Court Opinion

ID: 9637045
Source: CourtListenerOpinion
Date Created: 2023-08-22 14:54:31.408998+00
Date Added: 2024-06-11T18:09:52.488233
License: Public Domain

MAGRUDER, Circuit Judge
(dissenting).
I think that the judgment below should ibe affirmed, though the case must be conceded to be a close one.
There might be sound reasons of policy why charitable corporations, the same as *617other employers, should be required to make contributions toward the social security of their employees. However, the Congress has not seen fit so to prescribe. While the present case happens to arise under the Social Security Act, a decision against the plaintiff herein would necessarily involve the conclusion that the plaintiff is not entitled to exemption from income taxes under I.R.C. § 101(6), 26 U.S.C.A. Int.Rev.Code, § 101(6); that a person making a gift to the- plaintiff is not entitled to take a deduction therefor from gross income under I.R.C. § 23(q), 26 U.S.C.A. Int.Rev.Code, § 23(q), nor entitled, in computing net gifts under the gift tax, to take a deduction therefor as provided in I.R.C. § 1004(a) (2) (B), 26 U.S.C.A. Int.Rev.Code, § 1004(a) (2) (B); that if a testator makes a legacy or bequest to the plaintiff no deduction therefor from his gross estate can be made under I.R.C. § 812(d), 26 U.S..C.A. Int. Rev.Code, § 812(d), in computing estate taxes. Therefore, it seems to me inadmissible to argue, as the Government does, that § 811(b) (8) of the Social Security Act is to be interpreted narrowly against the plaintiff, because the granting of the exemption here would adversely affect persons who are not parties to the action, namely, plaintiff’s employees; whereas the same words under the income, gift and estate tax laws are to be construed liberally. See Faulkner v. Commissioner, 1 Cir., 1940, 112 F.2d 987, 991.
The plaintiff is a non-profit corporation whose basic objective is the promotion of the public health. It aims to make available adequate hospital facilities to people of moderate means, the great middle class, who find it most difficult to meet the cost of hospitalization. Thus large numbers of persons in the community who otherwise might perforce neglect or defer needed care for their bodily ills, to the detriment of the public health, are enabled to procure hospitalization when the need therefor is first manifested. At the same time hospitals, which have been finding it increasingly difficult to balance their annual budgets are, as a result of the plaintiff’s activities, being assured of an increasing flow of paying patients, and thus, with an enhanced financial stability, are being enabled to carry on more effectively their indispensable services to the community. Such being the objective of the plaintiff corporation, it seems to me that it is organized and operated exclusively for charitable purposes within the most obvious and familiar usage of that term.
It is true that the funds of the plaintiff 'corporation are at present derived wholly from fees paid by the annual subscribers rather than from charitable contributions. •This does not seem to me to be significant. A non-proprietary hospital corporation might be formed without any initial endowment from charitable contributions, and might for a time have to meet its operating expenses with income derived solely from fees paid by patients. I would not suppose that the hospital would be on that account any less a charitable corporation. Under the plaintiff’s charter here it is in fact authorized to establish its own hospitals wherewith to supply hospital care directly. The plaintiff is eligible to receive contributions by way of endowment, which might well enable it to extend its services in the promotion of the public health. No doubt it would be glad to receive charitable contributions; but I do not think its classification as a corporation organized and operated for charitable purposes must await the receipt of the first of such contributions.
The plaintiff is substantially distinguishable from a mutual insurance company. Its annual subscribers are not members of the corporation. They have no collective relationship to the corporation, but their rights are defined in their respective individual contracts with the corporation. They are not subject to assessment. If in a given year the demands for hospitalization among the subscribers are such that the cost of the hospital services and plaintiff’s expenses of administration is greater than the amount taken in from fees, the subscribers are nevertheless entitled to the hospital facilities specified in their contracts, without diminution. If, on the other hand, the plaintiff corporation should have an operating profit, as it has in the past, two years, the surplus is not to be divided among the subscribers by way of dividends. The funds of the plaintiff corporation are subject to the cy pres doctrine. See A.L. I. Restatement of Trusts, § 399. Upon dissolution of the plaintiff corporation its funds would have to continue being applied to charitable purposes.
That the Congress, in enacting the Social Security Act, did not expressly exempt corporations operating a nonprofit hospital service plan, does not legitimately warrant the inference that Congress intended such *618organizations not to be exempt from the act. The movement for the establishment of such organizations was then in its infancy and there is no indication that their status was considered by the Congress or its committees at that time. It does seem to me significant that when Congress first had occasion to consider this type of organization specifically, in 1939, it passed an act incorporating “Group Hospitalization, Inc.,” and declared such corporation “to be a charitable and benevolent institution” with all of its funds and property exempt from taxation other than taxes on real estate. 53 Stat. 1412. It would surely be an unintended result if the plaintiff corporation is subject to the social security taxes, while Group Hospitalization, Inc., operating in the District of Columbia in the same general manner, and with the same objective, is exempt. I do not think we can explain away the action of the Congress and the Massachusetts legislature in describing these corporations as “charitable and benevolent” by saying that it was desired to exempt such organizations from taxation even though they were not regarded as charitable corporations in the ordinary accepted sense. A more likely explanation is that the legislative bodies wanted to make it clear that the funds and property of these organizations must continue to be devoted to charitable purposes, thus distinguishing them from mutual insurance companies and similar organizations.