Court Opinion

ID: 4633441
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:13:54.932242+00
Date Added: 2024-06-11T07:59:19.732361
License: Public Domain

Martha Hubbard Davis, Petitioner, v. Commissioner of Internal Revenue, RespondentDavis v. CommissionerDocket No. 34213United States Tax Court22 T.C. 1091; 1954 U.S. Tax Ct. LEXIS 120; August 24, 1954, Filed August 24, 1954, Filed *120 Decision will be entered for the petitioner.  A donation by petitioner to a foundation organized for charitable purposes, held, deductible for gift tax purposes under section 1004 (a) (2) (B), Internal Revenue Code of 1939.  Wilson W. Wyatt, Esq., and Edgar A. Zingman, Esq., for the petitioner.A. Robert Doll, Esq., and John C. Calhoun, Esq., for the respondent.  Bruce, Judge.  BRUCE *1092  The respondent has determined a deficiency in gift tax of $ 48,431.26 for the year 1947.  The question presented is whether a gift of $ 249,250.06 in securities in the taxable year to a trust is deductible as a charitable or educational gift under section 1004 (a) (2) (B) of the Internal Revenue Code of 1939. *121  FINDINGS OF FACT.The petitioner is an individual residing at Louisville, Kentucky.  She filed a gift tax return for the calendar year 1947 with the collector of internal revenue for the district of Kentucky.For many years prior to 1947 the petitioner had been engaged in social service work in either a voluntary or professional capacity.  Between 1926 and 1929 she had been so engaged in the States of Massachusetts, New York, and Illinois.  In 1929 she came to Louisville, Kentucky, to become supervisor of the mother's aid division of the Louisville-Jefferson County Children's Home.  Petitioner resigned from this position in 1950 and retired.For many years prior to 1947 petitioner had been an active member of the Kentucky Conference of Social Welfare (hereinafter referred to as the conference).  This was an organization of public spirited citizens of Kentucky interested in problems of social welfare in the State.  Most of its members were from Lexington, Louisville, and Frankfort, Kentucky.  However, the organization was planned as a statewide body, its purpose being to have a wide membership able to operate throughout the State and especially in rural sections.  Petitioner was especially*122  interested in social service work among the underprivileged people in rural Kentucky.  The conference did not disburse charity.  It had no funds for such purpose.  Its work was, through its membership, to investigate local conditions, to determine those which called for relief, and to plan the best way in which to meet that need through its local or district committees.The only income of the conference was from dues from its membership which was not large.  Its officers acted without compensation.  Its executive secretary, a trained social service worker, received $ 15 per month for expenses but no salary. Its main activity prior to 1947 was the holding of the annual conference where social service problems were discussed and programs made for work by various committees investigating throughout the State questions relating to child welfare, mental health, and other questions of that general type.At the annual meeting of the conference in November 1946 petitioner was elected its first vice president for the year 1947 and also selected chairman of the membership and district association committees.  She was fully aware of the fact that if the work of the conference was to be successful*123  in its investigative and relief programs it was *1093  necessary to largely increase its membership, and that this could not be done unless it had the services of a full-time executive secretary who could visit the various counties in the State and enroll additional members and reactivate the district associations of the conference, as it was difficult to keep these local or district committees alive due to the conference's lack of membership and absence of contact maintained with these committees by the conference management.  This had for years been the general plan of the conference.  Petitioner, on being elected chairman of the membership committee, began to attempt to build an organization that was expected to reach into every county and on that basis to build potent district associations.In December of 1946 petitioner's mother died, leaving petitioner an estate of some $ 575,000, of which petitioner received some $ 400,000 after taxes and administration expenses.  This money came into petitioner's possession in 1947.On receipt of her inheritance petitioner decided to create a charitable foundation, funds of which were to be used for the relief of distress mainly in the*124  rural areas of the State.  It had been her experience that individuals best qualified to invest funds and obtain a maximum return were of a type who were rarely interested in social service work.  Consequently she planned the creation of a trust to which she would convey $ 250,000.  The trustees were to have only the authority of investing and reinvesting the funds, and all of the annual income from such investments was to be paid over by the trustees to a charitable foundation which she would create whose trustees and officers would be individuals interested in social service work and who would disburse these funds for the charitable purposes for which the foundation was to be created.  It was her plan that the trustees of the foundation should use the conference and its statewide organization for purposes of investigating and making studies of local conditions throughout the State as a basis for determining the necessary and proper projects of relief which the foundation would attempt to relieve through grants of aid.Accordingly, on November 8, 1947, the petitioner conveyed securities of a value of $ 249,250.06 to an irrevocable trust, the declaration of trust providing, inter*125  alia, as follows:Section I. Payments of Income.The annual net income from said trust shall be used perpetually to assist in preventing and relieving suffering and distress among poor, unfortunate and vocationally handicapped persons residing in the State of Kentucky, but particularly in rural areas, small towns and in areas of special need, by helping to provide for them and their dependents, well organized and administered welfare and health agencies and other facilities, including demonstrations of progressive and effective methods, for self-help and training, such assistance to be *1094  extended through aid to organizations, already operating, to enlarge and broaden the scope of operation, and/or through assisting in the setting up of new projects to provide services which no agency already in operation is planned or equipped to extend.To facilitate the use of this income for the purpose described above, the Donor has caused to be created and organized under the laws of the State of Kentucky a charitable corporation known as "THE KENTUCKY SOCIAL WELFARE FOUNDATION." The specific purposes of this corporation and the terms and conditions upon which it shall operate *126  are more fully set forth in the Articles of Incorporation of said corporation, which are attached hereto and made a part hereof and for purposes of identification are initialed by the Donor and by the Trustee.The Trustee shall pay to said Kentucky Social Welfare Foundation in perpetuity and in quarterly installments the entire net income from this trust fund.The petitioner had, 3 days prior to the conveyance to the trust, caused to be incorporated under the laws of Kentucky, The Kentucky Social Welfare Foundation (hereinafter referred to as the foundation).  The articles of incorporation thereof provided, inter alia, as follows:THIRD: The purpose for which said corporation is formed is to assist in improving standards of living and opportunity among the poor, sick, unfortunate and vocationally handicapped persons residing in the State of Kentucky, particularly in rural areas, small towns and areas of special need, by helping to provide for them and their dependents, well organized and administered welfare and health agencies and other facilities, including demonstrations of progressive and effective methods, for self-help and training.  This is to be done through assisting*127  organizations, already operating, to enlarge and broaden their scope of operation, and/or through assisting in the setting up of new projects to provide services which no agency, already in operation, is planned or equipped to extend.FOURTH: To accomplish the purposes of its creation the corporation shall use and expend the funds available to it as follows:(a) To help support the organization now known as the Kentucky Conference of Social Welfare, or any other agency that may replace it.  Until January 1, 1959 the corporation shall pay to said Kentucky Conference of Social Welfare either (1) as [sic] adequate sum to pay the salary of a full time Executive Secretary for the Conference or (2) as much of the sum needed for a salary as the Conference Board desires.  After January 1, 1959, payments to the Kentucky Conference of Social Welfare shall be made in the discretion of the Board of Trustees.(b) To render financial aid, assistance and support through loan or gift to organized health and welfare agencies within the State of Kentucky and particularly in rural areas, small towns and in areas of special need, in order to help such organizations to raise their standards of*128  service and to assist them in becoming county, or district or special area welfare or health centers.(c) To stimulate and assist constructive health and welfare projects within the area in which this corporation is authorized to operate.  Among such projects might be help in establishing a County Welfare Department, a County Health Clinic, a Mental Hygiene Clinic, Co-operative Projects, a center for teaching handicrafts or industries which will help to bring self support or higher *1095  standards of living to a community, or such other department, clinic, project or agency devoted to promoting the health, character, education or the welfare of a community.(d) No discrimination shall be made by the Trustees on account of race, color or creed of the individuals benefited in the selection of departments, clinics, projects or agencies to be assisted by this corporation.(e) Except as provided in Section 4 (a) hereof, the discretion as to extending financial assistance from the funds of this corporation and within the purposes of the corporation, is vested exclusively in the Board of Trustees of this corporation.  However, such Trustees shall, at all times, give special consideration*129  to all recommendations given by said Kentucky Conference of Social Welfare.(f) Except as limited by Section 4 (a) hereof, as respects any year, or years, and any purpose or purposes for which this corporation is created, the trustees in their uncontrolled discretion may withhold the whole or any part of the said funds which would otherwise be distributable hereunder, and either (1) accumulate the whole or any part of the amount so withheld for expenditures (which the Trustees are hereby authorized to make) for the same purposes in any future year or years, or (2) pay, apply and distribute the whole or any part of said amounts to and for the benefit of any one or more of the purposes of this corporation.Any surplus funds in the hands of the corporation which it is not anticipated will be needed in the reasonable [sic] near future may be invested in United States Government Bonds.The articles of incorporation of the foundation further provide for a board of trustees of seven; one to be the president of the conference, or someone chosen by him; two to be chosen by the board of the conference; one to be chosen jointly by the deans of the accredited schools of social work in the*130 State of Kentucky; one who is a member of the staff of the University of Kentucky and chosen by the president of that university; one who is an executive officer of the trustee bank of the trust fund; and one selected by the other six trustees.Following petitioner's gift in trust on November 8, 1947, the name of the conference was changed by the vote of its members to the Kentucky Welfare Association (hereinafter referred to as KWA).  On March 10, 1948, KWA was formally incorporated under the laws of the State of Kentucky.  It thereupon secured office space, and Helen A. Brown, a trained social service worker, accepted the position of executive secretary, this being made possible by the provisions of the articles of incorporation of the foundation under which the necessary funds were furnished by the foundation for this purpose.In accordance with petitioner's desire, no disclosure was made to the public of her gift of the major portion of her fortune for charitable purposes. The fact that she was the donor of the securities of which the foundation was the beneficiary was known only to the trust officer of the trustee bank and several close friends who were intended to participate*131  in the management of the foundation.  Of the remainder of her inheritance, amounting to approximately $ 125,000, the sum of $ 100,000 was conveyed in trust, the income payable equally to petitioner *1096  and a woman friend with whom she had long been associated; and, upon the death of the survivor of these, this trust corpus was to be paid over to the foundation.Prior to the creation of the trust and the foundation, at the time thereof, and subsequently, it was intended that the foundation's disbursement of funds to KWA for payment of salary and expenses of a full-time executive secretary would make it possible for KWA to largely increase its membership and ultimately become self-supporting.  It was intended that the executive secretary would personally contact the various district committees and reactivate them, enlist new members, contact various public officials in the counties of the State, such as the health officers or others having work connected with the problems of social service, contact the principals of the schools and leading citizens in the communities, and do the work necessary in training the district committees in the investigation of social service problems*132  and devising means to meet them through the local communities.  Following the employment of the full-time executive secretary, her services were of this character.From its organization in November 1947 through December 31, 1952, the foundation has received $ 60,517.96 from the trust.  During this period it disbursed $ 40,000 to KWA, leaving accumulated gross income in the amount of $ 20,490.86.  * The foundation has not since its organization disbursed any of its funds except its payments to KWA.  It was its purpose and plan to disburse funds for projects which might arise and would be thought to qualify for assistance, the studies of these being made by KWA.  Several of these projects are under consideration but no action has yet been taken in view of the fact that the deficiency herein was determined and the status of the fund as one qualifying under section 101 (6), Internal Revenue Code of 1939, was questioned.During 1947 and 1948 the activities*133  of KWA were largely investigative. It had some 18 standing committees.  One of these was known as the legislative committee. Its chairman was a resident of Frankfort and at times contacted the Governor of the State and members of committees of the legislature with respect to legislation of a social service character.  At times the legislative committee would appear before some committee of the legislature or furnish for its assistance the result of studies made by it of social conditions in the State.  It did not endorse any political party or candidate for office.  It occasionally, at the annual conference, would pass resolutions commending some piece of legislation enacted for social benefit or urging that legislative action be taken to remedy some condition which it, by its efforts, was attempting to alleviate.*1097  No substantial part of the activities of either the foundation or KWA during 1947 and 1948 was in carrying on propaganda or otherwise attempting to influence legislation.OPINION.The deficiency here arises upon respondent's disallowance of the deduction for gift tax purposes of the conveyance in trust of approximately $ 250,000 in securities for the benefit*134  of a charitable foundation as not allowable under section 1004 (a) (2) (B), Internal Revenue Code of 1939.  1 This action has been taken upon the ground that respondent has ruled the foundation as not tax exempt under section 101 (6), Internal Revenue Code of 1939, and has also ruled as not exempt under that section KWA which was the recipient of certain payments by the foundation under the terms of its articles of incorporation.*135  The gift in question was one to the trust, but as the duties of the trustees were merely to invest the corpus, collect the income, and pay it over to the foundation, respondent holds that the gift was in substance for the use and benefit of the foundation and consequently its status for tax purposes is to be determined by the status of the foundation under section 101 (6).  With this we agree.  It is further contended by respondent that the status of the foundation under 101 (6) is to be determined by the status under that section of KWA upon the ground, as contended by him, that the foundation was designed merely as a producer of income or a feeder for purposes of KWA and consequently must be considered as established merely for the benefit of the latter organization.  With this latter premise we do not agree.It is true that by the articles of incorporation of the foundation a certain limited amount of its income was to be paid over to KWA to be used by the latter for a definite and fixed purpose.  These payments were for a limited time specified in the articles of incorporation, *1098  whereas the foundation had perpetual life.  We can see nothing unusual or carrying the slightest*136  indication of an attempt to carry on propaganda, or otherwise attempt, to influence legislation in this provision.  Under the facts disclosed it is quite evident that the selection of KWA by the foundation in carrying out its purely charitable purposes was in the exercise of careful judgment and prudence.  KWA was a statewide organization operating through its district committees all through the rural sections of the State and in close touch with the conditions there existing and the various needs for relief on the part of those whom the foundation was intended to assist.  It was ideally suited as the investigative agent of the foundation in determining the worthwhile projects to which the trustees of the foundation would later make grants of relief.  It was intended and the purpose was clearly understood that the payments by the foundation to KWA were only in the amount necessary and for the purpose of providing the expenses of an executive secretary to keep in contact with the various district committees by visiting them and instructing them in methods of procedure to meet local conditions of distress.  We cannot conceive how it can be deemed that a payment for such purpose would*137  be carrying on propaganda, or otherwise attempting, to influence legislation.In this connection, it is noted that respondent by a very recent ruling, Rev. Rul. 54-243, 1954-1 C. B. 92, holds that an organization exempt from tax but not entitled to such exemption under section 101 (6) may accept contributions, deductible by the donors, if given for use exclusively for one of its purely charitable purposes, where action is taken by the recipient to guarantee their use for the specified purposes.  It appears to us that the reasoning underlying this ruling is that reality must govern and deductibility be determined by the purpose for which the contribution is made and the use to which it is actually devoted.We have no hesitation in concluding that the provisions of the articles of incorporation of the foundation in providing for payment to KWA for this special purpose could not support a determination that the foundation was thereby engaged in carrying on propaganda, or otherwise attempting, to influence legislation.In view of the fact that respondent's contention is that the status of the foundation is to be determined by that of KWA, we have*138  carefully examined the very voluminous record with reference to the activities of that organization.It is perfectly true that during 1947 and 1948 one out of 18 committees of KWA known as the legislative committee, did take certain action with respect to legislation.  All of this was in respect to legislation having to do with social service problems in the State.  KWA appears to have had no interest whatever or been active in any way *1099  with respect to other political questions, parties, or candidates for election.  These activities by the legislative committee of KWA which might be termed political were purely incident to its main and controlling purpose and activity which was unquestionably purely charitable and educational. They also appear to us to have constituted but a very small part of the general activities of the organization as a whole.  It appears to us that respondent has reached his conclusion as to KWA after considering the activities of this 1 committee alone without regard to the activities of the remaining 17 committees of KWA working upon problems over the entire State and maintaining and building up its organization in furtherance of its charitable purposes. *139 Section 1004 (a) (2) (B) does not deny exemption because of any legislative activity but only in cases where it constitutes a substantial part of otherwise charitable activities.  The question is always one of fact to be determined upon the record of purely charitable activities and activities influencing legislation and a comparison of the two.  Under such conditions the decisions of the courts in other cases are of little value.  However, the courts have recognized a distinction between political activities of a general character and those engaged in as a necessary incident of the carrying out of the purely charitable, educational, or religious purposes of the organization.  Respondent has himself recognized this distinction.  In GCM 3830, VII-1 C. B. 114, he ruled tax exempt and contributions to it deductible by the donors, an organization formed for the purpose of securing for the American Indian just treatment from the Government and promoting his welfare.  In so ruling he states:No doubt some of the activities of the association are directed toward securing legislation beneficial to the Indians or toward defeating legislation deemed inimical to their best interest. *140  However, it should be borne in mind that the restricted Indian is a ward of the Government and all that concerns his property and person is in a peculiar sense subject to legislative control and direction.  For this reason the improvement of the condition of the Indians is in a large measure dependent upon securing the enactment of wise and beneficent legislation, based upon a thorough understanding of the condition and needs of the Indians.  Any activities in this direction must, in the case of restricted Indians, be carried on through an agency of the character of the one here in question, for the reason that the restricted Indians are without funds or without authority to use their funds for such a purpose.  Since differences of opinion exist upon the question of what legislation is for the best interests of the Indians, the activities of the association in attempting to secure legislation deemed beneficial to the Indians or in opposing legislation deemed inimical to their best interests might, under different circumstances, properly be considered controversial in character.  However, for the reasons stated it is believed that the status of the restricted Indians in the United *141  States renders such activities an essential part of any work having for its purpose the betterment of the conditions of such Indians, and, therefore, that these activities may properly be considered as necessarily incidental to the charitable or educational activities of this association.*1100  Certainly the interest of the State of Kentucky in the health and welfare of its underprivileged citizens is not less than that of the Federal Government in the interests of the American Indian.In Slee v. Commissioner, 42 F. 2d 184, the Court of Appeals for the Second Circuit affirmed a decision by this Court, then the United States Board of Tax Appeals, in denying deduction of contributions to the American Birth Control League where one of the specific purposes of the league, as stated in its articles of incorporation, was "to enlist the support * * * of * * * legislators to effect the lawful repeal * * *" of existing laws respecting birth control.  In holding that this purpose was inconsistent with one "exclusively charitable," Judge Learned Hand stated the rule as follows:Political agitation as such is outside the statute, however innocent the*142  aim, though it adds nothing to dub it "propaganda," a polemical word used to decry the publicity of the other side.  Controversies of that sort must be conducted without public subvention; the Treasury stands aside from them.  Nevertheless, there are many charitable, literary and scientific ventures that as an incident to their success require changes in the law.  A charity may need a special charter allowing it to receive larger gifts than the general laws allow.  It would be strained to say that for this reason it became less exclusively charitable, though much might have to be done to convince legislators.  A society to prevent cruelty to children, or animals, needs the positive support of law to accomplish its ends.  It must have power to coerce parents and owners, and it does not lose its character when it seeks to strengthen its arm.  A state university is constantly trying to get appropriations from the Legislature; for all that, it seems to us still an exclusively educational institution.  No less so if, for instance, in Tennessee it tries to get leave to teach evolutionary biology.  We should not think that a society of booklovers or scientists was less "literary" or "scientific," *143  if it took part in agitation to relax the taboos upon works of dubious propriety, or to put scientific instruments upon the free lists.  All such activities are mediate to the primary purpose, and would not, we should think, unclass the promotors.  The agitation is ancillary to the end in chief, which remains the exclusive purpose of the association.  Trinidad v. Sagrada Orden, 263 U.S. 578">263 U.S. 578, 44 S. Ct. 204">44 S. Ct. 204, 68 L. Ed. 458">68 L. Ed. 458.See also Huntington National Bank, 13 T. C. 760, 769; Girard Trust Co. v. Commissioner, 122 F. 2d 108; Old Colony Trust Co. v. Welch, 25 F. Supp. 45">25 F. Supp. 45.It is undoubtedly true that the purely charitable work done by KWA throughout the counties of Kentucky would normally result in bringing to the attention of the individual citizens the need for many things, some of which could be remedied by local means and others which perhaps would require legislation by the State.  The information acquired by the public from this work would normally tend to have some effect in the actions of the State legislators, elected*144  by the people, to enact relief legislation.  Merely because some ultimate effect from this charitable work was realized in legislation providing for child welfare, mental health, sanitation, or other matters in improvement of social conditions in the State does not characterize *1101  such charitable work as carrying on propaganda, or otherwise attempting, to influence legislation.Our finding that no substantial part of the activities of the foundation or of KWA in 1947 and 1948 was in carrying on propaganda, or otherwise attempting, to influence legislation disposes of the issue.  The action of respondent is reversed.Decision will be entered for the petitioner.  Footnotes*. As indicated by stipulation and exhibit.  The difference is unexplained.↩1. SEC. 1004. DEDUCTIONS.In computing net gifts for the calendar year 1942 and preceding calendar years, there shall be allowed (except as otherwise provided in paragraph (1) of subsection (a)) such deductions as are provided for under the gift tax laws applicable to the years in which the gifts were made.In computing net gifts for the calendar year 1943 and subsequent calendar years, there shall be allowed as deductions:(a) Residents.  -- In the case of a citizen or resident -- * * * *(2) Charitable, etc., gifts. -- The amount of all gifts made during such year to or for the use of -- * * * *(B) a corporation, or trust, or community chest, fund, or foundation, 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 shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation.  For disallowance of certain charitable, etc., deductions otherwise allowable under this subparagraph, see sections 3813 and 162 (g) (2)↩;