Opinion
Docket No. 41590.
1954-05-7
FOREST PRESS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Paul V. Wolfe, Esq. , for the petitioner. James J. Quinn, Esq. , for the respondent.
Petitioner corporation was organized to prepare and publish a widely accepted system for indexing library collections. During the years in issue, petitioner's activities were confined to this operation. Held, petitioner is entitled to exemption under section 101(6) of the Internal Revenue Code as an educational organization. Paul V. Wolfe, Esq., for the petitioner. James J. Quinn, Esq., for the respondent.
This proceeding involves deficiencies of $1,287.63 in income tax and in declared value excess-profits tax of $603.68 for the fiscal year ended October 31, 1943, and in income tax of $1,098.77 for the fiscal year ended October 31, 1944.
The question involved is whether the petitioner was a tax-exempt educational organization within the meaning of section 101(6) of the Internal Revenue Code during the years in issue.
FINDINGS OF FACT.
The facts which have been stipulated are incorporated by this reference.
The petitioner, Forest Press, Inc., is a corporation organized under the laws of the State of New York with its principal office at the Lake Placid Club, Lake Placid, Essex County, New York. The returns for the years here involved were filed with the collector of internal revenue for the fourteenth district, Albany, New York.
The Lake Placid Club Education Foundation is an educational organization chartered by the Board of Regents of the University of the State of New York in 1922. The foundation is an organization exempt from income tax under section 101(6) of the Internal Revenue Code and corresponding sections of prior revenue acts. Exemption was granted by the Bureau of Internal Revenue on October 27, 1928, reaffirmed on April 3, 1938, and most recently reaffirmed on February 28, 1952.
The foundation is devoted to developing and propagating the use of the Dewey Decimal Classification System and Related Index. The system is a method for indexing any collection of books. It was developed originally by Melvil Dewey in 1873 and has now been adopted by more than 90 per cent of the libraries in the United States to classify and index their collections. The system is in use in 42 foreign countries and it is the method of indexing taught in schools devoted to library science.
Melvil Dewey donated the copyrights and all property relating to his classification system to the foundation, first provisionally in 1922, and then absolutely on October 31, 1924. The deed of gift stated that:
All receipts or royalties from the sales of the various editions of the Decimal Classification * * * shall be spent under direction of the Foundation Executive Board for editing, revising, bringing out needed special editions and making them known, thus making the system more widely useful without allowing it ever to be a source of personal profit beyond necessary expenses and reasonable salaries for actual work.
The system requires continuous revision. On an average of every 5 years, a new edition is published, bringing up to date its application to new fields of learning and subject matter. Three periodic revisions were published by the foundation up to 1933 when, for reasons of administrative convenience, the petitioner was formed for the specific purpose of preparing and publishing the system.
The foundation was supervised by a board of 25 trustees. While Mr. Dewey was alive, he ran the foundation and his decisions were accepted by the trustees. Following his death in 1931, however, the board took a more active hand in directing the affairs and policies of the foundation but the 25-member board proved too unwieldly for handling the administration of the Dewey Decimal Classification System. Consequently, the petitioner was organized for the specific purpose of creating a small, compact organization which could efficiently supervise the preparation, publication, and distribution of the system.
The petitioner was formed on August 31, 1933, as a stock corporation under article II of the New York State Corporation Law. The foundation transferred all the trademarks, copyrights, trade names, and goodwill of the Dewey Decimal Classification System to the petitioner in consideration of the transfer of the entire issue of 100 shares of the petitioner's no-par common stock to the foundation. This is the only stock that has ever been issued by the petitioner and all its outstanding stock has always been owned by the foundation.
Although petitioner's corporate charter, as originally issued and effective during the years in issue, was practically unlimited, the petitioner was organized exclusively to prepare and publish the system and has never engaged in any other activity except that necessary and related to the publication of the system.
Between editions, the petitioner normally employs 4 editorial assistants who are located in Washington, D. C., in office space provided through the courtesy of the Library of Congress. A small administrative staff is located in Lake Placid and consists of a secretary, a business manager, and the editor-in-chief. As editorial material accumulates and as the publication date approaches, 2 or 3 additional editorial assistants are added to the staff.
The price for an edition of the system is determined by the manufacturing expense, plus the estimated cost of carrying the small staff until the date of a subsequent edition. The price is not fixed with any intent to make a profit over and above the expenses involved in running the corporation and publishing the system. Petitioner does not advertise its publications in the conventional sense. Announcements concerning new editions are made in library journals, and some pamphlets explaining the system are distributed.
The petitioner's reported net profit or loss for income tax purposes since its incorporation to and including October 31, 1946, and the tax relative thereto is as follows:
+-------------------------------------------------------+ ¦Year ended October 31¦Profit or (loss)¦Taxes applicable¦ +---------------------+----------------+----------------¦ ¦1934 ¦$3,378.60 ¦$608.13 ¦ +---------------------+----------------+----------------¦ ¦1935 ¦1,969.36 ¦272.70 ¦ +---------------------+----------------+----------------¦ ¦1936 ¦3,027.64 ¦416.30 ¦ +---------------------+----------------+----------------¦ ¦1937 ¦2,471.09 ¦369.97 ¦ +---------------------+----------------+----------------¦ ¦1938 ¦1,317.00 ¦190.17 ¦ +---------------------+----------------+----------------¦ ¦1939 ¦498.58 ¦62.32 ¦ +---------------------+----------------+----------------¦ ¦1940 ¦(1,613.19) ¦ ¦ +---------------------+----------------+----------------¦ ¦1941 ¦(6,494.60) ¦ ¦ +---------------------+----------------+----------------¦ ¦1942 ¦$5,251.42 ¦ ¦ +---------------------+----------------+----------------¦ ¦1943 ¦11,626.12 ¦$1,604.87 ¦ +---------------------+----------------+----------------¦ ¦1944 ¦5,426.89 ¦796.80 ¦ +---------------------+----------------+----------------¦ ¦1945 ¦(5,510.83) ¦ ¦ +---------------------+----------------+----------------¦ ¦1946 ¦(2,243.72) ¦ ¦ +---------------------+----------------+----------------¦ ¦Total ¦$19,104.36 ¦$4,320.26 ¦ +-------------------------------------------------------+
The only dividends which petitioner has declared and paid to the foundation were (a) a dividend of $300 declared in December 1947 and (b) a dividend of $300 declared in October 1948. The $600 thus transmitted to the foundation was held in a special account to which was added a gift of $1,500. This money was expended primarily in striking medals in honor of Melvil Dewey which were awarded annually by the American Library Association in recognition of outstanding contributions to library science.
In May 1948, the Commissioner denied petitioner's request for a ruling that it was within the provisions of section 101(6) and exempt from taxation. The burden of the Commissioner's objection was that petitioner was then organized for general business purposes under an unrestricted corporate charter. On July 23, 1951, the petitioner's corporate charter was amended to restrict its functions to holding the rights to publish and to sell and distribute the Dewey Decimal System. Simultaneously, its bylaws were amended to preclude the declaration of any further dividends to the foundation. On July 3, 1953, the Commissioner granted petitioner a ruling that it was exempt from taxation under the provisions of section 101(6) of the Internal Revenue Code.
The petitioner has never attempted to influence legislation by propaganda, or otherwise.
The Dewey Decimal Classification System which was edited and published by the petitioner during the years in issue is an important aid to education and research and not a commercial enterprise.
Petitioner was organized and operated exclusively for educational purposes; it did not attempt to influence legislation, and no part of its net earnings inured to the benefit of any private stockholder.
Petitioner is entitled to exemption from income tax under section 101(6) of the Internal Revenue Code.
OPINION.
ARUNDELL, Judge:
The question involved here is whether the petitioner corporation was exempt from taxation under the provisions of section 101(6)
of the Internal Revenue Code during the years in issue.
SEC. 101. EXEMPTIONS FROM TAX ON CORPORATIONS.The following organizations shall be exempt from taxation under this chapter—* * * * * * *(6) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation.
The respondent takes the view that the petitioner was engaged in a commercial publishing enterprise with an unrestricted certificate of incorporation and consequently neither organized nor operated exclusively for scientific, literary, or educational purposes within the meaning of section 101(6).
On the other hand, petitioner argues that the Dewey Decimal Classification System is an important tool for educational purposes, that it has no commercial adaptation, and that the preparation, editing, and publication of this work has been its sole activity. Moreover, it contends that even if it were held to be a commercial enterprise, whatever profits it might make would eventually be paid over to its parent, the foundation, and devoted to educational uses by the foundation, under the terms of Dewey's gift, and this would be sufficient to give it exemption.
Certainly the holdings of the United States Courts of Appeals for the Second and Third Circuits in Roche's Beach, Inc. v. Commissioner, 96 F. 2d 776, and C. F. Mueller Co. v. Commissioner, 190 F. 2d 120, lend support to petitioner's view, but this Court has heretofore declined to follow those cases which were reversals of our own decisions. Joseph B. Eastman, Corporation, 17 T. C. 1502, and Donor Realty Corporation, 17 T. C. 899.
But this does not serve to dispose of the question we are called upon to answer. In Roche's Beach, Inc. v. Commissioner, and C. F. Mueller Co. v. Commissioner, supra, the taxpayer-corporations were unquestionably engaged in commercial enterprises, in competition with others, although all of the profits were dedicated to exempt purposes under section 101(6). However, in the instant case we have found as a fact that petitioner was both organized and operated exclusively for educational purposes and, as we stated in the early case of Unity School of Christianity, 4 B. T. A. 61, the fact that the charter under which the corporation was organized may have permitted other activities is not in and of itself controlling. In that case, we held that the organization was exempt from taxation under a provision of the law which was a predecessor to section 101(6). We said:
It is said that the fact that the incorporation was under the business law is indicative of its commercial purpose. This might be significant if not otherwise explained, but it is not conclusive. A corporation so organized is not, merely because it is permitted thereby to engage in business, precluded from an exclusively charitable purpose. The purpose of its organization and operation is still a question of fact, and the evidence may be such as to show that its purpose was charitable despite the ordinary implications of the statute under which it was created. The suggestion also arises that the stated purposes expressed in the charter gain—that a school or a sanitarium is not necessarily conducted for private gain—that a school or a sanitarium is not necessarily charitable or nonprofitable. And this, indeed, is true. By its charter this corporation might lawfully have been used as the means of increasing the wealth of its founders and stockholders. But the evidence is all to the effect that this was never the purpose or intent and has not been the effect. Looking to the purpose, as the statute requires, it becomes a question again of fact, as disclosed by evidence, and this is not determined by what might otherwise have been considered with the charter.
We think that a similar observation is pertinent in this case. The petitioner was formed, as the facts show without contradiction, for the purpose of preparing and publishing the Deway Decimal Classification System and that it confined its activities during the years in issue to that function. When the foundation performed this operation, prior to the petitioner's incorporation, it was exempt. While a reading of the petitioner's charter might imply that it was not organized exclusively for educational purposes, we think that such inferences are clearly displaced by the uncontradicted reasons for the petitioner's creation and by the activities it engaged in during the years in issue. Cf. Roche's Beach, Inc., 35 B. T. A. 1087.
We think that petitioner is entitled to exemption under section 101(6) of the Code.
Reviewed by the Court.
Decision will be entered for the petitioner.