Opinion
Docket No. 48059.
1955-06-14
ESTATE OF PHILIP R. THAYER, DECEASED, ANNA-MARY THAYER, ERNEST W. JACKSON, AND CROCKER FIRST NATIONAL BANK OF SAN FRANCISCO, EXECUTORS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Clarence E. Musto, Esq., for the petitioners. Aaron S. Resnik, Esq., for the respondent.
Clarence E. Musto, Esq., for the petitioners. Aaron S. Resnik, Esq., for the respondent.
Held, a legacy by the decedent to the California Alumni Association is deductible from the gross estate under section 812(d), Internal Revenue Code of 1939.
This proceeding involves a deficiency in estate tax in the amount of $26,341.48. The estate tax return was filed with the collector of internal revenue at San Francisco, California. Certain adjustments are uncontested. The sole issue presented for decision is whether a legacy by the decedent to California Alumni Association is deductible from the gross estate under section 812 (d) of the Internal Revenue Code of 1939. A stipulation of facts was filed and oral testimony and exhibits were introduced.
FINDINGS OF FACT.
The stipulated facts are found as stipulated and the exhibits to the stipulation are incorporated by this reference.
Philip R. Thayer, died on August 10, 1950. Anna-Mary Thayer, Ernest W. Jackson, and Crocker First National Bank of San Francisco are the duly appointed and qualified executrix and executors of the will of the decedent.
The estate tax return was filed on November 6, 1951. A deduction was claimed for $60,101.98, the amount of a bequest to California Alumni Association.
The University of California, hereinafter referred to as the university, was at all pertinent times a public institution organized and operated exclusively for educational purposes by the State of California and is supported by the State.
California Alumni Association, hereinafter referred to as the Association, was at all pertinent times a corporation organized under the laws of the State of California. Any person awarded a degree by the university or who had attended the university for one semester or more, or a member of its faculty, could become an active member of the Association upon payment of the dues. Until September 1, 1954, the Association's place of business was located in a building owned by the university on its campus at Berkeley.
The Association has carried on a program known as the California Alumni Scholarship Program under which the Association brings to the university leading high school and junior college students from throughout the State, the funds for these scholarships being secured from solicitation by the Association from the alumni of the university. The funds are administered and awards made under direction of the regents of the university. This program has grown from 13 scholarships awarded in 1934 to 189 awarded in 1952, and the total since 1934 amounts to about 2,200 awards. The amounts of the scholarships have increased from $180 to $300 each.
The Association publishes and distributes to all its members a magazine known as the California Monthly. The purpose of this magazine is to convey to the alumni information concerning the university and its activities and information developed at the university relative to new discoveries in the field of science and in other fields and other information, to maintain a continuing interest in the university on the part of its alumni and from time to time to secure their assistance as the university may need assistance. The magazine contains some educational material and some descriptions of personalities connected with the university. For example, the November 1952 issue of the Monthly contains articles on ‘Teaching and Research in the Physical Sciences,‘ one of a series of articles on University and Society, ‘Dwinelle Hall,‘ describing a new classroom building, ‘The Virus Laboratory,‘ describing a new laboratory, ‘Our Soundest Investment,‘ referring to the crop of scholars attending under the Alumni Scholarship Program, ‘California's High Campus,‘ describing the Lick Observatory on Mount Hamilton, of which the regents of the university are the trustees, ‘Johnny Olszewski,‘ describing a prominent California football player, and ‘A Tribute to You,‘ describing the new alumni building. In addition it contains news of the alumni clubs, reports from the various campuses, a description of the oldest living alumnus, ‘Keeping in Touch,’ containing news of individuals in past graduating classes, listed by classes, a class reunion calendar, university calendar, ‘Science Roundup,‘ describing a new polio vaccine, ‘Books and the University’ and a roster of worldwide alumni contacts. Advertisements include listings of schools for boys or girls in California.
The Association organized approximately 100 alumni clubs throughout the State. The primary activity of these clubs is to have speakers from the university deliver lectures on educational subjects. One of the purposes of the clubs is to bring the faculty of the university closer to the people of the State, so that citizens may know more about the university and its activities and benefits and therefore be more willing to give it financial support. These clubs also have as one of their activities the support of the Alumni Scholarship Program. The association assists the clubs by securing speakers from the university and paying their expenses on trips to address these clubs and reporting the meetings in the magazine. The clubs have some social activities.
Each year the Association holds special educational institutes in the Los Angeles and San Francisco Bay areas at which leading members of the university faculty speak on subjects of an educational character. These institutes are open to and are attended by the general public.
The Association holds a statewide alumni conference annually, usually in September, at which alumni leaders confer with university officers concerning university problems. At one such conference there were scheduled 15-minute talks followed by discussions on ‘The Statewide University,’ ‘The Student Body— Today and Tomorrow,’ ‘Teaching Today at Berkeley,’ ‘Plans for Future Building and Development— Berkeley Campus,‘ and ‘The University and the Legislature,‘ with luncheon addresses by the chancellor and the president, a visit to secret football practice, and a reception at the residence of the secretary of the Association.
Each year the Association sponsors a tour by the president of the university to alumni groups through the State at which the president and distinguished members of the university's faculty speak on subjects of current local or national interest. This is for the purpose of fostering a continuing interest in and support of the university by the alumni.
The Association carries on an alumni counseling program under which individual alumni working in cooperation with the University Counseling Center confer with students and advise them concerning their selection of professions and careers.
The Association made a study of the extracurricular activities of the students of the university at Berkeley and the facilities needed for such activities. The cost of this study, approximately $25,000, was paid by the Association. The Association submitted a report of this study in a volume entitled ‘Students at Berkeley’ to the regents of the university who, as a result, gave official sanction to the erection of a student union building to be constructed on property owned by the regents on the Berkeley campus.
The Association participated in the construction of a building known as Alumni House on the campus at Berkeley. The building was erected for the purpose of creating a closer interest in the university by the alumni and to make more effective alumni efforts to be of service to the university. The estimated cost of this building is $325,000 which sum will be raised by the Association. The title to the building is vested in the regents. The offices of the Association are now in this building. There are rooms available for meetings and recreational activities. It is used by student groups, faculty, and administrative officers of the university as well as by alumni.
The Association operates a summer camp at Pinecrest in the Stanislaus National Forest about 30 miles east of Sonora. It is operated for about 10 weeks each summer and is attended by about 1,200 to 1,500 alumni and their families. Those alumni who are members of the Association may attend at a reduced rate. The camp is operated on a nonprofit basis. A number of lectures and discussion groups or seminars are scheduled at the camp conducted by professors from the university.
The Association carries on a number of other activities calculated to keep alive and foster the loyalty of the alumni to the university for the purpose of advancing the interests of the university. These include a commencement luncheon, and a charter day banquet.
All the activities of the Association are for the purpose of advancing the interests of the university and for its benefit. This is not the sole or exclusive purpose of such activities. No substantial part of the activities of the Association is carrying on propaganda, or otherwise attempting to influence legislation.
The Association is operated as a nonprofit organization and none of its moneys is used for the benefit of any alumnus. The Association endowment fund is in possession of the regents and is invested by them. Earnings from this fund and membership dues are used for the foregoing activities.
The Association had approximately 40,000 members in 1950 of which a majority were life members. Its receipts are derived from dues from life or annual members, income from the endowment fund composed of portions of life membership dues deposited with the regents, from advertising in the magazine, from sale of souvenirs, and from special contributions from alumni for particular purposes. The life membership endowment fund now amounts to about $1,200,000. Funds received for scholarship purposes are received by the Association or by California Alumni Foundation, a separate organization within the Association, and are deposited with the regents who supervise the fund and award the scholarships.
The expenditures shown on the financial statement under the heading ‘Meetings and Banquets' include the expenses of speakers sent from the university to address local clubs. The Association paid the expenses of such speakers for some 200 or 300 trips each year.
The following is a comparative statement of the Association's income and surplus for fiscal years ended June 30, in 1950 and 1949:
+------------------------------------------------------------------+ ¦ ¦June 30, 1950¦June 30, 1949¦ +--------------------------------------+-------------+-------------¦ ¦Operating income: ¦ ¦ ¦ +--------------------------------------+-------------+-------------¦ ¦Life memberships ¦$89,458 ¦$59,925 ¦ +--------------------------------------+-------------+-------------¦ ¦Annual memberships ¦36,280 ¦31,907 ¦ +--------------------------------------+-------------+-------------¦ ¦California Monthly advertising ¦26,288 ¦30,862 ¦ +--------------------------------------+-------------+-------------¦ ¦Interest on endowment funds, etc ¦29,967 ¦27,432 ¦ +--------------------------------------+-------------+-------------¦ ¦Total operating income ¦$181,993 ¦$150,126 ¦ +--------------------------------------+-------------+-------------¦ ¦Operating expenses: ¦ ¦ ¦ +--------------------------------------+-------------+-------------¦ ¦Life membership promotion ¦$47,335 ¦$35,420 ¦ +--------------------------------------+-------------+-------------¦ ¦Annual membership promotion ¦4,446 ¦4,125 ¦ +--------------------------------------+-------------+-------------¦ ¦California Monthly direct expenses ¦60,863 ¦63,373 ¦ +--------------------------------------+-------------+-------------¦ ¦Administration and office ¦31,411 ¦38,515 ¦ +--------------------------------------+-------------+-------------¦ ¦Meetings and banquets ¦24,431 ¦18,697 ¦ +--------------------------------------+-------------+-------------¦ ¦Files and records ¦5,754 ¦5,576 ¦ +--------------------------------------+-------------+-------------¦ ¦Scholarships ¦1,997 ¦2,081 ¦ +--------------------------------------+-------------+-------------¦ ¦Total operating expenses ¦$176,237 ¦$167,787 ¦ +--------------------------------------+-------------+-------------¦ ¦Net income from operations ¦$5,756 ¦($17,661) ¦ +--------------------------------------+-------------+-------------¦ ¦Profit on sale of plates, records, etc¦3,491 ¦10,963 ¦ +--------------------------------------+-------------+-------------¦ ¦ ¦$9,247 ¦($6,698) ¦ +--------------------------------------+-------------+-------------¦ ¦Loss from summer camp operations ¦8,394 ¦879 ¦ +--------------------------------------+-------------+-------------¦ ¦Net income ¦$853 ¦($7,577) ¦ +--------------------------------------+-------------+-------------¦ ¦Surplus: ¦ ¦ ¦ +--------------------------------------+-------------+-------------¦ ¦Balance at beginning of year ¦$21,450 ¦$37,774 ¦ +--------------------------------------+-------------+-------------¦ ¦Add: Surplus adjustments ¦1,054 ¦1 (8,747) ¦ +--------------------------------------+-------------+-------------¦ ¦Surplus at end of year ¦$23,357 ¦$21,450 ¦ +------------------------------------------------------------------+
The following is a comparative statement of the financial situation of the Association as at June 30, 1950 and 1949:
+-----------------------------------------------------------------------------+ ¦ ¦June 30, 1950¦June 30, 1949¦ +-------------------------------------------------+-------------+-------------¦ ¦Current assets: ¦ ¦ ¦ +-------------------------------------------------+-------------+-------------¦ ¦Cash and deposits ¦$38,509 ¦$47,222 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Due on life memberships ¦63,785 ¦58,780 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Accounts receivable ¦13,737 ¦13,572 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Alumni camp supplies and advanced expenses ¦13,435 ¦16,406 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Supplies inventories ¦3,400 ¦2,736 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Total current assets ¦$132,866 ¦$138,716 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Less—current liabilities: ¦ ¦ ¦ +-------------------------------------------------+-------------+-------------¦ ¦Accounts payable ¦26,004 ¦22,056 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Deposits on alumni camp reservations ¦21,010 ¦18,892 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Due Alumni Foundation—scholarship funds ¦13,424 ¦11,531 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Other accruals and payables ¦18,506 ¦4,444 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Total current liabilities ¦$78,944 ¦$56,923 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Excess of current assets over current liabilities¦$53,922 ¦$81,793 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Funds and other assets: ¦ ¦ ¦ +-------------------------------------------------+-------------+-------------¦ ¦Life membership endowment and trust funds ¦875,374 ¦765,374 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Due on life memberships ¦562,575 ¦457,527 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Sundry investments ¦ ¦1,360 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Summer camp facilities ¦27,941 ¦21,086 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Office furniture and improvements ¦10,456 ¦4,114 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Deferred charges ¦45,399 ¦32,275 ¦ +-------------------------------------------------+-------------+-------------¦ ¦ ¦$1,575,667 ¦$1,363,529 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Deduct: ¦ ¦ ¦ +-------------------------------------------------+-------------+-------------¦ ¦Deferred interest, promotional income ¦ ¦ ¦ +-------------------------------------------------+-------------+-------------¦ ¦(prorated) ¦68,082 ¦64,170 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Net assets ¦$1,507,585 ¦$1,299,359 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Net assets evidenced by: ¦ ¦ ¦ +-------------------------------------------------+-------------+-------------¦ ¦Reserves for life membership, endowments, and ¦ ¦ ¦ +-------------------------------------------------+-------------+-------------¦ ¦trust funds ¦$897,653 ¦796,382 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Deferred life membership pledges ¦562,575 ¦457,527 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Reserve for California Monthly ¦24,000 ¦24,000 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Surplus ¦23,357 ¦21,450 ¦ +-------------------------------------------------+-------------+-------------¦ ¦Total ¦$1,507,585 ¦$1,299,359 ¦ +-----------------------------------------------------------------------------+
In the probate proceeding of this estate the State inheritance tax appraiser found that the interest passing to the Association under the will was subject to the inheritance tax law of California. The executors filed objections. After a trial on the merits the Superior Court of the State of California in and for the County of Alameda sustained the objections and found that the bequest was not subject to the State inheritance tax law. The Superior Court held that the Association was ‘organized solely for and exclusively engaged in and devoted to charitable, educational, public or other like work * * * pecuniary profit not being its object or purpose.’
In 1936 the Treasury Department issued a ruling that the Association was exempt from income tax as a social club within the provisions of section 101(9) of the Revenue Act of 1934. In 1938 the Department granted the Association exemption pursuant to section 101(b) of the Revenue Act of 1938 and held that contributions to it were deductible pursuant to section 23(o) for income tax purposes. In 1944 the Department revoked the 1938 ruling and exemption was granted under section 101(9) of the Internal Revenue Code.
The California Alumni Association is organized and operated exclusively for educational or charitable purposes.