Court Opinion

ID: 4614059
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:54:48.713727+00
Date Added: 2024-06-11T07:54:43.127988
License: Public Domain

ALFRED T. DAVISON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Davison v. CommissionerDocket Nos. 40749, 47723.United States Board of Tax Appeals21 B.T.A. 251; 1930 BTA LEXIS 1885; November 10, 1930, Promulgated *1885  1.  Contributions to an incorporated literary society, organized for the "intellectual and moral improvement of its members," held note deductible under section 214(a)(10)(B), Revenue Acts of 1924 and 1926, on the ground that the moral and intellectual improvement of its members was derived not only from literary and educational activities, but also by their living and eating together and otherwise enjoying social intercourse, and the contributions more importantly affect the social and living aspects of a fraternity (not per se within the statute), whose members automatically become members of the society and whose financial operations were interwoven with those of the society, than the literary aspects of the society.  2.  An amount paid for the assignment of a lease containing an option to purchase the leased property may not be amortized by the assignee out of the rent received from his subtenant, where the principal object of the assignee was to acquire the option and the evidence affords no basis upon which the price paid for the assignment may be apportioned between the rights as lessee and the rights as owned of the option.  3.  Nor may the price so paid be treated*1886  as cost of depreciable property constructed by the assignor, since the assignee, as lessee, was not the owner of such property.  Alfred T. Davison, Esq., pro se.  Ralph S. Scott, Esq., for the respondent.  STERNHAGEN *251  These proceedings involve deficiencies in income tax of $437.49 for 1925 and $134.29 for 1926.  Petitioner seeks to deduct from gross income contributions to an alleged educational corporation and rents received under an assigned lease contract containing an option for purchase of the property leased.  FINDINGS OF FACT.  Petitioner is an individual residing at Freeport, Nassau County, N.Y.  1.  In 1925 he contributed to the Adelphic Literary Society $1,000, which was solicited primarily for the erection of a hall on the campus of Wesleyan University, Middletown, Conn.  In 1926 he made a similar contribution of $250, and gave $10 more to make up a *252  deficiency in the society's expenses for that year.  In both years the Commissioner disallowed the deduction of these contributions in computing petitioner's income tax liability.  The Adelphic Literary Society of Wesleyan University was incorporated in 1881 under*1887  the laws of Connecticut "for the purpose of the intellectual and moral improvement of its members." Prior to 1913 those members who were undergraduates roomed and boarded in an old three-story building situated on the university campus and owned by the society.  They held literary meetings in a room on the third floor, which was hot in summer and cold in winter.  Thereafter this building was remodeled, and an addition built including a large hall in which the undergraduate members of the society met weekly for reading their literary productions, and a general meeting of undergraduate and alumni members occurred twice yearly.  The use of this hall was also granted to the faculty of the university for meetings and for the reception of distinguished visitors.  To these latter functions the whole college community was invited.  Undergraduate members of Alpha Delta Phi, an intercollegiate fraternity, automatically become members of the Adelphic Literary Society, and the membership and financial operations of the two are so closely interwoven that they are scarcely capable of any distinction.  The right to room and board in the society's building is restricted to its members, and the expenses*1888  of operation are assessed against those making use of such facilities, no profit ever being made from the building.  At times, however, the assessments collected fall below expenses, and contributions are then solicited to make up the deficit.  The society's graduate members appoint a committee which supervises the undergraduates' finances, behavior and new membership policy, and acts generally in a supervisory capacity.  2.  In December, 1923, petitioner procured for $8,000 the assignment of a contract covering property known as 16 and 18 West Merrick Road, Freeport, Nassau County, N.Y.  By the terms of this contract the property was leased for two years on July 7, 1921, to George E. Wheeler.  The lessee was also given a right of renewal for an additional three years at a monthly rental of $200 and an option to purchase the property for $28,500.  Petitioner received this contract by assignment from Matt Laub and Edith Hultz, to whom it had been previously assigned by the original lessee.  At the time of the assignment to petitioner the property had been improved at considerable expense and was advantageously sublet for a monthly rental above the $200 specified in the original*1889  contract.  In 1924 petitioner realized from it a net profit of $1,876.10.  For the year 1925 petitioner's receipts from the property were $4,345.10 and *253  his expenses $2,590.88, including the $200 monthly rental, which he assumed.  There resulted a net profit of $1,754.22.  In computing his income-tax liability for 1925 the Commissioner taxed as income $863.63 of this profit, said amount representing one-third of petitioner's expenses incurred in producing it.  Petitioner's only object in the purchase of the contract was to secure the option to purchase the property for $28,500.  OPINION.  STERNHAGEN: 1.  The amounts contributed by petitioner to the Adelphic Literary Society in 1925 and 1926 are claimed by him to be deductions under section 214(a)(10)(B), Revenue Acts of 1924 and 1926 as "contributions or gifts made within the taxable year to or for the use of * * * (B) any corporation, or trust, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, * * * no part of the net earnings of which inures to the benefit of any private stockholder or individual." But we think it clear*1890  that the corporation was both organized and operated for purposes broader than those described by the restrictive language of the statute.  The intellectual and moral improvement of its members goes far beyond any or all of the adjuctives of the act, to say nothing of the rigid boundaries of the terms fixed by the word "exclusively." The moral and intellectual improvement of the members is derived not only from literary and educational activities, but also by their living and eating together and otherwise enjoying social intercourse.  The members are also members of Alpha Delta Phi fraternity.  The fraternity is not per se within the statute, ; ; , and the petitioner testified that it was practically impossible to separate the financial operations of the society from those of the fraternity.  From such evidence as is in the record the social and living aspects of the fraternity are far more importantly affected by these contributions than the literary aspects of the society, and hence the situation is within the caveat of *1891 . The deductions are in our opinion properly disallowed.  2.  The respondent added to petitioner's income $863.63 of the total profit of $1,754.22 derived by petitioner in net rent from subletting the Freeport property.  At the hearing respondent claimed an increased deficiency by the addition to gross income of the full amount of $1,754.22 instead of the $863.63.  He was permitted, by virtue of Revenue Act of 1926, section 274(e), to make the claim.  The petitioner had a twofold relation to the property by virtue of his purchase of the contract; he was a lessee required to pay rent of $200 a month and he was the holder of an option to purchase for *254  $28,500.  He paid $8,000 for these rights in 1923.  If there had been no option, petitioner might perhaps have amortized the $8,000 over the term of his lease.  But he testified that the option was to him the important feature for which he paid.  How to measure its importance by an apportionment is not furnished by the evidence.  The $8,000 can not, therefore, be amortized out of the rent received from his subtenant.  Nor may petitioner, as he urges, treat the $8,000 as cost*1892  of depreciable property constructed by his assignor; for these he did not own, and as lessee he has no deduction in respect of them.  . The net amount of $1,754.22 received in 1925 was clearly income and should have been so returned.  The deficiency should be increased accordingly.  Reviewed by the Board.  Judgment will be entered under Rule 50.SEAWELL SEAWELL, dissenting: I dissent on the first point.  An "educational" purpose will take care of "intellectual" improvement and a "religious" and "charitable" purpose is all-sufficient for the "moral" improvement.  To say that one's contribution to a church building fund is not religious because forsooth church suppers and church socials will be held in the house when completed is to leave no room for the cambium between the bark and the wood of the tree.