Mutual Aid & Ben. Asso. v. Commissioner

MUTUAL AID AND BENEFIT ASSOCIATION OF FORSTMANN AND HUFFMANN EMPLOYEES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Mutual Aid & Ben. Asso. v. Commissioner Docket No. 20483. United States Board of Tax Appeals 17 B.T.A. 967; 1929 BTA LEXIS 2209; October 16, 1929, Promulgated *2209 1. Petitioner corporation was organized by another corporation for the purpose of carrying out the plans of the latter corporation for welfare work among its employees. In consideration of payments made to it by such corporation, petitioner agreed to furnish such employees with medical and dental service and to pay fixed amounts of sick and death benefits in accordance with the contract between petitioner and such other corporation. The income of petitioner was received from payments made to it by such other corporation under such contract. Held that petitioner is not a corporation organized exclusively for charitable purposes and is not exempt from income tax. Held, further, that payments made to it under contract by such other corporation were income to it. 2. Petitioner and mutual benefit associations distinguished. 3. Distinction drawn between petitioner and charitable enterprises whose beneficiaries are indefinite and without enforceable claim against its funds. 4. Where the liability of a corporation to its so-called "beneficiaries" is definitely fixed by contract without regard to the needs of such beneficiaries, payments made because such beneficiaries*2210 have the right to demand them are not charity. T. G. Haight, Esq., for the petitioner. Hartford Allen, Esq., and Hugh Brewster, Esq., for the respondent. PHILIPS *968 The Commissioner determined a deficiency in income and profits taxes for the fiscal year ending November 30, 1922, in the amount of $961.77, and for the fiscal year ending November 30, 1923, in the amount of $4,790.21. The petitioner brings this proceeding for a redetermination of its tax liability. It is alleged that the Commissioner erred (1) in denying to the petitioner exempt classification under section 231 of the Revenue Act of 1921 for each of the years in question; (2) in including in the petitioner's gross income for each of the taxable years certain amounts received as gifts or contributions, viz, $66,031.60 and $100,609.70, for the fiscal years ending November 30, 1922, and 1923, respectively. FINDINGS OF FACT. The petitioner is a New Jersey corporation with its principal office at 2 Barbour Ave., Passaic, N.J. It was organized November 28, 1921, under an act of the New Jersey Legislature entitled "An Act to incorporate associations not for pecuniary profit" *2211 approved April 21, 1898, and the acts supplementary thereto and amendatory thereof, which do not permit of stockholders or shareholders. The Forstmann & Huffmann Co. is, and during the years in question was, a large manufacturer of woolen and worsted goods and yarns with factories in the vicinity of Passaic, N.J. In 1920 it determined to acquire a tract of land and erect thereon a number of buildings to house those of its employees who could not, on account of a housing shortage, procure adequate dwelling facilities. At the same time it planned to inaugurate certain welfare work for the benefit of its employees. It proposed to establish a system of sick and death benefits for its employees and to furnish them with medical and dental services free of charge. In order to carry out these plans a corporation known as the Forstmann & Huffmann Housing & Welfare Corporation was formed under the General Corporation Act of New Jersey. To this corporation the Forstmann & Huffmann Co. conveyed the real estate which it had acquired for housing purposes and upon which it had erected a number of buildings. It was intended that the Housing and Welfare Corporation*969 should administer*2212 the plan for welfare work. It was found, however, that it was not suited under the New Jersey law to carry out this work and upon advice of counsel it was dissolved and the petitioner was organized to take over the work. The real estate which had been acquired for housing purposes was thereafter conveyed by the Housing & Welfare Corporation to petitioner, and the latter assumed the entire charge of the same and undertook to carry out the welfare work which had been planned by the Forstmann & Huffmann Co. The only consideration paid for the real estate was one dollar, but petitioner assumed the encumbrances which included a bond and mortgage of $186,366. The certificate of incorporation of petitioner provided in part as follows: 2: The purposes for which the corporation is formed are as follows: (a) To acquire, hold and develop real estate for the purposes of providing dwellings and housing facilities for the members of this association and at minimum cost; (b) To lease the said real estate when so acquired and developed, or such parts thereof as may be necessary and proper, from time to time, to the members of this association for dwelling purposes; (c) To provide, manage*2213 and control a sick and death benefit fund and old age pensions for the members of this association, their families and dependents; (d) To operate a co-operative store or stores for the use and benefit of the members of this association, their families and dependents; (e) To provide technical education for the members of this association and their families; (f) And in general to do all such things as may, from time to time, seem expedient and proper to improve the general welfare and living conditions of the members of this association and their families and dependents, and to relieve and alleviate distress and suffering among them. * * * 4: The number of trustees shall be five * * *. 5: The members of the association shall be divided into two classes to be known respectively as Class A and Class B; and the requirements and qualifications for membership in each class shall be prescribed by the by-laws. Any employee (including officers and directors) of the said Forstmann & Huffmann Company who has been in the employ of that company for one year and who shall comply with the requirements and regulations which may be prescribed by the by-laws of this corporation and shall*2214 not be debarred by reason of any provision of the said by-laws, shall be qualified and eligible for membership herein. 6: After the first year of the existence of the corporation, three of the trustees shall be chosen by the Class A members and two of them by the Class B members; PROVIDED, ALWAYS, that at least one of the trustees must be a resident of the State of New Jersey. * * * 8: Upon dissolution of this corporation, all of its property, real or personal, which may remain after the debts and obligations of the corporation shall have *970 been fully paid and satisfied, unless otherwise provided for in the deed or deeds of gift, contract or contracts or other instrument or instruments, respectively, by which such property was acquired by the corporation, shall be at the discretion of the trustees who may be acting as such at the time of dissolution either (1) returned in whole or in part to the corporation or corporations, individual or individuals, respectively, from whom such property was acquired, either in kind or in value (in case other and different property has been substituted for that originally acquired) as near as may be; or (2) shall be divided in whole*2215 or in part among the cities of Passaic, Garfield and Clifton, in the State of New Jersey, respectively, in such proportions as the trustees who are such at the time of said dissolution, may determine, and upon such conditions and under such trusts and provisions as they may designate, provided that the said property must be conveyed to be, and must be used by the said cities respectively for charitable and welfare purposes; or (3) the said property or any part thereof may be transferred by the said trustees to such other charitable agency, body or organization as the said trustees may designate; PROVIDED, however, that any moneys or any part thereof which may have been contributed by way of dues by the members of the association and which may remain unexpended or undisbursed at the time of dissolution shall be returned to the such members, providing they are such at the time of dissolution, if a majority thereof so request, in such proportions and in such way as the said trustees may determine is proper and just. 9: Any and all business which this corporation may engage in in order to carry out the before mentioned purposes for which it is formed, shall insofar as possible, be so*2216 conducted that no gains or profits shall be derived therefrom but if temporarily a profit or profits shall arise from the operation of one or more branches, then the same shall be used as soon as may be to reduce the cost to the members of whatever is furnished to them in that branch or branches, so that the business of the corporation as a whole shall not be operated for gain or profit but exclusively for the benefit of the members in one or more of the ways outlined in the before mentioned enumeration of purposes for which the corporation is formed. The by-laws provided in part as follows: 2. (a) The members shall be divided into two classes to be known respectively as Class A and Class B. (b) Entrance fees and dues shall be paid by all Class A members, and the amounts thereof respectively shall be fixed by the trustees from time to time, provided, however, that for the first year of the existence of the Association, the entrance fee shall be two hundred dollars, and the dues fifty dollars. (c) Entrance fees and dues may be required by the trustees to be paid by Class B members, but the same shall never exceed 10% of the entrance fees and dues to be paid by Class A members. *2217 At the incorporation of the company $2,500 was received from class A members. After the first year no funds were received from class A members. No entrance fees or dues were ever required of class B members. At the first meeting of the incorporators and members of petitioner the following offer from the Forstmann & Huffmann Co. was presented: *971 Nov. 29th, 1921. To Mutual Aid and Benefit Association of Forstmann & Huffmann Employees: Gentlemen: For approximately the last two years, we have been paying either directly, or indirectly through the Forstmann & Huffmann Welfare and Housing Corporation, certain sick and death benefits to our employees, as well as expending moneys for other welfare work among them. In view of the fact that your Association has been formed for the purpose, among others, of paying such benefits to, and doing similar welfare work among your members (who are limited to the employees, including officers and directors of this Company), and will be better equipped and in a better position than we are, or the said Forstmann & Huffmann Welfare & Housing Corporation is, or can be, to handle, supervise, manage, and distribute such benefits among*2218 our employees and do such welfare work; and further, because we wish as many of our employees, as possible, to receive sick and death benefits without expense or cost to themselves, we hereby offer to pay to you quarterly such sums as you may deem necessary (1) to carry out the plan under which we and the Forstmann & Huffmann Welfare & Housing Corporation have been operating for sick and death benefits, (2) to perform the before mentioned welfare work among our employees, and (3) to do such other welfare work among them as you may from time to time deem advisable or proper; provided, however, that the amounts which we shall be called upon to pay in any year shall in no event exceed the sum for which this company could secure sick and death benefit policies from an insurance company of recognized standing carrying to our employees the same benefits as are provided under the before mentioned plan. This offer, however, is made upon the following conditions, viz: (1) That you will undertake the entire supervision, management, distribution and payment of such sick and death benefits to all of our employees who, under the plan which is now, or which may hereafter be in force, are entitled*2219 thereto, irrespective of whether they are members of your Association or not, and will, insofar as is reasonably possible, carry on the welfare work which we have been directly or indirectly doing, as above mentioned. (2) That you will not charge any of your "Class B" members entrance fees or dues without our consent. (3) That the plan and regulations for sick and death benefits under which we and the Forstmann & Huffmann Welfare & Housing Corporation have heretofore been operating shall be continued by your Association (so far as the moneys contributed by us are concerned), except, that the plan and regulations are to be administered by your Trustees alone, or in conjunction with such Committee or Committees as you may appoint for that purpose. (4) That no changes shall be made in said plan or regulations except as aforesaid, unless our consent in writing has been first had and obtained. IT IS UNDERSTOOD that if you accept the offer hereby made, that the resulting agreement may be rescinded by either party upon thirty (30) days notice to the other party of its intention to rescind. Yours very truly, FORSTMANN & HUFFMANN COMPANY, JULIUS FORSTMANN, President. *2220 This offer was accepted and was subsequently approved by the board of directors at their first meeting on November 29, 1921. *972 At the first meeting of the board of directors, rules and regulations regarding the administration of sick and death benefits were adopted. These rules and regulations provided in part as follows: PART I. Any employee of the Forstmann & Huffmann Company, whether a member of this Association or not, including clerical force, who is employed on an hour, day, week or piece basis, if otherwise eligible according to these rules and regulations, shall be entitled to the benefits hereinafter prescribed. * * * PART III. Section 1. An employee shall not receive any benefit for the first six (6) working days of sickness disability, but is entitled to benefit for any fraction of a week consecutive to said six (6) working days not exceeding twenty-six (26) weeks. Sickness Disability Benefit will be paid weekly as follows: (a) For employee whose term of service has been sixty (60) days but less than two (2) years, one-half (1/2) of last average weekly earnings. (b) For employee whose term of service has been more than two (2) years. two-thirds*2221 (2/3) of last average weekly earnings. (c) Married employees will receive not less than $12.00 per week nor more than $30.00 weekly. (d) Unmarried employees will receive not less than $10.00 nor more than $25.00 weekly. (e) Widows with the following dependents: - children, parents, invalid sisters or brothers, will be considered the same as married employees and will receive not less than $12.00 nor more than $30.00 weekly. * * * PART IV. For accidents incurred by employee while engaged in the actual performance of the duties of hos occupation, disability benefits will be paid in accordance with the provisions and subject to the conditions of the Elective Compensation Section of the Workmen's Compensation Act of New Jersey. PART V. Section 1. Death from Sickness (including accidental injury not incurred in actual performance of duties of employee's occupation). (a) Eligibility: All employees of six months' service, shall without any contribution on their part, be eligible to Death Benefits, in accordance with the following plan: (b) Amount of Benefits: The Death Benefits payable under this Section of the Plan, to the beneficiaries and subject to the*2222 conditions provided in subsequent paragraphs of this Section, shall be in accordance with the following table, with a minimum of $500.00 and a maximum of $1,500.00. * * * Section 3. Death from Accident: (Incurred while on duty). For employee without regard to length of service whose death is caused by accidental injury incurred while the employee was engaged in the actual performance of the *973 duties of his occupation, payment will be made in accordance with the provisions and conditions of the Elective Compensation Section of the Workmen's Compensation Act of New Jersey. * * * PART VI. Section 1. The right to benefits under this plan will continue only during the period that the employee is in the service of the Forstmann & Huffmann Company, except as otherwise state herein. No money of the petitioner was paid for the liability of the Forstmann & Huffmann Co. arising under the Workmen's Compensation Act of the State of New Jersey. The Forstmann & Huffmann Co., under said act, carried its own liability insurance for employees injured in line of duty. The compensation to employees so injured was paid by the Forstmann & Huffmann Co. from reserves which it*2223 established for that purpose, and not by petitioner. The only identification required of the employee in order to receive assistance from petitioner was a card showing that he was an employee of the Forstmann & Huffmann Co. and eligible to such assistance. When employees were sick petitioner furnished them medical attention, whether they were eligible for sick benefits or not. It furnished nurses whenever it was necessary. It also furnished dental services to those who required them. The total number of cases treated by petitioner was about 5,000 per annum. In addition, it paid sick and death benefits to between 400 and 500 persons per annum. It maintained one dentist, one resident physician and two nurses. In addition it had arrangements for the services of eight physicians from whom a sick employee could choose the one he desired to attend to him. All this service was without any expense to the employee. The houses which petitioner owned were rented to employees at a less rental than they could obtain similar houses elsewhere. In 1922 petitioner received $66,031.60 from the Forstmann & Huffmann Co. It also received during the year interest on bank deposits, $304.83; *2224 rents, $14,617; and profits from sale of Liberty bonds, $1,770.13. It paid $11,251.37 for expenses and upkeep of the rented dwellings and sustained depreciation thereon of $7,856.25. Payments for doctors, dentists, nurses and hospital expenses totaled $33,000.80. Petitioner set up from income a reserve for sick and death benefits in the amount of $33,115.14. During that year it paid sick and death benefits in the amount of $23,290.59, making a net addition to reserve for sick and death benefits of $9,824.55. During the fiscal year ending November 30, 1923, the petitioner received, from the Forstmann & Huffmann Co., $100,609.70; from interest on bank deposits, $195.35; and from rents, $14,530.83. It paid *974 $10,669.53 for expenses and upkeep of the rented dwellings and sustained depreciation thereon of $7,921.50. Payments for doctors, dentists, nurses and hospital expenses totaled $29,444.07. It added to the reserve for sick and death benefits the amount of $67,300.78. During that year it paid sick and death benefits in the amount of $28,979.07, leaving a net addition to such reserve of $38,321.71. Its purpose in accumulating this reserve was to take care of any*2225 emergency work which might arise. Petitioner claimed exempt classification under section 231 of the Revenue Act of 1921. The Commissioner refused exempt classification to petitioner, included in its income the amounts received by it from the Forstmann & Hoffmann Co., refused to allow as a deduction the net additions to the reserve for sick and death benefits, and accordingly found the deficiencies here in question. OPINION. PHILIPS: The principal issue in this case is whether petitioner is entitled to classification as an exempt corporation under section 231 of the Revenue Act of 1921. An alternative issue arises if it is held that petitioner is not exempt from taxation. Section 231 of the Revenue Act of 1921 provided that the following organizations should be exempt from income tax: (6) Corporations, and any community chest, fund or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual. Petitioner was created by Forstmann & Huffmann Co. for the*2226 purpose of carrying out the plans of that company for welfare work among its employees. It acquired certain land and dwellings, which were rented to such employees substantially at cost. Its greatest source of income was from payments made to it by the Forstmann & Huffmann Co. under a contract whereby petitioner was to furnish dental, medical and hospital services and pay sickness and death benefits to the employees of that company or their beneficiaries. This case is distinguished from those where mutual benefit associations were involved, because practically no portion of its income was derived from payments made by its members. See ; ; and . In such cases we have a group of individuals organized for mutual protection, their respective rights being fixed and enforcible. *975 On the other hand, petitioner is not in the position of these charitable enterprises whose beneficiaries are indefinite and without enforcible claim against its funds. Its beneficiaries*2227 are limited to employees of the Forstmann & Huffmann Co. All of such employees are entitled to the benefits of the plan provided for in the contract between that company and petitioner, whatever their financial condition may be and without regard to any need for charitable relief. What is far more important, the precise extent of the relief to be granted is fixed by that contract. With minor exceptions, petitioner has no power to increase or decrease the relief or benefit which the employees may receive. All of the rights of the parties concerned, including those of the so-called donor and beneficiaries, were fixed by contract. In this material respect the case is different from , and , relied upon by petitioner. The briefs of the parties and our examination of authorities fails to disclose any case in which the courts have passed upon the character of a corporation such as the petitioner. That the purposes served by petitioner were benevolent is beyond question, but not all benevolences are charities. *2228 ; ; . It is probably unimportant that the contract between the Forstmann & Huffmann Co. and petitioner required that funds of petitioner be used among its employees. Such a limitation upon the class of beneficiaries was imposed in The important fact is that the liability of petitioner to each employee for sick and death benefits was definitely fixed without regard to needs of the employee or his dependents. Payments made because the payee has the right to demand them can not be classified as charity. See ; . In our opinion petitioner more nearly resembles a benefit association than a charitable corporation. We approve the action of the respondent in denying exemption from tax. In reaching our conclusion we have not found it necessary to discuss the effect of those provisions of the charter of petitioner which provide for the distribution of its funds on dissolution, *2229 and from which it appears that the Forstmann & Huffmann Company might have received any such funds. Such provision, considered in connection with the control which the Forstmann & Huffmann Co. unquestionably exercised over petitioner, raises a serious doubt whether its excess funds did not inure to the benefit of that company. See . It is claimed that the payments made by the Forstmann & Huffmann Co. to petitioner during the taxable years were gifts and not *976 a part of the gross income of the petitioner. It is urged that petitioner paid nothing and gave no consideration to the company for these monies. This does not appear to be the case. The consideration for these payments was the promise of the petitioner to continue to carry out the plan which the company had devised for the benefit of its employees; a consideration which was undoubtedly of benefit to the Forstmann & Huffmann Co. The burden assumed was more than that which is imposed on a charitable corporation to apply its funds for the purposes specified in its charter or the deed of gift. Petitioner undertook not merely to furnish relief to*2230 the sick, but to pay stated amounts of sick and death benefits to all employees who became entitled to them under its plan and its contract with the Forstmann & Huffmann Co. In effect, petitioner was, in one of its most important aspects, nothing more than a corporation writing group insurance for the employees of a certain business, the premium being paid by the employer. We are of opinion that the payments made represent a part of the gross income of petitioner. Stress is laid upon the fact that petitioner was without stockholders and organized under a statute providing for corporations other than those for pecuniary profit. The same would be true of most associations organized on the mutual plan, but it does not follow that such corporations are exempt from taxation or that they can not have a taxable income from operations or that no part of their profits inures to the benefit of any individual. Reviewed by the Board. Decision will be entered for the respondent. SMITH dissents.