Opinion
Docket Nos. 90145 90146.
1964-02-28
THE GOLDEN RULE CHURCH ASSOCIATION, A CALIFORNIA NON-PROFIT RELIGIOUS ORGANIZATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTHAROLD V. NORRIS, E. L. HANSON, AND MARIAN T. HUFF, AS THE ELECTED DELEGATES COMMITTEE OF THE ECCLESIASTICAL SOCIETY OF CHRIST'S CHURCH OF THE GOLDEN RULE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Howard B. Crittenden, Jr., for the petitioners. Sidney U. Hiken and William T. Ivey, Jr., for the respondent.
Howard B. Crittenden, Jr., for the petitioners. Sidney U. Hiken and William T. Ivey, Jr., for the respondent.
A church subsidiary managed several business as vehicles for the spreading of the church's religious doctrines. On the facts, held the church and its subsidiary were organized and operated exclusively for religious purposes. Sec. 501(c)(3), I.R.C. 1954. Held, further, a property-holding subsidiary is exempt under section 501(c)(2), I.R.C. 1954.
TRAIN, Judge:
Respondent determined income tax deficiencies and additions to tax under section 6653(a)
against the petitioners for the years and in the amounts indicated:
The deficiencies and additions to tax for the taxable year 1956 are in the alternative, i.e., a decision for respondent in respect of either petitioner will result in no deficiency and no addition to tax in respect of the other petitioner.
All statutory references are to the Internal Revenue Code of 1954, unless indicated otherwise. 2. Although the committee is not incorporated, it has not disputed (except as to the implications of issue 3) respondent's determination that, if taxable, it is an association taxable as a corporation. 3. Sec. 4(6) of the Bank and Corporation Franchise Tax Act, as last previously rewritten by Cal. Stats. 1949, ch. 513, p. 871, sec. 2, provided in relevant part as follows:(6) The following corporations shall be exempt from taxation under this act:(b) 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 act.(e) Corporations 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.These provisions, essentially unchanged, are now Cal. Rev. & Tax. Code, secs. 23701, 23701d, and 23701h (West's Ann. Cal. Codes 1962).
+-----------------------------------------------------------------------------+ ¦ ¦Taxable¦ ¦ ¦ +------------------------------------------------+-------+----------+---------¦ ¦Petitioner and docket ¦year ¦ ¦ ¦ +------------------------------------------------+-------+----------+---------¦ ¦ ¦ended ¦Deficiency¦Addition ¦ +------------------------------------------------+-------+----------+---------¦ ¦ ¦Sept. ¦ ¦ ¦ ¦ ¦30 ¦ ¦ ¦ +------------------------------------------------+-------+----------+---------¦ ¦The Golden Rule Church Association, a California¦ ¦ ¦ ¦ ¦ ¦nonprofit religious ¦ ¦ ¦ ¦ ¦ +------------------------------------------------+-+-----+----------+---------¦ ¦organization. No. 90145 ¦ ¦1956 ¦$95,000.00¦1 ¦ ¦ ¦ ¦ ¦ ¦$4,750.00¦ +------------------------------------------------+-+-----+----------+---------¦ ¦Harold V. Norris, E. L. Hanson, ¦(¦ ¦ ¦ ¦ +------------------------------------------------+-+-----+----------+---------¦ ¦and Marian T. Huff, as The ¦(¦1956 ¦95,000.00 ¦1 ¦ ¦ ¦ ¦ ¦ ¦4,750.00 ¦ +------------------------------------------------+-+-----+----------+---------¦ ¦Elected Delegates Committee ¦(¦ ¦ ¦ ¦ +------------------------------------------------+-+-----+----------+---------¦ ¦of The Ecclesiastical Society ¦(¦1957 ¦1,735.93 ¦2 86.60¦ +------------------------------------------------+-+-----+----------+---------¦ ¦of Christ's Church of the ¦(¦ ¦ ¦ ¦ +------------------------------------------------+-+-----+----------+---------¦ ¦Golden Rule. No. 90146 ¦(¦1958 ¦1,997.77 ¦99.89 ¦ +------------------------------------------------+-+-----+----------+---------¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+
The issues to be decided are:
(1) Whether petitioners are exempt from taxation under section 501(c)(2), 501(c)(3), or 501(d);
(2) Whether the assessment of a deficiency against the petitioner in docket No. 90146 for its taxable year 1956 is barred by the statute of limitations;
(3) Whether the petitioners are separate taxable entities;
(4) whether either petitioner or a combined entity realized a taxable gain from the sale of timber in its taxable year ending in 1956 and, it so, in what amount; and
(5) Whether the petitioners or a combined entity intentionally disregarded rules and regulations in failing to report income for any of their taxable year ending in 1956, 1957, or 1958.
FINDINGS OF FACT
Some of the findings have been stipulated and are hereby found as stipulated.
Christ's Church of the Golden Rule (hereinafter sometimes referred to as the church) is an unincorporated association of individuals, the body or membership of which is known as The Ecclesiastical Society of Christ's Church of The Golden Rule, hereinafter sometimes referred to as the Ecclesiastical Society. The church was originally organized in 1943 or 1944. It adopted a constitution and canon laws on February 15, 1948.
On March 15, 1948, the Ecclesiastical Society granted a charter to The Elected Delegates Committee of The Ecclesiastical Society of Christ's Church of the Golden Rule (hereinafter sometimes referred to as the committee), one of the petitioners herein.
On December 12, 1949, the Ecclesiastical Society granted a charter to the Golden Rule Church Association (hereinafter sometimes referred to as the association), the other petitioner herein. On the same day, the association was granted a certificate of incorporation by the State of California.
On brief, respondent notes that the correct figure is $86.80, the smaller figure being an obvious transcription error on the notice of deficiency.
The taxable years of both petitioners ended on September 30 of each of the years involved in this proceeding. Each petitioner filed exempt organization information returns Form 990-A for its taxable years 1956, 1957, and 1958 with the district director of internal revenue in San Francisco, Calif. The committee also filed partnership (apostolic society) information returns Form 1065 for its taxable years 1956 and 1957 with the district director of internal revenue in San Francisco, Calif.
The church's constitution includes a declaration of faith professing belief that: there is a unitary God who is omnipotent, omniscient, and omnipresent; ‘the man Jesus * * * (was) the highest exemplification of the Christ (Truth) to have evolved from the race of med’; the Holy Scriptures were divinely inspired and contain ‘all directions necessary to salvation’; salvation from the consequences of wrong-doing comes only through repentance and the correction of errors; ‘the essence of true religion is to learn to love God with all of one's heart and the art of doing unto others as we would have others do unto us'; and that economic equality is the only enduring foundation of proper relations and to insure such equality the church should own and manage all its members' property for the benefit of all mankind. The King James version of the Bible, as construed by the church's officials, is declared to be the governing law in ecclesiastical matters.
The church government is headed by a senior elder, who is elected by representatives of the student minister training projects and serves until a convention of such representatives elects a successor. The elder was the church's only ordained minister during the years before the court. She conducts marriage ceremonies and funeral services for church members. An advisory board of elders was initially elected by the convention of the Ecclesiastical Society on February 15, 1948. Since then the board has been a self-perpetuating body except that new members could serve only if acceptable to the senior elder. The advisory board of elders may, subject to the veto of the senior elder, change cannon law and generally direct the policy of the church. The church's cannon laws provide:
CANON LAW #10 REGULATIONS GOVERNING CHURCH ASSETS
No part of the income of any property, money or property right, of whatsoever kind or nature and wheresoever situated, shall ever inure to the personal profit or benefit of any person or persons, shareholders or certificate holders; but all income of any group, temporal agency, project, congregation, and society or any part thereof shall always be used for the religious purposes of this Church as defined and construed by the ecclesiastical Church Government. No amendment to these canon laws, and no instrument under which any gift, conveyance or transfer is made shall ever permit any person or persons or shareholder or shareholders to ever have any proprietary rights in the income of any such group, agency or society. No temporal agency shall ever issue any stock or certificate for the payment of any income to inure to the
benefit of any individual or stockholder. CANON LAW #11 REGULATIONS PROHIBITING USE OF CHURCH ASSETS FOR PROPAGANDA (OR INFLUENCING LEGISLATION)
No property held or acquired by any temporal agency, or for any religious purposes of the ecclesiastical society or any part thereof, project, congregation, group or society of the Church shall ever be used for influencing legislation or for propaganda; and no amendment to these canon laws shall permit any such property, income or proceeds to be ever used to influence legislation or for propaganda. No gift, conveyance, acquisition or other instrument under which property may at any time in the future be acquired by any temporal agency, or held, shall permit such use of any part of such money, property or property right, for such prohibited purposes.
The committee was chartered as the church's principal temporal agency. Subject to the policy directions of the senior elder and the advisory board, the committee maintains a community treasury, publishes religious literature, and directs the student minister training projects and the studies of the student ministers and other members of the church. Breaches of the canon laws are grounds for suspension or revocation of the committee's charter.
The association was chartered to hold for the church such real and personal property as the elders may direct, to lease the property when directed, to pay over to the committee such sums as it may need when directed, and to make property available for the use of the church when directed. The association does not hold or disburse any part of the community treasury, nor does it conduct any of the student minister training projects.
The association's certificate of incorporation from the State provides:
(6) The corporation does not contemplate pecuniary gain or profit to the members thereof. No part of the property of the corporation shall ever be used to influence legislation or for propaganda. No property of the corporation shall be used for other than religious purposes according to the doctrines and beliefs as determined from time to time by the ecclesiastical government for the ecclesiastical society.
Upon dissolution of this corporation, no assets or property shall ever pass to any corporation member or officer, but all such assets and property shall forever be and remain in trust for said ecclesiastical body and its successors.
A similar provision is contained in the association's bylaws.
In October 1949 the association had sued for a writ of mandate to compel the California franchise tax commissioner to issue a certificate of exemption to the association as a religious corporation under the Bank and Corporation Franchise Tax Act, section 4(6),
and to compel the California secretary of state to certify the association's incorporation. That action was terminated by stipulation of the parties after the franchise tax commissioner certified to the exempt status of the association and, on December 12, 1949, the secretary of state certified its incorporation.
The Ecclesiastical Society believes that God's laws are intended to apply not only to man's spiritual life, but also to the business, social, and private sectors of his physical life. In order to persuade people to apply the church's teachings to their business activities, the Ecclesiastical Society determined that it must show, by example or illustration, that those teachings were applicable. Accordingly, the committee was directed to acquire or create various small businesses to be operated as illustrations of the applicability of the ‘golden rule’ to daily life. These activities were referred to as ‘illustrations of the ministry’ or ‘student minister training projects.’ The sites of these activities were referred to as ‘training centers.’
Among such projects operated by the committee during the years before the Court were the following: Nu-Age Products, which purchased sized redwood lumber in the open market and fabricated it into finished products such as baskets, planter tubs, and similar nursery stock for sale at retail and wholesale; the American Laundry, which provided laundry, dry cleaning, and dyeing services to the general public; Du-All Enterprises, which manufactured and sold flexible rolling screens made of redwood materials; Myrtledale Hot Springs Hotel, consisting of a hotel building, several cabins, a lodge with a main dining room, a swimming pool and bathhouse, and a restaurant; the Bolinas Sawmill, which cut and hauled growing timber and processed it to finished lumber, some of which was sold to the public; the Palomarin Nursery, which raised and sold potted plants and produced plants for sale; and the Palomarin Ranch, on which livestock was raised, some of which was sold to the public and some of which was slaughtered and sold to butchers.
During the years before the Court, the Myrtledale Hot Springs Hotel was opened to the public on only a limited scale because of the church's need for housing facilities for its own members. The American Laundry was terminated as a training project in 1959 because it was difficult to find proper supervisory personnel among the membership and because the project required the employment of nonmembers whose smoking, swearing, and other activities made the project a poor illustration of the concepts the church tried to demonstrate to the public. The laundry was thereafter leased. A kiln and planing operation was terminated in 1953 and was leased during the years before the Court. The Bolinas Sawmill operations were terminated in 1957 and the mill was not leased thereafter.
Devotional services are conducted every morning at each of the training centers. The services consist of an opening hymn, a reading from the King James version of the Bible, a silent prayer, audible repetition of the Lord's Prayer, a reading from the church literature, a closing hymn, and a repetition in unison of the church's vision of ‘A world free from want, with liberty and justice for all, and with understanding love toward God and one another.’ The services held at the American Laundry were open to any members of the public who might be in the building at that time.
The committee publishes several periodicals and some booklets for use of the Ecclesiastical Society and for distribution to the public. No charge is made for these publications except as to one weekly leaflet. The subscription price for that leaflet covers little more than the coast of mailing.
The committee operates a school for the children of the church members. Children of nonmembers have also been admitted without charge.
The total adult (above the age of 15) church membership during the years before the Court was: 1956— 670; 1957— 662; and 1958— 65l. Of this number 25 to 30 percent (1956— 188; 1957— 170; 1958— 164) were student ministers, living on the church property at one or another of the training projects.
The total time of the student ministers is under ecclesiastical direction. They take theology courses; are required to report their daily studies in writing; attend classes on Monday nights; attend discussions on Tuesday nights about human relationship problems and applications of their teachings; attend inspirational and gratitude meetings on Wednesday nights; and on every fourth Monday they submit written summaries of their work or answer examinations put to them. On the average, approximately 25 to 30 percent of their training time is spent on application of teachings in relationship with the public. Approximately 10 percent of their time is spent on publications. Approximately 20 percent of their time is spent in housekeeping and similar activities necessary to maintaining their own facilities. The committee provides food, clothing, and shelter to the student ministers, except to the extent these needs are voluntarily provided for by the student ministers themselves or, in certain cases, out of governmental old age assistance funds. The student ministers are not paid for their services.
The services and products offered by the student minister training projects are priced at the going rates for such services and products. The projects avoid undercutting similar commercial businesses. The student ministers are rotated from project to project to maximize the variety of their experiences with the public. No effort is made, in assignment of personnel, to create specialists in order to foster efficiency of operation. The commercial success or lack thereof of any project has not affected the standard of living of the student ministers working at the project.
On August 17, 1950, the association acquired title to the Palomarin Ranch (hereinafter sometimes referred to as the ranch), consisting of approximately 3,100 acres in Marin County, northwest of San Francisco.
On February 21, 1956, the association's board of directors authorized the sale, for $400,000, of all the merchantable fir timber located on the ranch to a group of individuals. On May 14, 1956, the chairman of the association's board of directors reported to a special meeting of the board that the timber sale had been completed, that the first $100,000 had been paid by the purchasers, and that the escrow had been closed. On October 1, 1956, the chairman of the board reported to a special meeting of the board that when a contemplated exchange of property had been completed with the Tevis Land and Livestock Co., the association would be in a position to execute a second timber deed to the purchasers completing the timber sale approved at the meeting of February 21, 1956.
The total sales price was $400,000, of which: (1) The association netted $330,815.47; (2) association liabilities of $63,493.43 were paid; (3) $2,331.78 was paid to the Bank of America, the nature of which payment is disputed; and (4) $3,359.32 was paid as expenses of the sale. The last cash payment to the association on account of the timber sale was made on December 7, 1956. All of the $400,000 total was paid by December 30, 1956.
The tax basis of the entire rance was $67,420.61, not including the above-noted payment of $2,331.78 to the Bank of America. The ranch was largely covered with timber but there were a number of improvements on the property and at least three of the businesses operated by the committee are located on this property. The committee's headquarters have been located there since 1954. On January 16, 1952, the association entered into an oil and gas lease at the ranch with the Standard Oil Co. of California. The Palomarin property had value as cattle land after the timber was cleared off and the association intended to so use it.
Respondent determined that the association's (or, alternatively, that the committee's) profit on the timber sale was $380,000, and it is the income from this sale which gives rise to the deficiencies asserted with respect to 1956.
Apart from the 1956 timber transaction here at issue, the association's profits and loss for its taxable years 1950 through 1960 are:
+----------------------+ ¦Year:¦Profit (loss) ¦ +-----+----------------¦ ¦1950 ¦$3,850.29 ¦ +-----+----------------¦ ¦1951 ¦3,363.85 ¦ +-----+----------------¦ ¦1952 ¦22.64 ¦ +-----+----------------¦ ¦1953 ¦(56.51) ¦ +-----+----------------¦ ¦1954 ¦0 ¦ +-----+----------------¦ ¦1955 ¦0 ¦ +-----+----------------¦ ¦1956 ¦In issue ¦ +-----+----------------¦ ¦1957 ¦0 ¦ +-----+----------------¦ ¦1958 ¦0 ¦ +-----+----------------¦ ¦1959 ¦0 ¦ +-----+----------------¦ ¦1960 ¦0 ¦ +----------------------+
Apart from the timber transaction, the committee's stipulated net income or operating losses for its taxable years 1948 through 1959 are:
+----------------------+ ¦Year:¦Profit (loss) ¦ +-----+----------------¦ ¦1948 ¦($113,471.21) ¦ +-----+----------------¦ ¦1949 ¦( 33,232.70) ¦ +-----+----------------¦ ¦1950 ¦(128,251.16) ¦ +-----+----------------¦ ¦1951 ¦( 6,537.64) ¦ +-----+----------------¦ ¦1952 ¦( 23,688.92) ¦ +-----+----------------¦ ¦1953 ¦( 72,566.80) ¦ +-----+----------------¦ ¦1954 ¦(179,192.36) ¦ +-----+----------------¦ ¦1955 ¦29,388.68 ¦ +-----+----------------¦ ¦1956 ¦( 52,833.73) ¦ +-----+----------------¦ ¦1957 ¦( 29,617.17) ¦ +-----+----------------¦ ¦1958 ¦( 26,077.65) ¦ +-----+----------------¦ ¦1959 ¦( 37,798.47) ¦ +----------------------+
The net operating losses which may be carried to the committee's taxable year 1956 (those of 1951-54 and 1957-59, reduced by the 1955 profit), plus the loss for 1956, aggregate $398,924.06.
For the petitioners' taxable year 1956, the training projects, or ‘illustrations of the ministry’ were carried on by the committee and its student ministers exclusively for the purpose of illustrating to the public that the church's religious concept of the ‘golden rule’ can be applied to one's daily business activities; both the church and the committee were organized and operated exclusively for religious purposes; and no part of their net earnings inured to the benefit of any individual.
OPINION
Out of the plethora of issues and arguments presented in the pleadings and briefs, one appears to be crucial to the resolution of this complex case—whether the activities of the committee were such that it was exempt from taxation under section 501(c)(3).
SEC. 501. EXEMPTIONS FROM TAX ON CORPORATIONS, CERTAIN TRUSTS, ETC.(c) LIST OF EXEMPT ORGANIZATIONS.— The following organizations are referred to in subsection (a):(3) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, 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, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation, and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of any candidate for public office.
Respondent maintains that (1) the committee was not operated exclusively for religious purposes since its activities involved the operation of commercial enterprises and (2) expenditures for maintenance of the student ministers constituted inurement of net earnings to the benefit of individuals.
Respondent does not contend that any of the entities here involved attempted to influence legislation or participated in any political campaign.
Petitioners insist that the training projects were maintained as part of the church's religious activities. They argue that it would be a violation of the first amendment to the U.S. Constitution
to treat such activities as constituting operation for nonreligious purposes merely because religious organizations in this country do not normally undertake such activities for religious purposes. On the inurement point petitioners analogize the expenditures to those incurred generally by religious organizations who provide income or subsistence to ministers, sextons, and others who perform services for such organizations.
Amendment 1.Congress shall make no law respecting an establishment or religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.
We agree that petitioners were exempt from Federal income taxation during the years before the Court.
The statute requires, in relevant part, that the committee be organized and operated exclusively for religious purposes. In this requirement, the statutory language treats as a touchstone, not the organization's activity, but rather the end for which that activity is undertaken. Trinidad v. Sagrada Orden, 263 U.S. 578, 582 (1924); Unity School of Christianity, 4 B.T.A. 61, 70 (1926). See sec. 1.501(c)(3)-1(e)(1),
Sec. 1.501(c)(3)— 1 Organizations organized and operated for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or for the prevention of cruelty to children or animals.(e) Organizations carrying on trade or business— (1) In general. An organization may meet the requirements of section 501(c)(3) although it operates a trade or business as a substantial part of its activities, if the operation of such trade or business is in furtherance of the organization's exempt purpose or purposes and if the organization is not organized or operated for the primary purpose of carrying on an unrelated trade or business, as defined in section 513. In determining the existence or nonexistence of such primary purpose, all the circumstances must be considered, including the size and extent of the trade or business and the size and extent of the activities which are in furtherance of one or more exempt purposes. An organization which is organized and operated for the primary purpose of carrying on an unrelated trade or business is not exempt under section 501(c)(3) even though it has certain religious purposes, its property is held in common, and its profits doe not inure to the benefit of individual members of the organization. See, however, section 501(d) and Sec. 1.501(d)-1, relating to religious and apostolic organizations.
We recognize that activities such as the ‘illustrations' operated by the committee are normally carried on in substantial part for the purpose of producing income. See, e.g., Help the Children, Inc., 28 T.C. 1128 (1957); Scripture Press Foundation, 152 Ct. Cl. 463, 185 F.2d 800 (1961). Cf. Sand Springs Home, 6 B.T.A. 198 (1927). Nevertheless an activity normally carried on to produce income may, in certain cases, be carried on exclusively
for other purposes. Unity School of Christianity, supra at 66; Saint Germain Foundation, 26 T.C. 648, 657-658 (1956).
The Supreme Court has defined ‘exclusively’ in this context to mean that there is no nonexempt purpose that is ‘substantial in nature.’ Better Business Bureau v. U.S., 326 U.S. 279, 283 (1945).
See Frederic C. Leubuscher, Executor, 21 B.T.A. 1022, 1029 (1930), modified on another point 54 F.2d 998 (C.A. 2, 1932).
This discussion must be sharply distinguished from the source-vs-destination of income controversy. E.g., C. F. Mueller Co., 14 T.C. 922 (1950), revd. 190 F.2d 120 (C.A. 3, 1951). We may assume for purposes of this opinion that if the committee's activities were engaged in for the substantial purpose of earning income, then it would not be exempt even if the income so earned were devoted to exempt purposes. Here, we have concluded that the committee's activities were not engaged in for the substantial purpose of earning income.
The activities upon which respondent relies for his ruling denying exemption were not the sources of the income respondent here seeks to tax. In fact, respondent has conceded that these activities gave rise to net operating losses aggregating more than the profit from the timber sale. The carrying on of these activities despite persistent losses, the testimony of petitioners' witnesses as to the petitioners' purposes, and the committee's charter and bylaws, all indicate that the activities were not carried on to make profits or for any other non-exempt purpose. The record as a whole convinces us, and we have found as a fact, that the training projects operated by the committee and its student ministers were carried on exclusively for religious purposes. This conclusion is strengthened by, but does not depend upon, respondent's counsel's statement at the trial that ‘There is no effort, no attempt, no desire to attack or impeach the integrity of these people or their intentions or their honor or their faith or anything else.’
We agree that religious organizations in this country do not normally run such business operations. But that is not a proper justification for our refusal to recognize that this religious organization did engage in its activities for exclusively religious purposes. As we stated in Unity School of Christianity, supra at 70:
In considering whether a corporation is religious, charitable or educational, we must always be guided by the character of the organization and its activities. Religion is not confined to a sect or a ritual. The symbols of religion to one are anathema to another. What one may regard as charity another may scorn foolish waste. And even education is to-day not free from divergence of view as to its validity. Congress left open the door of tax exemption to all corporations meeting the test, the restriction being not as to the species of religion, charity, science or education under which they might operate, but as to the use of its profits and the exclusive purpose of its existence.
We have grave doubts that a contrary conclusion would be permissible under the Constitution of the United States. It is a violation of the first amendment to discriminate between religious organizations. Niemotko v. Maryland, 340 U.S. 268, 272-273 (1951); Fowler v. Rhode Island, 345 U.S. 67, 69 (1953). Although tax benefits such as exemption may be matters of legislative grace (compare New Colonial Co. v. Helvering, 292 U.S. 435, 440 (1934); Helvering v. Bliss, 293 U.S. 144, 150-151 (1934); and Better Business Bureau v. United States, 326 U.S. 279, 283 (1945)) nevertheless, a denial of such benefits granted to others of essentially the same class may well rise to the level of an unconstitutional discrimination. Speiser v. Randall, 357 U.S. 513, 518 (1958); United States v. Seeger, 326 F.2d 846 (C.A. 2, 1964). See Sherbert v. Verner, 374 U.S. 398, 404-406 (1963). If other religious organizations, solely because they are religious organizations, would not be taxable on timber sales proceeds such as those here sought to be taxed, then we doubt that petitioners can be taxed on this same transaction simply because their religious doctrine is in part unorthodox.
It does not necessarily follow that we must accept all claims that activities are religious simply because those claims are sincere. Nor are we here required to essay a definition of religion. We are convinced that any constitutionally permissible definition would treat petitioners, together with the church, as religious organization.
Where it can fairly do so, a court should interpret statutory provisions so as to avoid serious doubts as to their constitutionality. E.g., United States v. Delaware & Hudson Co., 213 U.S. 366, 407-408 (1909); Greene v. McElroy, 360 U.S. 474 (1959); United States v. Jakobson, 325 F.2d 409 (C.A. 2, 1963). The content we have here given to the phrase ‘religious purposes' will satisfy this obligation. See Washington Ethical Society v. District of Columbia, 249 F.2d 127, 129 (C.A.D.C. 1957); Fellowship of Humanity v. County of Alameda, 153 Cal.App.2d 673, 696, 315 P.2d 394, 408 (Dist. Ct. App., 1st Dist., 1957).
Respondent places his total reliance in this issue upon our 1955 Memorandum Opinion in Peggy Lou Riker and its affirmance in 244 F.2d 220 (C.A. 9, 1957). In Riker the taxpayers sought to deduct contributions made to the church and the committee or its predecessor, during the period October 1, 1947, through December 31, 1949. We denied the deductions on the ground that the committee was organized and operated in substantial part for the purpose of conducting profit-making commercial enterprises and that the church retained such extensive control over the committee's operation that the committee's ‘commercial activities should properly be ascribed to the ecclesiastical society itself in determining the latter's qualifications under section 23 (o) (of the 1939 Code).’
Respondent properly acknowledges that the doctrine of res judicata is not applicable here. Since neither petitioner now before us is identical with, a successor to, or in privity with either petitioner before us in Riker, the doctrine of collateral estoppel is also inapplicable. Commissioner v. Sunnen, 333 U.S. 591 (1948). In effect, then, respondent relies upon stare decisis.
We have carefully examined the record in Riker and conclude that that case must be distinguished from the one before us. Firstly: In that case the record showed that the committee had reported operating profits of $189,826.34 and $147,192.84 for its fiscal years ending September 30, 1948 and 1949.
No evidence was presented in that case indicating that the church or the committee had suffered losses in prior or subsequent years. In the case before us, the committee's stipulated operating losses have been consistent and substantial for the years relevant to our inquiry. We do not mean to say that a profitable operation must lead to taxation while a nonprofitable one will be exempt. However, we regard consistent nonprofitability as evidence of the absence of commercial purposes. Cf. Scripture Press Foundation, 152 Ct.Cl. 463, 468, 285 F.2d 800, 803.
The record before us contains no explanation of the substantial discrepancy between the profits reported in Riker and the losses for those same years stipulated to by the parties herein and noted in our Findings of Fact, supra.
Secondly: The constitutional argument was not presented to us in Riker. It is a commonplace that courts will not consider constitutional arguments unless properly raised by those with standing to make the arguments. For that reason, we had no occasion in Riker to consider whether the possible unconstitutionality of a decision denying exemption would be a factor in determining the outcome of that case. For that reason also, we express no view here on the question, logically related to our decision in this case, as to whether respondent must prevail because it is a violation of the first amendment to grant tax exemption to religious organizations simply because of their status as religious organizations. Compare Justice Reed's dissent in McCollum v. Board of Education, 333 U.S. 203, 249 (1948), and Justice Douglas' concurring opinion in First Unit. Church v. Los Angeles, 357 U.S. 545, 548 (1958), both apparently assuming the grant to be constitutional, and Reiling, ‘What is a Charitable Organization,‘ 44 A.B.A.J. 525, 595 (1958), urging that the grant is constitutional, with the joint dissent of Justices Roberts, Frankfurter, and Jackson in Follett v. McCormick, 321 U.S. 573, 581 (1944), Justice Douglas' concurring opinion in Engel v. Vitale, 370 U.S. 421, 437, footnote 1 (1962), and Note, ‘The Constitutionality of Tax Benefits Accorded Religion,‘ 49 col. l. rev. 968 (1949), all suggesting that the grant is unconstitutional.
Respondent further argues that the subsistence provided by the committee to the student ministers constitutes an inurement of net earnings to those persons within the meaning of section 501(c)(3). However, respondent concedes that, at least for the years before the Court, the expenditures for student minister maintenance constitute proper deductions by the committee. None of the entities paid salaries to those student ministers. We passed upon this question in a similar setting in Saint Germain, we hold that the provision of subsistence to the student ministers did not constitute inurements of net earnings to individuals.
Accordingly, we hold that, for the years before us, the committee was exempt from Federal income taxation under section 501(c)(3). In view of the fact that the church clearly is a religious society and that only the committee's activities were challenged as destructive of exemption under that provision, the church is also exempt as a religious organization. Since the association's only function was to hold property for the church and to transfer title to, use of, and rents derived from the church's property as the church might direct, the association is exempt under either section 501(c)(2)
SEC. 501. EXEMPTION FROM TAX ON CORPORATIONS, CERTAIN TRUSTS, ETC.(c) List of EXEMPT ORGANIZATION.— The following organizations are referred to in subsection (a):(2) 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 under this section.
The parties disagree as to the weight to be given to the issuance of the association's corporate charter under State law substantially identical to the Internal Revenue Code provisions here relevant. Since we have arrived at our conclusions on the basis of the other evidence in the record, we do not here resolve that dispute.
Since the church, the committee, and the association all were exempt, it is not necessary to decide which entity should be charged with the timber sale profit; whether the three are to be treated as one entity for Federal income tax purposes; whether the committee's exempt organization information return for its taxable year 1956 was a return for statute of limitations period is to be extended to 6 years under section 6501(e)(1); and whether the committee is exempt as an apostolic association under section 501(d).
Decisions will be entered for petitioners.