfare’ within the meaning of section 501(c)(4) of the 1954 Code— and therefore exempt from taxation? Or was it a ‘feeder organization’ as defined by section 502 of the Code— and therefore not exempt from taxation?

(2) If petitioner was not exempt from taxation, what was the basis for computing its gains or losses from sales of the used articles which it sold in said taxable year?

(3) Was petitioner's failure to file its income tax return for the taxable year involved, within the time prescribed by law, due to reasonable cause and not due to willful neglect, within the meaning of section 6651(a) of the 1954 Code?

FINDINGS OF FACT.

Some of the facts were stipulated. The stipulation of facts and the exhibits identified therein, are incorporated herein by reference.

Petitioner is a corporation organized under the laws of Utah,¹ as a ‘nonprofit corporation.’ It filed its income tax return for the fiscal year ended February 28, 1958, with the district director of internal revenue at Salt Lake City, Utah.

Petitioner was formed by certain members and officers of the Utah Department of the Disabled American Veterans (hereinafter called the Utah D.A.V.) on or about December 20, 1955. It is a membership corporation; and, as such, it does not have any authorized shares of capital stock. Every member in good standing of the Utah D.A.V. (which apparently is an unincorporated association) is also a member of the petitioner corporation. Petitioner's corporate purpose and powers are set out in its articles of incorporation, as amended on or about February 28, 1957; and they are as follows:

ARTICLE IV

PURPOSE: The objects, business and pursuits of this corporation shall be:

A. To raise funds for use by the Department of Utah, Disabled American Veterans, and/or in the discretion of the Board of Directors, for use by the various chapters in the State of Utah of said Disabled American Veterans, which funds shall be used by said State Department and/or Chapters, as the case may be, to carry out the policies, purposes, ideals and programs of said Disabled American Veterans, their widows, their orphans, and their dependents, by providing employment and rehabilitation (sic) opportunities and to word with, or aid financially any public or private agencies devoted to the cause of improving and advancing the conditions, health and interests of wounded, gassed, injured and disabled veterans.

B. For the accomplishment of these objects, this corporation shall have the power to engage in the general salvage business, among other things to solicit the public for second hand articles, including clothing, furniture and other household equipment and property of all kinds, and to repair and recondition the same and to offer the same to the public for sale and to use the net money received therefrom to carry out the purposes and objects of this corporation.

GENERAL POWERS: This corporation is to have and exercise all the rights and powers necessary to carry out its said objects and pursuits, to contract and be contracted with and to do and perform all the acts and things necessary in pursuance of said objects and purposes to the same extent as natural persons might or could do, at any place, either as principal or agent, or as contractor, trustee, or otherwise alone or in company with others; to lease or buy suitable buildings and equipment; and to acquire, by purchase or gift, such personal and real property as may be necessary to carry out the objects of this corporation; to receive donations of real and personal property to be applied to the uses and purposes of the corporation; to accumulate surpluses to insure its stability; to take, hold and manage real and personal property conveyed to it in fee or in trust, the income from which is to be applied to the uses and purposes of this corporation, and to execute such trusts; to mortgage or otherwise encumber any of its property, or to sell and convey the same, or to enter into any contract therewith. It shall also have the power to make such expenditures and to take such steps as the Board of Directors may deem necessary to carry out the ultimate objectives of the corporation, as will tend to build its prestige before the public, including among other things, the requirement from time to time of detailed reports of said State Department or Chapters of the Disabled American Veterans, as the case may be, showing what the money received by them from this corporation, was used for, with the power to withhold further payments to them if the money has been unjudiciously spent, and has not been used to substantially carry out the objects of the corporation as set out in paragraph ‘A’ of this Article. The enumeration of any specific objects, purposes or powers herein shall not be construed as a limitation or abridgement of the general powers of the corporation.

The circumstances surrounding the organization of petitioner corporation may be summarized as follows. In about 1952, an individual named Orlo Ellison came to Salt Lake City at the instance of certain officers of the Utah D.A.V., to open a store where used articles of clothing, furniture, and household appliances would be sold. Donations of such used articles were to be solicited from members of the public by employees of Ellison, who would make such solicitations in the name of the Utah D.A.V. In consideration for the use of the D.A.V.‘s name in such solicitations, Ellison contracted to pay a fixed percentage of the gross income from the store to the Utah D.A.V. In 1952 or 1953, Ellison opened a store of the type above described (called Veterans Thrift Store) in Salt Lake City; and subsequently at an unspecified date prior to 1956, he opened a second Veterans Thrift Store in Ogden, Utah. Ellison operated the stores as a proprietor until February 1, 1956; and pursuant to his contractual arrangements with the Utah D.A.V., he contributed a percentage (apparently 10 percent) of the gross income of both stores to said organization.

In late 1955, the Utah D.A.V. decided to purchase the two Veterans Thrift Stores from Ellison; and in order to avoid involving the business in certain ‘political controversies' which existed within the Utah D.A.V., its officers decided to organize the petitioner as a separate corporation, and to have it purchase the stores. As above found, petitioner was organized on or about December 20, 1955. And on or about February 1, 1956, petitioner purchased the two Veterans Thrift Stores from Ellison, at a total price of $90,000 to be paid out of future earnings of the stores, and with Ellison to be retained as manager thereof until the purchase price had been paid in full. In connection with such purchase, petitioner assumed Ellison's contractual obligation to make contributions from its earnings to the Utah D.A.V.

At all times after purchasing the Veterans Thrift Stores and during the taxable year involved, petitioner's ‘primary, if not sole, activity’ was that of operating said two stores. Such operation was conducted in the following manner. Solicitors employed by petitioner went from house to house in the residential areas of Salt Lake City and Ogden, asking the occupants for used clothing, furniture,...