Washington State Apples, Inc. v. Commissioner

WASHINGTON STATE APPLES, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Washington State Apples, Inc. v. Commissioner Docket No. 100723. United States Board of Tax Appeals 46 B.T.A. 64; 1942 BTA LEXIS 915; January 8, 1942, Promulgated *915 Petitioner was organized by apple growers as a nonprofit corporation to promote the sale of apples grown in the State of Washington. Its only source of income, other than gifts, was from the payment of 1 cent a box on apples shipped. Petitioner's bylaws and the contracts under which there funds were collected provided that this promotion was petitioner's sole function. Held, petitioner is a "business league" exempt from tax under section 101(7) of the Revenue Act of 1936. A. J. O'Connor, Esq., for the petitioner. E. C. Adams, Esq., for the respondent. HILL *64 Respondent determined deficiencies in income and excess profits taxes and imposed penalties in the following amounts: Year Kind of tax Deficiency 25% penalty [1936] Income $5,517.63 [1937] Income 457.65 $114.41 [1937] Excess profits 406.36 101.59 The issues before the Board are whether petitioner is exempt from tax by the provisions of section 101 of the Revenue Act of 1936, or if not exempt, whether or not the unexpended funds on hand are taxable income to the petitioner. The penalties are imposed for failure to file returns within the time allowed*916 by section 291. FINDINGS OF FACT. On July 30, 1936, petitioner was organized as a nonprofit corporation under the laws of the State of Washington, namely, sections 3888-3900 of Remington's Revised Statutes. Petitioner had neither capital nor capital stock, but was a membership corporation. The organization of petitioner was brought about by approximately 4,900 growers of applies in the Wenatchee and Yakima districts of Washington. These *65 districts produced about 98 percent of the total commercial crop for that state. The object and purpose of petitioner was to advertise and promote the sale of apples, which promotion was necessitated because the industry as a whole was suffering from a decline in the national per capital consumption of apples. The method provided was the advertising of the several varieties, principally the Jonathan, the Delicious, the Winesap, and the Newtown, in order to stimulate consumer demand for Washington apples. This type of advertising is called industrial advertising, since no specific brand or grower is mentioned, as in individual advertisements. Petitioner allocated the amount to be spent for advertising in each city, but for the*917 actual placement, a nation-wide advertising agency was selected. The funds for this work were provided by assessment against the members or handlers of 2 cents per hundred pounds gross shipping weight (approximately 1 cent per box). The articles of incorporation contain, inter alia, the following: ARTICLE III. SECTION 1. To engage in the business of advertising and promoting the sale of apples grown and produced in the state of Washington. 2. To make and carry out contracts of every kind that may be necessary or conducive to the accomplishment of any of the purposes of this corporation. 3. To purchase, acquire, apply for, secure, hold, or own any and all copyrights, trade marks, trade names and distinctive marks; and licenses, lease or authorize the use thereof by other persons, firms or corporations. * * * 6. To buy, sell, exchange and deal in all classes of personal property only insofar as is necessary or incidental to carrying on the business of advertising and promoting the sale of apples grown and produced in the state of Washington. * * * 8. To do any and all things necessary, suitable or proper for the accomplishment of any of the purposes*918 or for the attainment of any of the objects for the exercise of any of the powers herein set forth, whether herein specified or not, either alone or in connection with other firms, individuals or corporations. ARTICLE IV. SECTION 1. Members. The following persons shall be eligible to membership in this corporation: Any person, partnership, firm, corporation, association or cooperative organization growing and producing apples in the state of Washington. ARTICLE V. SECTION 1. This corporation shall not engage in any business, trade, avocation or profession for gain or profit. * * * ARTICLE VIII. SECTION 1. In the event of dessolution of this corporation, the assets thereof, after paying all debts, shall be distributed ratably and proportionately and without preference to each of the members of said corporation in good standing. *66 The bylaws provided in part the following as to members: ARTICLE IV. MEMBERS SECTION 1. The following persons shall be eligible to membership in this corporation: Any person, partnership, firm, corporation, association or co-operative organization growing and producing apples in the State of Washington, who has signed*919 an advertising contract with this corporation and maintained the same in good standing. * * * SECTION 4. No application for membership shall be necessary. Every producer of apples in the State of Washington eligible for membership as provided in Article IV, Section 1, shall by the signing of such advertising contract be deemed admitted to all the rights and privileges of membership, and such membership shall continue so long as said member shall be under contract with this corporation under its standard advertising contract with its members. Membership shall automatically terminate, without action by the corporation, upon the member ceasing to be under advertising contract with the corporation unless the corporation is not then requiring its members to sign contracts. Upon termination of membership, all rights of the member in the corporation or to its property shall terminate. SECTION 5. Agents. Each of the members who are a firm (joint ownership), partnership or corporation, by writing delivered to the corporation, shall appoint a natural person as agent of such member, and from time to time, by writing delivered to the corporation, may revoke such appointment and appoint*920 another natural person as agent. Such an agent, with respect to all matters relating to and affecting the corporation, its conduct of business or affairs, shall be the representative for all purposes of the member appointing him and be entitled to vote on behalf of and for all purposes represent such member. Such agent shall be eligible to all the privileges of membership. The advertising contract referred to in the above article of the bylaws had the following provision: 6. The Corporation specifically covenants and agrees: (1) To use all funds collected for advertising sales promotion and expenses incidental to the organization and operation of the Corporation provided by this contract and similar contracts; (2) That it will vigorously enforce all contracts between Growers and Handlers and the Corporation. This provision was narrower than the articles of incorporation, which gave petitioner broad powers limited only by the general purpose of advertising and promoting the sale of Washington apples. In addition to the grower contracts there were handler (shipper) contracts which provided for the same payment. The handler was to pay the 2 cents per hundredweight on*921 all shipments, whether by growers who were members or not. He had a contract right to deduct the amount of the payment from moneys due the member growers. In some instances growers who were not members paid the assessment. This contract also provided as follows: *67 3. The corporation agrees to use all moneys payable to it under this and all similar contracts for the purpose of advertising and promoting the sales of Washington apples, and for the payment of the necessary expense incident to the organization and operation of this Corporation. In addition both contracts required that 85 percent of the total growers' tonnage and 95 percent of the total handlers' tonnage, based upon the 1935 crop, be signed to contracts before any contract became effective. Sufficient contracts were signed to comply with those requirements. The assessment was actually paid on about 96 percent of the 1936-1937 crop of these two areas, although only 86 percent was covered by grower contracts. Petitioner's receipts from this source were $85,172.38 in 1936 and $82,569.28 in 1937. In addition petitioner received donations in the amount of $2,966.95 in 1936 and $375 in 1937 from paper companies, *922 spray companies, and other supply companies interested in the well-being of the apple industry. These gifts were received as the result of solicitation by the petitioner. The object of the solicitation was to secure donations in an amount sufficient to cover the operating expenses, so that all money received from the growers and shippers might be devoted to advertising. The amount received as donations was neither sufficient to take care of all these expenses nor was it restricted to such use. Since the amount of receipts was uncertain and based on a voluntary program, petitioner was careful not to make commitments above the amount of money collected. Because of this policy, petitioner had unexpended receipts on hand at the end of each taxable year, against which there was not presently accruable any advertising contract obligation or operating expense but which had to be devoted to the stated purpose or refunded to the members. Respondent determined that such unexpended amounts of petitioner's receipts represented income and determined deficiencies in income tax on the basis thereof. When petitioner's operations were closed and its obligations for advertisements paid all*923 of its receipts had been spent for advertising except those used for expenses, the purchase of furniture, the organization expense, and the amount of $299.48, cash on hand at the end of 1938. As an expense petitioner included some money spent for the purpose of fostering legislation passed by the state legislature taxing apples and setting up an advertising commission to take care of activities similar to those of petitioner. Thus, there was no need for petitioner to, and it did not, make assessments after the 1936-1937 season. The directors of petitioner were appointed by the Governor of Washington to serve on this commission. Petitioner is a business league, not organized for profit nor to engage in a business which is ordinarily carried on for profit. None *68 of petitioner's receipts inured to the benefit of its members or any individual. Petitioner kept its books on the accrual basis. OPINION. HILL: The first question presented to us for solution is whether petitioner is exempt from tax either as an "agricultural organization" or as a "business league" under section 101 of the Revenue Act of 1936 (hereinafter all sections are from this act). We believe*924 that the character of petitioner clearly brings it within the exemptive provisions of section 101(7). 1 Therefore, although perhaps it would be exempt as an agricultural organization under section 101(1), we need not discuss this provision nor express any opinion about was applicability. Regulations 94, relating to the Revenue Act of 1936, provides in part as follows: ART. 101(7) -1. 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 or board of trade. Thus its activities should be directed*925 to the improvement of business conditions 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 to be self-sustaining, is not a business league. * * * This administrative interpretation of the term "business league" is substantially similar to prior administrative interpretations which we have long approved. Uniform Printing & Supply Co.,9 B.T.A. 251; affd., 33 Fed.(2d) 445. A short resume of the facts will suffice to show that petitioner meets all the requirements of the statute and the regulations. Petitioner was organized by the apple growers of the State of Washington as a nonprofit corporation. The object and purpose was to advertise and promote the sale of Washington apples. The reason for petitioner's organization was the poor condition of the apple growing business due to a decline in the national per capita consumption of this fruit. Thus it appears that the apple growers*926 of Washington had a common interest, i.e., the well-being of their *69 industry, and the purpose for the formation of petitioner was to promote that interest. This much appears to be conceded on brief by the respondent. The principal contention of the respondent is that petitioner was organized to carry on a "regular business of a kind ordinarily carried on for profit" and to perform particular services for the individual apple growers to whose benefit the earnings of petitioner inure. We think the facts of the instant case and the authorities refute respondent's argument. In the cases relied upon by the respondent the primary object of the business league was either to make a profit or to render services to individual members. Retailer's Credit Association of Alameda County v. Commissioner, 90 Fed.(2d) 47; Northwestern Municipal Association, Inc. v. United States, 99 Fed.(2d) 460. The facts of the instant case readily distinguish it from those cases because this petitioner was organized to better the industry as a whole by industrial rather than individual advertising. *927 Retail Credit Association of Minneapolis v. United States,30 Fed.Supp. 855. Neither the statute nor the regulations requires the betterment of the general commercial welfare, but only that the activities be directed to the improvement of business conditions of one or more lines of business. G.C.M. 21000, C.B. 1930-1 (part 1), p. 124. However, the total collections which petitioner made by the assessment of approximately 1 cent per box shows that over 16,000,000 boxes of apples were shipped. Certainly, this demonstrates that apple growing and shipping was an important industry in that state. Thus the general commercial welfare of the community as a whole as well as the growers would be benefited by the improvement of business in the apple industry. Cf. Oregon Casualty Association,37 B.T.A. 340; Crooks v. Kansas City Hay Dealers Association, 37 Fed.(2d) 83. This result is inherent in the type of advertising in which petitioner was organized to and did engage in. No brand name or grower was mentioned in the advertisements, but only the varieties of apples grown in Washington. This type of advertisements did*928 not replace individual advertising, but only increased the demand for Washington apples. The members and other growers benefited indirectly only by the increased demand for Washington apples. We can see no merit in respondent's contention that this is the type of business normally carried on for profit. This might be true if petitioner itself had actually placed the advertising matter. Cf. Retail Credit Association of Minneapolis v. United States, supra.Here petitioner did not even do that, but hired a national advertising agency to place the advertisements. The respondent argues that the provision for distributing the assets of the petitioner at its dissolution, together with the practice of receiving *70 amounts from nonmembers, made earnings inure to the benefit of the stockholders or members. A small part of the receipts of the petitioner came from nonmembers. Those payments may have been gifts rather than income, but we need not decide that question. The petitioner was required to spend all of the money which it received, and there was no provision for distributing any amounts to its members or other individuals except upon dissolution. *929 The petitioner had no surplus, and actually when it dissolved its only assets were $299.48 in cash and some used office furniture. Those assets had to be distributed among the members in proportion to amounts paid in by the members. The return of the cash was in the nature of a refund, since it was much less than the amount members had paid in during that year. Oregon Casualty Association, supra.The circumstance that these two insignificant items were to be distributed to members upon dissolution does not make the petitioner subject to tax. We hold petitioner is exempt from tax by the terms of section 101(7) and the regulations relating thereto. Under this disposition of the case we need not decide any of the further questions posed by the parties. Decision will be entered for petitioner. Footnotes 1. SEC. 101. EXEMPTIONS FROM TAX ON CORPORATIONS. The following organizations shall be exempt from taxable under this title - * * * (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. ↩