Opinion
Docket Nos. 26402-26408 33429.
1952-06-4
JOHN DANZ, PETITIONER, ET AL.,* v. COMMISSIONER OF INTERNAL REVENUE RESPONDENT.
F. A. LeSourd, Esq., for the petitioners. Wilford H. Payne, Esq., and Douglas L. Barnes, Esq., for the respondent.
1. EXEMPTION— SECTION 101(6)— TRUST OPERATING REGULAR BUSINESS.— Congress, in section 101(6), did not intend to include in the exempt class, as a fund or foundation organized and operated exclusively for charitable purposes, a trust not engaged in charitable work but earning the larger part of its income by the operation of regular substantial businesses, unrelated to the operation of any charity, even though its property must eventually go to corporations of the type described in section 23(o)(2).
2. INCOME— TAXABLE TO GRANTOR— CHARITABLE TRUST— SECTION 22(a)— Clifford CASE.— The income of an irrevocable trust created for the purpose of receiving and earning funds ultimately to benefit charities is not taxable to the grantors.
3. ASSOCIATION TAXABLE AS A CORPORATION— SECTION 3797 (3).— An irrevocable trust created for the purpose of receiving and earning funds ultimately to benefit charities is not an association taxable as a corporation.
4. TRUSTS— DEDUCTION— CHARITABLE CONTRIBUTIONS— SECTION 162(a).— A trust is not entitled to a deduction under section 162(a) for that part of the gross income which is not paid or permanently set aside for the purposes and in the manner specified in section 23(o) pursuant to the terms of the deed creating the trust.
5. INCOME— DEDUCTIONS— CHRISTMAS BONUSES.— Deductions allowed for Christmas bonuses.
6. INCOME— DEDUCTIONS— CONTRIBUTIONS— ‘FOR THE USE OF‘— SECTION 23(o)(2).— Contributions to an irrevocable trust, the funds of which must ultimately go to charities of the kind described in section (o)(2) are for the use of such organizations and are deductible under section 23(o)(2).
7. STATUTE OF LIMITATIONS— RETURNS UNDER SECTION 54(f)— 275(a).— Forms filed under section 54(f) by a trust which supposed itself exempt from tax were not sufficient to start the running of the period fixed by section 275(a) for the assessment and collection of taxes due from such trust.
8. FAILURE TO FILE TIMELY RETURN— SECTION 291(a).— A trust was notified on July 3, 1947, that it was not exempt from tax and must file returns. It failed to file a return for 1947 until May 6, 1948, and failed to show that the delay was due to reasonable cause and not to willful neglect. The Commissioner properly added 10 per cent to the tax under section 291(a). F. A. LeSourd, Esq., for the petitioners. Wilford H. Payne, Esq., and Douglas L. Barnes, Esq., for the respondent.
The Commissioner determined deficiencies in income tax as follows:
+------------------------------------------+ ¦Docket¦ ¦ ¦ ¦ +------+------------------+-----+----------¦ ¦No. ¦Petitioner ¦Year ¦Deficiency¦ +------+------------------+-----+----------¦ ¦ ¦ ¦(1943¦$16,441.84¦ +------+------------------+-----+----------¦ ¦26402 ¦John Danz ¦(1944¦46,624.14 ¦ +------+------------------+-----+----------¦ ¦ ¦ ¦(1945¦45,042.33 ¦ +------+------------------+-----+----------¦ ¦ ¦ ¦(1943¦16,441.84 ¦ +------+------------------+-----+----------¦ ¦26403 ¦Jessie Danz ¦(1944¦46,624.14 ¦ +------+------------------+-----+----------¦ ¦ ¦ ¦(1945¦45,042.33 ¦ +------+------------------+-----+----------¦ ¦26405 ¦William Frank Danz¦1944 ¦595.25 ¦ +------+------------------+-----+----------¦ ¦26406 ¦Selma Jane Danz ¦1944 ¦615.00 ¦ +------+------------------+-----+----------¦ ¦26407 ¦Fredric Danz ¦1944 ¦587.30 ¦ +------+------------------+-----+----------¦ ¦26408 ¦Selma Danz ¦1944 ¦587.30 ¦ +------------------------------------------+
The Commissioner determined the following deficiencies against the John Danz Charitable Trust, in Docket Nos. 26404 and 33429:
+-------------------------------------------------+ ¦Year¦Kind of tax ¦Deficiency¦ +----+---------------------------------+----------¦ ¦1943¦Income tax ¦$2,321.50 ¦ +----+---------------------------------+----------¦ ¦ ¦Declared value excess-profits tax¦3,240.60 ¦ +----+---------------------------------+----------¦ ¦ ¦Excess profits tax ¦11,106.82 ¦ +----+---------------------------------+----------¦ ¦1944¦Income tax ¦4,563.93 ¦ +----+---------------------------------+----------¦ ¦ ¦Declared value excess-profits tax¦10,315.19 ¦ +----+---------------------------------+----------¦ ¦ ¦Excess profits tax ¦43,225.69 ¦ +----+---------------------------------+----------¦ ¦1945¦Income tax ¦6,218.81 ¦ +----+---------------------------------+----------¦ ¦ ¦Declared value excess-profits tax¦10,922.65 ¦ +----+---------------------------------+----------¦ ¦ ¦Excess profits tax ¦45,029.26 ¦ +----+---------------------------------+----------¦ ¦1946¦Income tax ¦33,219.02 ¦ +----+---------------------------------+----------¦ ¦1947¦Income tax ¦19,679.63 ¦ +-------------------------------------------------+
For 1947 there is an addition to the tax under section 291(a) in the amount of $1,967.96.
The issues for decision are:
(1) Is the trust exempt from tax under section 101(6) and, if not, is its income taxable (a) to the community of John and Jessie Danz, (b) as income of an association taxable as a corporation, or (c) as income of a trust under Supplement E, and, as a part of (c), was it entitled to deduct its entire net income under section 162(a);
(2) If the trust income is taxable, did the Commissioner err in disallowing the amounts paid as Christmas bonuses to employees for 1943, 1944, 1945, and 1946;
(3) Are the individuals entitled to deductions under section 23(o)(2) for contributions made to the trust;
(4) Had the statutory period for assessing and collecting the tax expired before the mailing of the deficiency notice to the trust for the years 1943, 1944, and 1945; and
(5) Had the trust reasonable grounds for believing that no return was due for 1947 so that no addition to the tax is due under section 291(a) for failure to file a return?
FINDINGS OF FACT.
John and Jessie Danz are husband and wife. William Frank and Selma Jane Danz are husband and wife. Fredric and Selma Danz are husband and wife. They all reside in Seattle, Washington. John and Jessie are the parents of William and Fredric. All returns for the petitioners herein were filed with the collector of internal revenue for the district of Washington.
John Danz has been engaged in the business of operating motion picture theatres in Seattle for about forty years. He concluded during the latter part of World War II that different ideologies were causing a great deal of trouble and even had a tendency to create wars; the country was about ready for some philosophy with some common ground acceptable to everyone based upon science, pragmatism, experience, and research that would eliminate all differences of opinion; but to get such an organization started in a large number of communities would require money. He and his wife created a trust on December 31, 1942, for the purpose of making and supplying money for that purpose. They called it ‘The John Danz Charitable Trust.‘ John hoped to find some organization in the United States with a number of branches which could be helped with the trust funds to grow and educate the people. He did not know of any such organization at the time he created the trust and for that reason reserved in the trust the right to designate the charitable beneficiaries of the trust.
John and Jessie, as grantors, transferred to the trustees by the trust instrument 900 shares of Sterling Theatres, Inc., common stock. John, William, and Fredric Danz were named as trustees in the trust instrument. The trustees were given broad powers over the trust property, including the power to engage in business under various forms, to loan funds of the trust with or without security, to join in enterprises in which the trustees were personally interested provided that they exercised good faith in the interests of the trust estate, and, in investing or speculating, to combine funds of any trusts created by the grantors. The trustees were entitled to receive reasonable compensation for their services but received non during the taxable years. They were not to be personally liable, in the absence of bad faith, for any losses from proper use of the trust funds. The grantors were not to derive and they have not derived, directly or indirectly, any benefit from the trust property. John Danz was to have the right during his lifetime and by his will to designate the beneficiary or beneficiaries of the trust and to change, add, or withdraw beneficiaries which were to receive corpus or income of the trust at times and in amounts specified by him. Designations were to be in writing delivered to the trustees. Only a corporation or organization ‘of a type which is within the exemption from Federal Income Tax now granted by Paragraph 101 of the Internal Revenue Code and in the event such exemption is hereafter restricted, then also within such restrictions‘ could be designated and the beneficiary also had to be of the type then specified in sections 23(o), 812(d), and 1004(a)(2) of the Internal Revenue Code so that the contribution, bequest or gift to such beneficiary would be deductible from income and exempt from estate and gift tax and in the event those classes were further restricted, then the beneficiary had to be within such restrictions. Named adult grandchildren or the trustees were to make similar designations covering any amount remaining in the trust after John's death and not covered by his will. The trust was irrevocable but could be amended in certain respects by the joint action of William Danz, Fredric Danz, and Leslie Stusser. The power to amend did not include the power to change the beneficiaries or to make a change which would in any way benefit the grantors or their estates. Additional property could be added to the trust. Leslie Stusser was to take the place of John Danz as trustee if occasion arose. Any other vacancy was to be filled by an appointment made by the remaining trustees. The trustees were to act through a majority. The trust instrument was to be governed by the laws of Washington.
Leslie Stusser was not related to or employed by any of the Danzes mentioned herein.
No amendments were made in the trust during the taxable years. John, William, and Fredric Danz served as trustees of the trust from its inception throughout the taxable years. Books and records were kept for the trust. Title to all of the assets of the trust has been taken in the name of the trustees. Bank accounts were maintained for the trust.
John and Jessie Danz made additional contributions to the trust during the taxable years in cash, in stock of Sterling Theatres, Inc., and in stock of Sterling Theatres Company, Inc. William and Selma Jane Danz and Fredric and Selma Danz made cash contributions to the trust during the taxable years. The total contributions made to the trust during the taxable years, taken at the fair market value of each at the time it was made, amounted to $109,542. The stock in Sterling Theatres, Inc., and in Sterling Theatres Company, Inc., held by the trust was a small part of the total outstanding stock of those corporations and played no part in the control or management of those corporations.
John Danz, after the creation of the trust, continued, at his own expense, to search for the type of organization which he had in mind in forming the trust, and after several years of travel and search he decided that there were groups of Humanists which came close to what he had in mind. He was instrumental with others in starting such an organization in Seattle beginning in the early part of 1947. It was incorporated as the Humanist Society of Washington. Prior thereto and beginning in September 1946, he had designated ‘American Humanist Society,‘ an organization which had a number of affiliates in different parts of the United States, as a beneficiary to receive funds of the trust in the total amount of $11,500. He was also instrumental, along with others, in starting the Humanist Society of San Francisco and, after the taxable years, in starting the Humanist Society of Los Angeles. The first distribution from the trust to the Humanist Society of Washington was made on March 20, 1947. Thereafter during that year additional large distributions were made to it, to the Humanist Society of San Francisco, and to other charitable organizations.
The trust purchased 600 shares of stock of Midland Steel Products for $17,691.64 in 1943 and sold those shares for a profit of $4,583.62 in 1945. It bought and retained 500 shares of Anaconda Copper in 1945 and 1,500 shares in 1946, and, in 1946, 1,000 shares each of Boeing Airplane Company, National Gypsum, and Westinghouse Electric at a total cost of $161,154.25. It also held on December 31, 1947, donated shares of Sterling Theatres, Inc., and Sterling Theatres Company, Inc., which it carried at $56,992.
The trust made the following purchases:
+---------------------------------------------------------------------------+ ¦ ¦Cost ¦Year ¦ +--------------------------------------------------------+-----------+------¦ ¦Savoy Hotel Property, including furnishings and fixtures¦$166,440.76¦1943 ¦ +--------------------------------------------------------+-----------+------¦ ¦Improved real estate Seventh and Pike ¦95,544.23 ¦1943 ¦ +--------------------------------------------------------+-----------+------¦ ¦Improved real estate Eighth and Pike ¦42,866.11 ¦1943 ¦ +--------------------------------------------------------+-----------+------¦ ¦Improved real estate Sixth and University ¦75,104.70 ¦1946 ¦ +--------------------------------------------------------+-----------+------¦ ¦Improved real estate San Francisco ¦42,882.35 ¦1947 ¦ +---------------------------------------------------------------------------+
It held the properties during the remaining taxable years and received rents therefrom, except that it sold the property at Eighth and Pike in 1946 at a profit of $43,740.78. The Savoy Hotel property and the Seventh and Pike properties substantially increased in value during the taxable years. There was a mortgage on the Savoy Hotel building in the amount of about $68,000 at the end of 1943. It was reduced $21,676 during 1944, but by the end of 1945 it had been increased to about $91,000. Thereafter, it was gradually reduced until it amounted to $45,739.74 at the end of 1947. There was a mortgage on the Seventh and Pike property which amounted to $44,860.04 at the end of 1943. It had been reduced to $19,689.04 by the end of 1945 and was paid off in 1946. There was a mortgage on the Sixth and University property which amounted to $54,582.22 at the end of 1946. It had been reduced to about $45,000 at the end of 1947.
The trust borrowed money from John Danz and from Sterling Theatres, Inc., at 3 per cent during the taxable years. John had to borrow money at interest rates in excess of 3 per cent to make the loans to the trust. The loans payable of the trust at the end of 1943 amounted to $138,821.06. They were about $4,000 less at the end of 1944 and amounted to about $1,800 at the end of 1945. They amounted to $109,000 at the end of 1946 and to $89,500 at the end of 1947.
The trust purchased a retail candy shop on September 10, 1943, for $1,514.75, another on September 22, 1943, for $875, and a third on January 31, 1944, for $1,500. It operated each shop after the purchase throughout the taxable years but at some undisclosed time thereafter ceased operating them. Each candy shop was adjacent to a theatre owned or managed by Sterling Theatres, Inc. Jessie Danz managed the three candy shops without pay because she wanted to make a contribution in that way to the acquisition of funds for the charitable trust.
The net worth of the trust, as shown on its balance sheets, increased from $65,862.62 at the end of 1943 to $448,420.09 at the end of 1947.
The average of the annual gross receipts from the Savoy Hotel for the taxable years was about $141,000, the operating expenses about $96,400, and the net income about $44,600. The trust had additional income from rentals during the taxable years ranging from $2,270 in 1943 to $12,564.50 in 1945. The total sales of the candy shops during the taxable years were $329,233.95, the net sales $158,689.10, expenses $106,435.75, and the net profits from the operation, including a small amount of income from telephones, were $52,650.44. Dividends received by the trust during the taxable years amounted to $23,458.10. The total net income of the trust for the taxable years, including profits on sales, was $404,526.29.
The trust made no distributions in 1943. Thereafter, it made distributions to a number of organizations, exempt from tax under section 101, of the types described in sections 23(o), 812(d), and 1004(a)(2) of the Internal Revenue Code. The total of those charitable contributions was $65,637.54, of which about two-thirds was contributed in 1947.
The Humanist Society of Washington occupied a large portion of the Sixth and University building rent-free from the time of the inception of that organization. The trust received rent from some other space in that building. The building in San Francisco was occupied rent-free by the Humanist Society of San Francisco.
The intention of the trustees in purchasing the Savoy Hotel property was to operate it only until the personal property could be sold and the real property leased to a hotel operator. Efforts were made to find such a lessee but no satisfactory arrangement was made until January 1, 1948. The hotel, at the time it was purchased by the trust, was being operated by a real estate company in Seattle and that company continued to operate the property for the trust under an oral agreement during the taxable years and until January 1, 1948, when the furnishings were sold for $60,000 and the real estate was leased to a hotel operator.
The trust made no loans to the grantors and no joint investments with anyone during the taxable years.
Docket Nos. 26402 and 26403.
The Commissioner, in determining the deficiencies for the years 1943, 1944, and 1945 against John Danz and Jessie Danz, held that the entire income of the John Danz Charitable Trust was taxable to them under the provisions of section 22(a), and no part of the deductions claimed on the returns of the taxpayers as contributions to the trust was allowable as a deduction under section 23(o) and, consistent with those determinations, he eliminated from the individuals' income interest reported from the trust and allowed the individuals deductions for charitable contributions made through the trust.
Docket Nos. 26404 and 33429.
The Commissioner, in determining the deficiencies for 1943, 1944, 1945, 1946, and 1947 against the John Danz Charitable Trust, held that it was not exempt under section 101(6), but was an association taxable as a corporation under Regulations 111, section 29.3797-3. He further held that amounts of $194 for 1943, $555 for 1944, $702.50 for 1945, and $725 for 1946, described as ‘Christmas gifts to employees,‘ were gifts and not deductible as compensation for services. Those amounts were ordinary and necessary expenses of the operation of the hotel. He further held:
Since no reasonable cause existed after July 1947 for failure to file returns of income, and since a return for the year ended December 31, 1947, was not filed until May 7, 1948, a delinquency penalty of 10 per cent of the tax liability has been asserted under the provisions of Section 291 of the Internal Revenue Code.
Docket Nos. 26405 and 26406.
The Commissioner, in determining the deficiencies for 1944 against William Frank and Selma Jane Danz, held that the deduction of $3,000 claimed by them as a contribution to Jane Danz Charitable Trust was not allowable as a deduction under section 23(o).
Docket Nos. 26407 and 26408.
The Commissioner, in determining the deficiencies against Fredric and Selma Danz for 1944, held that the deduction of $3,200 claimed by them as a contribution to the John Danz Charitable Trust was not allowable as a deduction under section 23(o).
All facts stipulated by the parties are incorporated herein by this reference.
OPINION.
MURDOCK, Judge:
One of the requirements for exemption under section 101(6) is that the entity be ‘organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes.‘ Among the purposes of the present trust during the taxable years was that of making money from the operation of retail candy stores and a hotel. Those were regular substantial businesses which normally subject the owners to tax.
They accounted for the larger part of the income of the trust and were in no sense merely incidental or even related to the operation of a charity. Cf. Squire v. Students Book Corp., 191 F.2d 1018. This trust did not operate any charity but was a ‘feeder‘ in that its property must ultimately go to a charitable organization. It was organized to do and the deed of trust authorized it to do the sort of thing which it actually did in operating these two profitable businesses. This Court has held that where a corporation was organized and operated to carry on a regular business under circumstances similar to those here present, it is not exempt by section 101(6) because it was not organized and operated ‘exclusively‘ for the purposes mentioned in that provision. The subject has been fully discussed both by this Court and by the Court of Appeals for the Fourth Circuit. The Tax Court has also indicated that it had not changed its thinking on this point despite a reversal by the Court of Appeals for the Third Circuit which chose to follow Roche's Beach, Inc. v. Commissioner, 96 F.2d 776. Cf. C. F. Mueller Co., 14 T.C. 922, revd. 190 F.2d 120; Joseph B. Eastman Corporation, 16 T.C. 1502; Donor Realty Corporation, 17 T.C. 899; United States v. Community Services, Inc., 189 F.2d 421. The present case is not distinguishable in principle from those cases because the trust did not take over an existing business, Donor Realty Corporation, supra, or because it did not intend to operate the hotel any longer than might prove to be necessary to find a suitable lessee. The trust is not exempt from tax under section 101(6).
Income from those businesses would not be exempt under the 1950 Amendments. See section 301, Revenue Act of 1950. Substantially all of the work of carrying on the candy shops was not performed without compensation. See section 422(b) provided by that amendment. Section 302(a) of the Revenue Act of 1950 does not apply because this was unrelated business income.
The Commissioner devotes a considerable portion of his brief to a vain effect to support his contention that the income of the trust for the years 1943, 1944, and 1945 is taxable to the community of John and Jessie Danz under section 22(a) and the principle of the line of cases headed by Helvering v. Clifford, 309 U.S. 331. The trouble with his argument is that it does not fit the facts in this case and he does not cite any case with facts similar to those here present. This trust was irrevocable and the grantors retained no powers to change it in any way. It was for an indefinite period and could extend beyond the lives of the grantors. The grantors as such retained no managerial powers over the trust property. There was no purpose in the creation of the trust to benefit the grantors or members of their immediate family in any way, and the trust was not operated during the taxable years to benefit that group. The trust was to benefit charitable organizations. Cf. Pierce v. United States, 51 F.Supp. 126, affd. 137 F.2d 428. The only power retained by John Danz as a grantor was the power to designate beneficiaries and to fix the time and amount of the contributions from the trust to them. The Commissioner indicated by a ruling in 1946 that he would not regard such a power as a reason to tax trust income to a grantor. T.D. 5488, sec. 29.22(a)— 21(d)(2), 1946-1 C.B. pp. 19-21; Mim. 5968, 1946-1 C.B. 25. Cf. Louis Stockstrom, 3 T.C. 255, affd. 148 F.2d 491, which is distinguishable on its facts. Contributions were made and they were made only to organizations which the Commissioner concedes were within sections 23(o) and 101(6). The situation disclosed by this record does not bring the case within the ambit of the Clifford precept or make the income of the trust taxable to the grantors under section 22(a). Cf. Pierce v. United States, supra; Commissioner v. Chamberlain, 121 F.2d 765; Edward Mallinckrodt, Jr., 2 T.C. 1128, 1146, affd. 146 F.2d 1, certiorari denied 324 U.S. 871.
Another contention of the Commissioner, inconsistent with that just discussed, is that the trust was an association taxable as a corporation. One of the leading cases on that subject is Morrissey v. Commissioner, 296 U.S. 344, but it is obvious from a study of that case and others in the same field that they do not apply to an ordinary trust like this one. See Regs. 111, sec. 29.3797-3. The following quotation from the Morrissey case bears this out:
It is no answer to say that these advantages flow from the very nature of trusts. For the question has arisen because of the use and adaptation of the trust mechanism. The suggestion ignores the postulate that we are considering those trusts which have the distinctive feature of being created to enable the participants to carry on a business and divide the gains which accrue from their common undertaking, trusts that thus satisfy the primary conception of association and have the attributes to which we have referred, distinguishing them from partnerships. In such a case, we think that these attributes make the trust sufficiently analogous to corporate organization to justify the conclusion that Congress intended that the income of the enterprise should be taxed in the same manner as that of corporations.
The John Danz Charitable Trust was not created to enable the participants to carry on a business and divide the gains which might accrue from their undertaking. The persons who created it were not participants in a common undertaking of carrying on the business of the trust. They did not divide the gains which accrued from the business of the trust. This was an ordinary trust and it did not have attributes making it sufficiently analogous to a corporation to justify the conclusion that Congress intended to tax its income in the same manner as that of corporations. The Commissioner cites no case holding that a trust like this one, which was organized to aid charities rather than it grantors, was an association taxable as a corporation and he erred in making such a holding in this case.
This trust was a genuine valid trust. In re Stewart's Estate, 26 Wash. 32, 66 Pac. 148; Peth v. Spear, 63 Wash. 291, 115 Pac. 164; In re Planck's Estate, 150 Wash. 301, 272 Pac. 972; In re Hunter's Estate, 147 Wash. 216, 265 Pac. 466. Cf. William H. Donner, 40 B.T.A. 80; A. W. Mellon, 36 B.T.A. 977, 1064 et seq; Eppa Hunton IV, 1 T.C. 821. It is taxable under Supplement E. This brings up the question whether it could have any taxable income since all of its gross income, not otherwise offset by deductions, is allegedly deductible under section 162(a). That section provides that the net income of a trust shall be computed in the same manner as in the case of an individual except that ‘There shall be allowed as a deduction (in lieu of the deduction for charitable, etc., contributions authorized by section 23(o)) any part of the gross income, without limitation, which pursuant to the terms of the will or deed creating the trust, is during the taxable year paid or permanently set aside for the purposes and in the manner specified in section 23(o), * * * .‘ This requires consideration of the terms of the deed of trust. Commissioner v. Bonfils Trust, 115 F.2d 788, affirming 40 B.T.A. 1085; Commissioner v. Upjohn's Estate, 124 F.2d 73. There was no requirement in the deed creating this trust that any part of the gross income of the trust should be paid or permanently set aside during any taxable year for the purposes and in the manner specified in section 23(o). Cf. Old Colony Trust Co. v. Commissioner, 301 U.S. 379. All of the income of this trust for any year could be invested or put back into any business carried on by the trust unless John Danz. by a separate writing, directed otherwise. None of the income of the trust for 1943 was paid or permanently set aside, pursuant to any term of the deed creating the trust, for the purpose and in the manner specified in section 23(o). An annual deduction is not allowed by section 162(a) merely because the property of the trust must eventually go to charities. It was not until October 5, 1944, that any amount was paid by the trust to a charity for the purposes and in the manner specified in section 23(o). The total charitable contributions actually made thereafter during 1944 amounted to $3,846.25. The contributions made in the later taxable years were $2,806.29 for 1945, $15,360 for 1946, and $43,625 for 1947. The record does not show that any other amounts were ever paid or permanently set aside for the purposes and in the manner specified in section 23(o) but it shows that large portions of the gross income for the taxable years were used for other purposes such as to repay loans, to pay interest on loans, and to make new investments. The income of a particular year used for such purposes might never go to any charity. Thus, the trust has not shown that it is entitled to deduct all of its otherwise taxable net income under section 162(a), despite the fact that the ultimate distribution of its properties must be for purposes and in the manner specified in section 23(o). Not only does the petitioner fail to qualify under the plain wording of section 162(a) but it also seems unlikely that Congress intended to grant a deduction from current income where the income could be put to uses of the trust in its effort to create more income or profits for charities and might never reach any charity as income or principal, for example, it might be lost in the business venture.
The Commissioner erred in disallowing the amounts paid by the trust as Christmas bonuses to employees for 1943, 1944, 1945, and 1946. Those represented amounts ranging from $5 to $35 determined by the manager of the hotel to be suitable bonuses for various employees of the hotel, and a bonus to the manager ranging from $50 to $150 per year fixed by the real estate company as agent for the trust in the operation of the hotel. The determination of the Commissioner indicates that they were disallowed not because in excess of reasonable compensation for the employees but because the trust had not deducted withholding or social security taxes from the amounts paid, except in the year 1947 which is not in controversy. A deduction for the payment of $125 to the manager in 1945 was allowed by the Commissioner. He erred in not allowing deductions of all of the amounts claimed.
The holding that the trust was not organized and operated exclusively for charitable purposes under issue (1) also has a bearing upon issue (3) in which the individual petitioners claim that they are entitled to deductions under section 23(o)(2) for contributions made to the trust. Those contributions are not deductible on the ground that they were made to the trust, a fund organized and operated exclusively for charitable purposes. however, contributions are deductible if they are made ‘for the use of‘ a corporation of the kind described in section 23(o)(2). It has been held, properly, that the words ‘for the use of‘ used in section 23(o) are intended to convey a meaning similar to that of ‘in trust for‘ so that a contribution irrevocably in trust for organizations described in section 23(o)(2) is sufficient. H. H. Bowman, 16 B.T.A. 1157; I.T. 3707, 1945 C.B. 114. The trust to which the contribution is made does not need to be an organization of the kind described in sections 101(6) or 23(o)(2). The contributions here in question were made to a valid irrevocable trust for the use of charities of the kind described in section 23(o) and are deductible under the Bureau's own ruling as well as under the law.
The trust contends that Forms 990 which it filed on September 19, 1946, for the calendar years 1943, 1944, and 1945 started the running of the statutory period for assessment and collection of its taxes for those years so that the notice of deficiency mailed to it on October 14, 1949, more than three years later, was too late. The returns to which it refers are those required by section 54(f) (added by section 117(a) and (b) of the Revenue Act of 1943). Section 54 is entitled ‘Records and Special Returns.‘ (f) provides that every organization, with exceptions not here material, exempt from taxation under section 101 shall file an annual return ‘stating specifically the items of gross income, receipts, and disbursements, and such other information for the purpose of carrying out the provisions of this chapter‘ as the Commissioner may prescribe by regulations. There is no suggestion in section 54(f) that returns filed in supposed compliance therewith will start the running of a statute of limitations on the assessment and collection of any taxes. Cf. section 302(b), Revenue Act of 1950. The stipulation includes copies of the returns filed. A comparison of those returns with the fiduciary returns for those same years filed on July 29, 1947, shows that they do not contain all of the data from which a tax could be computed and assessed. Cf. Germantown Trust Co. v. Commissioner, 309 U.S. 304. Furthermore, the information was not only not in the form required of taxpayers, but it was not given with such uniformity, completeness, and arrangement as to constitute an adequate return for the purpose of starting the running of the statute of limitations on assessment and collection of the taxes due. Commissioner v. Lane-Wells Co., 321 U.S. 219, affirming 43 B.T.A. 463. Section 302(b) of the Revenue Act of 1950 provides that the filing of the information return required by section 54(f) for any taxable year beginning prior to January 1, 1951, by an organization which would be exempt under section 101 were it not carrying on a trade or business for profit shall be deemed the filing of a return sufficient to start the period of limitations upon assessment and collection. But it goes on to provide that it shall not apply to a taxable year for which a notice of deficiency was sent to the taxpayer prior to September 20, 1950. The Commissioner mailed the notice of deficiency for the years 1943, 1944, and 1945 to the trust on October 14, 1949. Thus, section 302(b) does not apply in this case, but the wording of it indicates clearly that returns required by section 54(f) for taxable years beginning prior to January 1, 1951, were not intended to start the running of the period of limitations provided in section 275 and it required an act of Congress to make them effective for that purpose under any circumstances. The Commissioner is not barred by the statute of limitations from assessing and collecting the taxes due from the trust for the years 1943, 1944, and 1945.
The Commissioner notified the trustees by a letter dated November 22, 1946, that the trust was not exempt from tax and that income tax returns for all years would be required. Reconsideration was requested and the Commissioner again wrote the trustees on July 3, 1947, that upon reconsideration of the matter the previous conclusion was affirmed and returns must be filed. Fiduciary returns on Form 1041 were filed for the trust on July 28, 1947, covering the years 1943, 1944, 1945, and 1946. The first similar return for 1947 was filed on May 6, 1948. The latter return was due on March 15, 1948. The Commissioner assessed a 10 per cent addition to the tax for 1947 under section 291(a) which provides that in case of any failure to make and file a required return within the prescribed time there shall be added to the tax 5 per cent for each 30 days or fraction thereof during which the failure continues, not to exceed 25 per cent in the aggregate, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. The petitioner has not shown that its failure to make and file a required return for 1947 within the prescribed time was due to reasonable cause and not to willful neglect. The Commissioner did not err in adding the 10 per cent to the income tax of the trust for 1947.
Decisions will be entered under Rule 50.