Opinion
Docket Nos. 46097 46098.
1955-08-11
POLISH ARMY VETERANS POST 147, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.POLISH ARMY VETERANS POST 147 HOME ASSOCIATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
John M. Dudrick, Esq., for the petitioner. William J. Hagan, Esq., for the respondent.
1. Polish Army Veterans Post 147 was an organization which paid death, sick, and disability benefits to its active members. Approximately 90 per cent of the members of the Post were social members who did not receive any benefits and who were not shown to have any common bond with the active members or among themselves. Held, the Post was not exempt from taxation as a fraternal beneficiary society under section 101(3) or as a social club under section 101(9) of the Internal Revenue Code of 1939.
2. Polish Army Veterans Post 147 Home Association was a corporation which acquired and rented to the Post the building which it occupied. Only active members of the Post were members of the Home Association. Virtually all of its income was derived from rents and from coin machines operated in the clubrooms of the Post. It was not shown that the Home Association was operated for any social purpose. Held, the Home Association was not exempt as a social club under section 101(9) of the Internal Revenue Code of 1939.
3. Held, the Commissioner's determination of petitioners' net income was not shown to be erroneous. John M. Dudrick, Esq., for the petitioner. William J. Hagan, Esq., for the respondent.
Respondent determined deficiencies in the income and declared value excess-profits taxes of petitioners and additions to tax as follows:
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Declared value excess Income tax profits tax
Petitioner Year 25% 25% Deficiency addition Deficiency addition to tax to tax (1945 $325.34 $81.34 $171.78 $42.95 (1946 715.88 203.41 (1947 342.16 85.54 Polish Army Veterans Post 147 (1948 (1949 1.66 (1950 (1945 $816.58 $204.15 $431.15 $107.79 (1946 736.71 184.18
Polish Army Veterans Post (1947 3,288.55 822.14 147 Home Association (1948 1,748.43 437.11 (1949 1,949.54 487.38 (1950 1,202.50 300.62
The issues for decision are:
1. Whether the Commissioner erred in determining that petitioners were not organizations exempt from taxation within the purview of section 101 of the Internal Revenue Code of 1939.
2. Whether the Commissioner erred in determining the amount of income received by the petitioners.
FINDINGS OF FACT.
Since 1945 both petitioners have had their principal offices or headquarters at 287 East Market Street, Wilkes-Barre, Pennsylvania. Neither filed an income or excess profits tax return for any of the taxable years involved.
The petitioner Polish Army Veterans Post 147 (hereinafter referred to as the Post) was a member post of the Polish Army Veterans Association of American, Inc. (hereinafter referred to as the Veterans Association), throughout the years in question.
The Veterans Association, the parent organization, is a New York corporation whose constitution provides that its active membership shall consist of ex-soldiers of the Polish Armed Forces who served during World War I or II and the children of members if they served in the armed forces of any of the Western Allies. Honorary members are also permitted. The constitution further provides for the establishment of posts and states that each active member must be a member of a post and with some exceptions pay monthly dues and an initiation fee to the Veterans Association through the officers of his post.
Provision is also made in the constitution of the Veterans Association for rendering financial aid to sick and infirm ex-soldiers of the Polish Army and their families. In dispensing aid war invalids have first priority and active members of the Veterans Association are second in priority. The bylaws of the Veterans Association provide for the payment of death benefits. They state that the Veterans Association will pay $100 toward the funeral expenses of an active member unless the deceased was a member for less than a year in which case the amount is $50. In 1949 the Commissioner of Internal Revenue ruled that the Veterans Association was an exempt organization under section 101(8) of the Internal Revenue Code of 1939.
The Post was admitted to the Veterans Association in 1934. The purposes of the Post, as set forth in its constitution are as follows:
To maintain in an association or club for the mutual benefit, advantage and enjoyment of its members, by means of legitimate entertainments and social gatherings; to promote, foster and encourage the interests, welfare and improvement of all ex-service men and women, and their auxiliaries; * * *
The constitution of the Post provides for three types of members:
1. Active members.— All members who qualify for active membership in the Veterans Association.
2. Associate or social members.— All persons duly elected to membership by a majority vote of members present at any meeting. Admission to membership is for 1 year, and social members are not permitted to hold office.
3. Honorary members.— Distinguished persons of Polish descent elected to membership. Honorary members are not entitled to vote or hold office, but pay no dues.
During the years 1945 through 1950 the membership of the Post numbered in each class as follows:
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1945 1946 1947 1948 1949 1950 Active 31 37 39 40 41 43 Social 406 456 427 515 544 389 Honorary 15 15 15 15 15 15 Social members paid dues of $1 per year. The dues of the active members were $4.20 per year in 1945, 1946, and 1947, and $4.80 per year in 1948, 1949, and 1950. The Post paid the active members' dues to the Veterans Association. The total amount of dues paid by the active members, the total amount of dues forwarded to the Veterans Association, and the total amount of the active members' dues retained by the Post were as follows:
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1945 1946 1947 1948 1949 1950 Dues paid $124.05 $133.65 $156.85 $163.70 $218.35 $206.80 Forwarded 111.45 130.05 142.40 155.80 178.65 197.45 Retained $12.60 $3.60 $14.45 $7.90 $39.70 $9.35
The Post operated a bar in its clubrooms throughout the taxable years involved. The bar, which was open to all members, was the Post's principal source of revenue.
The Post paid sick, disability, and death benefits to its active members or their families and the expenses of funerals of active members, as follows:
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1945 1946 1947 1948 1949 1950 Sick benefits $10.00 $60.00 $130.00 $220.00 $105.00 $779.00 Disability benefits 210.00 380.00 Death benefits 200.00 400.00 200.00 Funeral expenses 183.20 187.17 96.00 Total $10.00 $60.00 $130.00 $603.20 $902.17 $1,455.00
The amount of benefits paid depended to a large extent upon the amount of income received from the operation of the bar. Social members were not paid the above benefits; nor did they receive such payments from the Veterans Association as did the active members.
The petitioner Polish Army Veterans Post 147 Home Association (hereinafter referred to as the Home Association) is a corporation organized under the ‘Non-Profit Corporation Act’ of the Commonwealth of Pennsylvania on January 30, 1945. All active members of the Post at that time also became members of the Home Association. None of the social or honorary members of the Post became members of the Home Association during the taxable years involved.
The statement of the Home Association's purposes in its certificate of incorporation is merely a repetition of the purposes set forth in the constitution of the Post, and in the bylaws of the Home Association its purposes are said to be:
(a) To maintain a Home which shall be a suitable meeting and recreational center for the benefit, advantage and enjoyment of its members;
(b) To promote the welfare and interests of its members and of all ex-service men and women;
(c) To aid, assist and advise in developing a more intelligent and serviceable citizenship.
Actually, the Home Association was utilized to acquire a building which was used by the Post as its home, headquarters, and clubrooms. It acquired such a building in March 1945 which it rented to the Post beginning in August 1945. All members of the Home Association rendered services in improving these premises.
No dues were paid to the House Association except $36 in 1949. Most of the income of the Home Association was derived from coin machines which it operated in the clubrooms of the Post and from rents. The rental income was received from the Post and from various members of the Post who were the tenants of two adjoining buildings which the Home Association acquired in 1947. The Home Association also received some income from a variety of other sources. The amount of income received from all sources (except dues) was as follows:
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Gaming Other Rents machines sources 1945 $500.00 1 $3,322.63 $819.92 1946 1,200.00 7,040.20 31.00 1947 1,690.00 16,504.55 45.27 1948 2,272.00 11,988.95 323.00 1949 2,432.70 10,935.00 19.00 1950 1,693.65 8,295.75 703.17
The Home Association was given $1,418 in donations and received loans from two of its members and from the Post. It also sold building fund bonds. Most of these loans and bonds were paid off by 1950. At the end of 1950 the Home Association had $24,139.63 in cash in addition to the real estate, fixtures, and $500 in bonds which it owned.
Neither of the petitioners was operated exclusively for pleasure, recreation, or social purposes during the taxable years involved.
OPINION.
BRUCE, Judge:
Both petitioners contend that they were organizations exempt from taxation during the taxable years involved. The Post claims that it was exempt both under section 101(3) and section 101(9) of the Internal Revenue Code of 1939. The Home Association claims that it comes within the purview of section 101(9). Respondent has determined that neither organization was exempt. In order to qualify as exempt organizations, petitioners must bring themselves squarely within the terms of the statute. Heiner v. Colonial Trust Co., 275 U.S. 232; Royal Highlanders, 1 T.C. 184, reversed on another point (C.A. 8) 138 F.2d 240.
Section 101(3) provides for the exemption of:
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;
In our opinion the Post has not established that it was exempt under the above paragraph. To qualify for the exemption an organization must be fraternal. Fraternal Order of Civitans of America, 19 T.C. 240; Philadelphia & Reading Relief Association, 4 B.T.A. 713. Here only the active members, comprising less than 10 per cent of the total membership of the Post, had a common tie. They, of course, had the bond of having formerly served in the Polish Army. But approximately 90 per cent of the total membership of the Post were social members who were not ex-members of the Polish Armed Forces and who, so far as the record discloses, had nothing in common with the active members or with each other. An organization cannot be classes as fraternal where the only common bond between the majority of the members is their membership in that organization. Fraternal Order of Civitans of America; Philadelphia & Reading Relief Association, both supra.
Furthermore, an organization does not qualify as a ‘beneficiary’ society where most of its members are not entitled to receive any benefits. Clause (B) quoted above requires that, to be exempt, the organization must provide ‘for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or their dependents.’ In Fraternal Order of Civitans of America, supra, at p. 244, it was pointed out that this clause ‘would mean little if satisfied by a lodge which provides for the payment of * * * benefits to * * * one class of members * * * and which provides for the payment of no benefits to another class of members.’ In the instant case the social members received no benefits while the active members received benefits from both the Veterans Association and from the Post.
An exemption is granted by section 101(9) to:
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;
The Post does not qualify under this subsection because it paid death, sick, and disability benefits to its active members of their families. These payments were made out of the general funds of the Post which were derived primarily from the operation of the bar. Except for 1945 the amount of these payments by the Post substantially exceeded the amount of that portion of the active members' dues which was not forwarded to the Veterans Association but was retained by the Post. The social members received no benefits. The facts in Allied Trades Club, Inc., 23 T.C. 1017, on appeal (C.A. 3), are almost identical. In holding that the petitioner in that case was not exempt, this Court stated that under the facts presented the payment of benefits ‘could not be classified as an operation for pleasure, recreation, or social purposes and, therefore, the petitioner was not operating exclusively for such purposes.’ We also held that, because of the payment of benefits, a part of the net earnings of the petitioner inured to the benefit of members. For the same reasons we hold that the Post was not exempt under section 101(9).
Similarly, the Home Association has not shown that it qualifies as an exempt organization under section 101(9). Regulations 111, section 29.101(9)-1, provides:
The exemption granted by section 101(9) applies to practically all social and recreation clubs which are supported by membership fees, dues, and assessments. If a club engages in traffic, * * * for profit, such club is not organized and operated exclusively for pleasure, recreation, or social purposes. Generally, an incidental sale of property will not deprive the club of the exemption.
The above regulations are substantially identical with previous regulations in effect since 1921, and by now should have almost the force of law. Juniper Hunting Club, Inc., 28 B.T.A. 525; Allied Trades Club, Inc., supra.
The Home Association was not operated exclusively for pleasure-recreation, or social purposes. In fact, despite the language of its certificate of incorporation and bylaws, so far as the record discloses, the Home Association was operated for none of those purposes during the taxable years involved. The Home Association cannot rely upon the social activities of the Post to establish its social purpose. The Post was an entirely different entity. Banner Building Co., 46 B.T.A. 857.
The Home Association not only apparently failed to perform any social function, but all of its activities were of a business nature. It derived virtually all of its income from rents received from the Post and its members and from the operation of coin machines in the clubrooms of the Post. As over 90 per cent of the members of the Post were not members of the Home Association, these activities constituted engaging in traffic with outsiders for profit. Cf. C.B. 1939-2, p. 106. The money-making activities described were not merely incidental transactions, as was the case in Santee Club v. White, (C.A. 1) 87 F.2d 5, Koon Kreek Klub v. Thomas, (C.A. 5) 108 F.2d 616, Scofield v. Corpus Christi Golf and Country Club, (C.A. 5) 127 F.2d 452, Anderson Country Club, Inc., 2 T.C. 1238, but were the principal activities in which it engaged. Cf. Aviation Club of Utah, 7 T.C. 377, affd. (C.A. 10) 162 F.2d 984, certiorari denied 332 U.S. 837; Banner Building Co., supra; West Side Tennis Club, 39 B.T.A. 149, affd. (C.A. 2) 111 F.2d 6, certiorari denied 311 U.S. 674.
Apparently the Home Association's primary function was to provide a building or clubrooms for the Post, but such is not the function of a social club. It is more the function of the type of organization described in section 101(14) of the Internal Revenue Code of 1939.
However, the Home Association does not rely upon section 101(14); and, in any event, it is clearly inapplicable as the Post was not exempt and the income of the Home Association was not distributed to the Post.
Decisions will be entered for the respondent. SEC. 101. EXEMPTIONS FROM TAX ON CORPORATIONS.Except as provided in paragraph (12)(B) and in supplement U, the following organizations shall be exempt from taxation under this chapter—(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 chapter. -------- Notes:
Includes $1,558 collected from program advertising and $767.33 from the sale of chance books.
Each petitioner filed an amendment to its petition, alleging that the Commissioner erroneously calculated the amount of the deficiency, and that he failed to allow correct depreciation. However, other than their indefinite complaint with regard to depreciation, petitioners do not state in what manner the calculation was erroneous; nor do they allege or point to any error upon which they rely. Also, they have made no attempt to establish the amount of depreciation which was allowed or the amount which should have been allowed.
Respondent computed the deficiencies on the basis of petitioners' books which contain an unsegregated listing of receipts and disbursements. To show error in respondent's determinations, petitioners rely solely upon their own computation of net income. However, their computation consists solely of the deduction of all disbursements from all receipts without any attempt to eliminate either receipts which were not income (such as loans and contributions) or disbursements which were not deductible expenses (such as the purchase price of buildings and sick benefits paid). The results of these computations are obviously inaccurate and cast no doubt upon respondent's determination of net income which is prima facie correct. As there is no basis for assuming that respondent's determinations are in error, they must be sustained. Cf. M. H. Levy Co., 10 B.T.A. 908.