The opinion of the court was delivered by: WORTENDYKE
The matter of income accumulation arises, along with some other questions, in this proceeding by the Samuel Friedland Foundation to recover $ 57,154.49 representing income taxes which it paid for the years 1951 and 1952. The Foundation's claim for refund is based upon the contention that during the two years mentioned it was exempt from income tax as a charitable organization under Section 101 of the Internal Revenue Code of 1939, 26 U.S.C.A. § 101
and that the amendments made by the Revenue Act of 1950
were not applicable to the Foundation, or if they were applicable they did not effect any loss of exemption as to the Foundation. The Government takes the extreme position that the Foundation by the very nature of its certificate and operation is not an organization exempt from tax under Section 101 and that if it were it lost its exemption for the years 1951 and 1952 by an accumulation and use of income proscribed by Section 3814.
The facts are virtually undisputed, both parties relying upon contentions as to the interpretation and application of the pertinent statutory provisions. For convenience all of the facts are set forth in a footnote.
Section 101(6) contains the following words of long-standing use for tax-exemption purposes:
'Corporations * * * organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes * * *.'
While this language does not seem difficult on its face, its meaning has, nevertheless, given rise to considerable litigation. Some of this litigation has involved the scope of the words 'religious, charitable, scientific, literary, or educational', and some the meaning of the words 'organized and operated exclusively'. It is this latter phrase which gives rise to one of the contentions in this proceeding.
Few cases involving interpretations of Section 101(6) or related provisions couched in similar terminology have ever reached the Supreme Court of the United States. Consequently, much emphasis has been placed upon decisions and opinions of the Circuit and District Courts and the Tax Court.
The Supreme Court has said generally that statutory provisions exempting from tax funds which are devoted to charity 'were begotten from motives of public policy, and are not to be narrowly construed.' Helvering v. Bliss, 1934, 293 U.S. 144, 151, 55 S. Ct. 17, 20, 79 L. Ed. 246. The Court has never retreated from that view. See Old Colony Trust Co. v. Commissioner of Internal Revenue, 1937, 301 U.S. 379, 57 S. Ct. 813, 81 L. Ed. 1169; United States v. Pleasants, 1939, 305 U.S. 357, 59 S. Ct. 281, 83 L. Ed. 217. The Court's express refusal to pass upon the matter when argued in Better Business Bureau of Washington, D.C. v. United States, 1945, 326 U.S. 279, 283, 66 S. Ct. 112, 90 L. Ed. 67, cannot be taken as a retreat. The facts of that case made it wholly unnecessary for the Court to consider the point. The Circuit Courts, too, have usually applied the doctrine of liberality. Seasongood v. Commissioner of Internal Revenue, 6 Cir., 1955, 227 F.2d 907, 910; Arthur Jordan Foundation v. Commissioner of Internal Revenue, 7 Cir., 1954, 210 F.2d 885, 889; C. F. Mueller Co. v. Commissioner of Internal Revenue, 3 Cir., 1951, 190 F.2d 120, 122; Commissioner of Internal Revenue v. Citizens and Southern National Bank, 5 Cir., 1945, 147 F.2d 977, 979; Bohemian Gymnastic Association Sokol of City of New York v. Higgins, 2 Cir., 1945, 147 F.2d 774, 777; United States v. Proprietors of Social Law Library, 1 Cir., 1939, 102 F.2d 481, 482; Cochran v. Commissioner of Internal Revenue, 4 Cir., 1935, 78 F.2d 176, 179.
The meaning of the key words 'organized and operated exclusively for' charitable purposes has been the subject of disagreement not only among litigants but also among the courts. As to 'organized' the Supreme Court has given no direct light, but the better view, based in part upon the doctrine of liberality of construction respecting charitable exemptions which resolves ambiguities in favor of the taxpayer and in part upon a refusal to allow from to control over substance, is that 'organized' means 'created to perform' or 'established to promote' charitable purposes rather than meaning merely 'incorporated' with powers limited solely to charitable activities. In Commissioner of Internal Revenue v. Battle Creek, Inc., 5 Cir., 1942, 126 F.2d 405, 406 a sanitarium was held to be a charitable organization exempt from income tax under Section 101(6) although its charter gave the trustees power to conduct any lawful business. The Court observed that 'It is not unusual for charters of corporations to grant broad powers and privileges that are never intended to be used.' Roche's Beach, Inc. v. Commissioner of Internal Revenue, 2 Cir., 1938, 96 F.2d 776 and Forest Press, Inc., v. Commissioner of Internal Revenue, 1954, 22 T.C. 265 are to the same effect. To grant or deny tax benefits to organizations upon a basis of recitations in a charter or certificate would not seem to accomplish what Congress was getting at. The issue of 'organized,' as this Court now conceives the law, is primarily a question of fact not to be determined merely by an examination of the certificate of incorporation but by the actual objects motivating the organization and the subsequent conduct of the organization. To some degree, 'organized' cannot be divorced from 'operated,' for the true purposes of organization may well have to be drawn in final analysis from the manner in which the corporation has been operated.
With particular reference to 'exclusively,' the Supreme Court has twice given this word meaning as it appears in Section 101(6) and related sections. In Trinidad v. Sagrada Orden de Predicadores, 1924, 263 U.S. 578, 44 S. Ct. 204, 205, 68 L. Ed. 458, the Court was faced with the question as to whether the production of income prevented an organization from being operated exclusively for charitable purposes. The Court held that the carrying on of income-producing activities did not offend the limitation of 'exclusively' so long as the activities were purely incidental to the principal charitable purposes to which the income was ultimately devoted. The Court's reasoning was that the exempting section itself recognized that a corporation might be organized and operated exclusively for charitable purposes and yet have an income; furthermore, the section said 'nothing about the source of the income' but made the 'destination' of income the 'ultimate test of exemption.' The organization held to be exempt in this case was religious, and the Court specifically approved income-producing investments in real estate, corporate stocks, loans at interest, occasional sales of stocks, and sales of wine, chocolate and other articles purchased and supplied for use in its churches, missions, schools and subordinate agencies. However, the Court suggested that the result might not be the same if the ...