Court Opinion

ID: 9450039
Source: CourtListenerOpinion
Date Created: 2023-08-04 16:33:21.087433+00
Date Added: 2024-06-11T17:32:07.488265
License: Public Domain

*936HAYS, Circuit Judge
(dissenting):
Not only is the majority unable to cite a single authority in support of its conclusion, it is, as I see it, departing from a line of controlling authority firmly established for many years in our own circuit. Nothing in the case before us justifies this break with the past. In fact the equities of the case cry out for the continued application of that construction of the relevant statute which this court has so long followed.
The majority opinion dismisses as hardly worth serious consideration the contention that such activities at Camp Tamiment as the following are social welfare activities:
Weekly lectures on art, music, literature, current affairs, anthropology, psychology and human relations;
Weekly concerts by vocalists and instrumentalists of international reputation;
Daily concerts and lectures on music by a resident professional pianist;
An annual four day music festival featuring outstanding chamber music orchestras and string quartets;
A subsidized experimental theatrical group composed of a professional director, writers, composers, lyricists, arrangers, designers of scenery and costumes, actors, actresses, dancers and others, which produced new and original plays;
A professional orchestra for productions in the theatre;
A resident professional artist and art teacher giving instruction without charge in painting and drawing;
Exhibitions of painting and sculpture with an annual prize for painting.
The question which the majority opinion fails to answer is:
If these and the other activities of the camp were not for social welfare purposes, what was their purpose ?
It is conceded that the camp is not operated for the purpose of earning a profit for any objective except an admittedly social welfare objective. The camp has no such “commercial purpose” as the Supreme Court found in Better Business Bureau v. United States, 326 U.S. 279, 66 S.Ct. 112, 90 L.Ed. 67 (1945). Its operation is not designed to benefit any group “economically.” See Consumer-Farmer Milk Coop. v. Commissioner, 186 F.2d 68 (2d Cir. 1950), cert. denied, 341 U.S. 931, 71 S.Ct. 803, 95 L.Ed. 1360 (1951); American Institute for Economic Research v. United States, 302 F.2d 934 (Ct.C1.1962), cert. denied, 372 U.S. 976, 83 S.Ct. 1109, 10 L.Ed.2d 141 (1963),
To the extent that the camp was operated for “cultural” purposes, i. e. education in art, music, literature, polities, etc., the encouragement of experiment in the theater, and of excellence in music, sculpture and painting, then surely its purposes were social welfare purposes. To what other purpose is to be ascribed its provision of rest and recreation for young people interested in these cultural purposes ? It seems to me to be impossible to find any rational formulation of the purposes of the camp which can be phrased in any terms other than social welfare. It is significant, I believe, that the majority does not even attempt to formulate any alternative.
There is some suggestion in the majority opinion that the activities of the camp cannot be social welfare activities if a charge is made to the participants. This position proves on reflection to be absurd, since it would eliminate from tax exemption universities which charge tuition, hospitals which charge for medical services, art galleries and historical museums which charge admission fees, churches which charge pew rentals, and some examples of almost every other imaginable type of social welfare organization. In fact to concede that the activities of the camp would be social welfare activities if provided free of charge is practically to concede the correctness of petitioner’s position.
But assuming arguendo that the cultural and recreational aspects of the operation of the camp do not have a social *937welfare purpose, then, by clear authority this circuit is bound to the destination test, i. e. the rule that the purpose of the activity is a social welfare purpose if the profits from the operation of the “business” are used for social welfare objectives. Trinidad v. Sagrada Orden, 263 U.S. 578, 44 S.Ct. 204, 68 L.Ed. 458 (1924); Roche’s Beach, Inc. v. Commissioner, 96 F.2d 776 (2d Cir. 1938) ; Bohemian Gymnastic Ass’n Sokol v. Higgins, 147 F.2d 774 (2d Cir. 1945) ; Debs Memorial Radio Fund, Inc. v. Commissioner, 148 F.2d 948 (2d Cir. 1945). See also Willingham v. Home Oil Mill, 181 F.2d 9 (5th Cir.), cert. denied, 340 U.S. 852, 71 S.Ct. 80, 95 L.Ed. 624 (1950) ; Lichter Foundation, Inc. v. Welch, 247 F.2d 431 (6th Cir. 1957); Boman v. Commissioner, 240 F.2d 767 (8th Cir. 1957).
But, says the majority:
“The destination test ought not to be used to permit an entity to escape taxation where, as here, so much of its revenues are devoted to expanding its commercial facilities and increasing its surpluses, and so little of its revenues are actually spent for social welfare activities, that it is factually clear that the primary purpose of the organization is not really the promotion of social welfare but the running of a commercial operation.”
Not only is there no authority whatsoever for any such exception to the destination test, but the majority’s analysis of the situation cannot survive scrutiny. What the majority is saying, in effect, is that no organization can properly be classified as a social welfare organization if it devotes a certain proportion of its income to expanding its facilities, whatever may be the purpose of such expansion. (Eepeated use by the majority of the word “commercial” to describe the operations of the camp should not be permitted to prejudice consideration of the real character of those operations. They are, of course, not “commercial” operations in the ordinary or usual sense of that word since they are not designed for private profit.)
The majority’s analysis is deficient in another material respect. It refers to the proportion of the petitioner’s “revenue” which is devoted to “expanding its * * facilities and increasing its surpluses.” Both here and in the table reproduced on page 931, the argument is presented as if “facilities” and “surpluses” were two separate and distinct items, as if the camp had, in addition to its “facilities” some two million three hundred thousand dollars salted away somewhere in cash. Of course the largest part of petitioner’s “surpluses” is represented by its “facilities.” “Accumulated earned surplus” is merely the bookkeeping item of liability which balances assets.
Moreover, the “revenue” to which the majority refers is the gross revenue before deduction of any expenses. Using gross revenue in this way suggests that the majority would hold that any organization which has a large operation in money terms cannot be a social welfare operation. (The attempt to distinguish the destination cases is largely based on the argument that the operations in those cases resulted in smaller revenues than in the present case.) There is, of course, no justification whatsoever to support such a position. Nothing in the statute or in any of the cases suggests that the size of an operation has any bearing on whether it is a social welfare organization.
If we use the much more significant figure of net operating revenue, that is, gross revenue less expenses of operation, we find that, even excluding cultural programs and activities, the proportion of concededly social welfare expenditures ranges in the years 1956 to 1960 from 53% to 89% (and that it was 53% in 1956, the tax year in question). The following table also shows that if the expenditures for cultural activities are added to the expenditures which are admittedly for social welfare, a very large proportion of operating revenue went for the total of the two purposes.
*9381956 1957 1958 1959 1960
Contributions to Teague for
Industrial Democracy* ? 4,000.00 $ 4,000.00 8 4,000.00 $ 3,000.00 $ 3,000.00
Brandéis University ____ - 2,000.00 — 2,500.00
University of Scranton _ _ _ 100.00
Physical recreation expenditures 28,147.33 22,981.39 27,146.67 31,578.95 24,228.13
Total — “Costs of other activities” 32,147.33 26,981.39 33,146.67 34,578.95 29,828.13
“Cultural programs and activities” per Judge Pierce 82,746.41 87,178.45 97,792.47 91,164.60 10S,071.51
(1) Total excluded by Judge Pierce from “social welfare” expenditures 114,893.74 114,159.84 130,939.14 125,743.55 137,899.64
(2) Operating revenue 119,147.03 232,487.58 276,082.70 258,311.51 219,619.38
(3) Adjusted operating revenue (item (2) less item (1) above) 84,253.29 118,327.74 145,143.56 132,567.96 81,719.74
(4) “Social welfare” expenditures per Judge Pierce $ 44,684.76 $ 70.718.27 $ 78,194.54 $ 83,751.40 $ 72,610.13
(5) Per cent which item (4) is of item (3) above 53 60 54 64 89
Additions to reserves ranged in the years 1956 to 1960 from 4% to 24% of operating revenue. The addition to reserves was 20% of operating revenue in 1956.
The majority seek to find support for their conclusion in the adoption of two statutes by Congress in 1950. The first, now Section 502 of the Code, withdrew exemption from “feeder” organizations. The other, now Section 511 of the Code, imposed a tax on the unrelated business income of certain organizations otherwise exempt from taxation. Admittedly neither of these statutes is applicable to petitioner. Far from lending support to the conclusion reached by the majority, the fact that Congress adopted these statutes to remedy the particular situations with which they dealt, excluding from their application the social welfare organizations described in Section 501(c) *939(4), would seem to support the conclusion that Congress was satisfied with the working of the statute applicable to petitioner and intended no change. However, we need not speculate on the Congressional purpose since the Report of the Committee on Finance on the Revenue Bill of 1950 (Sen.Rep.No.2375, 81st Cong., 2d Sess., 1950-2 Cum.Bull. 483, 504-505) U.S.Code Congressional Service 1950, p. 3080, stated with respect to the statutory amendments:
“It is important to note that many organizations now exempt from income tax under section 101 of the Internal Revenue Code [of 1939] are not affected by these tax measures. * * * These include * * * civic leagues; social welfare organizations; * * *
“ * * * In fact it is not intended that the tax imposed on unrelated business income will have any effect on the tax-exempt status of any organization. An organization which is exempt prior to the enactment of this bill, if continuing the same activities, would still be exempt after this bill becomes law. * * * ”
If we are to look to other statutes for support for one position or the other, the majority’s view that the accumulation of surplus is a ground for withdrawing exemption is dealt a powerful blow by consideration of Section 504 of the Code which expressly provides that exemption shall be denied charitable and educational organizations “if the amounts accumulated out of income during the taxable year or any prior taxable year and not actually paid out by the end of the taxable year — (1) are unreasonable in amount or duration in order to carry out the charitable, educational, or other purpose or function constituting the basis for [their] exemption * * Social welfare organizations are not subject to the provisions of Section 504. The majority is, then, clearly in error in reading the limitations of Section 504 into the section on social welfare organizations. See Erie Endowment v. United States, 316 F.2d 151, 156 n. 21 (3d Cir. 1963).
It seems to me quite clear on the basis of logic and authority, as well as because of the equities of the case with which we are presented, that the decision of the Tax Court must be reversed.

 These contributions were for the education program, among the students, on campuses of universities in this country.