Shaker Heights Country Club Co. v. Lindley ( 1979 )

William B. Bkown, J.

We are asked to decide whether the taxpayer is a “corporation organized for profit” and is therefore subject to a corporate franchise tax pursuant to R. C. 5733.01 et seq. Appellant argues that, it has always maintained the character of a non-profit corporation and that it has never operated for profit; therefore, it should be exempt from. Ohio franchise tax liability.'We disagree. We believe that taxpayer was organized for profit; and that during the years in question, it operated for profit.

In a franchise tax ease, the character of a corporation is the relevant consideration, and it is how that character is determined which is of vital importance. As was stated in State, ex rel. Russell, v. Sweeney (1950), 153 Ohio St. 66, paragraph four of the syllabus, a case setting forth the statutory requirements for a non profit organization:

“Such character is determined not by the authority that probably will actually be exercised by the corporation-but rather by the authority it actually possesses and may exercise under the articles recorded.” (Emphasis sic.)

'This statement was reaffirmed in Woodland Gardens Apartments v. Porterfield (1968), 16 Ohio St. 2d 56, a case involving whether a franchise tax should be imposed. Interpreting Sweeney, supra, this court, at page 57, stated:

“* * # [T]he character of a corporation, whether for profit or not for profit, is to be determined not by the manner of its actual operation, but rather by the authority it actually possessed and may exercise under its recorded Articles of Incorporation.”

In a franchise tax situation, the focus should bo upon the language of R. C. 5733.01(A), which states, in pertinent part:

“The tax provided * * * by this chapter * * * shall be the amount charged against each corporation organized for profit under the laws of this state * # * for the privilege of exercising Us franchise * * (Emphasis added.)

When the Shaker Heights Country Club Company filed its original articles of incorporation in 1913, its desire was to form a corporation for profit. The company received a •franchise from the state of Ohio to exercise the power and authority 'of a business for profit. Having complied with the filing requirements, appellant had the rights, privileges and immunities granted by the state through its statutory power. Appellant was a corporation created with a structure and a legal capacity to operate with a view towards generating a profit.

Appellant urges us to consider the history of the corporation in making our determination. In viewing that history, we note that a 1917 amendment to the articles provided for the creation of preferred stock and the payment of dividends to the holders. This is one of the privileges that the club chose to exercise as a corporation organized for profit.

Although the history of the corporation’s activities may be persuasive, the only relevant period are the years 1972-1974. As in Woodland Gardens, supra, the facts pre-rented in the instant cause suggest that the club was in fact operating for profit during this period.

In the present cause, the club had the power to accumulate surplus, and this occurred in 1972,1973 and 1974. This surplus consisted of the accumulation of excess revenues over expenses. The surplus was used for capital improvements and expenditures for assets. The accumulation of surplus increased equity in the stock. As a measure of the shareholder’s equity, the surplus reflected in dollar amounts what the shareholders could realize in the event of a liquidation.

In addition, during the three years in question, the club had a policy of redeeming its outstanding stock at less than book value which increased the surplus available to the company. The record indicated that surpluses increased some $5,500 as a result of redeeming the stock at less than book value. The redemption of stock left fewer remaining shareholders to share in the equity. Appellant’s accountant acknowledged that the effect of such a course of action was to increase the per share equity of the remaining shareholders.

Therefore, we find that taxpayer was organized for profit ; and, as the evidence establishes, it was also operating for profit. A country club which files its original articles of incorporation as a corporation organized for profit and which exercises the privilege of its franchise, is subject to the franchise tax under R. C. 5733.01 et seq.

The decision of the Board of Tax Appeals, being neither unreasonable nor unlawful, is affirmed.

Decision affirmed.

Celebrezzk, C. J., HebbeRT, P. Brown and Sweeney, JJ., concur. Locher and Holmes, JJ., dissent.