Produce Exchange Stock Clearing Asso. v. Commissioner

PRODUCE EXCHANGE STOCK CLEARING ASSOCIATION, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Produce Exchange Stock Clearing Asso. v. Commissioner Docket No. 62105. United States Board of Tax Appeals 27 B.T.A. 1214; 1933 BTA LEXIS 1214; April 26, 1933, Promulgated *1214 A corporation organized for the clearance of contracts made on the New York Produce Exchange is held not to be a "business league" exempt from income tax. Allen H. Gardner, Esq., for the petitioner. I. Graff, Esq., for the respondent. SMITH *1214 This is a proceeding for the redetermination of a deficiency in income tax for 1929 in the amount of $368.50. The petitioner contends *1215 that it is exempt from income tax under the provisions of section 103(7) of the Revenue Act of 1928 and that it is not liable for any deficiency in income tax for 1929 but is entitled to a refund of tax paid in the amount of $4,264.22. FINDINGS OF FACT. The petitioner was organized under the laws of the State of New York and has its office at 2 Broadway, New York City. The New York Produce Exchange was incorporated in 1862, and until 1928 it afforded facilities to its members for the exchange of commodities. The formation of the petitioner was occasioned by a decision on the part of the New York Produce Exchange to afford facilities to its members for dealing in securities as well as commodities on that exchange. The petitioner was, therefore, *1215 organized in November 1928, pursuant to Article II of the Stock Corporation Law of that state for the purpose of aiding those trading in securities listed on the exchange in clearing the securities and the payment therefor. Purposes for which the petitioner was formed, as stated in its articles of incorporation, are as follows: SECOND: The purposes for which it is to be formed are to provide members of the New York Produce Exchange and other persons, firms and corporations for whom it may act with facilities for clearing contracts between them and for delivering stocks and securities to and receiving stocks and securities from each other and for procuring the transfer of stocks and securities upon the books of the corporations or associations issuing the same and for procuring the exchange of any stocks or securities for any other stocks or securities and for receiving or paying any amounts payable to or payable by such members, persons, firms and corporations in connection with any of the foregoing transactions or in connection with any loans made by or to them; to act for such of the members of the New York Produce Exchange and such other persons, firms and corporations as shall*1216 employ it upon terms and conditions satisfactory to it, as agent, in clearing contracts between such members, persons, firms and corporation and in delivering stocks and securities to and receiving stocks and securities from such members, persons, firms and corporations and in procuring the transfer of stocks and securities upon the books of the corporations or associations issuing the same and in procuring the exchange of any stocks or securities for any other stocks or securities and in receiving from and paying to such members, persons, firms and corporations any amounts payable to or payable by them in connection with any of the foregoing transactions or in connection with any loans made by or to them; to enter into all such contracts and to do all things necessary or proper to carry out the foregoing purposes. The petitioner's entire capital stock consisted of 250 shares of $100 par value each and was issued to the New York Produce Exchange for cash. The purpose of the stock issue was to provide an amount with which to commence the activities of the petitioner. The petitioner entered upon its activities as a clearing house for *1216 those trading in securities in December*1217 1928, and has continued in that capacity to the present date. These functions are carried on in the following manner: A given broker may, in the course of a day's trading, make several purchases and sales in a particular stock for his customers. This broker will later make up a clearing sheet showing the various transactions in the stock on the day in question and, if the number of shares sold should, for example, exceed those purchased by 100 shares, he will forward to the petitioner a ticket showing his agreement to deliver 100 shares of the stock to such broker as the petitioner may designate. Some other broker (with whom the first broker may have had no transactions) has purchased 100 shares more of the same stock than he has sold on that day and discloses this fact and his right to receive 100 shares of the stock upon a similar ticket filed with the petitioner. The petitioner then directs the first broker to deliver 100 shares of the stock to the second broker, which is done by manual delivery. In this manner the first broker makes only one delivery of the given stock when, if it were not for the clearing process, he would be required to make a delivery for each sale and*1218 receive stock on each purchase. The payments are cleared in a similar manner. Brokers who have more money to receive than to pay out on the day's transactions draw drafts on the petitioner; those who have a net amount to pay send their checks to the petitioner. This obviates the need for settlement between each broker on each transaction. The advantages of this clearing process are open to those known as "clearing members." Persons who are members of the New York Produce Exchange, firms having a partner who is a member of that exchange, and members of the New York Stock Exchange and the New York Curb Exchange, who have registered in accordance with the rules for dealing in securities of the New York Produce Exchange, in general, those who have an interest in trading in the securities listed on the Produce Exchange, are eligible to become "clearing members." For these clearing services the members pay a small fixed charge which is uniform as to everyone. The amount of the charge was originally determined with a view to balancing receipts and expenses. During the few weeks of operation in 1928 the expenses exceeded the receipts, but in 1929, the taxable year here involved, *1219 the receipts exceeded expenditures by $39,914.20. This was neither desired nor anticipated, but was occasioned by the phenomenal amount of the security trading in that year and by the large amount of interest received from banks on balances. In order to realize the purpose of the petitioner of furnishing services at cost, the fees were reduced on three different occasions, namely, in May 1929, *1217 May 1930, and September 1930, with the result that since the year 1929 the current expenses for each year have exceeded receipts and the surplus created in 1929 was appropriated to meet the deficit. The receipts based upon the reduced fees were not expected to equal operating expenses and this condition of current expenses exceeding current receipts is expected to continue until the surplus realized in 1929 is absorbed, when it is intended to increase the fees to such extent that the receipts will balance expenses. In addition to the fees for clearing services, which constitute the principal source of revenue, the petitioner also receives interest on bank deposits and small amounts in fines. In the year 1929, the petitioner received clearance fees of $56,547.56, interest on*1220 bank deposits of $21,535.43, and fines in the amount of $405. No provision is made in the articles of incorporation or the bylaws for the payment of dividends on the capital stock and no dividends have ever been paid by the petitioner. The petitioner has the usual corporate officers and directors. They do not give a great amount of time to the affairs of the petitioner and receive no compensation. In 1929, in addition to the officers, the petitioner had about 10 employees, including the manager and assistant manager, who received compensation in that year of $25,256.08. The petitioner filed a corporation income tax return for the year 1929 with the collector for the second District of New York, on April 14, 1930, which showed a net income, after the deduction of a net loss for the prior year of $1,148.58, of $38,765.62, and a tax liability of $4,264.22, which was paid in 1930. OPINION. SMITH: The petitioner claims to be exempt from income tax for the year 1929 under section 103 of the Revenue Act of 1928, which provides in part as follows: SEC. 103 EXEMPTIONS FROM TAX ON CORPORATIONS. The following organizations shall be exempt from taxation under this title - *1221 * * * (7) Business leagues, chambers of commerce, real estate boards, or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual. Article 528 of Regulations 74, promulgated under the Revenue Act of 1928, provides as follows: ART. 528. Business leagues, chambers of commerce, real estate boards, and boards of trade. - A business league is an association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit. It is an organization of the same general class as a chamber of commerce, *1218 or board of trade. Thus its activities should be directed to the improvement of business conditions or to the promotion of the general objects of one or more lines of business as distinguished from the performance of particular services for individual persons. An organization whose purpose is to engage in a regular business of a kind ordinarily carried on for profit, even though the business is conducted on a cooperative basis or produces only sufficient income*1222 to be self-sustaining, is not a business league. An association engaged in furnishing information to prospective investors, to enable them to make sound investments, is not a business league, since its activities do not further any common business interest, even though all its income is devoted to the purpose stated. A stock exchange is not a business league, a chamber of commerce, or a board of trade within the meaning of the law and is not exempt from tax. It is apparent that to be exempt from income tax the petitioner must be (1) a business league, chamber of commerce, real estate board, or a board of trade; (2) not organized for profit; and (3) an organization no part of the net earnings of which inures to the benefit of any private stockholder or individual. Manifestly the petitioner is not a chamber of commerce, real estate board, or board of trade, as those terms are ordinarily understood. We are also of opinion that it is not a business league within the contemplation of the statute. It is to be noted that the term "business league" is used in connection with the words "chamber of commerce, real estate board, or board of trade." By the familiar doctrine of noscitur*1223 a sociis a business league must have the general characteristies of a chamber of commerce, real estate board, or board of trade to be exempt from tax. We commented upon this fact in , and held that since that organization did not have the general characteristics of a chamber of commerce, etc., it was not exempt from tax. Our decision in that case was affirmed by the , and certiorari was denied, . We further stated our conception of a "business league" in , which we held exempt from income tax. Generally speaking, our conception of a business league exempt from income tax is an association of business men or of business enterprises, incorporated or unincorporated, which has for its purpose the furtherance of the interest of its members by way of the furnishing of information to its members, or the performance of services which are not ordinarily carried on by businesses for profit, and which is not organized for profit and no part of the net earnings of which*1224 inures to the benefit of any private shareholder or individual. It is furthermore to be noted that the statute provides for the exemption of business leagues, etc., "not organized for profit." The petitioner was incorporated under the Stock Corporation Law of the State of New York, Article II, section 5 of which provides that "three or more persons may become a stock corporation for any *1219 lawful business purpose or purposes." (Cahill's Consolidated Laws of New York, 1930, p. 2257.) Article I, section 3, of the General Corporation Law of the State of New York defines a "business corporation" as a "corporation formed under or subject to the stock corporation law." (Cahill's Consolidated Laws of New York, 1930, p. 972.) Article VI, section 58, of the Stock Corporation Law authorizes the "payment of dividends by corporations organized pursuant to the provisions of said law." (Cahill's Consolidated Laws of New York, 1930, p. 2267.) In contradistinction to these provisions the New York laws also provide for the incorporation of organizations known as "membership corporations." Article I, section 2, of the Membership Corporation Law defines the term "membership corporation" *1225 as a "corporation not organized for pecuniary profit" and provides for the incorporation thereunder of such organizations as cemetery associations, corporations for prevention of cruelty, medical societies, historical associations, and agricultural and horticultural associations. (Cahill's Consolidated Laws of New York, 1930, pp. 1418-1436.) Although up to the present time the petitioner has not paid any dividends to its sole stockholder, the New York Produce Exchange, there appears to be no reason under the law why it could not amend its by-laws and pay dividends to its sole stockholder. Upon the facts of record we are of the opinion that the petitioner does not qualify as a corporation exempt from income tax for 1929. Cf. ; affd., ; A-1 Cleaners & Dyers Co., 14 B.T.A. 1314; ; ; *1226 . Reviewed by the Board. Judgment will be entered for the respondent. MURDOCK and GOODRICH concur in the result.