American Soc. of Cinematographers, Inc. v. Commissioner

AMERICAN SOCIETY OF CINEMATOGRAPHERS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. American Soc. of Cinematographers, Inc. v. Commissioner Docket No. 96411. United States Board of Tax Appeals 42 B.T.A. 675; 1940 BTA LEXIS 968; September 4, 1940, Promulgated *968 The petitioner was incorporated as a nonprofit organization under the laws of California, for the advancement of cinematography. In connection with its activities it publishes a monthly magazine, the American Cinematographer, which is about self-supporting. By special assessments upon its members it has created a fund from which it pays benefits to totally disabled members or in case of death to the deceased member's beneficiary. Held, that the petitioner is exempt from income tax. Edward L. Conroy, Esq., for the petitioner. E. A. Tonjes, Esq., for the respondent. SMITH *675 This is a proceeding for the redetermination of deficiencies in income and excess profits taxes for the fiscal year ended March 31, 1936, of $375.83 and $42.16, respectively. The petitioner claims that it is exempt from income tax for the fiscal year in question and that it is entitled to a refund of the tax already paid. FINDINGS OF FACT. 1. Petitioner is a corporation, organized on January 6, 1919, under the provisions of Title XII, part LV, division first (593), of the Civil Code of the State of California, relating to the organization of nonprofit, profit, *969 scientific, educational, and labor organizations. 2. The corporation has no capital stock and its certificate of incorporation states that pecuniary profit is no part of its objects or purposes. It has never paid any dividends or distributed any profits to its members. 3. The certificate provides as follows with respect to the objects and purposes for which the petitioner was organized: NINTH: * * * To bring together, fraternally and socially, all those Cinematographic Artists who, by their exquisite art and consummate skill, have attained a nnme, in lay and professional circles, synonymous with excellence; *676 To so bring them together in order that by the free and untrammeled interchange of ideas and experiences the Art of Cinematography shall be advanced; the welfare of the artists shall be bettered - especially in his relation to the producer - and the profession shall receive that recognition it justly merits; To so bring it about that membership in the organization shall be at once a mark of honor and distinction based on merit; To own, hold and acquire - in any lawful way - any and all real and personal property which may be reasonably necessary to*970 provide places of meeting, recreation and accommodation for the members, and to carry out and effectuate the objects and purposes of the corporation; to sell and dispose of the same and otherwise deal with reference thereto, as may be allowed by law; to do any and all things necessary or expedient in the furtherance of the objects of the corporation and allowed by law. 4. Membership in the petitioner is limited to first cameramen in motion picture studios and newsreeal cameramen working throughout the world. Membership is by invitation. The present membership is approximately 280. Since petitioner was incorporated it has paid no dividends, nor disbursed profits to its members in any other manner. 5. members of the petitioner have a monthly meeting where all members can get together and discuss various problems. Any member of the organization, if he has a problem, can call upon any other member, at a meeting or otherwise, for information or knowledge with respect to his problem. If the member who is called upon can not furnish the information, the organization will obtain it from one of the other members who has experienced the problem and can impart the knowledge to the*971 one seeking it. These educational and scientific benefits are obtainable by members of petitioner throughout the world. The information usually imparted is in the form of certain photographic problems that concern new lenses, new film, lighting equipment, or camera equipment, or certain tricks that may have been used in one picture, which the studios guard very carefully but which the cameramen impart to each other. 6. When sound pictures came in the problems involved were all new to the cameramen. The members of the petitioner gave of their time at the studios and devoted their nights to the study of sound problems, all without compensation of any kind and only in order to benefit the industry. 7. Petitioner also acts as a labor representative of its members in settling disputes between the producer and the cameramen. It is the sole representative of its members, having entered into an agreement with all of the major producers which, by its terms, provides for the hours of work, overtime pay, minimum salary scales, conditions of work, and other employment advantages for the members. *677 8. Article IX of the petitioner's bylaws provides as follows: ARTICLE*972 IX Publication Section 1. The American Society of Cinematographers shall publish and maintain a monthly publication which shall be an educational and instructive medium, espousing progress and art in motion picture photography, and in the arts and sciences allied to motion picture photography. Section 2. The name of said publication shall be "THE AMERICAN CINEMATOGRAPHER." Shortly after the petitioner was organized it commenced the publication of the American Cinematographer, which is circulated to all of its members and to all persons interested in the science of motion picture photography. The scientific articles in it are all contributed by petitioner's members. The magazine is highly technical and of little interest to the public or to anyone who is not familiar with professional motion picture photography. A profit was realized from the publication of the magazine for the year in question, although for the whole period from 1922 through 1936 it operated at a loss of $2,333.92. The magazine was originally started by the members as a house organ so that each member would know what the others were doing, and to keep them advised on any advancement in photography. The*973 members who write articles for the magazine receive no compensation therefor. The magazine has a monthly circulation of about 2,000 copies. 9. The constitution and bylaws of the petitioner contain the following provisions: ARTICLE 4 - EMERGENCY FUND. Section 1: An Emergency Fund shall be maintained for the relief of the members and the beneficiarie thereof in the following manner, to wit: members and the beneficiaries thereof in the following manner, to wit: applicants to and members of the American Society of Cinematographer, * and shall be deposited in a special fund to be known as the Emergency Fund. Section 2: Upon satisfactory proof being furnished of the death or total disability of any member of the society in good standing, who having paid his emergency fund assessment for the current year, the treasurer shall be empowered by the Board of Governors to draw from the Emergency Fund of the Society an amount not less than One Thousand Dollars ($1000.00) and to pay such amount to such totally disabled member, or in the event of his death, to the beneficiary named by such member. Section*974 3: In the possible event an emergency arises where or when the death benefits required to be paid in any one year exceed the total amount of the Emergency Fund on hand, then it shall be within the power of the Board of Governors to levy a pro-rata assessment upon the membership in a sufficient amount to meet such an emergency. *678 Section 4: All assessments levied under the terms of this article shall be immediately due and payable, all unpaid assessments to be considered as unpaid dues. Section 5: The Board of Governors shall cause to be issued a suitable receipt quoting the provisions of Article 4 of these Bylaws to each member upon payment of his annual assessment. Section 6: Each member of the Society shall be required to place on file with the Secretary the name of such beneficiary as he may desire to benefit by the provisions of this article. Section 7: Under no conditions shall any of the funds created under the provision of this article be used for any purpose other than provided for under the terms of this article. 10. During the taxable year the petitioner increased its "Reserves for Special Funds" by the amount of $2,733.32, which*975 sum was added to the petitioner's taxable income by the respondent in the determination of the deficiency. This sum represents the excess of the amounts collected from the members, pursuant to the provisions of article 4 of the constitution and bylaws, together with certain miscellaneous additions, over the disbursements from such fund. 11. The petitioner filed an income tax return for the fiscal year ended March 31, 1936, on August 15, 1936, upon which a tax of $711.47 was assessed. Payments of tax, together with interest, were made as follows: 8/15/36 $75.75 6/13/36 103.13 9/14/36 178.62 12/14/36 177.87 3/15/37 177.86 Total 713.23 The petition in this proceeding was filed December 12, 1938. 12. The petitioner is a corporation organized and operated exclusively for scientific purposes, no part of the net earnings of which inures to the benefit of any private stockholder or individual. OPINION. SMITH: The petition filed in this proceeding alleges error upon the part of the respondent as follows: (a) Determination that petitioner is not exempt under § 101, Revenue Act of 1934. (b) Including as taxable income amounts contributed to a*976 segregated fund used only as a disability and death benefit fund for the petitioner. Section 101 of the Revenue Act of 1934 provides in part as follows: The following organizations shall be exempt from taxation under this title - (1) Labor, agricultural or horticultural organizations; * * * (6) Corporations, * * * organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, * * * no part of the *679 net earnings of which inures to the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation; (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. On brief the petitioner argues that it falls under one or more of the classifications above referred to. It is organized as a nonprofit organization under the laws of California and one of its objects is to bring together cinematographic artists "in order that by the free and untrammeled interchange*977 of ideas and experiences the Art of Cinematography shall be advanced." Although the activities of the organization partake somewhat of the nature of a labor organization and of a business league, we think that the organization properly falls in the class of corporations organized and operated exclusively for scientific purposes. If it properly falls in that class, it is not to be denied exemption from tax because its activities to some extent show it to be a labor organization or a business league. In his deficiency notice the respondent does not state the grounds for denying exemption from income tax. On brief he contends that the petitioner is not entitled to exemption as a corporation organized and operated exclusively for scientific purposes because of the fact that it publishes a monthly magazine called "The American Cinematographer", from which it derived a small amount of income during the taxable year ended March 31, 1936. The evidence shows that this magazine was at its inception an organ for the dissemination of scientific information to its members. This membership was not limited to persons living in Los Angeles or the immediate vicinity. The problems which*978 were met by the directors of photography or first cameramen were not problems restricted to the directors of photography in the studios which centered in the Los Angeles area. The magazine is concerned exclusively with the publication of articles which are of assistance to its members and to news cameramen throughout the world. It was never expected that the magazine would be operated at a profit to the membership and the evidence shows that over a period of 14 years it operated at a loss of $2,333.92. The courts have uniformly held that the destination of the income rather than the source is the ultimate test of exemption. See Trinidad v. Sagrada Orden De Predicadores,263 U.S. 578. In that case the collector claimed that a religious corporation had lost its exempt status because it owned and operated large properties in the Philippines, consisting of real estate and stocks in private corporations, and loaned money at interests. The Supreme Court held, however, that *680 the corporation was operated exclusively for religious purposes and that it did not lose its exempt status because it realized profits from certain enterprises which were devoted*979 to the objects of the order. The destination of the income was held to be the factor of prime importance. In Unity School of Christianity,4 B.T.A. 61, the respondent contended that the corporation was not exempt from tax because it had been formed under the business corporation law of Missouri and that because it published various magazines and operated a cafeteria, farm, reading room and library, it was not exempt from tax. We reversed the respondent's determination. Roche's Beach, Inc. v. Commissioner, 96 Fed.(2d) 776, involved the question of whether a corporation organized for the purpose of being the medium through which a charitable foundation could operate property and collect the income therefrom was exempt from taxation. The function of the corporation consisted of operating a bathing beach business of 3,000 bath houses, which were rented to transient bathers and accommodated as many as 6,000 bathers a day. The income of the corporation for 1931 was more than $85,000. In determining that the corporation was exempt, the court held that, while to gain exemption the corporation must be operated as a charitable corporation and*980 no part of its earnings could inure to the benefit of any private shareholder, yet the exemption statute should not be narrowly construed. To the same effect see Sand Springs Home,6 B.T.A. 198. We do not think that the petitioner is to be denied exemption from tax because of the publication of a magazine, the American Cinematographer. The publication of the magazine was necessary for the advancement of the art of cinematography. It was not published for profit. The respondent also points to the fact that the petitioner made assessments upon its members for the purpose of establishing a fund for the payment of a benefit to totally disabled members and, in the case of the death of a member, to such member's family or beneficiary. He contends that such an activity is incompatible with the petitioner's claim that it is operated exclusively for scientific purposes. In Harrison v. Barker Annuity Fund (C.C.A., 7th Cir.), 90 Fed.(2d) 286, the question before the court was whether a corporation organized for nonpecuniary purposes under the statutes of Illinois was exempt from tax. The United States Distrcit Court held it to be exempt from*981 tax. The United States Circuit Court of Appeals affirmed. A part of the income from the corporation was used to pay pensions to employees of the Haskell & Barker Car Co., in which Katherine Barker Spaulding, the principal donor of the funds, had *681 had a very substantial interest. The donor no longer had any interest in the formerly existing Haskell & Barker Co. She was related in no way to the beneficiaries and knew none or few of them, but was inspired to reward the faithful employees of the company hwich had ceased to exist. The court held that the corporation was operated exclusively for charitable purposes within the meaning of the statute. We think that the petitioner did not forfeit its claim to exemption because of the operation of the emergency fund. It was merely incidental to the general purposes of the organization. Moreover, it is to be noted that the petitioner acted merely as a trustee of the emergency fund. Since the petitioner contends that not only is it not liable for any deficiency but is entitled to a refund of the tax paid, Decision will be entered under Rule 50. Footnotes *. Excepting Associate, Past and Honorary Member (Section 1). ↩