William L. Powell Found. v. Comm'r of Internal Revenue
| Decision Date | 23 November 1953 |
| Docket Number | Docket No. 35422. |
| Citation | 21 T.C. 279 |
| Parties | WILLIAM L. POWELL FOUNDATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Frank C. Olive, Esq., and George S. Olive, C.P.A., for the petitioner.
George E. Gibson, Esq., and Elmer E. Lyon, Esq., for the respondent.
The petitioner, a religious and charitable foundation, accepted the gift of two United States Government bonds totaling $15,000 upon the proviso that it pay the income of such bonds, or the income of the proceeds thereof, to the wife of the donor during her lifetime. Such bonds were subsequently converted into cash by the petitioner and the proceeds invested in real estate mortgages. Since 1943 there was no segregation of the proceeds of the bonds from the general assets of the petitioner. They were intermingled with various mortgage investments. The maximum rate of interest earned by petitioner on such mortgages during 1943 through 1950 was 5 per cent. There were losses of interest on various mortgages during that period. During the fiscal year ended January 31, 1950, interest payments on four mortgages were in arrears. The petitioner paid the income beneficiary $750 (5 per cent on $15,000) during its fiscal year ended January 31, 1950, and each of the years since 1943. Respondent determined that a part of petitioner's income inured to the benefit of a private individual and that it was, therefore, not entitled to exemption from taxation under section 101(6). Petitioner contends that it paid the income beneficiary no more than was required by the income proviso.
Respondent notified petitioner in 1948 that it was not entitled to exemption under section 101(6), and affirmed this ruling in 1949. Petitioner filed its income tax return for its fiscal year ended January 31, 1950, on December 4, 1950, attaching thereto a statement denying the correctness of respondent's ruling.
1. Held, a part of petitioner's income inured during the taxable year to the benefit of a private individual, and petitioner is not entitled to exemption from Federal income taxation under section 101(6).
2. Held, further, petitioner's failure to file a timely return was due to willful neglect, and not due to reasonable cause.
This proceeding involves a deficiency in income tax for the taxable year ended January 31, 1950, of $397.62 and a penalty of $99.41 asserted against the William L. Powell Foundation (hereinafter referred to as the petitioner).
The issues to be determined are: (1) Whether petitioner has complied with the requirements of section 101(6) of the Internal Revenue Code during the taxable year ended January 31, 1950, and is therefore exempt from Federal income taxation as a religious and charitable foundation; and (2) whether petitioner is liable for a 25 per cent penalty under section 291(a) of the Internal Revenue Code for delinquency in filing its return for the taxable year ended January 31, 1950.
The respondent has conceded that he was in error in including the full amount of $316.86, which was received as dividends from domestic corporations, in the taxable income of petitioner for the taxable year ended January 31, 1950; and a dividend received credit in that amount will be allowed to the petitioner in a recomputation under Rule 50.
Some of the facts were stipulated.
The stipulated facts are so found are are incorporated herein.
Petitioner is an Indiana corporation, organized on February 5, 1926, and is located in Lebanon, Indiana. Its tax return for the year here involved, petitioner's fiscal year ended January 31, 1950, was filed with the collector of internal revenue for the district of Indiana on December 4, 1950.
William L. Powell was a member of the Central Christian Church in Lebanon, Indiana. Prior to 1926, he was worth from $100,000 to $125,000. Desiring to make some gifts to the church, conferences were held with James C. Darnall (hereinafter referred to as Darnall), his close friend and business advisor, and the Board of the Church. Petitioner corporation was thereupon organized and its articles of incorporation, at paragraph 2, provided as follows:
The purposes for which said corporation is organized, are to promote religious, educational and charitable purposes, and in order to promote such purposes, to acquire by gift, devise, purchase or otherwise and to hold for investment or in trust, sell or dispose of any money, business, real estate, stocks, bonds or other securities or evidences of indebtedness created by any other corporation or corporations organized under the laws of the State of Indiana or any State in the United States and also all bonds or evidences of indebtedness of the United States or any county, State or municipality therein, or any evidences of indebtedness of any person or persons, firm, partnership or association.
The articles of incorporation also provided that the successors to the directors named in the articles ‘shall be elected by the official board of The Central Christian Church of Lebanon, Indiana or by its successors, assigns or by the church or organization of which said church becomes a part.‘ Directors were always so chosen, and Darnall was both an officer and member of the board of directors of petitioner from its incorporation to the date of trial of this case.
Shortly before his death in January 1928, William L. Powell gave to Darnall three United States Liberty Loan Bonds with the request that they be delivered to the petitioner. They were transferred to the petitioner on January 23, 1928, together with the following instructions which had been written on the envelope containing the bonds:
Bond #39993 for $10,000.00
I hereby request that the income from this Bond or the proceeds thereof shall be paid annually to my Wife Ella P. Powell during her life time and at her death I request That one half of the annual income from this bond or its proceeds shall be used annually for religious, charitable or educational purposes and the other half of said annual income shall be added to the assets of William L. Powell Foundation. (signed) W. L. POWELL.
I hereby request that this bond and the proceeds thereof be used as follows, that the principal of said bond or its proceeds be kept as a Permanent fund and that one half of the interest on said bond or its proceeds be expended annually and the other half of said interest from said bond or its proceeds be added annually to the permanent fund. Said money to be expended in the United States. (signed) WILLIAM L. POWELL
Witness: W. J. DEVOL.
The within bond is given by William L. Powell to the William L. Powell Foundation upon the following terms and conditions. The income from said bond or proceeds of same is to be paid to Mr. Powell during his life time and to his wife Ella P. Powell during her life time after which same become property of said Foundation.
The same after death of both Mr. & Mrs. Powell shall be used as follows:— One half of the income from said bond or the proceeds of said bond is to be used annually for religious, educational or benevolent purposes anywhere in the United States of America and one half of said income is to be added to the principal.
The within bond is to be delivered to William L. Powell Foundation at the death of William L. Powell.
On or about January 25, 1928, petitioner converted bonds No. 39993 and No. 42532, in both of which Ella P. Powell had a beneficial interest, into bonds of like amount registered in petitioner's name. At the same time, bond No. 3994 was converted into a coupon bond. The three bonds earned 4 1/4 per cent interest both before and after conversion. This amounted to $637.50 per annum on the two bonds totaling $15,000, the income from which was payable to Ella P. Powell. The petitioner paid Ella P. Powell the amount of $637.50 during each of its fiscal years ending January 31, 1929 to 1936, inclusive.
In 1935, when the United States Government bonds which William L. Powell had donated to the petitioner were maturing, a decision had to be made as to whether or not the proceeds should be reinvested in new Government bonds which were paying 3 1/4 per cent. Darnall discussed the matter with Ella P. Powell, informing her of the substantial reduction in her income which would result from the purchase of Government bonds at that time. He suggested that the $15,000 be invested in real estate mortgages since the petitioner was currently earning 5 and 6 per cent on such mortgages. He stated that the decision as to how the proceeds of $15,000 of Government bonds were to be invested was being left up to her. Ella P. Powell was hesitant about the transfer of the principal from Government bonds to mortgages. She agreed, however, that petitioner should make this change after Darnall assured her that she could depend on receiving 5 per cent on the $15,000. She was familiar with the professional reputation of Darnall as a loan agent and abstractor, and knew that he personally passed on all mortgage loans made by the petitioner. Darnall reported her wishes on this matter to petitioner's board of directors. They then set aside, on December 12, 1936, three mortgages aggregating $15,000 in a fund designated ‘Ella Powell income fund.‘ The following interest payments were received by petitioner on these three segregated mortgages during its fiscal years 1937 through 1942.
+------------------------------------------------------------+
¦ ¦1937 ¦1938 ¦1939 ¦1940 ¦1941 ¦1942 ¦
+-------------+-------+-------+-------+-------+------+-------¦
¦Bradshaw Note¦$36.16 ¦$149.25¦ ¦ ¦ ¦ ¦
+-------------+-------+-------+-------+-------+------+-------¦
¦Riley Note ¦449.55 ¦445.50 ¦405.00 ¦$405.00¦ ¦$821.38¦
+-------------+-------+-------+-------+-------+------+-------¦
¦Gill Note ¦259.20 ¦189.27 ¦ ¦207.26 ¦ ¦ ¦...To continue reading
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