Opinion
Docket No. 13318.
1949-06-28
THE AUTOMOBILE CLUB OF ST. PAUL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Gustav C. Axelrod, Esq., for the petitioner. Thomas A. Steele, Jr., Esq., for the respondent.
Petitioner, an automobile club, deriving its income principally from membership dues and the sale of insurance and rendering to its membership various services, including emergency road service, tourist information, and similar services, held, not exempt from tax under section 101(8) or (9) of the Internal Revenue Code. Chattanooga Automobile Club, 12 T.C. 967, followed. Gustav C. Axelrod, Esq., for the petitioner. Thomas A. Steele, Jr., Esq., for the respondent.
This proceeding involves the following deficiencies in income and excess profits tax and penalties for the calendar years 1943 and 1944:
+------------------------------------------------------+ ¦ ¦Deficiency ¦25% penalty ¦ +------------------+-------------------+---------------¦ ¦Tax ¦ ¦ ¦ ¦ ¦ +------------------+---------+---------+-------+-------¦ ¦ ¦1943 ¦1944 ¦1943 ¦1944 ¦ +------------------+---------+---------+-------+-------¦ ¦Income tax ¦$1,879.00¦$2,386.72¦$469.75¦$596.68¦ +------------------+---------+---------+-------+-------¦ ¦Excess profits tax¦2,780.80 ¦ ¦695.20 ¦ ¦ +------------------------------------------------------+
The sole issue herein is whether the Commissioner was correct in determining that the petitioner, during 1943 and 1944, was not exempt from tax under the provisions of either section 101(8) or section 101(9) of the Internal Revenue Code.
Petitioner concedes that if it is determined herein that it is not a tax exempt organization, its membership dues are properly includible in its taxable income and that the delinquency penalties assessed by the respondent in the notice of deficiency are correct. Other adjustments made by the respondent in computing petitioner's tax liability for 1943 and 1944 are not contested by the petitioner.
FINDINGS OF FACT.
Petitioner is a corporation, organized in 1903 under the laws of the State of Minnesota, with its principal offices at 85-87 East Kellogg Boulevard, St. Paul, Minnesota. Petitioner kept its books and records on an accrual and calendar year basis. On August 15, 1944, petitioner filed its Federal corporation income and declared value excess profits tax return for the taxable year ended December 31, 1943, with the collector of internal revenue for the district of Minnesota.
Petitioner's articles of incorporation, as amended on July 29, 1925, state its purpose and objectives as follows:
Its general plan of operation shall be to promote good roads and render to its members emergency road and other services; to advance the business and commercial interests of the City of St. Paul by maintaining places or offices, either independently or in conjunction with other Civic or Commerce Associations, for the purpose of maintaining Information Bureaus for the dissemination to its members and tourists of information pertaining to road conditions throughout the State; the regulatory traffic laws of the State and Municipal Ordinances, and the industrial, commercial and public institutions of St. Paul; to promote safety in the operation of automobile vehicles, by demonstration, instruction and publicity, and to cooperate with State and Municipal Authorities in the enforcement of their regulatory traffic laws.
Petitioner has never issued stock or paid dividends to its officers or members. Its bylaws provide for committees on membership, legislation, good roads, civic affairs, traffic and safety, service (pertaining to emergency road service, garages, and other service), and a home district committee (pertaining to activities in respect to home district and alley conditions). No one connected with the petitioner, with the exception of its employees, receives a salary.
During 1943 and 1944 petitioner charged a $3 entrance fee for membership and dues of $12 a year. A member of the petitioner was entitled at any time to the same privileges as a member of any other club in the United States which was associated with the American Automobile Association. During the years in question petitioner retained salesmen who were paid a commission of $5 for every membership obtained.
Petitioner supplied its members with the following services: Emergency road service; bail bond service up to $5,000; ambulance service up to $5; license plate service; travel service, including maps, tour books, accommodation directories, and weather and road reports; a theft reward on every car of a member which might be stolen; notary service; travel check service; and ‘Sparks‘ Magazine, published by the Minnesota State Automobile Association.
The emergency road service consisted of towing, battery service, gasoline and changing of a tire within a radius of 5 miles from an authorized A.A.A. garage at no charge to a member. Petitioner had under contract some 28 garages to provide such service to its members. In the case of nonmembers, petitioner would dispatch a truck to render assistance, but not at the petitioner's expense. To some extent, the travel service and license plate service were made available to nonmembers without charge.
Petitioner performed numerous other services in addition to those rendered to its members. It sponsored the Safety Council of St. Paul and Ramsey County. Petitioner was instrumental in securing passage and revision of the Drivers' License Law, the Financial Responsibility Act, and the Minnesota State Traffic Act, and other legislation affecting motorists. The club has taken active part in the development of a parking plan in the city of St. Paul. It has purchased at its own expense safety placards and posters and conducted safety and 30-mile speed limit campaigns. It has erected and maintained ‘welcome‘ and speed signs on the various highways leading into the city of St. Paul. During the war, it extended the facilities of its travel division to all service men and their families without cost and computed the official mileage upon which the ration boards granted gasoline to an applicant. Petitioner has been instrumental in preventing moneys raised by gasoline taxes from being diverted from state highway funds and has been active in securing the enforcement of traffic laws and the planning of traffic safety programs. It has sponsored and rendered financial assistance to school patrols and driving schools which were available to the general public. It has at its own expense provided digests of the traffic laws in pamphlet form to the St. Paul Police Department for distribution to persons paying traffic fines.
The premises at 85-87 East Kellogg Boulevard are at present owned by the petitioner and used solely for office space. Petitioner has had no social committees, nor has it ever paid a Federal excise tax as a social club. It sponsored no entertainment or recreational activities during 1943 and 1944. The Automobile Club of Minneapolis, during the years in question, extended the privilege of using its country club to petitioner's members. The Minneapolis club may withdraw those privileges at any time, and, due to the growth of the membership of both clubs, this privilege is not presently advertised by the petitioner and an additional charge is required of petitioner's members who attend the Minneapolis club for dinner.
During 1943 and 1944 petitioner sold insurance as the agent of the Farmers Automobile Inter-Insurance Exchange. The insurance sold was of the type regularly found in an automobile liability policy, including public liability, fire, theft, and collision insurance. The money realized from such activities was paid into the general fund of the club.
A comparative statement of petitioner's income and disbursements for the years ended December 31, 1943 and 1944, is as follows:
+------------------------------------------------------+ ¦Income ¦1943 ¦1944 ¦ +---------------------------+-------------+------------¦ ¦Dues income ¦$28,680.52 ¦$31,177.50 ¦ +---------------------------+-------------+------------¦ ¦Net income, insurance dept.¦7,784.47 ¦6,895.88 ¦ +---------------------------+-------------+------------¦ ¦Miscellaneous income ¦1,407.29 ¦1,595.74 ¦ +---------------------------+-------------+------------¦ ¦Rental income ¦ ¦360.00 ¦ +---------------------------+-------------+------------¦ ¦ ¦37,872.28 ¦40,029.12 ¦ +---------------------------+-------------+------------¦ ¦Disbursements ¦26,865.62 ¦30,380.97 ¦ +---------------------------+-------------+------------¦ ¦ ¦1 11,006.66¦2 9,648.15¦ +---------------------------+-------------+------------¦ ¦ ¦ ¦ ¦ +------------------------------------------------------+
Included in the total disbursements shown above were the following expenditures:
+------------------------------------------------+ ¦ ¦1943 ¦1944 ¦ +------------------------------+--------+--------¦ ¦Legal services ¦$600.00 ¦$600.00 ¦ +------------------------------+--------+--------¦ ¦Commissions and sales salaries¦2,203.70¦4,428.39¦ +------------------------------+--------+--------¦ ¦Manager's salary ¦4,470.00¦4,800.00¦ +------------------------------+--------+--------¦ ¦Manager's expense ¦65.25 ¦45.15 ¦ +------------------------------+--------+--------¦ ¦Sign maintenance ¦75.00 ¦75.00 ¦ +------------------------------+--------+--------¦ ¦Sales promotion ¦403.92 ¦679.37 ¦ +------------------------------+--------+--------¦ ¦Dues and memberships ¦95.00 ¦120.00 ¦ +------------------------------+--------+--------¦ ¦Publicity ¦153.17 ¦177.65 ¦ +------------------------------+--------+--------¦ ¦Emergency road service ¦5,847.54¦4,524.63¦ +------------------------------+--------+--------¦ ¦Touring bureau expense ¦155.51 ¦204.63 ¦ +------------------------------+--------+--------¦ ¦Emblem expense ¦119.16 ¦153.58 ¦ +------------------------------+--------+--------¦ ¦Minnesota state dues ¦2,375.00¦2,477.00¦ +------------------------------+--------+--------¦ ¦Bail bond expense ¦111.00 ¦153.00 ¦ +------------------------------+--------+--------¦ ¦Safety and traffic expense ¦369.99 ¦283.15 ¦ +------------------------------+--------+--------¦ ¦Administrative salaries ¦4,255.61¦4,436.18¦ +------------------------------+--------+--------¦ ¦ ¦ ¦ ¦ +------------------------------------------------+
For the taxable year ended December 31, 1943, petitioner's books show income from membership dues in the amount of $28,680.52 and income from payments from ‘The Safety Council‘ in the amount of $800. On its Federal tax returns for that year petitioner did not report as income either the $28,680.52 membership dues or the $800 received from ‘The Safety Council.‘
By letters dated October 9, 1943, and July 10, 1944, addressed to the petitioner, the respondent held that petitioner was not exempt from filing Federal income tax returns under the provisions of section 101(9) of the Internal Revenue Code, and would be required to file returns for the calendar year 1943 and subsequent years. In a letter dated April 23, 1945, the respondent held that petitioner was not exempt from Federal income tax under the provisions of section 101(8) of the Internal Revenue Code.
In the income and declared value excess profits tax return filed for the taxable year 1943, petitioner reported a net loss of $18,473.86. Respondent increased petitioner's gross income by the amount of $29,480.52 and allowed additional deductions for taxes and tax exempt interest in the amount of $373.16, which resulted in an adjusted net income under the respondent's computation of $10,633.50.
Adjusted by respondent to $10,633.50.
The adjustment of $29,480.52 represented membership dues of $28,680.52 and $800 received by petitioner from the Safety Council in 1943. 2. SEC. 101. EXEMPTIONS FROM TAX ON CORPORATIONS.The following organizations shall be exempt from taxation under this chapter—* * * *(8) Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes; 3. (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;
Since no Federal tax return was filed by petitioner for the taxable year 1944, respondent took the net income as disclosed by petitioner's books in the amount of $9,648.15, against which amount he allowed a deduction of $274.40 for taxes and tax exempt interest, resulting in an adjusted net income of $9,373.75.
During 1943 and 1944 petitioner was not operated exclusively for the promotion of social welfare within the meaning of section 101(8) of the Internal Revenue Code.
Petitioner was not organized, and during 1943 and 1944 it was not operated, exclusively for pleasure, recreation, and other nonprofitable purposes within the meaning of section 101(9) of the Internal Revenue Code.
OPINION.
ARUNDELL, Judge:
Petitioner concedes that if it is determined herein that it is not exempt from tax under the provisions of either section 101(8)
Adjusted by respondent to $9,373.75.
of the Internal Revenue Code, the deficiencies and penalties as assessed by the respondent in the notice of deficiency are correct.
We are of the opinion that this proceeding, in so far as it relates to the taxability of the petitioner under section 101(9), is governed by the recent decision of this Court in Chattanooga Automobile Club, 12 T.C. 967, wherein we held:
* * * This petitioner has gone beyond its original purpose as set forth in its bylaws. It was not operated during the taxable year ‘exclusively for pleasure, recreation, and other nonprofitable purposes.‘ Sec. 101(9), I.R.C. Its principal activity was the rendering of services of a commercial nature to members at a lower cost than they would have to pay elsewhere. It thereby competed with others rendering similar services as a regular business for profit. * * * These were not merely incidental to some other transcending purposes of the petitioner. The petitioner was definitely engaged in business of a kind generally carried on for profit. It had some profits from that business and its members profited by receiving the service cheaper than they could have obtained it elsewhere. Such an organization is not exempt from tax under section 101(9).
As the facts in the instant case are essentially the same as those forming the basis of our decision in Chattanooga Automobile Club, supra, we conclude, on the authority of that case, that the petitioner herein is not exempt from tax under section 101(9). See also G.C.M. No. 23688, 1943 C.B. 283.
Petitioner further contends that it is exempt from tax under the provisions of section 101(8), which generally exempts from taxation organizations which are not organized for profit but are operated exclusively for the promotion of social welfare and whose net earnings are devoted exclusively to charitable, educational, or recreational purposes. From the facts we have found herein it is obvious that the income earned by petitioner was not devoted exclusively to charitable, educational, or recreational purposes, but largely inured to the direct benefit of its individual members by way of services of a commercial nature rendered to them by petitioner at lower rates than they would have to pay elsewhere.
Therefore, we are of the opinion that petitioner is not a tax-exempt corporation within the meaning of either section 101(8) or section 101(9) of the Internal Revenue Code, and that the deficiencies as determined by the respondent in the notice of deficiency must be sustained.
Decision will be entered for the respondent.