Bowman v. Commissioner

H. H. BOWMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

J. WILLIAM BOWMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Bowman v. Commissioner

Dockets Nos. 15850, 18935.

United States Board of Tax Appeals

16 B.T.A. 1157; 1929 BTA LEXIS 2435;

June 27, 1929, Promulgated

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">*2435 1. Expenses of a department store in holding annual picnic for employees held to be ordinary and necessary expenses of conducting the business.

2. Contributions to a trustee to provide a fund for distribution among various classes of corporations or to a certain community chest held deductible under the Revenue Act of 1921, but not under the Revenue Act of 1918.

Paul G. Smith, Esq., for the petitioners.

Bruce A. Low, Esq., for the respondent.

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MURDOCK

">*1158 The Commissioner determined deficiencies as follows:

Calendar years	H. H. Bowman	J. William Bowman
1920	$3,662.90	$1,993.02
1921	2,387.97	2,465.90
1922	943.07	1,864.11
1923	454.56	None

Both petitioners attacked these determinations on the ground that, in computing their distributive shares of the net income of a partnership of which they were members, the Commissioner disallowed expenses of an annual picnic given by the partnership for its employees. Each petitioner also alleged an error relating to the year 1924, for which year we dismissed the proceedings for lack of jurisdiction. J. W. Bowman alleged as an additional error the disallowance">*2436 of deductions for contributions made to the trustee of a fund the income of which was to be used only for religious, charitable, scientific or educational purposes.

FINDINGS OF FACT.

The petitioners are and were during all the taxable years members of the partnership of Bowman & Co., which conducted a department store in Harrisburg, Pa. They each had a 40 per cent interest in this partnership. The partnership paid or accrued on its books as welfare expenses or advertising on account of picnics given for its employeesThe following total amounts for the following years:

Fiscal year ended January 31 -
1920	$1,156.71
1921	1,361.01
1922	1,638.40
1923	2,222.49

In the determination of the deficiencies these amounts have not been allowed as deductions from the gross income of the partnership.

For a number of years preceding the taxable years the partnership had given and during each of the years before us it gave a picnic for its employees. These picnics took place on some day during the summer. On that day the store would be closed all day. The picnics were held at the Bowman country residence. The services of the ">*1159 employees for the full">*2437 day, the cost of transporting them to and from the picnic grounds, the cost of feeding and amusing them while at the picnic, and all other expenses incident thereto, were paid by the partnership.

The partnership obtained considerable desirable publicity from the picnics. The fact that a picnic was to be held at a certain date was advertised in the store, in newspapers and elsewhere, and with it the fact was also advertised that the store would be closed on the day of the picnic. On the day of the picnic the employees of the store usually marched through some part of the City of Harrisburg preceded by a band. Pictures and motion pictures of the picnic were taken and were later displayed in the store and in the motion picture houses in Harrisburg. The managers of the store considered the picnic a desirable and profitable form of publicity and the means of attracting favorable attention to the store. They held it as a part of their plan to obtain publicity for the store and to attract attention to the store. They also used it as a means of maintaining proper morale among their employees. In the opinion of the managers of the store, its sales increased satisfactorily in relation">*2438 to the amount expended for advertising and publicity of one kind and another. Competing stores in Harrisburg were at that time giving similar picnics.

The expenses of the picnic for each year were ordinary and necessary expenses paid or incurred during the taxable year in carrying on the trade or business of the partnership.

On April 20, 1920, J. William Bowman, made, executed, signed, acknowledged and delivered a deed of trust in the following terms to the Harrisburg Trust Co., a corporation doing a general banking business, which company by its proper officers, duly accepted the trust:

THIS DEED OF TRUST, Made the 20th day of April, A.D. 1920.

WITNESSETH, That I, J. William Bowman, of the City of Harrisburg, County of Dauphin, Pennsylvania, do hereby give to the Harrisburg Trust Company, a corporation of the State of Pennsylvania, the sum of One Dollar ($1.00) and such other and additional money, property and gifts as I may hereafter, and from time to time designate, set aside or otherwise add thereto, IN TRUST, to be held, managed and distributed by it for charitable purposes, upon the following terms and conditions:

1. The fund thus created, and to be created, shall">*2439 be designated and called "THE J. WILLIAM BOWMAN CHARITABLE TRUST."

2. It shall be kept separate from any and all other trusts or funds, except those expressly added to become a part thereof.

3. The Donor, J. William Bowman, his wife, Frances Marion Bowman, and, as they severally become of legal age, their children, shall constitute, with the Trustee, a committee to direct the management, investment and disbursement of the fund and gifts made therefrom for the charitable purposes hereinafter designated.

">*1160 Upon the death, resignation or inability of any member of the Committee to act, the survivors shall succeed to their powers and duties, and such survivors shall elect their successors from among the lineal descendents of J. William Bowman and Frances Marion Bowman, so as at all times to maintain a Committee of not less than two nor more than six active members, including the Harrisburg Trust Company. In the event that there should be a failure of lineal descendents of the said J. William Bowman and Frances Marion Bowman, his wife, qualified to act as members of the Committee, as herein provided, then the Harrisburg Trust Company is designated as the Trustee, or">*2440 Custodian of this fund, to be administered as part of the Harrisburg Foundation, but only for the purposes hereinafter expressed.

4. The Trustee shall hold, invest, reinvest and manage the fund hereby created, with full powers, and with authority to purchase and sell real estate, according to its best judgment, and without being limited in its discretion as to the character of investments to be made, and shall distribute the income and make gifts for the charitable purposes hereinafter expressed, subject only to the advice and direction of the Committee hereinbefore established, of which the Trustee is a member.

In case of the inability of the Committee to reach an agreement upon any matter, by reason of an equal division among its members in a tie vote, then and in such event the Trustee shall have the power to decide the matter by casting two votes upon such question; and provided that whenever the principal of the said fund shall exceed the sum of Fifty Thousand Dollars, not more than a one-tenth part thereof shall be invested in any single security.

5. The purposes of this gift and foundation are to benefit, consistently with existing laws, the people of the City of">*2441 Harrisburg, or of the Commonwealth of Pennsylvania, either by bringing their minds and hearts under the influence of education, or of the Christian religion, by relieving their bodies from disease, suffering or constraint, by assisting them to establish themselves in life, or aiding those stricken by public calamity, and to that end the Trustee may distribute, as it may appear to be wise, and as directed by the Committee, any part or all of the income derived from the fund hereby established, by making gifts or contributions to corporations or associations organized and operated exclusively for religious, charitable, scientific or educational purposes, no part of the net earnings of which inures to the benefit of any private stockholder or individual. If, in any year, the whole of the income of the fund shall not be so distributed, the balance remaining may, at the discretion of the Trustee and the Committee, be added to and become a part of the principal of the said fund or be distributed in a subsequent year.

6. No part of the fund, or the income therefrom shall be spent for any other purpose than those herein designated, except that from the income there shall be defrayed the">*2442 necessary expenses of the administration of the trust hereby created, and such proper and usual charge as may be allowed by the Committee to the Harrisburg Trust Company for its services as Trustee.

7. If the express purpose of this trust, or any part thereof, shall fail, or be forbidden by law, or otherwise become impossible of accomplishment, the fund hereby created shall be so administered as to fullfill as nearly as may be the aims and purposes of its creation under the direction of the court of proper jurisdiction.

8. As to any matter of detail or management and operation, but not in any matter affecting the purpose of this foundation, or the application of the income thereof, the terms and conditions of this Deed of Trust may be changed at any time by unanimous agreement of the Trustee and the Committee, such ">*1161 unanimous agreement having been reduced to writing and evidenced by the signature of the Trustee and each member of the Committee.

9. If at any time it shall be deemed advisable by the Committee, the fund herein established may be committed to the Harrisburg Foundation for administration, but only for the purposes hereinbefore set forth, such decision">*2443 by the Committee to be evidenced by a written direction to that effect, to be filed with the Harrisburg Trust Company.

IN WITNESS WHEREOF, I have hereunto set my hand and seal at Harrisburg, Pennsylvania, the day and year first above written.

The Harrisburg Foundation is a community chest.

J. William Bowman had, prior to the execution of the trust agreement, made certain contributions of a charitable nature. His purpose in creating the trust was to provide for the continuation of contributions of this character after his death. In June, 1920, he took out two policies of insurance on his own life in the total amount of $50,000, in which the beneficiary was "Harrisburg Trust Company, Incorporated under the laws of the State of Pennsylvania under deed of trust dated April 20, 1920." In December, 1920, he took out an additional policy of insurance in the amount of $50,000 on his life, naming the same beneficiary. In none of these policies did he reserve the right to revoke or change the beneficiary. In 1920 he turned over these policies to the Harrisburg Trust Co., which has continued to hold them.

In each of the taxable years J. W. Bowman contributed to the trust an amount">*2444 as set forth below, which amount was approximately the amount necessary to pay the premiums on the three policies of insurance just mentioned:

Year:	Amount
1920	$4,500
1921	3,500
1922	2,000

The Harrisburg Trust Co. opened an account upon its books under the title of "The J. William Bowman Charitable Trust". This account contains entries for the calendar years in question showing receipt during the taxable years of the amounts contributed by J. William Bowman, and shows as the only expenditures for the taxable years the payment of the premiums on the three policies of insurance aforesaid.

In the determination of the deficiencies in question, the Commissioner did not allow the deduction of any of the amounts above set forth.

OPINION.

MURDOCK: The respondent defends as to the first issue, only on the broad ground that picnic expenses can not be considered ordinary ">*1162 and necessary expenses. We think that it has been sufficiently demonstrated in this case that they were ordinary and necessary expenses of carrying on the department store business of the partnership. ">*2445 ; ; ; ; ; ; ; . The partnership net income should be redetermined by allowing this deduction and the distributive shares of the petitioners redetermined accordingly.

The petitioner J. W. Bowman claims the right to deduct the amounts which he contributed to the trust which he established in his name. For the year 1920 he claims this right under section 214(a)(11) of the Revenue Act of 1918, which is in part as follows:

(a) That in computing net income there shall be allowed as deductions:

* * *

(11) Contributions or gifts made within the taxable year to corporations organized and operated exclusively for religious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of">*2446 which inures to the benefit of any private stockholder or individual * * *.

For the years 1921 and 1922 he claims this right under section 214(a)(11) of the Revenue Act of 1921, which is in part as follows:

(a) That in computing net income there shall be allowed as deductions:

* * *

(11) Contributions or gifts made within the taxable year to or for the use of: * * * (B) any corporation, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary or educational purposes, including posts of the American Legion or the women's auxiliary units thereof, 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 stockholder or individual; * * *.

This is the first case of its kind which has ever come to our attention. We know of no decided case involving an alleged contribution to a trust for the use of charitable and the other organizations as a class. In , we decided that the petitioner therein was not entitled to deduct premiums paid on a policy of life insurance on his own life where he had">*2447 named as beneficiary certain religious and charitable corporations but had retained the right to change the beneficiary. The present case, however, is distinguishable from the Adler case, for here the petitioner did not reserve the right to change the beneficiary.

The wording of the part of the 1918 Act above set forth differs materially from that of the Revenue Act of 1921. In the former ">*1163 Act Congress has limited the deduction to contributions or gifts made to corporations, as defined in the statute, while in the latter Act it has used the words "or for the use of" and also the words "or community chest, fund, or foundation." It is obvious that these additional words used in the later Act allow the deduction of contributions which were formerly not allowed. The gifts here in question were not made to a corporation organized and operated exclusively for religious, charitable, scientific or educational purposes or for the prevention of cruelty to animals. They were not made to a corporation at all but on the contrary were made to a trustee, and they might go to a community chest. It follows, therefore, that the petitioner is not entitled to deduct any part of">*2448 the $4,500 which he contributed to the trust in 1920. .

The situation under the Revenue Act of 1921 is different. It is true that in almost every case that has come before this Board involving contributions, the contributions in question have been made to some specifically named recipient. However, we find nothing in the Revenue Act of 1921 requiring the naming of any particular recipient, but on the contrary the language employed by Congress in this Act in our opinion permits the deduction of contributions made for the use of any one or all of a class consisting for example of the churches, the hospitals, or the children's homes situated in any part of the United States, no part of the net earnings of which inures to the benefit of any private stockholder or individual. If the petitioner in this case had established a trust similar to the one which he did establish and had provided therein that the trustee should distribute the income and/or the corpus of the trust to any one or more of the churches in Harrisburg organized and operated exclusively for religious purposes, no part of the net earnings of which inured to the">*2449 benefit of any private stockholder or individual and during each of the taxable years had contributed $5,000 to this trust, this amount would be a contribution within the meaning of the Revenue Act. Furthermore, if he sees fit to extend the class which may benefit by his gift and, in extending the class, uses the very words of the Revenue Acts to include corporations or associations organized and operated exclusively for religious, charitable, scientific and educational purposes, no part of the net earnings of which inures to the benefit of any private stockholder or individual, we see no reason why he should be any the less entitled to deduct from his income the amount which he contributed in any year. Cf. ; . Paragraph 9 of the deed of trust provides that the fund may be turned over to the Harrisburg Foundation for administration, but only for the purposes theretofore ">*1164 set forth in the deed of trust. This foundation is a community chest. In this provision of the trust instrument there would be no bar to the right of the petitioner to deduct the amount contributed, ">*2450 subject to the 15 per cent limitation.

The petitioner definitely parted with the money which he gave to the trust and thereafter he had no equitable nor legal claim to the amount. The beneficiaries under the trust are, of course, somewhat uncertain, but they are limited to a class. It is also true that during the taxable years no one in the class received any benefit from the amounts contributed by the petitioner to the trust. However, no one outside the class can ever benefit by the contribution and machinery was set in motion whereby in all likelihood some member of the class would benefit. In our opinion this was the sort of thing that Congress intended to encourage, and under the 1921 Act, or for the years 1921 and 1922, the petitioner is entitled to deduct as contributions, subject to the 15 per cent limitation, the amounts which he gave to the trust, namely, $3,500 and $2,000.

Reviewed by the Board.

Judgment will be entered under Rule 50.