Opinion
No. 252, Docket 20544.
June 26, 1947.
Petition to review an order of the United States Tax Court.
Petition by the Credit Bureau of Greater New York, Inc., to review a decision of the Tax Court of the United States determining income tax deficiencies and penalties imposed by the Commissioner of Internal Revenue.
Affirmed.
This appeal involves petitioner's liability for income taxes for the years 1934-1936 inclusive, and penalties for those years and also for the years 1933, 1937 and 1940. Petitioner claims an exemption from liability under the provisions of § 101(7) of the Internal Revenue Code, 26 U.S.C.A.Int. Rev. Code, § 101(7), exempting from income tax "business leagues, chambers of commerce, real-estate boards, or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder. * * *"
The facts as found by the Tax Court are substantially as follows: Petitioner was originally organized under the New York Membership Corporations Law, Consol. Laws, c. 35. Its purpose as set forth in its Constitution was as follows: To "promote, encourage and establish friendly intercourse and cooperation by the interchange of ideas and information among, and the rendering of mutual assistance to, representatives of individuals, copartnerships or corporations who transact business in whole or in part on a credit basis, or who are otherwise interested in the safeguarding of credits. To disseminate at frequent intervals literature containing accurate and reliable information on the subject of Retail Credits. To do and perform any other work and objects of a kindred nature incidental to, or based upon, the extension or safeguarding of credits." The corporation has no stock or stockholders, and pays no dividends. It employs one permanent officer who receives a salary of $11,000; its other officers come from the membership of the corporation and serve in rotation without compensation. In addition, it has about 175 paid employees. "During the years here in question, the petitioner had about 1,000 members, including department stores, banks, clothing companies, jewelers, public utility companies, publishers, hospitals, stock brokerage firms and professional men. * * * An annual membership fee is charged to the members. This charge is either $25 or $15, depending on the type of membership. Of the $25 fee the petitioner allocates $10 for dues, $10 for contingent services (reports) and $5 for membership in a national trade association."
The petitioner maintains a complete credit record relating to approximately 5,000,000 people. On the basis of these records, it issues credit reports to members and non-members; the services rendered to non-members are negligible. The membership fee covers between eight and twenty reports, depending on the type of report requested. A charge is made for reports in excess of that number, the charge being about half the price paid by non-members. Petitioner attempts to furnish these reports at a figure closely approximating its own costs. Membership dues and charges made for credit reports are petitioner's only sources of income.
The secondary issue in this case is whether petitioner's failure to pay income taxes and declared value excess profits taxes in the years in question was due to wilful neglect. The Commissioner found wilful neglect, and accordingly imposed penalties on petitioner. The evidence on this issue included the following excerpt from the minutes of the annual meeting of the petitioner held April 19, 1918: "Mr. Cuddy, at the request of the Secretary, Mr. Thompson, had made inquiries as to whether or not the Associations were liable to the Income Tax. Associations are not liable, but it is left to the discretion of the Commissioner to decide. He stated that the Commissioner had called upon him, and that it was necessary for him as the President, to make and file an affidavit, which he did. This had to be sworn to."
Nothing in the record indicates the contents of the affidavit referred to in these minutes. The Tax Court found that thereafter, from April 1918 to 1937, "the petitioner had no correspondence with any officers of the Bureau of Internal Revenue with respect to its tax liabilities. It was generally assumed by the officers and employees of the petitioner that it was exempt from taxation and such a question was not raised. The general counsel of the petitioner expressed his opinion on one occasion that petitioner was exempt from taxation. This opinion was apparently informal in nature. In 1937 the petitioner received a letter from the Collector of Internal Revenue requesting information as to the petitioner's purpose and activities. This letter was answered on July 16, 1937. There was additional correspondence with the Collector during that year. At some later time, the exact date of which is not disclosed by the record, the respondent ruled that the petitioner was liable for tax on its income. On February 24, 1943, the petitioner filed federal income tax returns for fiscal years ended March 31, 1930 to March 31, 1942, inclusive. The respondent determined that the delay in filing the returns for the years in question was not due to reasonable cause."
The Tax Court found that the petitioner was liable for income taxes as assessed by the Commissioner, and upheld his determination that petitioner had not shown reasonable cause for its failure to pay such taxes. Petitioner has taken this appeal from the decision of the Tax Court.
Kenneth Carroad, of New York City (Arthur Rosenberg, of New York City, of counsel), for petitioner.
Sewall Key, of Washington, D.C., George A. Stinson, of New York City, and Louise Foster, of Washington, D.C., for respondent.
Before CHASE, CLARK, and FRANK, Circuit Judges.
Petitioner claims that it comes within the precise terms of the statutory exemption because it was not "organized" for profit. We will not consider that argument here, since the Tax Court based its decision primarily on Treasury Regulation 103, § 19.101(7)-1, which construes the exemption statute. The pertinent portions of the Regulation are as follows: "A business league is an association of persons having a common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit * * * Thus its activities should be directed to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons. An organization of a kind ordinarily carried on for profit even though the business is conducted on a cooperative basis or produces only sufficient income to be self-sustaining is not a business league * * *" This is an old regulation, in force during repeated re-enactments of the statute which it construes. We think it a reasonable interpretation of the statutory language, determinative of its meaning. Underwriters' Laboratories v. Commissioner, 7 Cir., 135 F.2d 371; Retailers Credit Association of Alemeda County v. Commissioner, 9 Cir., 90 F.2d 47, 111 A.L.R. 152. On the evidence, it is clear that petitioner is an organization of the kind ordinarily conducted for profit, and one which, by the Regulation, is precluded from claiming an exemption as a business league. Retailers Credit Association of Alameda County v. Commissioner, supra; Credit Managers Association of Northern and Central Cal. v. Commissioner, 9 Cir., 148 F.2d 41; Park-West Riverside Associates, Inc. v. Helvering, 2 Cir., 110 F.2d 1022.
Section 291 of the Internal Revenue Code, 26 U.S.C.A.Int.Rev. Code, § 291, provides for imposition of a penalty for failure to file a return, unless the taxpayer shows reasonable cause for such failure. The burden of establishing an excuse for such failure rests on the taxpayer. Sabatini v. Commissioner, 2 Cir., 98 F.2d 753. The Tax Court held that the petitioner had failed to sustain that burden. The Court found that the corporation's officers believed it to be tax-exempt; but this, in itself, is not enough (West Side Tennis Club v. Commissioner, 2 Cir., 111 F.2d 6, 130 A.L.R. 103), and there is no adequate showing of a reasonable basis for such belief. The evidence regarding Mr. Cuddy's affidavit is incomplete. There is substantial testimony to support the Tax Court's finding that the opinion given by petitioner's counsel (to the effect that petitioner was tax-exempt) was informal and consequently did not merit reliance thereon. We think that petitioner's liability for taxation was abundantly clear (cf. West Side Tennis Club v. Commissioner, supra), and that the Tax Court's determination that no reasonable cause had been shown for the failure to file is well supported by the evidence or lack thereof. See Paymer v. Commissioner, 2 Cir., 150 F.2d 334.
Petitioner asks us to consider the applicability of the new Administrative Procedure Act, c. 324, 60 Stat. 237, 5 U.S.C.A. § 1001 et seq., to determinations by the Tax Court. We see no reason to do so since the evidence here sufficiently supports the Tax Court's findings under any theory of judicial review.
Affirmed.