DocketNumber: Docket No. 714-78.
Citation Numbers: 42 T.C.M. 590, 1981 Tax Ct. Memo LEXIS 326, 1981 T.C. Memo. 410
Filed Date: 8/10/1981
Status: Non-Precedential
Modified Date: 11/21/2020
MEMORANDUM OPINION
TANNENWALD,
This case was submitted fully stipulated pursuant to
Petitioner is a New York nonprofit corporation with its principal place of business in Brooklyn, N.Y. Its members*328 each own, directly or indirectly, taxicabs licensed by New York City. According to its certificate of incorporation and its by-laws, petitioner was created to provide radio dispatching service to its members, to advertise the availability of taxicab services to the public, to promote the safety of its members, and generally to "foster and promote the interests of those individuals who are engaged in business as licensed medallion taxicab owners in the City of New York."
Petitioner owns and operates a two-way radio station used to dispatch its member cab owners. Petitioner installs in each member's cab a two-way radio and related equipment. The radio and equipment remain petitioner's property. Petitioner employed dispatchers at its transmitting station 24 hours per day, 7 days per week.
The equipment placed in each cab includes a hidden alarm system which members may activate when they believe they are in danger. In addition, petitioner encourages its members to report suspicious or criminal behavior seen while on duty to the dispatcher so that information can be relayed to the police.
Petitioner regularly purchases fare vouchers from its members. These fare vouchers represent*329 receivables from charge account customers for services performed by petitioner's members. Petitioner purchases these vouchers at a discount of between 10 and 15 percent from face value and then collects the vouchers from the charge customers. Once petitioner purchases a fare voucher, it bears the risk of nonpayment.
Members of petitioner are not obligated to use petitioner's services. However, petitioner provides its services exclusively to its members.
Petitioner's membership is limited to licensed taxicab owners of good moral character. If an individual qualifies for membership, he pays an "initiation fee" ranging from $ 750 to $ 1,500 during the years in issue, an amount ranging from $ 3,000 to $ 6,000 for "radio rights," and weekly dues which have varied between $ 20 and $ 30. While the initiation fees and weekly dues are nonrefundable, the "radio rights" of an outgoing member will be sold if possible by petitioner, and the proceeds from such sale will be paid over to the outgoing member. During the years in issue, no member lost money on the sale of his radio rights.
Petitioner's gross income during the years in issue was $ 363,661 for 1973, $ 483,756 for 1974, and*330 $ 655,646 for 1975. Of these amounts, $ 196,368, $ 275,235, and $ 382,528 represented dues, initiation fees, and payments for radio rights received by petitioner from members in each of the aforesaid years, respectively. During that same period, petitioner's deductions from gross income totaled $ 289,461.06 for 1973, $ 324,609.65 for 1974, and $ 394,897.93 for 1975. Petitioner did not distribute any of its net income; however, petitioner did excuse its members from one week's dues for the week of Christmas 1975. Petitioner's directors were uncompensated, as were petitioner's officers. However, petitioner's office manager received a salary.
Petitioner makes two basic contentions: (1) that it is a mutual or cooperative telephone company or like organization, and therefore exempt from tax under
Petitioner's contention that
Conceivably, some portion of the amounts involved may have represented payment for some proprietary right such as the right to share in the assets of petitioner in the event of dissolution. 2 But on the record before us, we are unable to determine now much, if any, represented payment for any such rights. It was petitioner's burden to prove the amounts which should be properly so allocated. In view of the foregoing,
As far as
In sum, we hold that the amounts involved constituted income taxable to petitioner unless it is entitled to exemption under
Petitioner argues that it is an organization described in
Benevolent life insurance associations of a purely local character, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations; but only if 85 percent or more of the income consists of amounts collected from members for the sole purpose of meeting losses and expenses.
*334 Petitioner cites
Although the parties have stipulated that 99 percent of petitioner's gross income was received from its members, there is no stipulation concerning the amount of income collected "for the sole purpose of meeting losses and expenses." The burden of proof is on petitioner. Rule 142(a).
Petitioner argues that its retained profits constitute no more than a reserve account to cover future expenses and losses. To be sure, amounts in such an account should be treated as collected to meet losses and expenses, see
Petitioner's only proffered justification*336 for its substantial retained earnings was its factoring activity. Although it is true that petitioner paid out more than $ 1,000,000 per year to its members as part of its factoring activity, it collected a greater sum than it disbursed once its charge customers paid their bills. After the first few months of its existence (and petitioner's first taxable year is not before this Court), petitioner's cash flow would have been sufficient to cover its factoring activity -- in any event, petitioner has failed to prove the contrary. 5
Petitioner has demonstrated no other need for a substantial reserve account. Petitioner had no major capital expenditures, and the depreciation deduction itself constituted in effect a reserve account for the replacement of tangible assets. On the record before us, we cannot find that petitioner has carried its burden of proving that 85 percent of its income in any taxable year in dispute was collected solely to cover losses and expenses, and we therefore hold that petitioner was not, *337 during the years in issue, and organization described in
1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue. Unless otherwise indicated, any reference to "Rules" shall be deemed to refer to the Tax Court Rules of Practice and Procedure.↩
2. Because petitioner's certificate of incorporation does not prescribe the distributive rights of its members, a voluntary dissolution of petitioner would result in its net assets being distributed as specified in the plan of dissolution adopted at the time of dissolution by petitioner's board of directors and ratified by its members. See
3. We do note, however, that, in
4. Respondent suggests that
5. In addition, it is far from clear that funds needed for the factoring activity are properly characterized as "meeting losses and expenses."
b-forman-company-inc-v-commissioner-of-internal-revenue-mccurdy , 453 F.2d 1144 ( 1972 )
federated-department-stores-inc-v-commissioner-of-internal-revenue , 426 F.2d 417 ( 1970 )
Peninsula Light Company, Inc., a Mutual Corporation v. ... , 552 F.2d 878 ( 1977 )
Affiliated Government Employees' Distributing Company, a ... , 322 F.2d 872 ( 1963 )
Washington Athletic Club v. United States of America, ... , 614 F.2d 670 ( 1980 )