DocketNumber： Docket No. 13738
Citation Numbers： 12 T.C. 1038, 1949 U.S. Tax Ct. LEXIS 168
Judges： Opper
Filed Date： 6/10/1949
Status： Precedential
Modified Date： 11/20/2020
*168
Petitioner, an automobile club deriving its income principally from membership dues and rendering to its members various travel services, including low cost insurance, safety promotion, touring advice, and the procurement of emergency repairs,
*1038 By this proceeding petitioner challenges respondent's determination of deficiencies for the calendar year 1943 as follows:
| Income tax | $ 13,242.02 |
| Declared value excess profits tax | 104.81 |
| Excess profits tax | 12,905.05 |
*169 The above deficiencies resulted from respondent's action in ruling that petitioner was not entitled to exemption as a "club," within the meaning of
FINDINGS OF FACT.
Petitioner, a Pennsylvania corporation, filed its corporation income and declared value excess profits tax and corporation excess profits tax returns for the calendar year 1943 with the collector of internal revenue for the first district of Pennsylvania. Petitioner is an automobile club which operates in Pennsylvania, east of Harrisburg and south of Bethlehem; in New Jersey, south of New Brunswick to Cape May; in Maryland; in the District of Columbia; and in the several northern counties of Virginia.
*1039 In 1906 the Automobile Club of Delaware County, an unincorporated association, was organized in Delaware County, Pennsylvania. That club was incorporated in 1911 under the laws of Pennsylvania, its charter stating in part as follows:
Second, - The purpose for which this corporation is*170 formed is to maintain a club for social enjoyment and a club house, and for the comfort, protection and convenience of its members in the pursuit of the pastime of automobiling.
* * * *
Eighth, - The annual income of the said corporation other than that derived from real estate shall not exceed the sum of Twenty thousand dollars ($ 20,000).
In 1917 the name of the club was changed by court decree from the Automobile Club of Delaware County to Keystone Automobile Club, petitioner in the instant proceeding. In 1929 the above provisions in petitioner's charter were amended to read as follows:
Second. The purpose for which this corporation is formed is to promote the construction and maintenance of public highways, to promote the safe and convenient use of the public highways, to collect and disseminate touring and other information valuable to automobile users, to promote the comfort, protection, convenience and interests and to protect the rights of automobile owners and users in general, and its members in particular, to facilitate the co-operation of its members to their mutual advantage and protection in matters relating to the use and ownership of motor vehicles, to maintain a*171 club for social enjoyment, and a club house, and to purchase, lease and improve such real estate or other property as may be necessary for such aforesaid purpose.
* * * *
Eighth. The annual income of the said corporation, other than that derived from real estate, shall not exceed the sum of Two million dollars ($ 2,000,000).
Petitioner's bylaws contained the following provisions with regard to eligibility for membership:
Article II.
The procedure by which a person becomes a member of petitioner is the filing with the board of directors of an application endorsed by a member. Upon payment of dues and election by the board, the applicant becomes a member. In addition to the eligibility requirements in the bylaws, the applicant must meet the further requirements of not having an unfavorable reputation as a reckless driver and of not having a criminal record of convictions for driving while intoxicated, stealing an automobile, or similar offenses. During the taxable year petitioner charged an entrance fee of $ 2 for new members, and*172 the annual dues were $ 10 for all members except those in the Washington *1040 and Baltimore operating areas, where the dues were $ 12, and in the central Pennsylvania area of York and Harrisburg, where the dues were less than $ 10. The differences in dues charged in the above areas resulted from differences in the cost of servicing members in those areas. Petitioner's membership on December 31, 1942, was 54,000; at the close of the taxable year, on December 31, 1943, it was 48,010; and at the time of the hearing in this case, 88,000. Petitioner's letterhead carries a statement that petitioner is the largest automobile club "in the East."
The bylaws of petitioner, effective March 23, 1943, contain the following provisions:
Article IV.
* * * *
Article V.
* * * *
Article VI.
* * * *
The incentive for becoming a member of petitioner is the right to obtain the various services rendered. During the taxable year the activities engaged in and the services rendered by petitioner were as follows: Public safety and traffic engineering, sign posting, motor patrol, safety education, emergency road services, touring and routing services, license and notary services, bail service, publication of the Keystone Motorist -- monthly organ of petitioner, insurance facilities, and automobile finance facilities.
Petitioner owned during the taxable year 100 per cent of the capital stock of two insurance companies: The Keystone Automobile Club Casualty Co., hereinafter called the Casualty Co., and the Keystone *1043 Automobile Club Fire Co., hereinafter called*179 the Fire Co. Both insurance companies, representing a total original capital investment of $ 450,000, were organized in 1928 with funds furnished by petitioner, which borrowed the necessary funds from a bank and repaid them within about ten years from money derived solely from membership dues and entrance fees. Both insurance companies were incorporated under the laws of Pennsylvania. All insurance premiums are paid directly to the companies, and not to petitioner. The companies issue policies only to members of petitioner and of the two other clubs mentioned below with which petitioner has reciprocal relations. Members of petitioner are not required to buy insurance from either the Casualty Co. or the Fire Co., but members have a privilege to obtain insurance on standard policies from those companies cheaper than they can obtain such policies from regular commercial insurance companies. During the taxable year about 70 per cent of petitioner's members were insured through the Keystone Automobile Club Casualty Co. and Fire Co. The Fire Co., in addition to insuring members' automobiles, also insures members' residences and contents thereof.
The aforementioned insurance companies*180 have never declared or paid a cash dividend. In the years 1930, 1939, and 1941 both insurance companies declared stock dividends in order that they might meet the capital stock requirements of Pennsylvania and New York laws. These increases in capital stock were made solely by declaration of stock dividends, no money changing hands. On the books of the insurance companies, the paid-in capital stock was credited with the amount of stock dividend declared and contingent reserve was debited. On its books petitioner has always carried its investment in the insurance companies at the original investment amounts of $ 300,000 for the Casualty Co. and $ 150,000 for the Fire Co. During the taxable year the Casualty Co. and Fire Co. earned profits of about $ 125,000 to $ 150,000 and $ 30,000 to $ 40,000, respectively. Those sums were transferred to contingent reserve accounts of the two insurance companies, no payment of dividends of any kind being made. Both insurance companies filed Federal income tax returns and paid the taxes during the taxable year.
During the taxable year the boards of directors of petitioner, the Casualty Co., the Fire Co., and the Acceptance Co. were composed of the same persons. The officers of petitioner were a president, five vice presidents, a treasurer, a secretary, and an assistant secretary. The president during the taxable year, first elected to that office in 1941, was J. Maxwell Smith. He was also president of the Fire Co., Casualty Co., and Acceptance Co. He received no *182 salary from petitioner; his salary was paid by the Insurance Co. and Acceptance Co., which shared payment of it. He devoted his time to the affairs of petitioner and the Insurance Co. and Acceptance Co. Similarly, the five vice presidents of petitioner also served as vice presidents of the Insurance Co. and Acceptance Co., and no vice president received any salary from petitioner. Members of the board of directors received no salary from petitioner. The only officers of petitioner whose salaries, or part of whose salaries, were paid by petitioner were the secretary and assistant secretary, neither of whom were members of the board of directors.
During the taxable year petitioner employed approximately 100 employees in its central office and 50 employees in its 17 branch offices. The central office of petitioner was located at Broad and Vine Streets, Philadelphia, Pennsylvania, in the Keystone Building. That building was not owned by petitioner, the insurance companies, or the Acceptance Co. Petitioner, the Casualty Co., Fire Co., and Acceptance Co. rented and occupied 2 1/2 floors of the buildings' 10 floors. Petitioner occupied the first floor, the mezzanine, and a garage in*183 the basement, where petitioner's cars were stored. The Casualty Co., Fire Co., and Acceptance Co. occupied the tenth floor. A small space on the first floor was used by a cashier, who received premiums paid to the insurance companies. The remainder of the first floor and mezzanine contained filing cabinets, typewriters, and other business equipment. There were no club rooms and the space was devoted entirely to the servicing of the membership. Each corporation had a separate lease and each paid rent. At the time of the hearing in this case, petitioner, the insurance companies, and the Acceptance Co. jointly occupied a building owned by the Casualty Co. at 220 South Broad Street, Philadelphia, Pennsylvania. A few employees in the central office work for petitioner and the insurance companies, and their salaries are prorated, based upon the actual time they work for the several organizations. Petitioner and the insurance companies occupied *1045 during the taxable year the same office space in the 17 branch offices and used the same personnel in those offices. The operating expenses of the branch offices were prorated on the basis of actual expenses chargeable to each *184 organization.
Petitioner does not sponsor social functions for its members. During the taxable year petitioner held its annual meeting and nine district advisory board meetings. No special membership meetings were held in the taxable year because of war conditions.
Petitioner is a member of the American Automobile Touring Alliance, a national association of automobile clubs, which in turn is a member of the Alliance Internationale de Tourisme, with headquarters in Geneva, Switzerland. J. Maxwell Smith, president of petitioner, is also secretary and treasurer of the American Automobile Touring Alliance. Petitioner during the taxable year had an arrangement with the Pittsburgh Motor Club, Pittsburgh, Pennsylvania, and the Delaware Automobile Association, Wilmington, Delaware, whereby the three organizations rendered touring and emergency road services for each other's members on a reciprocal basis.
Petitioner's principal sources of income are its entrance fees and dues. In a schedule attached to its returns for the taxable year, petitioner reported receipts and expenses as follows:
| Receipts | ||
| Membership: | ||
| Dues | $ 449,472.10 | |
| Entrance fees | 9,257.00 | |
| Emblems and Miscellaneous | 664.87 | |
| $ 459,393.97 | ||
| Other Receipts: | ||
| Hotel Bureau | 922.12 | |
| Interest | 92.70 | |
| Gain -- Disposition of Assets | 842.19 | |
| Bad Debts | 83.58 | |
| 1,940.59 | ||
| Total | $ 461,334.56 | |
| Expenses | ||
| Regular Membership Services | $ 193,443.86 | |
| Operating Expenses | $ 310,846.25 | |
| Less: | ||
| Reimbursement of expense advanced and paid | ||
| for on behalf of insurance companies | 94,543.59 | |
| 216,302.66 | ||
| Total | $ 409,746.52 | |
| Excess Receipts over Expenses | $ 51,588.04 | |
*185 *1046 Petitioner's "excess of receipts over expenses" for the years 1928-1947 was as follows:
| Excess receipts | |
| Year | over |
| expenses | |
| 1928 | $ 23,308.40 |
| 1929 | 137,075.88 |
| 1930 | 90.420.35 |
| 1931 | 57,168.24 |
| 1932 | 53,957.33 |
| 1933 | 30,288.49 |
| 1934 | 4,026.18 |
| 1935 | 1 ($ 5,303.02) |
| 1936 | |
| 1937 | 29,144.67 |
| 1938 | 2,539.47 |
| 1939 | 5,601.12 |
| 1940 | 22,339.60 |
| 1941 | 51,145.80 |
| 1942 | 28,772.78 |
| 1943 | 2 56,210.01 |
| 1944 | 59,749.89 |
| 1945 | 19,544.08 |
| 1946 | 51,996.01 |
| 1947 | 106,817.82 |
In a statement attached to its returns petitioner denied all liability for tax, stating in part as follows:
The Club contends * * * (1) that it is exempt from taxation under the provisions of
In any event, none of this excess, irrespective of the reason for its existence, is a profit, which could be distributed to shareholders. This statement is patently correct when it is realized that the Club is a nonprofit corporation organized under the Nonprofit Laws of Pennsylvania without capital stock or shareholders of any description, and cannot enter into general commercial transactions from which profits might result because of the restrictions of the Act under which the Club is organized.
For the reasons stated above all tax liability is denied.
The item of $ 942.12 designated as "Hotel Bureau" under "Receipts" in petitioner's returns represented the excess of the amount received from various hotels *187 for listing their names in petitioner's hotel directory, over the expense of compiling and printing the directory. The item of $ 92.70 represented interest received in the taxable year on Government bonds which were purchased as a reserve for any possible tax liability pending the outcome of this case. The item of $ 83.53 represented a recovery from closed banks in which petitioner had deposits, the assets of those banks being liquidated. The item of $ 842.19 represented the gain realized by petitioner from the sale of some of its used automobiles during the taxable year.
Emergency road service and touring service were the two most expensive membership services rendered by petitioner. The peak *1047 months for the emergency road service were December, January, and February of each year, and the peak months for touring service were June, July, August, and September. Operations throughout the year indicated that the receipt of dues and entrance fees during the months of December, January, February, and March were never sufficient to cover the cost of membership services and operating expenses during those months. It was petitioner's policy to try to have a cash balance at *188 the end of each calendar year of as near $ 50,000 as possible to permit meeting the increased expenses of emergency road service during the early months of the succeeding year. At the end of the taxable year petitioner had a cash balance of $ 51,588.04, the amount shown on its returns as the excess of receipts over expenses.
Respondent in his notice of deficiency stated:
It is determined that the Keystone Automobile Club is not an organization exempt from taxation for the taxable year 1943 under the provisions of
In the notice of deficiency under "Adjustments to Net Income," respondent stated:
| Net income as disclosed by return | $ 51,588.04 |
| Net income adjusted -- no change | 51,588.04 |
OPINION.
This proceeding is controlled by