Court Opinion

ID: 9457183
Source: CourtListenerOpinion
Date Created: 2023-08-04 20:14:56.391238+00
Date Added: 2024-06-11T17:35:15.079366
License: Public Domain

SCHNACKE, District Judge
(concurring in part and dissenting in part):
I concur in so much of the opinion of the majority as holds that the Foundation is and was organized exclusively for religious, charitable, or educational purposes within the meaning of Sections 101(6) of the 1939 Code and 501(c) (3) of the 1954 Code. Indeed, the contrary, though urged by the Commissioner before the Tax Court, has not been pressed here.
I respectfully dissent, however, from so much of the opinion as holds that the income of the Foundation is rendered taxable by the feeder organization provisions added as Section 101(6) (b) by the Revenue Act of 1950 and the provisions of Section 502 of the 1954 Code, essentially for the reasons advanced in the majority opinion of the Tax Court, University Hill Foundation, 51 T.C. 548, 559-574.
The court decisions prior to the statutory provisions here involved are exhaustively reviewed by the Tax Court and, to some extent, by the majority opinion, and will be adverted to here only insofar as is necessary to show the-basis of my disagreement with the majority of the Court.
As the Tax Court well said,
“In essence, we are called upon herein to chart a course on the sea of judicial interpretation which will avoid the reefs of judicial legislation.” 51 T.C., at p. 561.
In my view, the majority in this case has run aground upon such a reef.
There can be no doubt that the taxpayer here ingeniously devised and skillfully executed a formula (the “Cote formula”) for the purpose of bringing its operations in buying and selling businesses within the rental exclusion of *710Section 101(6) of the 1939 Code (as amended by the Revenue Act of 1950) and Section 502 of the 1954 Code. This, however, is the beginning and not the end of our inquiry. We must decide whether or not it was successful in achieving its manifest purpose.
In approaching this problem it is well to bear in mind what this Court has said: “* * * the literal meaning of words can be insisted on in resistance to a taxing statute * * * ”, United States v. Armature Exchange, 116 F.2d 969, 971 (9th Cir.), certiorari denied, 313 U.S. 573, 61 S.Ct. 960, 85 L.Ed. 1531. It can scarcely be denied that the Cote formula complies specifically with the letter of the rental provisions of the feeder organization exception.
The “legislative saga,” as the Tax Court called it (51 T.C., at p. 565), of the rental provisions respecting feeder organizations is of little assistance (except in the one respect hereafter noted, which relates to the 1969 amendments, adopted after the decision of the Tax Court herein). It seems clear that Congress had intended to preserve the exempt status of income derived by charitable organizations from the leasing of hotels, apartments and office buildings, together with their incidental furnishings and fixtures, and to preserve exemption of income derived from essentially “passive” investments of charita.ble organizations. The majority directly rejects basing its decision on these concepts of incidental or passive income and Congress did not incorporate them into its amendment, except as they are distilled into the unambiguous language of the feeder amendment. The Congress said in plain words in Sections 502 and 512 that a corporation, even though organized and operated for trade or business at a profit remained exempt under Section 501 if its profits were all payable to an organization, exempt under that section and if all of its income was derived from the rental of its real property (including personal property leased with the real property).
The majority sees fit to state that the Foundation was “beyond any doubt engaged in a business of its own,” colorfully dubbed that of “a used-business dealer” {ante, pp. 704-705). This, I respectfully submit, gets us nowhere, since all charitable organizations deriving profits (as all hope to) from their investments can. in a sense be said to be engaged in a business — the investment business, in which, it might be mentioned, they are in competition with numerous other corporations and private individuals, perhaps unfairly so in the view of some because of their tax advantage.
The question, rather, is whether the Foundation’s business, whatever called, falls within the limits fixed by the statute, the “rental * * * of real property (including personal property leased with the real property.).” The majority has nowhere faced up to this question. If they did, they would have to agree, as the Tax Court found, that the taxpayers’ activities fell squarely within the exemption.
It is entirely incorrect to say, as the majority does, that “The Tax Court applied the destination-of-income test in the instant case * * * ” {ante, p. 703). The Tax Court expressly recognized that one of the main purposes of the 1950 amendments was to repeal the destination-of-income test. 51 T.C., at p. 564. Moreover that test, as applied by the numerous cases cited by the majority, beginning with Roche’s Beach, Inc. v. Commissioner of Internal Revenue, 96 F.2d 776 (2nd Cir.) dealt with the organization’ requirements (as to which the majority here agrees with the Tax Court) and not to the entirely distinct question of the operational requirements introduced by the feeder organization amendments enacted in 1950, which is what this case is all about.
Whether the feeder organization amendments of 1950, including the rental proviso, in the circumstances presented here and as construed by the Tax Court granted “an exemption broader *711than that which previously existed” as the majority says {ante, p. 706), depends, of course, on whether, in the court before which the issue was presented, the Roche’s Beach view or the view of this Court in Ralph H. Eaton Foundation v. Commissioner of Internal Revenue, 219 F.2d 527 (9th Cir.) was followed. It thus borders on hyperbole to say that the views of the Foundation and the Tax Court “stand the feeder organization amendment on its head” {ante, p. 706).
The majority deems to be of no significance to the present case whether the amendments to the leasing proviso made in the Tax Reform Act of 1969, Title I, Sections 121(b) (2) (A) and 121(b) (7), 83 Stat. 487, 538-39, 542, adopting the “incidental” test as to rent from personal property argued for by the Commissioner in this case, and wisely avoided by the majority, reflected Congress’s views of the effect of the 1950 amendments or constituted new law. Admittedly, the 1969 amendments foreclosed future arrangements of Cote type. I cannot agree that the 1969 amendments are of no significance in view of the fact that the Treasury Department, in order to persuade Congress to adopt the 1969 amendments, seemingly conceded that the Cote formula exempted income under the 1950 proviso and thus resulted in a “loophole” for income of feeder organizations which should be closed. In fact, the Department presented to Congress the very facts of the instant case, thinly disguised by the use of letters instead of names, in urging reform in the field of exemption of feeder organizations. Treasury Department Report on Private Foundations, Senate Committee on Finance, 89th Cong., 1st Sess., 31-32 (Comm. Print 1965).
I cannot escape the feeling that running through the majority opinion and, in a sense, dictating its result, is a so-cio-economic philosophy that there was something sinister about the Cote formula, since by ingenious, complex, and somewhat unorthodox arrangements, it managed, if successful, to cause income otherwise taxable to escape taxation by adhering, if the Tax Court and I are right, to the strict language of the taxing statute. Thus the majority refers disparagingly to “trading on its tax exemption” {ante, p. 708) and cites numerous commentators who do not like this sort of thing. The majority seems awed by the success of the Foundation, resulting in impressive profits paid or accumulated for payment to Loyola University, which is, of course, at least in part attributable to the business acumen of its management and is in any event legally irrelevant.
In my view, however, it is well to bear in mind in every tax case Judge Learned Hand’s remark that:
“Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” Helver-ing v. Gregory, 69 F.2d 809, 810 (2nd Cir.).
Or as Lord Sumner, L. J., put it:
“They incur no legal penalties and strictly speaking, no moral censure if, having considered the lines drawn by the Legislature for the imposition of taxes, they make it their business to walk outside them.” Levere v. Inland Rev. Commrs., [1928] A.C. 217, 227.
In my view the clear language of the Code can be circumvented only if the “incidental” or “passive” test is adopted and found to be violated in this case. The majority rejects the former and upholds the Tax Court with respect to the latter. I therefore fail to see how the holding of the majority can be justified.
I would accordingly affirm.