(3) a tax was imposed on net income in excess of $ 1,000 derived by any organization within Section 101(6) from business activities not related to the purposes for which exemption was granted to the organization;
(4) a new Section 3813 was added denying exemption to organizations which engage in any of a number of specific 'prohibited transactions' with creators or donors or corporations controlled by such persons; however, certain organizations were specifically exempted from the application of this section (see footnote 1); and
(5) a new Section 3814 was added denying exemption for the particular tax year involved to any Section 101(6) organization which unreasonably accumulate income, use income to a substantial degree for purposes other than those constituting the basis of exemption, or invest income in such manner as to jeopardize the carrying out of those purposes; again, however, certain organizations were specifically exempted from the application of this section (see footnote 1).
With the foregoing background of fact and law, the questions posed by this litigation may be considered
I. Is The Foundation Exempt From Income Tax Under Section 101?
It would seem that the Foundation was created and operated to promote medical care, education and research. That such purposes are charitable, educational or scientific within the meaning of Section 101(6) is not disputed by the Government. However, the Government contends that because of the powers and activities of the trustees of the Foundation respecting financial matters the Foundation was not organized and operated exclusively for charitable purposes in the sense required by Section 101(6) and, furthermore, the financial activities caused it to be 'operated for the primary purpose of carrying on a trade or business for profit' within the meaning of the amendment to Section 101 made by the Revenue Act of 150 set forth in footnote 4.
While the powers given to the trustees in the certificate of incorporation in respect of investments may be broad, as already pointed out the certificate provisions are not determinative of whether an organization meets the requirements of Section 101.
Upon analysis, the financial activities of the Foundation during the years 1951 and 1952, apart from the receipt of contributions and the distribution of funds to charitable organizations, consisted only of investing in stocks, debentures and mortgages on real and personal property.
The investment of funds of a charitable organization in securities has never been conceived of as a 'purpose' of the organization. It has always been treated as an incidental activity subservient to the fundamental charitable objects. It is safe to say that the vast majority of charitable organizations and trusts in this country today have funds invested in stocks, bonds, mortgages, or real property not merely for safekeeping but for earning income. In many cases these investments provide the very lifeblood of the charitable work carried on or supported. If any authority is needed that such investments are incidental to the purposes of a charity it will readily be found in the Supreme Court's decision in the Trinidad case already discussed. In that case, approximately 35% of income was derived from rents and 59% from dividends and interest on investments. The Court observed (263 U.S. 578, 44 S. Ct. 205):
'Such (charitable) activities cannot be carried on without money; and it is common knowledge that they are largely carried on with income received from properties dedicated to their pursuit. This is particularly true of many charitable, scientific and educational corporations and is measurably true of some religious corporations. Making such properties productive to the end that the income may be thus used does not alter or enlarge the purposes for which the corporation is created and conducted.'
As noted in the Trinidad case, Section 101(6) clearly recognizes that charitable organizations may have income, and it is hard to conceive of a more passive way to acquire income than through investment in securities. Treasury Regulations 111, promulgated under the Internal Revenue Code of 1939 and amended to embrace changes made by the Revenue Act of 1950, expressly state in Section 29.101(6)-1
'A corporation otherwise exempt under section 101(6) does not lose its status as an exempt corporation by receiving income such as rent, dividends, and interest from investments, provided such income is devoted exclusively to one or more of the purposes specified in that section.'
The investment and security transactions of the Foundation during the years 1951 and 1952 consisted of the following:
Purchases Sales Item
March 1951 - $75,000 Jackson County V. A. Construction
May 1951 (satisfied by pre- $805,000 Casablanca Hotel Mortgage
payment in 1952)
May 1951 October 1951 $403,000 Casablanca Hotel
May 1951 - 55,000 shares Food Fair Stores,
(Contribution) May 1951 120,000 shares Official Films,
June 1951 - $1,000 Miami Jewish Center Debenture
(Contribution) October 1951 2,000 shares Food Fair Stores,
June 1951 - 500 shares Food Fair Stores, Inc. Common
February 1952 April 1952 $100,000 Sun Tan and Palm Vel Buildings
October 1952 - $17,500 Dwelling Mortgage
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