Roche's Beach, Inc. v. Commissioner

ROCHE'S BEACH, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Roche's Beach, Inc. v. Commissioner Docket No. 78259. United States Board of Tax Appeals 35 B.T.A. 1087; 1937 BTA LEXIS 800; May 7, 1937, Promulgated *800 A business corporation empowered by its certificate of incorporation to carry on various commercial businesses besides to hold title to property and collect income therefrom, which is not required by its certificate of incorporation to turn over its entire net income to an organization itself exempt from taxation, is held not exempt from taxation under section 103(6) or 103(14) of the Revenue Act of 1928 even though all of its stock is owned by trustees of a fund for the relief of needy persons and its income is not used for the benefit of any private stockholder or individual. Jacob Mertens, Jr., Esq., for the petitioner. J. E. Marshall, Esq., S. L. Young, Esq., and L. W. Creason, Esq., for the respondent. HARRON *1087 The respondent has determined a deficiency in income tax for the calendar year 1931 in the amount of $1,192.80 based upon total tax liability of $1,843.62 of which the petitioner paid $650.82 February 17, 1932, and filed a claim for refund of this amount November 14, 1932. The petitioner corporation claims exemption from taxation under section 103(6) or (14) of the Revenue Act of 1928. FINDINGS OF FACT. The petitioner*801 is a corporation, incorporated under the laws of the State of New York. The circumstances under which the corporation was organized and the purposes for which it was organized are set forth hereafter. Edward Roche, deceased, was unmarried and a resident of Far Rockaway, Queens County, New York. During his lifetime he owned realty, known as Roche's Beach, facing on the Atlantic Ocean in Queens County, near Far Rockaway. Part of the beach property was leased to a bathing club known as the Colony Club and on the remaining part of the beach property decedent had operated, during his life, a bathing business consisting generally of renting bath houses for small fees to transient bathers. On the upland part of the property, away from the waterfront, the decedent owned various buildings consisting of six dwelling houses, a garage, and a hotel building which had been partially destroyed by fire and never restored. The city of New York condemned part of the ocean frontage of the beach property which was under water, whereby decedent had a claim against the city of New York for property taken in condemnation proceedings. Edward Roche executed his last will and testament on the 26th*802 of August 1930, at which time he was seriously ill. He died December *1088 28, 1930. At the same time, he conveyed all of his real estate, described above, to Roche's Beach, Inc., by deed executed August 25, 1930. This deed also conveyed all right, title, and interest of Edward Roche to any awards to which he was entitled by reason of the taking of part of his property by New York City in condemnation proceedings. In return for the conveyance of realty, Edward Roche received 197 shares of capital stock of Roche's Beach, Inc., which were all of the authorized shares of capital stock of that corporation, with the exception of three shares issued to the incorporators. In his last will, the decedent devised and bequeathed all the residue and remainder of his estate, including the above stock, in trust to his executors for the purpose of establishing a fund for the relief of destitute women and children, to be known as "The Edward and Ellen Roche Relief Foundation." The trustees were given general powers to manage, invest, and reinvest said fund, collect the income, rents, and profits thereof, and after paying all proper charges and expenses, to pay the entire income to the*803 relief of destitute women and children in their entire discretion and with power also to make gifts of income to any institutions having as their object the relief of destitute women and children and not operating for profit. The trustees were also given power to form a corporation or fund, and institution or institutions, to carry on such work directly or indirectly, but always without profit, and to provide for carrying on such work in perpetuity. The decedent in his will described Roche's Beach, Inc., as "a New York corporation to which I have conveyed all real property owned by me and to which I have also transferred my bathing business at Far Rockaway aforesaid." With respect to the stock of this corporation the decedent authorized and empowered the trustees, inter alia: * * * to so use and vote said stock that the business of said corporation, including any purposes and objects expressed in its Certificate of Incorporation (whether or not theretofore transacted) shall be carried on, with full power to said trustees to at any time and from time to time change the business at any time carried on by said corporation and to cause any and all real property owned by said corporation*804 to be improved * * *, to be sold, conveyed, leased and/or disposed of * * * with full power to said Trustees to loan to said corporation and/or cause said corporation to borrow (on mortgage or otherwise) at any time and from time to time such amounts of money as may be deemed advisable for any purpose, activity or business at any time carried on by said corporation * * *. Roche's Beach, Inc., was granted a certificate of incorporation on May 13, 1929, but held no property and issued no stock, excepting the qualifying shares, to the incorporators, until August 26, 1930, at which time it adopted bylaws and issued 197 shares of no par capital stock to Edwaro Roche in return for the improved real estate conveyed to it by deed of August 25, 1930. The decedent organized this *1089 corporation for the purpose of being the medium through which the Edward and Ellen Roche Relief Foundation could operate the property and collect income after his death. The decedent intended to and did operate the properties personally as long as he lived, received all income therefrom and paid operating expenses. The petitioner corporation did not receive any income until 1931. The petitioner corporation, *805 in 1931, owned no property except the realty, improvements, equipment, and the claim against New York City conveyed to it by Edward Roche until 1934 when it purchased U.S. Treasury bonds in the amount of $406,687.50 out of the net proceeds it received under the condemnation award and interest on the award for property taken by the city of New York. The bathing business consisted of renting 3,000 bath houses to transient bathers. The gross income was received from bath house, suit, and towel rentals; concessions given out for restaurants and refreshments; rents from the Colony Club beach; rents from the houses and garage. Its gross income in 1931 was $99,947; expenses, $76,703.80; net income, $23,243.20. The certificate of incorporation of Roche's Beach, Inc., states that the purposes for which it is to be formed are to invest in, buy, sell, rent, deal in, own, improve, use, and occupy any and all kinds of property, real or personal; to carry on a general business of distributing, improving, managing, buying, and selling all kinds of real and personal property; to carry on the bathing business and the business of a bathing beach and/or a public amusement resort; to purchase, lease, *806 or otherwise acquire, and to manage, both as principal and/or agent, theatres, moving picture establishments, roof gardens, amusement parks, and business connected therewith; to purchase, lease, contract, acquire, carry on, and dispose of amusement devices, restaurants, refreshment stands, and public resort concessions of any kind; to purchase, acquire, hold, own, sell, use, exercise, or develop licenses in respect of, or otherwise turn to account, patents, patent rights, copyrights, devices, inventions, trade secrets, whether secured under letters patent of the United States or any foreign country; to purchase, acquire, hold, and dispose of stocks, bonds, and other evidences of indebtedness of this corporation or of any other corporation. The trustees of the Edward and Ellen Roche Relief Foundation have received funds from the petitioner corporation which they have disbursed to approved needy women and children and to a few charitable organizations giving relief to the same class. Roche's Beach, Inc., was not organized exclusively for any of the purposes enumerated in section 103(6) or (14) of the Revenue Act of 1928. *1090 OPINION. HARRON: No question is raised*807 regarding the nature of the Edward and Ellen Roche Relief Foundation as a charitable organization exempt from taxation. The sole question is whether the petitioner corporation is exempt from taxation within the provisions of either subsection (6) or (14) of section 103 of the Revenue Act of 1928. 1 Both subsections (6) and (14) of section 103 limit exemption from taxation to corporations organized exclusively for stated purposes. It is a principal of the law of private corporations that "the particular classification within which*808 a corporation falls depends upon the purposes for which it is formed and the powers conferred upon it. The purposes for which it is organized are primarily to be sought and found in its charter or certificate of incorporation * * *." See Fletcher, Cyclopedia of the Law of Private Corporations, 1931, vol. 1, § 71. Thus in the case of ; , in a proceeding involving exemption of a corporation from the New York Tax Law, it was held that the articles of incorporation alone must determine whether a corporation comes within the exemption. See also, In ; ; ; . The Circuit Court of Appeals, Second Circuit, in , has stated that the word "organized" in section 103(14) of the Revenue Act of 1928 means "incorporated" and not "operated" and pointed out that the use of the word "operated" in addition to the "organized" in subdivisions (4), (6), (9), and (12) *809 of the same section, "indicates that 'organized' was not intended to have the meaning of 'operated' * * *." See also , where exemption under section 103(6) was denied. There the articles of incorporation showed that the association was organized for the purpose of carrying on a general mercantile business for the accommodation of students and faculty so that the corporation was not "a corporation organized and operated exclusively for educational purposes." The principle involved is clear that to determine whether a corporation falls within any stated class, it is necessary to look to the charter of the corporation to see what the purposes of the particular corporation *1091 are and whether they are such as to bring the corporation within a described class. In this proceeding, examination of the charter of the petitioner corporation shows that it was organized only for purposes related to carrying on various kinds of business, including carrying on the business of a bathing beach or public amusement resort. Its purposes, summarized in the findings of fact above, are not exclusively for charitable*810 purposes or for holding title to property, collecting income therefrom, and turning over the entire proceeds to an organization itself exempt from taxation. It is evident that Edward Roche, deceased, intended that all the stock of the petitioner corporation should be held by the trustees for the Relief Foundation and that the corporation should be a medium for producing income for the Relief Foundation. However, the exemption here claimed is limited by statute to corporations organized exclusively for stated purposes and this petitioner corporation appears to have been organized for the purpose of carrying on various types of business. The stockholders have the power to change the type of business in their own discretion to any of the enterprises permitted by the certificate of incorporation. Section 103(6) and (14), in our opinion, does not permit us to give consideration to intent or circumstances outside of the charter of the corporation. Section 103(6) is applicable to corporations which are both organized and operated exclusively for stated purposes, including charitable purposes. The difficulty in this proceeding is that the petitioner corporation, while operated to*811 produce income for charitable uses and although it held title to property and collected income therefrom through various rentals in the taxable year, was not organized for any of these purposes exclusively in so far as its certificate of incorporation shows. Also, the certificate of incorporation of the petitioner corporation leaves it within the discretion of the board of directors to determine and direct the use and disposition of any net earnings or surplus and to set apart out of any of the funds of the corporation available for dividends reserves for any purpose other than dividends and to determine in its own discretion when dividends shall be paid. Such wide powers as to the use of earnings are not consistent with the single purpose of turning over the entire net income to an organization itself exempt from taxation, as section 103(14) seems to require. The record indicates in a general way that net earnings of the petitioner corporation were paid over to the Relief Foundation, but there is not positive proof that all the net earnings were so used. See *812 . The petitioner relies strongly on the decisions in ; ; *1092 and . In all of these cases the charters of the corporations involved showed that the corporations were organized for either religious, educational, benevolent, charitable, or scientific purposes. The Sand Springs Home Corporation was organized as an eleemosynary corporation. In the Unity School case this Board held that a corporation otherwise exempt from tax is not deprived of exemption because it carries on competitive activities in furtherance of its predominant religious and charitable purposes. Those cases are distinguishable on the facts from this proceeding and do not serve to support petitioner's contentions. It is therefore held that the petitioner corporation fails to meet the requirements of both subsections (6) and (14) of section 103, and the determination of the respondent is sustained. See *813 Decision will be entered for the respondent. Footnotes 1. SEC. 103. EXEMPTIONS FROM TAX ON CORPORATIONS. * * * (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 shareholder or individual; * * * (14) Corporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt from the tax imposed by this title. ↩