Jockey Club v. Commissioner

THE JOCKEY CLUB, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Jockey Club v. Commissioner Docket Nos. 63181, 68664. United States Board of Tax Appeals 30 B.T.A. 670; 1934 BTA LEXIS 1285; May 11, 1934, Promulgated *1285 1. Petitioner was not "organized and operated exclusively" for any one or more of the purposes which, under the applicable statutes, give a tax-exempt status. Held, petitioner is not exempt from income tax, and dues paid by its members are includable in its gross income. 2. Petitioner failed to file a proper income tax return for 1927 until December 9, 1929. Held, the deficiency notice mailed November 21, 1932, was timely, and petitioner's tax liability for 1927 is not barred by the statute of limitations. 3. Where petitioner, which had in good faith claimed a taxexempt status and was notified by respondent of his denial of that status, promptly filed proper return, held the 25 percent delinquency penalty should not be imposed. J. Sterling Halstead, Esq., for the petitioner. James H. Yeatman, Esq., for the respondent. SEAWELL *670 These proceedings were consolidated for hearing and report. The deficiencies in income tax in controversy are $1,296, $1,236, and $1,018.75 for the calendar years 1927, 1928, and 1929, respectively. A 25 percent penalty in the amount of $309 determined by the Commissioner for the year 1928*1286 is also in controversy. The cases are submitted on a stipulation and oral testimony adduced at the hearing. The errors assigned are that the Commissioner erred (1) in holding the petitioner is not exempt from income tax by virtue of section 231 of the Revenue Act of 1926 and section 103 of the Revenue Act of 1928; (2) by including in petitioner's gross income the membership dues paid to it during the taxable years in issue; (3) in not holding the income tax liability of petitioner for the year 1927 *671 is barred by the statute of limitations, section 277(a)(1) of the Revenue Act of 1926; and (4) in imposing a penalty of 25 percent, in the amount of $309, for delinquency in filing tax return for the calendar year 1928. FINDINGS OF FACT. The petitioner is a corporation, organized in 1894 under chapter 213 of the New York Laws, passed April 20, 1891, which enactment has been superseded by laws subsequently passed and embodied in what is known as "The Membership Corporation Law" of New York. The objects and purposes of the petitioner, as stated in its articles of incorporation, are "the investigating, ascertaining and keeping a record of the pedigree of horses and the*1287 instituting, maintaining, controlling and publishing a Stud Book or book of registry of horses in the United States of America and Canada, and of promoting and holding exhibitions of such horses; and generally for the purpose of improving the breed thereof." Petitioner was given authority under the laws of New York to prescribe reasonable rules and regulations for the conduct of running races and race meets, which rules and regulations are subject, however, to modification or abrogation by the State Racing Commission. The petitioner is a membership corporation and does not have any capital stock. It has only one salaried officer, the assistant secretary and assistant treasurer, who receives approximately $20,000 a year. It has nine paid employees. The membership is limited to 50 members, who meet monthly. It maintains club rooms, and the members are accorded special privileges at race meets. The admission of new members is passed on by the members. Interest in the breeding of thoroughbred horses is not a sufficient basis for the election of a member. Love for the horse and sports, and business and social standing are a part of the requirements for admission of new members. *1288 The petitioner takes an active part in the breeding of horses. Such activity is carried on through its "Breeding Bureau," which was created in 1906 after an extensive investigation of conditions in England, France, and Germany. The Jockey Club appropriates annually $10,000 for maintenance of its breeding bureau and in each of the years in issue expended for the purpose more than $10,000. The petitioner acquires by gift and purchase thoroughbred horses suitable for breeding purposes and upon application places these horses with individuals in various sections of the State of New York and in other states. Since 1906 it has acquired approximately 350 horses. The individual receiving the horse pays nothing to the Jockey Club and collects all fees. The Jockey Club, however, supervises *672 the maintenance of these horses and makes at least two inspections a year. It maintains an experimental breeding station at Avon, Livingston County, New York, contributing $6,000 a year towards its maintenance, and had erected there, at its expense, stables costing approximately $15,000. The United States Remount Service was organized in 1919 and the Jockey Club has ever since cooperated*1289 with this service in breeding light horses for military purposes and has given more than 40 stallions to the Remount Service, the minimum value of which horses was $1,000 apiece and for some of which the Jockey Club paid more than that amount. The Jockey Club receives no revenue whatever from such activity. It keeps a registry office in which all the thoroughbreds may be registered, the registry fee being now $5, formerly $3, for each horse. Every four years the Jockey Club publishes "The American Stud Book," with annual supplements, containing the names and pedigrees of 34,000 horses. This book, without any charge for the portion of the overhead allocable to it, costs the club about $35 a copy and after 500 copies of a first edition are printed, it is usually necessary to print a second edition. The Stud Book is used in the Bureau of Animal Husbandry at the Department of Agriculture. The Jockey Club does not own, lease, or operate any race tracks. The "Rules of Racing" which have been promulgated under the authority of the Laws of New York constitute the code under which all horse racing in New York State is carried on. These rules are administered and applied by the stewards*1290 of the Jockey Club, who practically constitute a board of directors, and to a more limited extent by the stewards of race meetings appointed to represent the Jockey Club at particular meetings. The rules contain a list of the powers of the stewards of the Jockey Club and also a provision as to the method of appointing stewards of race meetings, two of whom must be members of the Jockey Club. In addition to its supervision of races conducted by the five New York State racing associations, the Jockey Club has reciprocal agreements with racing associations elsewhere. The stewards of the Jockey Club issue licenses to trainers and jockeys after careful investigation, the fee for trainers being $15 and for jockeys $25. The Jockey Club keeps a registry of assumed names which are taken by various racing stables under which to enter their horses in the race meetings presided over by the Jockey Club. At the request of the Racing Commission, the Jockey Club has purchased and maintains jointly with the various racing associations a horse ambulance. *673 The stewards of a race meeting may fine or suspend a jockey or trainer for the period of a meeting, but more serious penalties, *1291 such as ruling an individual off the turf, must be passed on by the stewards of the Jockey Club. The club employs detectives to investigate and prevent infractions of the rules by jockeys and trainers. With the proceeds of fines and penalties, the Jockey Club maintains a disability fund set aside to care for disabled trainers and jockeys. This fund has reached a total of approximately $25,000, and provides for the care of 10 or 12 disabled men, annually, funeral expenses, and other charges. The stewards of the various race meetings, selected from the membership of the Jockey Club, serve without compensation and pay their own expenses. The Jockey Club indirectly derives certain income from these activities, including a percentage of the prize money paid to the club by the owner of every winning horse, fees for the registration of assumed names and colors, trainers' and jockeys' licenses, etc. The Jockey Club publishes a monthly magazine, "The Racing Calendar," with a circulation of approximately 2,000, and as the result of the advertising which it publishes it is practically selfsustaining and is subscribed for by clubs and sold on news stands. The magazine publishes the*1292 dates of various race meetings, not only in New York State but elsewhere, and the results of some, the transfers of horses which have taken place, and other items of interest to horsemen. The Jockey Club registers the assumed names under which race horse owners elect to operate and for each registration or change of an assumed name the club receives $100 and the owner receives the exclusive right to operate under the name selected and registered with the Jockey Club. It also registers the colors of the owners of racing stables, for which fees of $1, $5, and $25 are charged, depending upon the time of the year when the registration occurs and whether it is annual or for life. At the race meetings of the five racing associations in the State of New York, it appoints the judges, the starter, and the clerk of the scales. Under the "Rules of Racing" 1 percent of all purses of $2,500 or less and 2 percent of all purses exceeding $2,500 is paid over to the Jockey Club. A tax of 10 percent on the dues paid by members of the Jockey Club in the years in issue has been paid regularly and voluntarily to the collector of internal revenue for the third district of New York without any ruling*1293 thereon by the Commissioner of Internal Revenue. The annual dues paid by the members of the Jockey Club were increased in 1926 from $100 to $200. *674 The Jockey Club's income and expenditure account for the years in issue was as follows: (Table omitted) (Table omitted) *675 The petitioner filed with the collector of internal revenue for the second district of New York, on March 15, 1928, Form 1120, purporting to be its income tax return for the calendar year 1927. The return was subscribed and sworn to by its treasurer and assistant treasurer, but was in blank, except the heading and signatures, the petitioner claiming an exempt status. Such status was denied by the Commissioner and the petitioner was so advised about October 9, 1929, whereupon it filed with said collector on December 9, 1929, its tax return for the year 1927, there being contained therein an itemized statement of its gross income, deductions, and credits. The deficiency notice covering the year 1927 was mailed to petitioner on November 21, 1932. The petitioner on March 15, 1929, again filed with the collector another Form 1120, not signed or sworn to and in blank, with the exception*1294 of the heading. Attached thereto was a letter bearing date of March 14, 1929, stating that on March 15, 1928, it had filed Form 1120 in blank for the year 1927 and had attached thereto a letter setting forth the reasons why it should not be required to file returns on Form 1120 and that as no reply to same had been received, "the return for the year 1928 is herewith filed in blank for the reasons as stated in the letter attached to the return for the year 1927 and also to avoid any possible penalty for failure to file a return on time should the contentions of the taxpayer be finally rejected by the Commissioner." The letter stated to have been attached to the 1927 return is not in evidence. Having been notified about October 9, 1929, as above *676 stated, that an exempt tax status was denied, the petitioner on December 9, 1929, filed its 1928 return, showing gross income, deductions, and credits. OPINION. SEAWELL: We will consider the errors assigned in the order enumerated. (1) The petitioner claims exemption from tax on its income for 1927 under section 231 (6) and (9) of the Revenue Act of 1926 and for the years 1928 and 1929 under the corresponding section, 103*1295 (6) and (9), of the Revenue Act of 1928. It is a well recognized principle of law that a claim for exemption must be clearly made out and that where there is any doubt the construction must be in favor of the Government. Under other provisions of taxing statutes, similar to those before us to the extent that they exempted associations "organized and operated exclusively" for designated purposes, it has been uniformly held that all of the tests of the statute must be met by the taxpayer. It is not enough that the claimant be organized for the purposes given statutory recognition; it must be so operated and to that end exclusively. Herbert E. Fales,9 B.T.A. 828; J. Noah H. Slee,15 B.T.A. 710; affd., 42 Fed.(2d) 184. "Questions of taxation must be determined by viewing what was actually done, rather than the declared purpose of the participants, and when applying the provisions of the Sixteenth Amendment and income laws enacted thereunder we must regard matters of substance and not mere form." (*1296 Weiss v. Stearn,265 U.S. 242.) Whether the petitioner is entitled to the exempt status claimed is largely, if not wholly, determined from the activities in which it engaged during the taxable years in issue as shown by the record. Those activities have been quite fully and in detail set forth in our findings of fact and it is not necessary to here recount them. What the petitioner did in prior years and in the taxable years in issue undoubtedly tended to improve and did improve the breed of race horses, in which its members manifested great interest. The activities of the petitioner, in prescribing rules and regulations under which horse races were to be run; the appointment of stewards, judges, starters, and clerks of the scales; passing on the qualifications and conduct of trainers and jockeys; publishing the Stud Book and also a monthly race paper issued in the interest of horse racing and containing information on past and future races and race meets; and requiring the registration with it of the colors and assumed names used by owners of racing stables, and the many other activities described in our findings of fact and for many of which fees, commissions, *1297 or charges were required to be paid, show, in our opinion, that the predominant purpose and object of petitioner was to improve, and in large measure control, horse racing in the State of *677 New York. Its activities and expenditures in connection with its breeding establishment at Avon, New York, and the donations of stallions to individuals in the State of New York and elsewhere were very largely directed toward fostering and maintaining horse racing, which is generally regarded as a sport. The record fails to show that during the taxable years in issue the petitioner engaged in any research work having for its object the accumulation, coordination, or systematization of scientific knowledge pertaining to the breeding of horses or on any other subject. Nor does it appear from the record that the petitioner has in the years in issue done any experimenting or investigating concerning the breeding of horses with the object of determining principles and truths for adoption and guidance in such industry. The record shows that the petitioner's income, including annual dues of members, was over $100,000 for each of the years in issue, with a surplus of $7,873.06 in 1927, $19,198.92*1298 in 1928, and $12,656.04 in 1929, and the condensed balance sheets of the petitioner in evidence show it had a surplus of $203,487.78 at the end of 1929. The fact that the petitioner is a membership as distinguished from a stock corporation does not indicate that it is not operated or can not be operated for profit. The record shows that it is to some extent operated for profit or, at least in the years in issue, that substantial profit resulted from its operation, and it is not shown that the aforesaid surplus might not be distributed in the form of a dividend and thus inure to the benefit of petitioner's members. In any event, they would be the ones that would be entitled to the surplus upon dissolution of the corporation. In the light of the record herein, we are of the opinion and hold that the petitioner does not qualify as a corporation "organized and operated exclusively" for scientific purposes and is not, as such, under section 231(6) of the Revenue Act of 1926 and the corresponding section of the Revenue Act of 1928, entitled to the exempt status claimed. We are further of the opinion and hold that the record fails to show that the petitioner was "organized and operated*1299 exclusively for pleasure, recreation, and other nonprofitable purposes," entitling it, under section 231(9) of said Revenue Act of 1926 and the corresponding section of the Revenue Act of 1928, to the exempt status claimed. We are also of the opinion and hold that the petitioner is not exempt from income tax - as also insisted in its behalf - on the ground that it was "organized and operated exclusively" for purposes designated and specified in exempt classifications named in subsections (6) and (9) of sections 231 and 103 of the Revenue Acts of 1926 and 1928, respectively. We have carefully considered the *678 entire record and have, as indicated, reached the conclusion and hold that the respondent did not err in denying to the petitioner an exempt status. The record, we think, indicates that the petitioner's organization and activities are mainly for the promotion of horse racing and the control of the same in New York, which it has largely achieved. Its purpose and power there are recognized by the laws and courts of that State. See *1300 Grannan v. Westchester Racing Assn.,153 N.Y. 449. (2) The petitioner contends that the dues paid by its members should not be included in its gross income even though the petitioner is subject to tax. This Board has held, however, that dues, fines, etc., received by nonexempt clubs, benefit associations, etc., are taxable and should be included in gross income, and in the instant case it adheres to its former determinations to that effect. See Employees' Benefit Assn. of American Steel Foundries,14 B.T.A. 1166; A - 1 Cleaners & Dyers Co.,14 B.T.A. 1314; United Retail Grocers Assn.,19 B.T.A. 1016. (3) The petitioner pleads the bar of the statute of limitations as to any tax liability for the year 1927 and makes in brief filed the same contention as to the year 1928, though as to it the statute of limitations was not pleaded and need not be considered. For the year 1927 the petitioner filed on March 15, 1928, Form 1120, which was in blank as described in our findings of fact and contained no data whatever showing gross income, deductions, and credits. In the circumstances shown by the record, and*1301 set forth in our findings of fact, we are of the opinion and hold that the Form 1120 filed as stated did not comply with the requirements of the statute in regard to the filing of a tax return and was not such a return as started the running of the statute of limitations. Corona Coal & Coke Co.,11 B.T.A. 240; American Vineyard Co.,15 B.T.A. 452; United States v. Updike, 1 Fed.(2d) 550; affd., 8 Fed.(2d) 913; certiorari denied, 271 U.S. 661. The petitioner did not file any return other than the Form 1120 heretofore described until December 9, 1929, when there was filed a return for the year 1927 which was sufficient and of such character as to start the running of the statute of limitations. The deficiency notice covering the year 1927, however, was mailed on November 21, 1932, which was within three years from the date the petitioner filed a sufficient return for 1927, and therefore the deficiency notice was timely, and we hold the tax deficiency for 1927 as determined by the respondent is not barred by any statute of limitations. (4) The record shows that the petitioner claimed it occupied an*1302 exempt status and did not think it was required to file income tax returns, but notwithstanding such contention, with a view to avoiding any penalty if in error, it did file on March 15, 1928, and March *679 15, 1929, Form 1120 (in blank with the exception of the heading and signatures) for the respective years 1927 and 1928 and thereafter awaited advice from the respondent as to whether it was correct in its claim of exemption. Receiving notice from respondent about October 9, 1929, that its exempt status was denied, it, on December 9, 1929, filed tax returns for both 1927 and 1928, showing, as required by law, gross income, deductions, and credits. Under the circumstances stated, the respondent determined a deficiency in tax for each of the years 1927 and 1928, imposing a 25 percent penalty in the amount of $309 for the year 1928, but imposed none for 1927. In our opinion, the record shows that the failure to file in due time a proper return for 1928 was not on account of willful neglect, and we are further of the opinion and hold in the light of the facts disclosed by the evidence that the failure to file a proper return for 1928 within the time prescribed by law was*1303 due to a reasonable cause and that the imposition of the 25 percent penalty for such failure is not authorized and should not be collected. See Adelaide Park Land,25 B.T.A. 211, and authorities cited therein. The instant case is distinguishable from Charles E. Pearsall & Son,29 B.T.A. 747, in which the failure to file tax returns for several years was due to ignorance of the law relative to the filing of tax returns. Such ignorance did not excuse nor furnish "a reasonable cause" for failure to file returns. Reviewed by the Board. Judgment will be entered for the respondent in Docket No. 68664, and under Rule 50 in Docket No. 63181.