Rike v. Commissioner

FREDERICK H. RIKE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Rike v. Commissioner Docket No. 24335. United States Board of Tax Appeals 18 B.T.A. 149; 1929 BTA LEXIS 2110; November 11, 1929, Promulgated *2110 A corporation organized and operated solely for the purpose of providing annuities for superannuated or disabled secretaries of the Y.M.C.A., which derives its funds from public contributions and from voluntary contributions by associations and employees of the Y.M.C.A., no part of the net earnings of which inures to the benefit of any private shareholder or individual, is an exempt corporation as defined in section 231 of the Revenue Act of 1921, and contributions thereto by an individual are deductible under section 214(a)(11) of the Revenue Act of 1921. Henry J. Richardson, Esq., for the petitioner. Frank S. Easby-Smity, Esq., for the respondent. LANSDON *149 The respondent has asserted a deficiency in income tax for the year 1922 in the amount of $74.40. The single issue presented for determination is whether a contribution of $125 to the Young Men's Christian Association Retirement Fund, Inc., is deductible under section 214(a)(11) of the Revenue Act of 1921. *150 This proceeding was consolidated for hearing with the Young Men's Christian Association Retirement Fund, Inc., Docket Nos. 36261 and 41599. FINDINGS OF FACT. *2111 The petitioner is an individual residing at 403 West First Street, Dayton, Ohio. During the taxable year petitioner contributed $125 to the Young Men's Christian Association Retirement Fund, Inc. At the time of such donation the Dayton Y.M.C.A. was conducting a drive in that city to raise its share of a $4,000,000 fund needed as a reserve in order to start operations of the Young Men's Christian Association Retirement Fund. Petitioner's contribution, together with other contributions or donations, does not exceed 15 per cent of his net income for such year. The Young Men's Christian Association Retirement Fund was created by the following special act of the Legislature of New York: AN ACT to incorporate the Young Men's Christian Association Retirement Fund, for the benefit of employed officers of the Young Men's Christian Association after their retirement from active service. The People of the State of New York, represented in Senate and Assembly, do enact as follows: SECTION 1. F. Wayland Ayer, James H. Post, Sereno P. Fenn, Lucien T. Warner, Gerald W. Birks, John R. Mott, L. Wilbur Messer, Alfred E. Marling and Raymond P. Kaighn, and their successors, are hereby*2112 created a body corporate by the name The Young Men's Christian Association Retirement Fund. § 2. The purpose of such corporation shall be to establish and maintain a retirement fund for the benefit of those who have been employed officers of any Young Men's Christian Association when they shall have retired from active service and who become eligible to the benefits of the said fund under the conditions to be established by the board of trustees of the corporation created by this act. § 3. The corporation hereby created shall have power to take and hold, by bequest, devise, gift, purchase or lease, either absolutely or in trust for any of its purposes, any property, real or personal, without limitation as to the amount or value, except such limitation as the legislature shall hereafter impose; to convey such property and to invest and reinvest any principal and deal with and expend the principal and income in such manner as in the judgment of the board of trustees will best promote its objects. The persons named in section one of this act, or a majority of them, shall hold a meeting and organize the corporation and adopt a constitution and by-laws not inconsistent with the*2113 constitution and laws of this state, which constitution from time to time shall be subject to amendment. The constitution and by-laws shall prescribe the number of trustees by whom the affairs and business of the corporation shall be managed, the qualifications and powers of said trustees and any other provisions for the management and disposition of the property and regulation of the affairs and fulfillment of the objects of the corporation which may be deemed expedient. *151 § 4. Such corporation is not established and shall not be maintained or conducted for pecuniary profit and shall have the status of a religious, educational or benevolent corporation. None of its trustees, officers, members of employees shall receive any pecuniary profit from the operation thereof, except reasonable compensation for services in effecting one or more of its purposes. It shall be subject to the provisions of sections thirty-nine and forty-five of the insurance law and the amendments thereof so far as the same are applicable hereto and are not inconsistent with the provisions of this act. § 5. This act shall take effect immediately. In 1911 a commission of the Y.M.C.A. secretaries*2114 met and considered the need of a retirement plan. They prepared and filed a report with the convention of the Y.M.C.A. which met in Cincinnati in 1913, and a series of resolutions was passed by that body recommending the plan and appointing a Board to investigate the feasibility of creating and maintaining such a retirement fund. A convention in 1916 endorsed the progress made, but due to the war no further action was taken until 1919. At the Y.M.C.A. convention in 1919 the trustees were authorized and directed to take such steps as were necessary to raise the required fund and acquaint brother secretaries of the purposes and intended workings of the retirement plan. In order to have the fund start off at a definite date without working a hardship on the older men it was necssary to accumulate an amount, known as the accrued liability fund, to provide for the years which the older men had already spent in service. As of January 1, 1920, it was estimated on an actuarial basis that a reserve of $4,000,000 would be necessary to start off the retirement annuities. While they were attempting to collect that amount by popular subscription a business depression came, and by July 1, 1922, when*2115 the $4,000,000 had been raised, an additional amount of $1,700,000 was needed. This additional sum was subscribed by various associations of the Y.M.C.A. The board of trustees adopted a constitution and by-laws and started operation of the retirement fund on July 1, 1922. The material provisions of the constitution and by-laws are as follows: CONSTITUTION Article I. SEC. 2. The object of this Fund shall be to provide certain benefits to secretaries of the Young Men's Christian Association who retire from active service and are eligible to the benefits of the Fund under the conditions described in the By-Laws. Article II. SEC. 5. The Board of Trustees is empowered to make by-laws for the operation of the Fund in accord with the Retirement Fund Plan as approved by the International Convention of 1919 and not inconsistent with this Constitution. *152 BY-LAWS Section 1. 3. "Association" shall mean any Young Men's Christian Association organization * * * 4. "Secretary" shall mean any (male) person with the status of a full-time salaried officer employed by an Association as described in standing resolutions adopted by the Retirement Fund Board*2116 from time to time. 5. "Participating Association" shall mean any Association which provides through payments to the Retirement Fund for Association Annuities to any or all of its participating Secretaries and has been so recorded by the Retirement Fund Board and whose payments are not more than six months in arrears. 6. "Participating Secretary" shall mean any Secretary who elects to make the payments required by the Retirement Fund and has been so recorded by the Retirement Fund Board, and whose personal or association payments are not more than six months in arrears. 8. "Prior Service" shall mean all service, as a Secretary, rendered prior to the formal establishment of the Retirement Fund, on July 1, 1922, which shall be certified in a Prior Service certificate and allowable as provided in Section 7 of these by-laws. 9. "Subsequent Service" shall mean all service, as a Secretary, which shall be rendered after July 1, 1922, and before the Secretary has attained age sixty and on account of which the Association payments to the Retirement Fund shall have been made. 12. "Accumulated Secretarial Payments" shall mean the total of the amounts paid*2117 by a Participating Secretary, together with regular interest thereon, standing to his credit in the Secretaries Savings Account. Section 2. July 1, 1922, shall be considered the date on which the Retirement Fund was formally established by action of the Retirement Fund Board, * * * Section 3. Participants in the Retirement Fund shall consist of: 1. Associations which have entered into agreement with the Retirement Fund Board to have any or all of their Secretaries covered by the provisions of the Retirement Fund and which have made all the required payments. 2. Secretaries who have entered into agreement with the Retirement Fund Board and passed the medical or other examinations required by said Board and who have made all the required payments. SECTION 4. 1. The members of the Retirement Fund Board shall serve without compensation as members of the Board, but may be reimbursed from the Expense Account for any necessary expenditures incurred in service on said board. 2. The Retirement Fund Board shall elect from its membership a chairman and a treasurer, and shall appoint a secretary, an actuary, an attorney, an auditor and such medical, clerical and other*2118 employees as may be necessary. 3. The compensation of all employees of the Retirement Fund Board shall be fixed by said Retirement Fund Board. *153 Section 5. 1. The Retirement Fund Board shall have full power to invest and reinvest all money in any of the accounts of the Retirement Fund, subject, however, to such limitations and restrictions as are imposed by law upon life insurance companies of New York State in the making of investments of their reserve funds, so far as the same are applicable. * * * 2. The Retirement Fund Board shall credit to the Associations Reserve Account the interest, dividend, and other earnings from all invested funds. It shall transfer from the Associations Reserve Account to the credit of the Secretaries Savings Account and the Annuity Reserve Account regular interest on the balances of these respective accounts. 5. Except as herein provided, no member and no employee of the Retirement Fund Board shall have any interest, direct or indirect, in the gains or profits of any investment made by the Retirement Fund Board, nor as such, directly or indirectly, shall receive any pay or emolument for his services. No member and no employe*2119 of said Retirement Fund Board, directly or indirectly, for himself or as an agent or partner of others, shall borrow any of its funds or deposits, or in any manner use the same except to make such current and necessary payments as are authorized by the Retirement Fund Board; nor shall any member or employee of said Retirement Fund Board become an endorser or surety or in any manner an obligor for moneys loaned or borrowed of said Retirement Fund Board. Section 6. The assets of the Retirement Fund shall be credited, assording to the purpose for which they are intended, to one of four accounts; namely, (1) the Associations Reserve Account, (2) the Secretaries Savings Account, (3) the Annuity Reserve Account, or (4) the Expense Account. 1. The Associations Reserve Account shall show all payments made by the Participating Associations and all other moneys which are held in reserve to pay Association Annuities. Each Participating Association shall pay monthly, or at such other intervals as agreed upon with the Retirement Fund Board, to the treasurer of the Retirement Fund Board, on behalf of each Participating Secretary in its employ, an amount equal to such percentum of*2120 such Participating Secretary's salary including bonus as shall be certified by the Retirement Fund Board as necessary to procure for him at the time of retirement the Association Annuity which would be payable to him on account of subsequent service. * * * In addition to the above payments on behalf of Participating Secretaries, there shall be credited to the Associations Reserve Account all gifts, donations, legacies or other moneys payable or which shall become payable to the Retirement Fund Board for the payment of accrued liabilities or for any other purpose not otherwise provided for. * * * 2. The Secretaries Savings Account shall show the Accumulated Secretarial Payments from the salaries of Participating Secretaraies. Each Participating Secretary shall pay monthly, or at such other intervals as agreed upon with the Retirement Fund Board to the treasurer of the Retirement Fund Board, such percentum of his salary as shall be computed by the actuary to be sufficient with Regular Interest to provide for him on retirement, at age 60, a Secretary's Annuity equal to three-quarters of one percentum (0.75%) of his Final Salary multiplied by the number of years of his service*2121 as a Participating Secretary after the formal establishment of the Retirement Fund. * * * 3. *154 The Annuity Reserve Account shall show the reserves on annuities payable to retired Secretaries or their families. Upon the retirement of a Secretary there shall be transferred to the Annuity Reserve Account (a) from the Secretaries Savings Account a credit of the amount of the Accumulated Secretarial Payments and (b) from the Associations Reserve Account a credit of an amount equal to the Association Annuity Reserve. All annuities when paid shall be charged to this account. * * * 4. The Expense Account shall show such amounts as are credited to the Retirement Fund for the payment of administrative expenses. * * * Section 8. 1. Should a Participating Secretary at any time be required to discontinue his services as a secretary as a result of circumstances beyond his control, or should a participating Secretary after one year or more of Subsequent Service and Secretarial Payments, voluntarily terminate his service as a Secretary, or desire to discontinue as a participant in the Retirement Fund, he shall be paid on demand (a) the full amount of his Accumulated*2122 Secretarial Payments or, in lieu thereof, should he so elect, (b) an annuity or a deferred annuity which shall be the actuarial equivalent of said Accumulated Secretarial Payments. 2. Should a Participating Secretary die and before retirement, his Accumulated Secretarial Payments shall be paid to his estate or to such person or persons as he shall have nominated by written designation duly executed and filed with the Retirement Fund Board. Section 11. Any Participating Secretary who is sixty years of age or over may retire as a Secretary of the Young Men's Christian Association by filing with the Retirement Fund Board a written statement, duly attested, setting forth at what time subsequent to the execution and filing of said application he desires to cease to be an Association Employed Officer. The filing of said application on forms provided by the Retirement Fund Board shall automatically retire said Participating Secretary at the time specified. Section 12. 1. On Regular Retirement a Participating Secretary shall receive a Retirement Allowance which shall consist of: a. A Secretary's Annuity, which shall be the actuarial equivalent of his Accumulated Secretarial*2123 Payments, and b. An Association Annuity of three-fourths of one percentum of his Final Salary for each year of Subsequent Service, and c. A further Association Annuity of one and one-half percentum of his Final Salary for each year of Prior Service certified on his Prior Service certificate provided his Association Service has been continuous from the date of the formal establishment of the Retirement Fund, on July 1, 1922. There is no physical examination required of secretaries in order to participate in the benefits. The Young Men's Christian Association Retirement Fund was organized and has been operated primarily as an aid to the Y.M.C.A. Before its creation the Y.M.C.A. had lost 55 per cent of the men who entered the work as secretaries within the first two years, and *155 80 per cent of such men during the first five years. Men specially adapted to Y.M.C.A. work were taken from the service by more lucrative offers of employment when they were at the peak of their ability, largely due to the dread of dependence in old age. After the creation of the Retirement Fund the turnover of employed secretaries dropped approximately 13 per cent per year. The Young*2124 Men's Christian Association Retirement Fund, Inc., is not a stock corporation and has no capital stock and no stockholders. Its income consists of interest on investments and contributions. Under the methods by which it now operates there is no need for outside contributions. The income from the principal amount plus the payments of the associations and secretaries being sufficient to care for the retirement annuities. The parties have stipulated that the Y.M.C.A. is and was during the taxable year a corporation organized and operated exclusively for religious, charitable or educational purposes, and that it has been exempted from income tax under the provisions of section 231(6). OPINION. LANSDON: Section 214(a)(11) of the Revenue Act of 1921 provides in part as follows: That in computing net income there shall be allowed as deductions: * * * (11) Contributions or gifts made within the taxable year to or for the use of: * * * (B) any corporation, or community chest, fund, or found ation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including posts of the American Legion or the women's auxiliary units*2125 thereof, 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; * * * to an amount which in all the above cases combined does not exceed 15 per centum of the taxpayer's net income as computed without the benefit of this paragraph. * * * We have held that the Young Men's Christian Association Retirement Fund, Inc., is an exempt corporation under the provisions of section 231 of the Revenue Act of 1926. . Section 231 of the Revenue Act of 1921 contains substantially the same provisions as section 231 of the Revenue Act of 1926. Pursuant to our decision in that case, which is controlling here, the petitioner is entitled to deduct $125 under the provisions of section 214(a)(11), above, in computing his taxable income for the year 1922. Reviewed by the Board. Decision will be entered under Rule 50. SMITH, STERNHAGEN, and TRAMMELL concur in the result only. MURDOCK *156 MURDOCK, dissenting: I dissent for reasons which will be apparent from a reading of my dissent*2126 in Young Men's Christian Association Retirement Fund, Inc.,18 B.T.A. 139.