Banner Bldg. Co. v. Commissioner

BANNER BUILDING COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Banner Bldg. Co. v. Commissioner Docket No. 105605. United States Board of Tax Appeals 46 B.T.A. 857; 1942 BTA LEXIS 802; April 7, 1942, Promulgated *802 1. Petitioner was organized under the laws of the State of Kentucky as a corporation with a stated capital stock. This capital stock was represented by shares of $10 par value which were sold to the members of a fraternal beneficiary society operating under the lodge system, which society is itself exempt from taxation under section 101, Revenue Act of 1936. Petitioner acquired, improved, and has ever since operated a building in Louisville, Kentucky, on which it collects rents, and in which it operates bowling alleys and a bar from which it collects revenue from members of the fraternal beneficiary society and the general public. In the taxable year petitioner had net income from these and other sources. Held, petitioner is not an exempt corporation under section 101, Revenue Act of 1936. 2. During the taxable year petitioner's officers, who were also the officers of the fraternal beneficiary society and the members of such society, conducted bingo parties and other similar activities in petitioner's building to raise revenue to further supplement petitioner's net income and turned over the net proceeds of such parties to petitioner. The fraternal beneficiary society*803 in question had the use of lodge rooms in petitioner's building without any definite payment therefor. Held, the net receipts from these bingo and other parties paid into petitioner's treasury represented taxable income, and the Commissioner is sustained in including these net receipts in petitioner's income. Charles Roser, Esq., for the petitioner. Frank M. Cavanaugh, Esq., for the respondent. BLACK *858 The respondent determined deficiencies in the petitioner's income and excess profits taxes for the fiscal year ended November 30, 1938, in the total amount of $361.20. In determining these deficiencies respondent made several adjustments in the income and deductions as reported on petitioner's income tax return. Some of these adjustments were in petitioner's favor and some of them operated to increase petitioner's net income. None of them are contested in this proceeding. After making these adjustments the respondent held that petitioner was not an exempt corporation under section 101 of the Revenue Act of 1936. The petitioner denies liability upon the ground that it is an exempt corporation under section 101(3), (6), (9) and (14) *804 of the Revenue Act of 1936. The petitioner also alleges that the respondent erred in treating money turned over to it during the taxable year by Banner Council No. 39 Jr. O.U.A.M. as income from rents, and not donations or deposits. FINDINGS OF FACT. The petitioner is a corporation with principal place of business in the city of Louisville, Kentucky. It filed its income and excess profits tax return for the taxable year with the collector of internal revenue for the district of Kentuckt, at Louisville. The petitioner was incorporated on January 1, 1908, by members of Banner Council No. 39, hereinafter called Banner Council, a local lodge unit of the Junior Order of United American Mechanics, a fraternal beneficiary society. The purpose for which the petitioner was organized is stated by its incorporators in a prelude to its printed bylaws and articles of incorporation reading as follows: *859 THE OBJECT. The object of the Banner Building Company is to erect a suitable place for Banner Council No. 39 Jr. O.U.A.M. to hold its meetings and to arrange for its members regular club quarters. It is also the intention to make this a paying proposition and for this*805 reason we have formed a stock Corporation company in conjunction with Banner Council No. 39 and it is hoped that each and every member will lend his assistance. Pertinent provisions of its charter are as follows: Article 3. The corporation is formed for the purpose of acquiring land in Louisville, Kentucky and erecting thereon a building, which building is to be used as a Lodge Hall and leased for Lodge purposes, but said building and parts thereof may be used and leased for other purposes. For these purposes said corporation shall have the right to purchase, acquire, own and sell all necessary real and personal property. Article 4. The capital stock of the corporation is fixed at $15,000, to be divided into fifteen hundred shares of $10.00 each. * * * Article 7. The affairs of the corporation shall be conducted by a Board of twelve (12) Directors, one of whom shall be elected by the Board as President. Said Board of Directors shall also elect one of its members as Vice President, one of its members as Secretary and one as Treasurer. The Board of Directors shall have the right to appoint and vest in the officers or agents of the Corporation the power to appoint such*806 subordinate officers, agents or servants as they may deem proper. The Directors are to be elected annually at a stockholder's meeting to be held at the office of the company in Louisville, Kentucky on the first Monday in January of each year. The directors are to hold office until their successors are elected and qualified. The bylaws provide that only Banner Council or its members shall be allowed to become stockholders or own any stock in the petitioner, and gives Banner Council the right to purchase the stock of any stockholder at any time by giving 30 days' notice to the stockholder and to the petitioner. Section 16 of the bylaws of petitioner provides as follows: Each member shall be entitled to a certificate of stock, designating the number of his shares, which shall be issued in the name and under the seal of this Company, signed by the President and attested by the Secretary, which certificate shall be transferable only to Banner Council No. 39 Jr. O.U.A.M. or members thereof, by assignment in person or by attorney, in the presence of the Secretary and to be approved by the Board of Directors. Each certificate of stock shall be conspicuously marked with the number*807 and the date of issue. No certificates of stock shall be issued until same are fully paid. Members desiring to transfer or sell their stock shall give the Board of Directors 30 days' notice. Section 21 of these bylaws provides: DIVIDENDS AND RESERVE FUND. The Board of Directors shall determine semi-annually how much of the earnings shall be set apart to the Reserve Fund for the payment of contingent losses, and the residue of said earnings shall be divided among the shareholders. Soon after completing organization, the petitioner's incorporators offered its capital stock to members of Banner Council at $10 per *860 share on small weekly payments. Most of the members purchased petitioner's stock and have ever since remained its stockholders. Some of the shareholders, who have died, have had their stock purchased by Banner Council. With funds derived from the sale of stock and from borrowings, the petitioner purchased its present home office building at 318 East Broadway, in the city of Louisville, Kentucky, for the price of $14,600. The condition of the property when purchased is not shown in the record, the testimony merely showing it to be a building about*808 100 feet wide on East Broadway and extending back to the alley in rear and three stories high at the front and two stories high at the rear. The petitioner remodeled and improved the building at an expenditure of some thirty or forty thousand dollars, which it raised through an issue of mortgage bonds. The improvement included conversion of the first floor into an auditorium and dance hall, intended for rental to the public at commercial rates; also a clubroom for use of members of Banner Council, and a refreshment bar, primarily for use of club members but open to the public generally. On the second floor provision was made for the petitioner's office and the office of Banner Council, and the balance of the space was divided into two lodge rooms, one large and one small, suitably furnished and equipped for the holding of lodge meetings. The third floor of the building was made into living quarters for the building janitor. For a number of years the petitioner rented its auditorium and dance hall from time to time for public gatherings, meetings, entertainments, bazaars, dances, and like activities. It frequently donated use of the hall to churches and societies engaged in furthering*809 religious and charitable causes. The auditorium and hall, however, proved not to be a paying facility and, after several years of operating with continuing losses, the petitioner converted the space occupied by it into eight bowling alleys at an expenditure of $20,000, which it borrowed from a local bank. Since installation the bowling alley enterprise has been petitioner's largest source of income. Banner Council and members use the petitioner's lodge rooms, club, and other facilities without paying anything therefor except in the manner hereinafter indicated. When not required for Banner Council, the lodge rooms are rented to outside organizations at the rate of $4 a night for the large room and $2 a night for the small room. The gross rentals from these rooms, plus receipts from the bowling alleys and the bar, are insufficient to meet the petitioner's operating expenses, and to further augment its income members of Banner Council regularly conduct picnics and bingo parties as money raising affairs, the profits from which are turned over to the petitioner's treasurer without condition. The petitioner sometimes borrows money from Banner Council, and at the end of the taxable*810 year owed to the latter a *861 considerable sum for money borrowed. The petitioner has never declared dividends upon its capital stock, or otherwise distributed profits among its stockholders. It paid, however, annually to some of its stockholders over a period of some five or six years, 3 percent upon their respective investments in its stock upon the theory that the investments constituted temporary loans to it for the period following the organization. It discontinued these payments about the year 1918. The petitioner pays no salaries to its officers and directors except to its secretary and treasurer, respectively, these being limited by its bylaws to $100 and $25 per annum. Frequently members of Banner Council render valuable services to petitioner in the form of making repairs and improvements to its building without making any charge therefor. In its income and excess profits tax return for the taxable year, the petitioner reported gross income in the amount of $25,960.05, of which $423 was derived from rentals, and the rest from other income, explained in schedule E of the return as follows: ITEM 13 - OTHER INCOME $5,589.39 Picnics, other donations. 13,143.67 Bowling Alleys. 6,803.99 Refreshments & Bar. $25,537.05 Total *811 Petitioner took deductions of $24,701.98 on its return, none of which are in controversy in this proceeding. Petitioner's return showed net income of $1,258.07, but petitioner paid no taxes upon the claim that it was and is a fraternal organization exempt from taxation on income under section 101 of the Revenue Act of 1936. Petitioner's income tax return for the taxable year contained the following, designated as: SPECIAL NOTE Banner Building Company is exempt from the Federal Income Tax in accordance with 101. "Exemption from Tax on Corporation" Sec. 3. Fraternal beneficiary societies, Orders, or Associations (a) operating under the Lodge System or for the exclusive benefit of the members of a fraternity itself operating under the Lodge System and (b) providing for the payment of life, sick, accident or other benefits to the members of such Socity, Order, or Association or their dependents. The respondent, as has already been stated, denied petitioner's claim for exemption and determined the deficiencies in question. OPINION. BLACK: In support of its claim for exemption as a fraternal beneficiary society, the petitioner pleads specifically the benefits of*812 paragraphs *862 (3), (6), (9), and (14) of section 101 of the Revenue Act of 1936. Exemption is claimed under facts stated in the petition as follows: (b) That the petitioner is a Fraternal beneficiary society, operating under the lodge system for the exclusive benefit of the members of Banner Council No. 39, Junior Order United American Mechanics, a fraternity itself operating under the lodge system; and the petitioner does operate indirectly through Banner Council No. 39 and does assist Banner Council in the payment of sick and death claims, and provides for other relief and assistance to its own members in addition to helping all other worthy public causes both private and governmental. (c) That the petitioner does not operate for profit and no part of its net earnings is now, nor has it ever inured to the benefit of any member or individual. Nor has any person ever secured any profits from the petitioner and no one can received any personal gain or profits in the future. The paragraphs in section 101 of the Revenue Act of 1936 relied upon by petitioner are printed in the margin. 1 *813 Considering first the petitioner's contention that it is a fraternal beneficiary society within the meaning of paragraph (3), supra, it is obvious, we think, that the contention must be denied. The section is clear in limiting its benefits solely to societies "(A) operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system" and (B) "providing for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or their dependents." It seems clear of course that Banner Council No. 39 Jr. O.U.A.M. is a fraternal beneficiary society within the meaning of the above quoted law and is exempt from Federal taxation. The respondent concedes that is true, but Banner Council is not before us for taxation. Clearly, it is not the same entity as the Banner Building Co., which is the petitioner in the instant case, and it is *863 futile, we think, under the showing which has been made to argue that the petitioner meets either of the requirements for exemption above named. First, its charter is that of a capital stock corporation operating under a board of directors, *814 and not a fraternal organization operating under the lodge system. Stock of a par value of $10 per share was actually issued to stockholders who paid in the amounts which they subscribed for it. This stock is still outstanding, so far as the record shows, although some of it is in the hands of others than those to whom it was originally issued. The purpose for which the corporation was organized, as declared in its charter, are purely business purposes, which comprehend earning of profits. The bylaws anticipate the distribution of profits among the stockholders, and in section 21, after directing the directors to determine semiannually how much shall be set apart for a contingent loss fund, provide that the residue of the earning shall be divided among the shareholders. These provisions of the charter and bylaws are determinative of the petitioner's true character as a corporation. ; American Surety Co. v. 14 Canal St., 276 Mass. 119; *815 ; ; ; ; . Under authority of these decisions we decide against the petitioner on the first point urged. Likewise, under the same authorities and under the same line of reasoning, without repeating it, petitioner is not exempt under section 101(6) or (9). We hold against its contentions that it is exempt under these provisions. The petitioner's claim for classification as a holding corporation under paragraph (14) likewise can not be sustained. A holding c0mpany under this paragraph is one which has been organized for the exclusive purpose of holding title to property, collecting the income therefrom and turning over the entire amount, less expenses, to an exempt association. The petitioner has not shown that it was organized for any such purpose. Again we refer to its charter and bylaws for proof of its corporate form and purpose, which in neither respect are within the paragraph. The petitioner*816 contends, however, notwithstanding its charter provisions, that it was organized to serve the purposes of a building holding company for Banner Council, and has so operated since its organization to and including the taxable year. It contends, that actual operations rather than corporate form are the test of its right to be exempted under the law. We need not discuss the law involved in this last claim, since the record fails to show the petitioner's compliance in respect to operations. An *864 essential requirement of a holding company under the paragraph pleaded is that it turn over income from the property held, less expenses, to an exempt association. The petitioner has not shown that it was under any legal obligation to turn over any of its funds to Banner Council No. 39 Jr. O.U.A.M., nor has it shown that it did in fact pay over any of its said funds to Banner Council. The failure in this essential precludes its classification as an exempt corporation under this provision. ; affd., *817 . The petitioner is not sustained in this contention. There remains to be considered whether or not the respondent erred in treating as part of petitioner's gross income the net receipts from bingo parties, and picnics conducted by Banner Council and members and turned over to the petitioner during the taxable year. The petitioner contends that these payments were gifts or deposits from Banner Council and its members. The respondent stated his position respecting these payments in a paragraph of the deficiency notice as follows: Respecting the various sums turned over to you by Banner Council No. 39, and claimed by you to be contributions or deposits, it is held that all such sums and monies were rental income to you paid by Banner Council No. 39 for use and occupancy by it of your premises. Whether or not the respondent correctly classed these payments as rents, we need not decide. We think that, under the evidence in this proceeding, he correctly included them as part of the petitioner's gross income and must be sustained. The petitioner contends that the payments were gifts from Banner Council and members to it. Gifts are defined as the voluntary*818 transfer of property from one person to another, without any consideration, or compensation therefor. ; . To be without consideration means without obligation to the donee, as might be discharged or paid by the transfer. In our opinion Banner Council and its members can not be said to be without obligation to the petitioner in this case. They enjoy at all times and without cost free use of its building, rooms, club, and all other rental facilities. These facilities are used in conducting the money raising affairs here discussed. The petitioner's committees and officers assist in conducting said parties and its treasurer receives the profits from all of them. The petitioner is a stock corporation operating for the purpose of earning income. It pays taxes on the property which it owns. For the taxable year in question it deducted for taxes $1,499.78. It pays for repairs to its building. It pays interest on its bonded and other indebtedness. Obviously it must collect money for the use of its facilities to meet *865 these and other expenses, *819 and there appears to be no good reason why it should not collect from Banner Council No. 39. This it did in the form of net profits from bingo parties and picnics. The petitioner concedes that the parties are given for its exclusive benefit, the purpose being to supplement its revenues to meet deficiencies in its operating income. We think petitioner has failed to show that these payments were transfers of property made to it without motivating considerations and therefore in establishing that they constituted gifts. On this point the petitioner is not sustained. Decision will be entered for the respondent. Footnotes 1. SEC. 101. EXEMPTIONS FROM TAX ON CORPORATIONS. The following organizations shall be exempt from taxation under this title - * * * (3) Fraternal beneficiary societies, orders, or associations, (a) operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system; and (b) providing for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or their dependents; * * * (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, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation; * * * (9) Clubs organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net earnings of which inures to the benefit of any private shareholder; * * * (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; ↩