Court Opinion

ID: 4596130
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:16:28.646969+00
Date Added: 2024-06-11T07:51:33.895204
License: Public Domain

Estate of Philip R. Thayer, Deceased, Anna-Mary Thayer, Ernest W. Jackson, and Crocker First National Bank of San Francisco, Executors, Petitioners, v. Commissioner of Internal Revenue, RespondentThayer v. CommissionerDocket No. 48059United States Tax Court24 T.C. 384; 1955 U.S. Tax Ct. LEXIS 171; June 14, 1955, Filed *171 Decision will be entered under Rule 50.  Held, a legacy by the decedent to the California Alumni Association is deductible from the gross estate under section 812 (d), Internal Revenue Code of 1939.  Clarence E. Musto, Esq., for the petitioners.Aaron S. Resnik, Esq., for the respondent.  Tietjens, Judge.  Turner, J, dissenting.  TIETJENS*384  This proceeding involves a deficiency in estate tax in the amount of $ 26,341.48.  The estate tax return was filed with the collector of internal revenue at San Francisco, California.  Certain adjustments are uncontested.  The sole issue presented for decision is whether a legacy by the decedent to California Alumni Association is deductible from the gross estate under section 812 (d) of the Internal Revenue Code of 1939. *172  A stipulation of facts was filed and oral testimony and exhibits were introduced.FINDINGS OF FACT.The stipulated facts are found as stipulated and the exhibits to the stipulation are incorporated by this reference.Philip R. Thayer died on August 10, 1950.  Anna-Mary Thayer, Ernest W. Jackson, and Crocker First National Bank of San Francisco*385  are the duly appointed and qualified executrix and executors of the will of the decedent.The estate tax return was filed on November 6, 1951.  A deduction was claimed for $ 60,101.98, the amount of a bequest to California Alumni Association.The University of California, hereinafter referred to as the university, was at all pertinent times a public institution organized and operated exclusively for educational purposes by the State of California and is supported by the State.California Alumni Association, hereinafter referred to as the Association, was at all pertinent times a corporation organized under the laws of the State of California.  Any person awarded a degree by the university or who had attended the university for one semester or more, or a member of its faculty, could become an active member of the Association upon payment*173  of the dues.  Until September 1, 1954, the Association's place of business was located in a building owned by the university on its campus at Berkeley.The Association has carried on a program known as the California Alumni Scholarship Program under which the Association brings to the university leading high school and junior college students from throughout the State, the funds for these scholarships being secured from solicitation by the Association from the alumni of the university.  The funds are administered and awards made under direction of the regents of the university.  This program has grown from 13 scholarships awarded in 1934 to 189 awarded in 1952, and the total since 1934 amounts to about 2,200 awards.  The amounts of the scholarships have increased from $ 180 to $ 300 each.The Association publishes and distributes to all its members a magazine known as the California Monthly. The purpose of this magazine is to convey to the alumni information concerning the university and its activities and information developed at the university relative to new discoveries in the field of science and in other fields and other information, to maintain a continuing interest in the *174  university on the part of its alumni and from time to time to secure their assistance as the university may need assistance.  The magazine contains some educational material and some descriptions of personalities connected with the university.  For example, the November 1952 issue of the Monthly contains articles on "Teaching and Research in the Physical Sciences," one of a series of articles on University and Society, "Dwinelle Hall," describing a new classroom building, "The Virus Laboratory," describing a new laboratory, "Our Soundest Investment," referring to the crop of scholars attending under the Alumni Scholarship Program, "California's High Campus," describing the *386  Lick Observatory on Mount Hamilton, of which the regents of the university are the trustees, "Johnny Olszewski," describing a prominent California football player, and "A Tribute to You," describing the new alumni building.  In addition it contains news of the alumni clubs, reports from the various campuses, a description of the oldest living alumnus, "Keeping in Touch," containing news of individuals in past graduating classes, listed by classes, a class reunion calendar, university calendar, "Science *175  Roundup," describing a new polio vaccine, "Books and the University" and a roster of worldwide alumni contacts.  Advertisements include listings of schools for boys or girls in California.The Association organized approximately 100 alumni clubs throughout the State.  The primary activity of these clubs is to have speakers from the university deliver lectures on educational subjects.  One of the purposes of the clubs is to bring the faculty of the university closer to the people of the State, so that citizens may know more about the university and its activities and benefits and therefore be more willing to give it financial support.  These clubs also have as one of their activities the support of the Alumni Scholarship Program.  The Association assists the clubs by securing speakers from the university and paying their expenses on trips to address these clubs and reporting the meetings in the magazine. The clubs have some social activities.Each year the Association holds special educational institutes in the Los Angeles and San Francisco Bay areas at which leading members of the university faculty speak on subjects of an educational character.  These institutes are open to and are*176  attended by the general public.The Association holds a statewide alumni conference annually, usually in September, at which alumni leaders confer with university officers concerning university problems.  At one such conference there were scheduled 15-minute talks followed by discussions on "The State-Wide University," "The Student Body -- Today and Tomorrow," "Teaching Today at Berkeley," "Plans for Future Building and Development -- Berkeley Campus," and "The University and the Legislature," with luncheon addresses by the chancellor and the president, a visit to secret football practice, and a reception at the residence of the secretary of the Association.Each year the Association sponsors a tour by the president of the university to alumni groups through the State at which the president and distinguished members of the university's faculty speak on subjects of current local or national interest.  This is for the purpose of fostering a continuing interest in and support of the university by the alumni.*387  The Association carries on an alumni counseling program under which individual alumni working in cooperation with the University Counseling Center confer with students *177  and advise them concerning their selection of professions and careers.The Association made a study of the extracurricular activities of the students of the university at Berkeley and the facilities needed for such activities.  The cost of this study, approximately $ 25,000, was paid by the Association.  The Association submitted a report of this study in a volume entitled "Students at Berkeley" to the regents of the university who, as a result, gave official sanction to the erection of a student union building to be constructed on property owned by the regents on the Berkeley campus.The Association participated in the construction of a building known as Alumni House on the campus at Berkeley.  The building was erected for the purpose of creating a closer interest in the university by the alumni and to make more effective alumni efforts to be of service to the university.  The estimated cost of this building is $ 325,000 which sum will be raised by the Association.  The title to the building is vested in the regents. The offices of the Association are now in this building.  There are rooms available for meetings and recreational activities. It is used by student groups, faculty, *178  and administrative officers of the university as well as by alumni.The Association operates a summer camp at Pinecrest in the Stanislaus National Forest about 30 miles east of Sonora.  It is operated for about 10 weeks each summer and is attended by about 1,200 to 1,500 alumni and their families.  Those alumni who are members of the Association may attend at a reduced rate.  The camp is operated on a nonprofit basis.  A number of lectures and discussion groups or seminars are scheduled at the camp conducted by professors from the university.The Association carries on a number of other activities calculated to keep alive and foster the loyalty of the alumni to the university for the purpose of advancing the interests of the university.  These include a commencement luncheon, and a charter day banquet.All the activities of the Association are for the purpose of advancing the interests of the university and for its benefit.  This is not the sole or exclusive purpose of such activities.  No substantial part of the activities of the Association is carrying on propaganda, or otherwise attempting to influence legislation.The Association is operated as a nonprofit organization and none*179  of its moneys is used for the benefit of any alumnus.  The Association's endowment fund is in possession of the regents and is invested *388  by them.  Earnings from this fund and membership dues are used for the foregoing activities.The Association had approximately 40,000 members in 1950 of which a majority were life members.  Its receipts are derived from dues from life or annual members, income from the endowment fund composed of portions of life membership dues deposited with the regents, from advertising in the magazine, from sale of souvenirs, and from special contributions from alumni for particular purposes.  The life membership endowment fund now amounts to about $ 1,200,000.  Funds received for scholarship purposes are received by the Association or by California Alumni Foundation, a separate organization within the Association, and are deposited with the regents who supervise the fund and award the scholarships.The expenditures shown on the financial statement under the heading "Meetings and Banquets" include the expenses of speakers sent from the university to address local clubs. The Association paid the expenses of such speakers for some 200 or 300 trips each*180  year.The following is a comparative statement of the Association's income and surplus for fiscal years ended June 30, in 1950 and 1949:June 30, 1950June 30, 1949Operating income:Life memberships$ 89,458$ 59,925 Annual memberships36,28031,907 California Monthly advertising26,28830,862 Interest on endowment funds, etc29,96727,432 Total operating income$ 181,993$ 150,126 Operating expenses:Life membership promotion$ 47,335$ 35,420 Annual membership promotion4,4464,125 California Monthly direct expenses60,86363,373 Administration and office31,41138,515 Meetings and banquets24,43118,697 Files and records5,7545,576 Scholarships1,9972,081 Total operating expenses$ 176,237$ 167,787 Net income from operations$ 5,756($ 17,661)Profit on sale of plates, records, etc3,49110,963 $ 9,247($ 6,698)Loss from summer camp operations8,394879 Net income$ 853($ 7,577)Surplus:Balance at beginning of year$ 21,450$ 37,774 Add: Surplus adjustments1,0541 (8,747)Surplus at end of year$ 23,357$ 21,450 *181  The following is a comparative statement of the financial situation of the Association as at June 30, 1950 and 1949: *389 June 30, 1950June 30, 1949Current assets:Cash and deposits$ 38,509$ 47,222Due on life memberships63,78558,780Accounts receivable13,73713,572Alumni camp supplies and advanced expenses13,43516,406Supplies inventories3,4002,736Total current assets$ 132,866$ 138,716Less -- current liabilities:Accounts payable26,00422,056Deposits on alumni camp reservations21,01018,892Due Alumni Foundation -- scholarship funds13,42411,531Other accruals and payables18,5064,444Total current liabilities$ 78,944$ 56,923Excess of current assets over current liabilities$ 53,922$ 81,793Funds and other assets:Life membership endowment and trust funds875,374765,374Due on life memberships562,575457,527Sundry investments1,360Summer camp facilities27,94121,086Office furniture and improvements10,4564,114Deferred charges45,39932,275$ 1,575,667$ 1,363,529Deduct:Deferred interest, promotional income(prorated)68,08264,170Net assets$ 1,507,585$ 1,299,359Net assets evidenced by:Reserves for life membership, endowments,and trust funds$ 897,653796,382Deferred life membership pledges562,575457,527Reserve for California Monthly24,00024,000Surplus23,35721,450Total$ 1,507,585$ 1,299,359*182  In the probate proceeding of this estate the State inheritance tax appraiser found that the interest passing to the Association under the will was subject to the inheritance tax law of California.  The executors filed objections.  After a trial on the merits the Superior Court of the State of California in and for the County of Alameda sustained the objections and found that the bequest was not subject to the State inheritance tax law.  The Superior Court held that the Association was "organized solely for and exclusively engaged in and devoted to charitable, educational, public or other like work * * * pecuniary profit not being its object or purpose."In 1936 the Treasury Department issued a ruling that the Association was exempt from income tax as a social club within the provisions of section 101(9) of the Revenue Act of 1934.  In 1938 the Department granted the Association exemption pursuant to section 101(6) of the Revenue Act of 1938 and held that contributions to it were deductible pursuant to section 23(o) for income tax purposes.  In 1944 the Department revoked the 1938 ruling and exemption was granted under section 101(9) of the Internal Revenue Code.The California Alumni*183  Association is organized and operated exclusively for educational or charitable purposes.*390  OPINION.The sole question is whether the decedent's legacy to the California Alumni Association is a proper deduction from the gross estate under section 812 (d) 1 of the Internal Revenue Code of 1939.  This in turn depends upon whether the Association is a corporation organized and operated exclusively for charitable or educational purposes. It is stipulated that none of the moneys acquired by the Association are used for the benefit of any alumnus and that no substantial part of its activities is carrying on propaganda, or otherwise attempting to influence legislation.*184 The stated purposes of the Association are "to advance the interests of the University of California and to promote the welfare of its alumni," and "to do any and all things necessary to accomplish the foregoing purposes." The Association carries on several activities which are obviously educational or charitable in nature such as the scholarship program, counseling with undergraduates concerning their careers, and special educational institutes.  Notwithstanding such activities, if the Association has any substantial activity which is noneducational and noncharitable it will not be exclusively educational or charitable within the meaning of section 812 (d).  See Better Business Bureau v. United States, 326 U.S. 279">326 U.S. 279 (1945).The respondent argues that since one of the purposes of the Association is "to promote the welfare of its alumni," one of its principal functions and objectives is to maintain a program of social and recreational activities, and that it has devoted its activities and efforts to be of service to its individual members.  The respondent points to the following as being social and recreational activities carried on for the benefit*185  of members: (a) The establishment of local clubs and the operation of social programs at their meetings; (b) sponsorship of class reunions, homecoming celebrations, rallies, dances, cocktail and other parties, as well as the sponsorship of tours and conferences; (c) the operation of a recreational camp; (d) the organization of special alumni recreational activities and events by the camp director during the spring and winter seasons; (e) operation of facilities for the purchase *391  of tickets by members to athletic events; (f) the sponsorship and operation of institutes at which subjects of current and general interest are discussed; (g) the maintenance of an alumni house, designed for the comfort and convenience of alumni; (h) the expenditure of approximately $ 25,000 annually for meetings and banquets. In addition the respondent refers to the following other activities as being substantially social and recreational in nature: (a) The publication of a monthly periodical containing articles and other materials of general interest and entertainment to members, including sections therein of interesting activities and happenings of individual members of the Association; (b) a *186  publication of a catalog of alumni; (c) the maintenance of a roster of personal contacts in states other than California and in foreign countries with whom members can meet on their travels; as for example, Paris, France; Shanghai, China; and Saudi Arabia where periodic meetings are held.  These activities, says the respondent, are directed toward the welfare, interest, recreation, fellowship, and social activities of the members of the Association.It is stipulated that all moneys acquired by the Association are used for the activities described in the stipulation and that all such activities are for the purpose of advancing the interests of the university and for its benefit, although it is agreed that this is not the sole or exclusive purpose of such activities.  The activities, even though involving some social or recreational features, are for the ultimate benefit of an educational institution.The crux of the issue is whether the social and recreational activities are "substantial" or merely incidental to the objective of advancing the interests of the university.  See Huntington National Bank, 13 T. C. 760 (1949), acq.  1950-1 C. B. 3.*187 It seems clear that any social or recreational aspects of the Association's activities are merely incidental to its primary purpose of affording a medium through which the alumni can contribute to the welfare of the university.  Entertainment features serve to stimulate interest in the Association and in such primary purpose. In I. T. 3330, 1939-2 C. B. 185, an organization which conducted study courses for the benefit of employees of local banks and published a nonprofitable professional magazine, and which had certain entertainment activities, was held exempt as an educational organization, the entertainment being for the purpose of creating and stimulating interest and being merely incidental to the primary purpose of education.The local clubs are not under the control of the Association.  The Association encourages their formation and serves them by sending faculty members at the Association's expense to speak at club meetings.  While the clubs have some social features they also serve the purpose *392  of acquainting alumni with university problems and with faculty members who speak at club meetings.  The primary activity of the clubs is to have*188  speakers from the university deliver lectures on educational subjects.  The club programs are related to the university.  The expenditure of over $ 24,000 for meetings and banquets in the fiscal year ended June 30, 1950, includes the expenses of some 200 or 300 trips made by these speakers sent to address the local clubs.The class reunions and homecoming celebrations are social events conducted by the classes or student groups, not by the Association, which merely furnishes assistance through listing the events in the monthly magazine. The president's tour of the State enables him to speak before alumni groups in different localities to maintain their interest in and support of the university.  The special educational institutes are educational rather than social in their nature and are open to the general public.  The alumni house, although its construction was financed by contributions from the alumni, is used by faculty, student groups, and administrative officers as well as by alumni, and title is in the regents. Its purpose is to make alumni efforts to serve the university more effective.  See Squire v. Students Book Corp., (C. A. 9, 1951) 191 F. 2d 1018.*189 One of the respondent's principal arguments concerns the summer camp sponsored by the Association.  The respondent says this is a major activity of the organization, it is similar in operation to commercial camps in the same area, and its purpose is wholly recreational. The camp is operated for approximately 10 weeks each summer and about 1,200 to 1,500 alumni attend with their families.  Attendance is not restricted to members of the Association, but almost all attending are members.  At the camp some 20 to 25 professors from the university give lectures and lead discussion groups on educational subjects.  The camp is operated on a nonprofit basis and is not a money-making enterprise.  Even if the members who attend derive more recreation than education from the camp it reaches only a small part of the Association's membership, about 3 or 4 per cent, and as to those members, serves to attract their interest to the university and its problems.  The Association's investment in camp facilities was about $ 28,000 out of net assets of over $ 1,500,000, or less than 2 per cent.  This is not so substantial an activity as to characterize the Association as social rather than educational. *190  The respondent contends that the Association operates facilities for purchase of tickets by members to athletic events.  This is not borne out by the evidence.  The testimony shows that members have an opportunity along with students and faculty to purchase tickets from the university, not from the Association, and have no special privilege as to price or seat locations.*393  The Association has not published a list of the alumni since about 1937 nor does it maintain a directory of alumni.The California Monthly contains educational articles, reports from the different campuses of the university, of the local alumni clubs, items about individual members, calendars of activities and notices of reunions planned by different graduating classes.  The social matter contained is not predominant and much of that deals with activities of classes or local clubs rather than of the Association itself.Although it appears that the camp director organizes special alumni events during the spring and winter seasons, there is nothing to indicate that these are in any way recreational, as contended by the respondent.We think the facts shown with reference to the activities demonstrate that the*191  promotion of the welfare of the alumni, referred to as a purpose of the Association in its articles of incorporation, means the welfare of the alumni collectively as a group which maintains a vital interest in the university, its problems, and its function as an educational institution.The State court held, in a trial on the merits, that the Association was "organized solely for and exclusively engaged in and devoted to charitable, educational, public or other like work." While this decision, interpreting another statute and based upon a different record, is not controlling here, it lends some support to our ultimate similar finding.We conclude that the Association is operated exclusively for educational and charitable purposes within the meaning of section 812 (d) of the Internal Revenue Code of 1939.Decision will be entered under Rule 50.  TURNER Turner, J, dissenting: I am unable to read the facts recited in the report herein and justify the conclusion that the California Alumni Association was organized and is operated exclusively for educational or charitable purposes. The report seemingly acknowledges the fact that there were activities which do not qualify as being*192  for the stated purposes but seeks to dismiss them from consideration by referring to them as incidental. First, it is my view that the facts do not indicate that they were incidental and not substantial, and second, I do not feel that we are at liberty to write qualifying words into a statute where Congress has not stated or indicated any permissible conditions or exceptions.  I accordingly note my dissent.  Footnotes1. This discrepancy is not explained.↩1. SEC. 812. NET ESTATE.For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the value of the gross estate --* * * *(d) Transfers for Public, Charitable, and Religious Uses.  -- The amount of all bequests, legacies, devises, or transfers * * * to or for the use of the United States, any State, Territory, any political subdivision thereof, or the District of Columbia, for exclusively public purposes, or to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation, * * *↩