Opinion
Docket No. 20719.
1950-11-15
THE CUMMINS-COLLINS FOUNDATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
James E. Fahey, Esq., for the petitioner. Ralph W. Harbert, Jr., Esq., for the respondent.
Petitioner, a nonstock and nonprofit corporation organized under the Kentucky Revised Statutes for religious, educational and charitable purposes, is exempt from tax under section 101(6) of the Internal Revenue Code in each of the taxable years involved. James E. Fahey, Esq., for the petitioner. Ralph W. Harbert, Jr., Esq., for the respondent.
This proceeding involves deficiencies in income and declared value excess-profits taxes and penalties as follows:
+------------------------------------------------------------+ ¦ ¦¦ ¦ ¦Declared value¦ ¦ +------------------+----------+-------+--------------+-------¦ ¦Fiscal year ending¦Income tax¦Penalty¦excess-profits¦Penalty¦ +------------------+----------+-------+--------------+-------¦ ¦ ¦¦ ¦ ¦tax ¦ ¦ +-----------------++----------+-------+--------------+-------¦ ¦Oct. 31, 1945 ¦¦$2,142.84 ¦$535.71¦$1,096.50 ¦$274.13¦ +-----------------++----------+-------+--------------+-------¦ ¦Oct. 31, 1946 ¦¦2,118.14 ¦529.54 ¦ ¦ ¦ +-----------------++----------+-------+--------------+-------¦ ¦Oct. 31, 1947 ¦¦298.34 ¦74.59 ¦ ¦ ¦ +------------------------------------------------------------+
The issue is whether petitioner is exempt from income and declared value excess-profits taxes under section 101(6) or (14) of the Internal Revenue Code in the respective taxable years involved. If the answer is in the negative, a further issue arises as to whether the respondent erred in assessing penalties on the taxes due for such taxable years.
The case was submitted on a stipulation of facts with exhibits, oral testimony and documentary proof. The facts as stipulated are so found. Additional facts are found from the evidence.
FINDINGS OF FACT.
Petitioner was organized under the Kentucky Revised Statutes relating to religious, charitable, and educational societies, on October 5, 1944, and received its certificate of incorporation on October 9, 1944. Its incorporators were A. J. Cummins; his wife, Yancey B. Cummings, G. C. Collins, Jr.; his wife, Christine H. Collins; and John K. Skaggs, Jr. These five organizers were elected to petitioner's board of directors and served throughout the periods involved, except G. C. Collins, Jr., who died on June 26, 1945. His son, Hunt C. Collins, was elected to the vacancy on September 18, 1945.
The preamble to petitioner's Articles of Incorporation provides:
The undersigned hereby associate themselves to form a corporation for religious, educational and charitable purposes under the provisions of Chapter 273 of the Kentucky Revised Statutes and for those purposes they adopt the following Articles of Incorporation:
Article III of the Articles of Incorporation provides:
The corporation is organized and shall be operated exclusively for religious, charitable and educational purposes and it is authorized to accept, hold, administer, invest and disburse for charitable, religious and educational purposes such funds as may from time to time be given to it by any person, persons or corporations, to receive gifts and make financial and other types of contributions and assistance to charitable, religious and educational organizations, and in general to do all things that may appear necessary and useful in accomplishing the purposes hereinabove set out. All of the assets and earnings shall be used exclusively for the purposes hereinabove set out, including the payment of expenses incidental thereto; and no part of the net earnings shall inure to the benefit of any private shareholder or individual and no substantial part of its activities shall be for the carrying on of propaganda, or otherwise attempting to influence legislation.
In the event of dissolution all of the remaining assets of the corporation shall be distributed only for religious, charitable and educational purposes.
Petitioner is not authorized to issue capital stock.
On October 15, 1945, petitioner filed with the Commissioner of Internal Revenue an application for exemption under section 101 of the Internal Revenue Code, and filed therewith a return on Treasury Form 990.
On June 18, 1947, petitioner was advised that its claim for exemption was rejected.
On May 19, 1948, petitioner filed with the collector of internal revenue for the district of Kentucky income tax returns for the fiscal years ended October 31, 1945, and October 31, 1946. On October 27, 1948, it filed its income tax return for its fiscal year ending October 31, 1947. These returns showed no tax due, and each such return claimed an exemption from tax under section 101 of the code.
The idea of forming petitioner originated with G. C. Collins, Jr., in 1943. Later, in the summer of 1944, he interested his business partner, A. J. Cummins, in the formation of petitioner, and these two men and their wives became its founders.
In 1944, petitioner received cash contributions in the amount of $135,500. On November 27, 1944, G. C. Collins, Jr., A. J. Cummins, Christine H. Collins, and Yancey B. Cummins each contributed $5,000, and on December 12, 1944, these same individuals contributed $27,000 each. On November 27, 1944, Old Happy Hollow Distillery, Inc., contributed $5,000, and on December 12, 1944, it contributed $2,500. At the times such corporation made its contributions, its outstanding capital stock consisted of 106,306 shares of common stock, of which 44,083 were owned by G. C. Collins, Jr., 42,973 were owned by Christine H. Collins, and 19,250 were owned by A. J. Cummins.
On December 31, 1945, petitioner received two debenture bonds from A. J. Cummins, and one debenture bond from Yancey B. Cummins. Each of these bonds was issued by the Cummins-Collins Distilleries, Inc., in the face amount of $5,000, and bore interest at the rate of 5 per cent.
In December 1942, Athertonville Distillery, Inc., (hereinafter referred to as Athertonville) was incorporated. Its outstanding capital stock consisted of 40,000 shares of common stock which was owned in equal proportions by R. L. Buse, Sr., and E. L. Buse, Sr. In December 1942, the Buses had acquired at a sale at public auction the physical properties of the Cummins Distilleries Corporation. The stock of this latter corporation was widely held, A. J. Cummins and G. C. Collins, Jr., each holding less than 10 per cent thereof. The Buses assigned their bid on the Cummins Distilleries Corporation to Athertonville.
The operation of a distillery was a new venture to the Buses, all their previous experience in the whiskey business having been dealing in whiskey warehouse receipts. At that time all distilleries were required to operate under the direction of the War Production Board. Athertonville was required to devote its entire operations to the production of alcohol and high proof spirits to be used in manufacture of aviation gasoline, munitions, and synthetic rubber. It was required to sell its entire output to the Defense Supplies Corporation. The Government was running two to three months behind in payment of its invoices. After operating Athertonville for about a month, the Buses became dissatisfied with their investment, and decided to sell their stock holdings. After contacting several prospective purchasers, the Buses, on January 28, 1943, entered into a contract with A. J. Cummins and G. C. Collins, Jr., which provided, in substance, that the Buses were to surrender 30,000 shares of Athertonville stock to that corporation for cancellation in exchange for issuance to the Buses of 6 per cent first mortgage notes in the face amount of $300,000. A. J. Cummins and G. C. Collins, Jr., were to purchase or cause to be purchased from the Buses $1,500 face amount of these mortgage notes monthly and 10,000 shares of Athertonville stock for $102,000 in cash. The 10,000 shares of Athertonville stock were purchased, with 3,000 shares going to A. J. Cummins, 3,000 shares to G. C. Collins, Jr., 2,000 shares to Yancey B. Cummins, and 2,000 shares to Christine H. Collins. The $300,000 face amount of notes were issued to the Buses and were secured by all the land, buildings, machinery, and equipment owned by Athertonville. The notes were in denominations of $500 and $1,000. Notes in the principal amount of $1,000 were to mature at the rate of one such note per month for a period of 10 years beginning February 28, 1943. All the remaining notes were to mature on or before the expiration of the 10-year period, and were to bear interest at 6 per cent per annum, payable monthly. In addition to the foregoing provisions for the paying off of the notes by Athertonville, A. J. Cummins and G. C. Collins, Jr., were to purchase from the Buses $95,000 face amount of the notes for the sum of $95,000 cash, and purchase, or cause to be purchased, notes in the principal amount of $1,500 every 30 days, beginning February 28, 1943, and pay therefor the face amount plus the interest payable at the time of the purchase.
In December 1943, Yancey B. Cummins created five trusts, one for each of her five children. In each trust she placed $5,000 face amount of the Athertonville 6 per cent mortgage notes. In March 1944 she added $8,000 face amount of such notes to each trust. In February 1944 Christine H. Collins established two trusts for her children, in which she placed $18,000 face amount of Athertonville 6 per cent mortgage notes. The Kentucky Trust Co. was named trustee in each of such seven trusts. These mortgage notes placed in such trusts had been purchased by the respective donors, pursuant to the aforementioned agreement of sale by the Buses of Athertonville. Before setting up these mortgage notes on its trust books, the Kentucky Trust Co., as trustee, investigated the notes and was completely satisfied that these notes were a sound investment for trust funds.
On December 15, 1944, petitioner, with money obtained from its founders, purchased from the Kentucky Trust Co. $91,000 face amount of Athertonville mortgage notes which had been placed in the aforementioned trusts. On January 12, 1945, petitioner purchased $186,000 face amount of Athertonville 6 per cent mortgage notes, to wit: $142,500 from the Buses, $32,500 from Christine H. Collins, $9,000 from Yancey B. Cummins, and $2,000 from M. R. Kennedy. The notes purchased from others than the Buses had been purchased by such others from the Buses pursuant to the agreement of January 28, 1943. Petitioner paid the face amount plus accrued interest for all the Athertonville mortgage notes it purchased. The total of $277,000 face amount of such mortgage notes were all the outstanding notes of the original issue of $300,000.
At the time petitioner made the investment in the Athertonville mortgage notes, neither A. J. Cummins nor G. C. Collins, Jr., nor their families were under any financial stress or difficulties with regard to carrying out any of their financial obligations in connection with the notes or other financial obligations.
When petitioner began purchasing the Athertonville notes it had funds on hand totaling $135,000. There were outstanding $277,000 face amount of such notes. After petitioner acquired some of the aforesaid mortgage notes, petitioner's board of directors determined it would be advantageous to acquire all the outstanding Athertonville mortgage notes. Not then having sufficient funds to do so, petitioner contacted the National Life and Accident Insurance Co. of Nashville, Tennessee (hereinafter referred to as National) with a view to borrowing a sum of money with which to complete the purchase of all such notes. Petitioner proposed to National that it lend petitioner $150,000 on the security of the $277,000 face amount of Athertonville mortgage notes. Petitioner was advised that National would make such a loan at 4 1/2 per cent interest. Petitioner's directors considered it to be advantageous to petitioner to accept the loan which would enable it to make 1 1/2 per cent interest on $150,000 over and above the return it would be receiving on its own investment. On January 12, 1945, petitioner borrowed the $150,000 from National and used the proceeds to purchase the Athertonville 6 per cent mortgage notes. Petitioner gave National its note for the amount of the loan secured by a pledge of $277,000 face amount of Athertonville mortgage notes.
On May 31, 1943, Athertonville was dissolved. It was succeeded by Cummins-Collins Distilleries, a partnership composed of G. C. Collins, Jr.; his wife, Christine H. Collins; A. J. Cummins and his wife, Yancey B. Cummins. Each of the men had a 30 per cent interest and each of the women a 20 per cent interest. On May 1, 1945, the partnership was succeeded by Cummins-Collins Distilleries, Inc., a Kentucky corporation, whose stock was held by the same four individuals in the proportion of their respective interests in the predecessor partnership. The said partnership and the said corporation each in turn assumed the obligations in respect to the aforesaid mortgage notes of Athertonville. The mortgage notes were paid on or before maturity and the interest was kept up-to-date at all times.
In the settlement of the estate of G. C. Collins, Jr., it became necessary to sell his Cummins-Collins Distilleries, Inc., stock to raise funds to pay estate taxes. No purchaser could be found who would purchase a minority interest, and in order to sell Collins' stock, it became necessary for all the stockholders to sell their stock in Cummins-Collins Distilleries, Inc. On October 30, 1946, the stock of that corporation was sold to Gallagher & Burton, Inc., and Distillers Warehouses, subsidiaries of Joseph E. Seagram & Sons, Inc.
On November 1, 1946, Cummins-Collins Distilleries, Inc., paid petitioner the sum of $15,000 in retirement of three of its 5 per cent debenture bonds held by petitioner. On November 26, 1946, that corporation paid petitioner the sum of $254,000 in full payment of the 6 per cent mortgage notes of Athertonville then outstanding, together with interest thereon.
On November 26, 1946, petitioner paid to National the sum of $128,366.18 in full payment of all the principal and interest due that company on its loan to petitioner of $150,000 made on January 12, 1945.
After the receipt of the payments in discharge of the aforementioned 5 per cent bonds and the 6 per cent mortgage notes, and the repayment of its loan to National, petitioner had $150,000 cash on hand. The gainful reinvestment of these funds was immediately considered by petitioner's board of directors. A. J. Cummins advised the board that Louisville Distilleries, Inc. (hereinafter referred to as Louisville) desired a loan of $200,000 to equip its plant, and suggested the board consider such a loan. After a thorough investigation of the soundness of the loan, the board determined to make a loan of $200,000 to Louisville. On March 7, 1946, Louisville had been incorporated. Its total outstanding capital stock at the time of the loan to it by petitioner consisted of 129,000 shares of common stock, which was owned in equal proportions by Holman R. Wilson, A. J. Cummins, and John K. Skaggs, Jr.
Petitioner again contacted National with a view to borrowing $100,000 at 4 1/2 per cent, which when added to its own funds would enable petitioner to make the $200,000 loan to Louisville, but was advised by National that the law of its incorporation prevented it from making loans on industrial properties which were not going concerns but that it would be glad to make such a loan on petitioner's terms when Louisville was in actual operation. On account of the position which National took, it became necessary for petitioner to secure an interim loan. Yancey B. Cummins and Christine H. Collins advised petitioner that they would be willing to lend petitioner $100,000 at 4 1/2 per cent interest, pending petitioner's working out of the loan with National. On January 7, 1947, petitioner borrowed $50,000 from each woman at the rate of 4 1/2 per cent interest. On the same day petitioner loaned Louisville $200,000, secured by a mortgage on the plan and equipment of Louisville, and assigned such mortgage to Yancey B. Cummins and Christine H. Collins as security for their loans to petitioner.
By the end of January 1947, Louisville had begun distilling operations, and National then made a loan to petitioner of $100,000, the proceeds of which were used to repay in full the loans made by Yancey B. Cummins and Christine H. Collins to petitioner.
Petitioner's board of directors, in determining to make the loan to Louisville, considered the investment to be sound for the following reasons: The plant of Louisville had been appraised on December 20, 1945, by Walter C. Wagner, an outstanding authority as a distillery engineer and architect, as having a fair market value of $319,053; subsequent to such appraisal Louisville had installed approximately $160,000 worth of new equipment; the management of Louisville, with the exception of G. C. Collins, Jr., was the same that had successfully operated Athertonville and Cummins-Collins Distilleries; Louisville had acquired the same brands that had been merchandised by Cummins-Collins Distilleries and had acquired an inventory of aged whiskeys to be bottled under those brands, and at the time of the loan had been marketing bottled whiskey for approximately seven months; Louisville was expecting to begin the manufacturing of whiskeys within a period of two or three weeks following the completion of the proposed loan; Louisville's properties were exempt from property taxation by the City of Louisville for a period of 5 years beginning January 1, 1947, and the distilling industry was enjoying a very prosperous period and the value of distillery plants and whiskey inventories had recently increased tremendously.
The income, expenses and amounts distributed in the fiscal years October 31, 1945, 1946, and 1947, were as follows:
+----------------------------------------------------+ ¦Fiscal year ended¦Income ¦Expenses ¦Distributions¦ +-----------------+----------+---------+-------------¦ ¦Oct. 31, 1945 ¦¦$13,538.99¦$4,794.95¦$10,010 ¦ +----------------++----------+---------+-------------¦ ¦Oct. 31, 1946 ¦¦16,114.97 ¦6,250.03 ¦9,137 ¦ +----------------++----------+---------+-------------¦ ¦Oct. 31, 1947 ¦¦7.269.12 ¦5,773.69 ¦9,447 ¦ +----------------------------------------------------+
During the above-mentioned fiscal years, petitioner made distributions as follows:
+------------------------------------------------------------------+ ¦Organization ¦1945 ¦1946 ¦1947 ¦ +---------------------------------------------+------+------+------¦ ¦St, Andrew's Episcopal Church, Louisville ¦$2,125¦$4,500¦$6,000¦ +---------------------------------------------+------+------+------¦ ¦American Red Cross, Louisville ¦2,900 ¦1,000 ¦675 ¦ +---------------------------------------------+------+------+------¦ ¦St. Francis of Assisi Church, St. Francis, Ky¦500 ¦500 ¦ ¦ +---------------------------------------------+------+------+------¦ ¦Kentucky Society for Crippled Children ¦250 ¦200 ¦200 ¦ +---------------------------------------------+------+------+------¦ ¦Louisville Tuberculosis Assn ¦10 ¦10 ¦ ¦ +---------------------------------------------+------+------+------¦ ¦St. X. Improvement Fund, Louisville ¦500 ¦500 ¦ ¦ +---------------------------------------------+------+------+------¦ ¦Shrine Circus Fund, Louisville ¦ ¦22 ¦22 ¦ +---------------------------------------------+------+------+------¦ ¦War Fund, Louisville ¦3,500 ¦1,500 ¦ ¦ +---------------------------------------------+------+------+------¦ ¦Methodist Church, Dixon, Tenn ¦100 ¦ ¦ ¦ +---------------------------------------------+------+------+------¦ ¦Holy Spirit Church, Louisville ¦100 ¦ ¦ ¦ +---------------------------------------------+------+------+------¦ ¦Sisters of Notre Dame, Covington, Ky ¦25 ¦ ¦ ¦ +---------------------------------------------+------+------+------¦ ¦St. Joseph's Orphan Society, Louisville ¦ ¦100 ¦100 ¦ +---------------------------------------------+------+------+------¦ ¦Norton Psychiatric Building Fund, Louisville ¦ ¦500 ¦ ¦ +---------------------------------------------+------+------+------¦ ¦Mt. Lebanon Baptist Church, Louisville ¦ ¦5 ¦ ¦ +---------------------------------------------+------+------+------¦ ¦Manual-Male Memorial Fund, Louisville ¦ ¦300 ¦ ¦ +---------------------------------------------+------+------+------¦ ¦Community Chest, Louisville ¦ ¦ ¦1,500 ¦ +---------------------------------------------+------+------+------¦ ¦Jewish Hospital Bldg. Fund, Louisville ¦ ¦ ¦500 ¦ +---------------------------------------------+------+------+------¦ ¦W. Barnett Owen Memorial Fund, Louisville ¦ ¦ ¦250 ¦ +---------------------------------------------+------+------+------¦ ¦American Cancer Society, Louisville ¦ ¦ ¦100 ¦ +---------------------------------------------+------+------+------¦ ¦Y.M.C.A. World Youth Fund, Louisville ¦ ¦ ¦100 ¦ +---------------------------------------------+------+------+------¦ ¦Total ¦10,010¦9,137 ¦9,447 ¦ +------------------------------------------------------------------+
The Manual-Male Memorial Fund to which petitioner made a contribution of $300 in 1946, was a fund organized in 1945 by the alumni associations of two public high schools for boys in Louisville, Kentucky. The purpose of the Fund was to establish a memorial to the boys of both high schools who served in World Ward I and II. The Fund was to be used for the repair of the athletic stadium and installation of floodlights at one school, and for the purchase of an athletic practice field for the other school. The Fund raised $48,317.28 through solicitation of contributions by committees of the two alumni associations from members and the public. The entire amount raised by the Fund was devoted to the aforesaid purposes. The members of the Fund received no compensation for their services and no distribution of the Fund's property. The Fund has never engaged in carrying on propaganda or otherwise attempting to influence legislation.
In March 1947, petitioner received cash contributions from 10 individuals in the total amount of $415, for the purpose of its being distributed throughout the year to an individual named Stratford S. Goin. Goin had previously been a waiter at the Two Thirty-Five Club, a professional and business men's luncheon club in downtown Louisville. When Goin became ill, members of the club discussed with John K. Skaggs, Jr., a member of petitioner, what they could do to aid him. Skaggs obtained free medical services of a leading Louisville surgeon for Goin. Skaggs also offered to take up with petitioner a plan whereby petitioner would distribute to Goin monthly a fund to be contributed by members of the club. The monthly distributions through petitioner were desired in order to insure that Going would have the money monthly throughout the year he was expected to live, rather than in a lump sum which might be unwisely spent. Skaggs investigated Goin's situation by obtaining a report from the surgeon, and visiting Goin's home and by corresponding with him. Skaggs advised petitioner Goin was suffering severe pain from an incurable cancer, was destitute, and living alone in a $3-a-week room, and when not in the hospital was aided by a few neighbors. Petitioner acted as a medium for the distribution of the fund of $415 earmarked for Goin, and during its fiscal year ended October 31, 1947, paid out to him $399.50.
Petitioner has pledged $35,500 to St. Andrew's Episcopal Church of Louisville, and has paid a substantial part of that pledge. Ten thousand dollars of the amount was devoted to the purchase of a pipe organ, and $20,500 to build an assembly hall which bears the name ‘George C. Collins, Jr., Memorial Hall. ‘ The Cummins family has not as yet been able to decide upon a suitable project to memorialize the Cummins family name.
No part of the net earnings of petitioner has ever inured to the benefit of any member of petitioner or to any individual. No part of its activities is devoted to carrying on propaganda or otherwise attempting to influence legislation.
During the taxable years involved, petitioner was operated exclusively for religious, charitable and educational purposes.
OPINION.
LEECH, Judge:
Petitioner contends that it is a corporation exempt from tax under section 101(6) and (14) of the Internal Revenue Code.
The respondent contends that petitioner does not qualify under either of said subsections.
SEC. 101. EXEMPTIONS FROM TAX ON CORPORATIONS.The following organizations shall be exempt from taxation under this chapter—(6) Corporations, and any 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 and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation;(14) Corporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt from the tax imposed by this chapter;
Petitioner was formed under the Kentucky Revised Statutes for religious, educational and charitable purposes. Its charter provides that it is organized and shall be operated exclusively for religious, charitable and educational purposes, and that all of its assets and earnings shall be used exclusively for those purposes, and no part of its net earnings shall inure to the benefit of any private shareholder or individual. It received a certificate of incorporation as a nonstock and nonprofit organization on October 9, 1944.
A corporation, to be entitled to exemption from tax under section 101(6) must establish that it is both organized and operated exclusively for one of the purposes specified in the statute. While the charter of a corporation is conclusive as to the purpose for which it was organized, it does not control the fact as to whether it was operated exclusively for such purposes. Whether it was so operated is to be determined from the facts and circumstances established in each particular case. Cf. Underwriters' Laboratories, Inc., 46 B.T.A. 464, affd., 135 Fed.(2d) 371, certiorari denied, 320 U.S. 756.
The respondent contends that exemption should be denied petitioner because the facts warrant the inference that petitioner's organization was part of a prearranged plan of its incorporators to take advantage of the exemption provisions of the Internal Revenue Code with respect to contributions to exempt corporations, and to maintain a fund which could be used to further the purposes of the individuals creating petitioner.
Petitioner concedes that the amounts it received in 1944 from the respective donors were determined on a basis of what the statute permitted as deductions as contributions to exempt corporations as defined in section 101 of the code. We think no unfavorable inference may be drawn from the fact that individuals accept the benefits the law specifically grants. The statute in granting exemptions to corporations prescribes certain tests which must be met. We are to determine whether this petitioner qualifies. In view of the provisions of its charter, we think no reasonable argument can be made that petitioner was not organized exclusively for purposes specified in section 101 of the code. As to whether it was so operated poses a different problem. We, therefore, examine this phase of respondent's contention.
The facts set forth in our findings clearly show that the corpus of petitioner was invested in amply-secured mortgage notes of certain enterprises either owned or controlled by either some or all of the individuals who were acting as directors of petitioner during the taxable years involved. Do such circumstances require us to deny exemption to petitioner on the ground that it was not operated exclusively for the purposes specified in the statute? We think not. One of the tests prescribed in subdivision (6) of section 101 of the Code is that no part of the net income of a corporation claiming exemption from tax shall inure ‘to the benefit of any private shareholder or individual.‘ This limitation may indicate That congress was concerned primarily with the use of the net income rather than with the manner and character of its investments. The destination of the income is more significant than its source. Trinidad v. Sagrada Orden de Predicadores, 263 U.S. 578. All of the petitioner's investments in the enterprises of its members and directors were in mortgage notes bearing 6 per cent and secured by properties of more than twice the value of the face of the notes. That they were reasonable investments is also shown by the fact that the National Life and Accident Insurance Co., of Nashville, Tennessee, loaned petitioner large sums at 4 1/2 per cent interest on the security of such mortgage notes, and the further fact that an officer of the Kentucky Trust Co. testified that he had made an investigation of the notes and was completely satisfied they were a sound investment and would be attractive to trustees seeking to invest trust funds. If a corporation is otherwise qualified, we do not think the statute requires a denial of exemption because its corpus was invested in debenture bonds and mortgage notes of enterprises controlled by its founders, where the investments are amply secured and bear a reasonable interest rate, as shown by this record. The Revenue Act of 1950 supports this view. That act adds a new section (3813) to Chapter 38 of the Code, applicable to certain corporations defined in section 101(6).
Petitioner is a corporation to which the amendment is applicable. Subdivision (b) of section 3813 defines six ‘Prohibited Transactions‘ which require a denial of exemption, if such prohibited transactions are engaged in by such corporation seeking exemption. The prohibited transactions defined in subsection (b) to do not include transactions of the character in which this petitioner engaged.
SEC. 3813. REQUIREMENTS FOR EXEMPTION OF CERTAIN ORGANIZATIONS UNDER SECTION 101(6) AND FOR DEDUCTIBILITY OF CONTRIBUTIONS MADE TO SUCH ORGANIZATIONS(a) Organizations to Which Section Applies.— This section shall apply to any organization described in section 101(6) except—(1) a religious organization (other than a trust);(2) an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on;(3) an organization which normally receives a substantial part of its support (exclusive of income received in the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 101(6) from the United States or any State or political subdivision thereof or from direct or indirect contributions from the general public;(4) an organization which is operated, supervised, controlled, or principally supported by a religious organization (other than a trust) which is itself not subject to the provisions of this section; and(5) an organization the principal purposes or functions of which are the providing of medical or hospital care of medical education or medical research.(b) Prohibited Transactions.— For the purposes of this section, the term ‘prohibited transaction‘ means any transaction in which an organization subject to the provisions of this section—(1) lends any part of its income or corpus, without the receipt of adequate security and a reasonable rate of interest, to;(2) pays any compensation, in excess of a reasonable allowance for salaries or other compensation for personal services actually rendered, to;(3) makes any part of its services available on a preferential basis to;(4) makes any substantial purchase of securities or any other property, for more than adequate consideration in money or money's worth, from;(5) sells any substantial part of its securities or other property, for less than an adequate consideration in money or money's worth, to; or(6) engages in any other transaction which results in a substantial diversion of its income or corpus to:the creator of such organization (if a trust); a person who has made a substantial contribution to such organization; a member of the family (as defined in section 24(b)(2)(D)) of an individual who is the creator of such trust or who has made a substantial contribution to such organization; or a corporation controlled by such creator or person through the ownership, directly or indirectly of 50 per centum or more of the total combined voting power of all classes of stock entitled to vote or 50 per centum or more of the total value of shares of all classes of stock of the corporation.
If it can be gathered from a subsequent statute in pari materia what meaning the Congress attached to the words of a former statute, such may amount to a legislative declaration of the meaning of the entire statute and control its construction. Sheaffer Pen Co. v. Lucas, 41 Fed.(2d) 117; United States v. Phez Co., 28 Fed.(2d) 106; Blackard v. Jones, 62 Fed.Supp. 234. The character of petitioner's investments, in the taxable years involved, therefore does not warrant the conclusion that it was not operated exclusively for religious, educational, and charitable purposes.
Petitioner was incorporated under the Revised Statutes of Kentucky pertaining to religious, educational, and charitable corporations. Its charter limited its activities exclusively to such purposes. In the taxable years petitioner was not engaged in any commercial enterprise in competition with nonexempt business corporations. It was not a feeder corporation of the character involved in the case of c. f. Mueller Co., 14 T.C. 922, which was held not exempt under section 101(6) of the Code.
The respondent further contends that petitioner was not operated exclusively for religious, educational and charitable purposes because it distributed the sum of $300 to the Manual-Male Memorial Fund in 1946, and in 1947 distributed $399.50 to Stratford S. Goin. The facts and circumstances with respect to these distributions appear in our findings of fact. Obviously, we think, the distribution to the Manual-Male Memorial Fund was one for educational and charitable purposes benefiting the public and not individuals. Weyl v. Commissioner, 48 Fed.(2d) 811, 812; St. Louis Union Trust Co. v. Burnet, 59 Fed.(2d) 922, 926.
With respect to the distribution to Goin, the record establishes 10 individuals contributed to petitioner in 1947 the sum of $415, which was specifically earmarked for distribution by petitioner to Goin in monthly payments. Goin was not a member of petitioner. The distribution made to Goin was less than the amount contributed for such specific purpose; thus no part of petitioner's net income was distributed to an individual. It is clear that in making such distribution to Goin, petitioner was merely the agent of those 10 individuals for that specific purpose. The action of petitioner as such agent was not a part of its general charitable purpose, but was not sufficiently substantial to deprive petitioner of its exempt status under section 101(6). Cf. American Society of Cinematographers, Inc., 42 B.T.A. 678, 681.
It has been stipulated that all other distributions by petitioner in each of the taxable years involved were made for charitable purposes, and that no part of its activities was carrying on propaganda or otherwise attempting to influence legislation. We conclude that petitioner has met all the tests prescribed in section 101(6) of the Code to qualify it as a tax-exempt corporation in each of the taxable years in question. In so holding we find it unnecessary to determine whether petitioner also qualified as an exempt corporation under subdivision (14) of section 101, as petitioner requests us to do. The collateral issue as to petitioner's liability for penalties for failure to file timely returns in the respective taxable years is mooted.
Reviewed by the Court.
Decision will be entered for the petitioner.