*1 affairs the two officers on the of the tax- PEOPLE’S EDUCATIONAL CAMP SO- payer corporation. This is sufficient in- CIETY, INC., Petitioner, dispose ap- on formation of the peal. deny We therefore the motion to supplement COMMISSIONER OF INTERNAL REV- the record. ENUE, Respondent. government urges The the ex- No. Docket 28264. highly cluded evidence was relevant establishing material whether Appeals United States Court of compensation paid by taxpayer Second Circuit. was rea- argument is that since the sonable. The Argued Dec. 1963. testify could not as to the executives April Decided spent amount of the affairs time corporation, compensation paid each by subsidiary would afford some basis allocating the two. the time between agree. is nei- We cannot Such evidence nor material. It is well ther relevant accepted in that an the business world salary upon dependent executive’s is not job. spent An amount of time may executive do some his most crea- relaxing tive This work while home. by judge was taken into account the trial charged jury, he “an when executive charged responsibility ducing doesn’t count hours in results performs his duties and his he functions.” And it should be noted that part exception was taken to this charge. compen as to The evidence subsidiary paid is neither

sation determining

relevant nor material paid compensation

reasonableness taxpayer. jury was The aware holding the two officers were

positions, and this was a sufficient in taxpayer

dication that their services for part light time. No further

would have been shed on the real issue excluded, evidence judge, therefore,

the trial did not abuse by refusing

his discretion to allow the fully introduced.

evidence It

within discretion trial court relating

to exclude evidence to collateral Jayson

issues. v. United 294 F.2d (5th 1961); Luck Cir. Vareltzis v. Steamship Co., (2d

enbach 258 F.2d 78 1958). judgment affirmed.

925- ficiency $25,784.43 federal petitioner, People’s come tax of Educa- Camp Society, Inc., tional for its fiscal *3 year ending . September 30, 1956. The rejected petitioner’s Tax Court claim that it was from the income tax under 501(c) (4) of the Internal Reve- nonprofit nue Code as a civic organization operated exclusively for the promotion welfare, rejecting of social ground that such an precluded was relationship because of the petitioner’s operation large of a totality commercial resort bore agree activities. We exemption. not entitled to the complete A statement of the facts sur- rounding petitioner’s operations, includ- ing a detailed breakdown of its financial opinion can be found in the Court, reported the Tax at 39 T.C. 756. summary Our thereof follows: membership York Petitioner a New corporation principal with its offices City. organized York It was New by persons Rand associated with the Science, an School of Social institution operated by the American then Socialist engaged Society conducting and adult presenting pro- classes and lectures and grams dissemination of in- related formation on labor movement and During principles. 1920 of- socialist ficials and friends of Rand School be- Sher, I. City, Herman New York purchasing came interested a tract petitioner. 2,196 acres land in 'the Pocono Moun- Oberdorfer, Atty. Gen., Louis F. Asst. eye Pennsylvania, tains of with an Jones, Jr., Meyer Rothwacks, John B. developing camp- toward on the tract a Attys., Dept. Justice, Washington, D. faculty, site where Rand School’s C., respondent. might gather students and dur- friends ing carry the summers to on their studies WATERMAN,* Before SMITH programs develop they in which HAYS, Judges. Circuit After school’s interested. executive secretary acquired option pur- had WATERMAN, Judge. Circuit $21,000, peti- chase the land for about petition This is a organized to review a decision tioner was to take title to the Tax Court of the property camp, United develop States the summer upheld eventually given Commissioner of In- which was name ternal Revenue’s “Tamiment,” nearby. determination a de- the name of a lake * appeal argnecl panel Judge This Judge before a Waterman was substituted. composed Judges Clark, Smith and Clark had voted in af- a memorandum to firm, Hays. Judge any opin- Clark died before prepared, ion had been and thereafter organized tions; Petitioner, cooperate York as a New with such or- ganizations membership corporation, has is- never movements any movements, never shares of stock has initiate such sued but said purposes stockholders. Its shall had not extend to those

n conducted objects group corporations may of individuals for which may members, pursuant be known whose number formed to the Educa- Law, tion never exceed 35 and whose election nor shall activities of governed membership by petitioner’s corporation said be conducted for by-laws. Any may profit person pecuniary elected to its members.” membership publicly endorsed who As of the time of the Tax Court *4 principles socialism for at least of ceedings below, by-laws pro- petitioner’s years, membership has two and whose upon prop- vided that dissolution all its by petitioner’s Board recommended been erty to to the American was revert So- (of approved and has been Directors although Society, Society, cialist already of persons None members. those along its Rand School of Social petitioner’s or directors receive officers Science, As had to exist in 1956. ceased n anysalary compensation, other but the or steps no had to of this time been taken director, managing director and associate relating by-laws portion amend of the op- day-to-day petitioner’s who conduct disposition petitioner’s property to the of erations, peti- do receive salaries as do dissolution, upon nor had alternative employees. other tioner’s plan contemplated.2 for dissolution been organized petitioner its cer- was When opening Camp Tamiment of From the. incorporation its set forth of tificate began July 1921, occupancy in of n objectsin following terms: growth. experience Dur- considerable to growth organize, ing years twenty main- and its “To conduct its first steady though By camps 1941 the and centers moderate. summer tain gross purposes; camp’s had in- recreative annual instructive and build, own, lease, $281,633.87, of purchase, man- value to and the to creased dormitories, age camps, $398,- operate to assets increased and its had fixed n dining rooms, years play halls, Except 1925 and recreation 663.93. for the incurred, reading rooms, 1932, .grounds, and halls when small losses were n other consistently buildings year of for the Tamiment each forth; period except corporation and, profit, as herein set shown for the (cid:127)said a general knowledge petitioner re- diffuse a from 1921 to 1923 when to through entirely literature, contributions, it art and science ceived has been self-sustaining. lectures, publications January 1936, medium performances; again January petitioner bor- ob- (cid:127)and dramatic corporate rulings money pur- for the row tained from the Commissioner corporation that, poses and to issue Internal Revenue the basis bonds, available, petitioner of in- or other evidences was en- *5 magazines year discussion, here under these assets and brochures as “Tamiment grown During $2,301,604.74. in the had to Poconos.” surplus, periods petitioner’s same these guest principal quarters Tamiment’s in designated in its balance sheet as “re more consisted of than 160 fur- serves,” $311,079.97 had from increased cottages, capable nished of accommodat- 1941, 1951, $1,573,452.14 in to and to ing persons, about 900 and located ad- $2,226,080.50 in 1956. Petitioner’s an jacent dining seating to a hall with a ca- nual revenues showed like increases after pacity apart of 1000. Set from the main figures 1941, petitioner’s with the complex cottages group of was a of gross all sources for total revenues from bungalows designed Sandyville, known as 1951, being, respectively, and 1956 by children, for use families with and $290,804.60, $840,364.23, $942,632.-55.4 and adjoined play which school a small a and portion overwhelming peti T he of physical gross store. The other facilities expenses and tioner’s revenues during grounds period examination, as which Tamiment’s the under dotted were as of the luxury well the increase in value of its type not uncommon to va- figures showing peti- gross (no 3. value of the and net income or ex- pense figures available) assets at end of its fiscal tioner’s the from taverns at year 1957, figures Moreover, $12,- as well as other an Tamiment. additional year, gross were also set forth the Tax 811.39 .was realized revenue* They growth Mailly the Court. indicate from assets the Educational petitioner’s operations preceded Fund, segregation represents a of a year portion petitioner’s (derived taxable the 1956 continued at about of assets year. largely Tamiment) same profits the rate next fiscal from from placed special which were in a fund in Figures stipulated years for fiscal subse- 1944. While earmarked as a fund for quent petitioner’s to 1956 indicate that purposes, educational disburse- growth gross as reflected its annual rev- made ments which were from the of time upward enue has continued an trend. through its creation payments 1957 were annual $979,- Gross revenues totaled help defray $2700 of to costs 579.07, gross while revenues for 1960 operating play of a school at the above $1,115,932.39. amounted to Sandyville, also, mentioned and in 1956 figures 5. The revenue for fiscal portion and a minor of its assets fairly typical. $942,612.55 in Of the were used in the erection of a new cultural gross revenues, $929,611.17 total came center at Tamiment. following gross from the sources: guests resort; opinion, infra, setting come gross at Tamiment 6. See table in this bungalows expenditures income from of rentals forth certain of Sandyville, directly a of Tamiment section which were not related to Tami- designed by families; especially operation. for use ment’s catering young city adult housed Rand to a School resorts cation clientele; building; Science, library, a the school’s Social an administration hall; independent publication a offices library; of an and concert lecture a golf Leader, building; principal course called the and the 18-hole New ballroom containing petitioner. corporate a cocktail office When the a clubhouse dining Society lounge; and American Socialist another clubhouse was dissolved Tamiment; overlooking March and Lake terrace accordingly building; ceased, pe- vari- Rand School and facilities theater acquired sports. titioner all of the assets outdoor ous and, library renovating school’s after Also, included activities Tamiment’s hiring personnel began it, it- staff organized programs fields library. operate self maintain and art, drama, all available music and Containing largest most one charge. guests On the resort free of dealing complete collections material Sunday evenings Saturday after- movement, Socialism, with the labor building scene the theater noons freely Communism, library was made production dramatic or musical persons engaged available all in re- employed staged by group a theater search those fields. through- purpose, for that building week rest out the Acting the name “Tamiment under pic- motion used for exhibition Institute,” petitioner also undertook Orchestras hired on theater eve- tures. promote sponsor and various other play nings for musical comedies grams interest, mostly New customarily used after the revues City. inter- stimulate York In order to provide performances music at dances. *6 string composi- quartet est in American during the summer season Each week tion, petitioner promoted com- annual performed con- and musicians vocalists music, position in of this field contests gave recitals, a deal- or and lecture certs original awarding prizes ad- works ing topic a with the arts connected judged An award annual book the best. weekly public also or affairs was prize conducted, at a which luncheon was staying at the for those resort. fare Throughout by petitioner for the best was awarded art season an each summer year. .biographical of Petition- the book gave employed by petitioner free director programs to foster er launched several guests, and art instruction to interested thought important and discussion about professional invited dis- artists were public discussed such issues issues. It play and offer them for their works there public ad- service from time to time sale. sponsored, and in it vertisements which ’**' single outstanding published pamphlets The most cultural cir- it presented at attraction Tamiment was also numer- itself. It conducted culated year early in the college each summer vacation essay and uni- contests ous for season, a featur- chamber festival music public versity An annual students. ing string quartet. an orchestra and prominent citi- at was held which forum gen- open was festival to members the pub- on matters zens aired their views paying eral as well Tamiment’s lines, along concern, and, these same lic charged guests, but a moderate was fee sponsored Tami- at were annual seminars attending staying at those who not opening the resort’s the before ment the resort. scholarly papers summer season at Though operation Tamiment the and discussed. were read great constituted the bulk 3,1956, the March Commis period On activities under re- pe petitioner wrote view, Revenue of Internal also on other sioner titioner, carried peti ruling that, time, chiefly inasmuch as activities New engaged operat City. primarily acquired York it tioner In 1951 from enterprise, building ing it Society a commercial American Socialist a (1) (2) require exemption do Conditions not longer from to be accorded an extensive treatment. While at least one filed Petitioner income taxes. federal given court has subsection fiscal a rather corporate return tax by defining exemption limited construction 1956 but claimed narrowly itial tax, word “civic” then re- asserted and the Commissioner garding modifying “leagues” $25,784.13. against deficiency it as both “organizations,” proceedings peti- Erie Endowment Tax Court below (3 United correctness of 316 F.2d did not contest the tioner 1963), unsuccessfully party deficiency proceedings figure, neither to these but any question ground has raised as to em- on it was defended sole phasis placed upon to be the word “civic” all since it was not liable tax at interpretation exemption or the under to an accorded entitled Section construing 501(c) Rather, (4). 501(c) the 1954 Code. Section they tacitly that, 501(c) (4) provides have both for an assumed even genre case if the term connote a limited from the income tax of: does characterized organiza- leagues “(4) Civic or something op- than organized profit op- tions but classified, erations, may be so exclusively promo- erated they confined have themselves welfare, tion of social or local asso- analysis petitioner’s opera- whether employees, ciations the member- exclusively tions in 1956 were of a social ship of which is limited to the em- welfare nature. designated ployees person aof or persons particular municipality, in a emphasis the broader term This earnings cur and the net of which line with the “social is in welfare” subsection, regulations covering exclusively charitable, devoted rent give educational, pur- appear the word or recreational which do not limiting poses.” independent ef real “civic” organiza but deal with fect Petitioner, course, seeks to take ad- “operated primarily for the tions vantage part of that subsection bringing betterment civic about organiza- leagues exempting “[c]ivie *7 Reg. 1.501(c) improvements,” social § organized op- profit not for but tions (4) (1) (a) (2), also line with and is — exclusively promotion the of erated rulings interpreting this and revenue 7 so, petitioner To social welfare.” do subsections,8 g., predecessor e. Rev.Rul. statutory the must meet three conditions 259; 55-495, Rev.Rul. 1955-2 Cum.Bull. set the subsection demon- forth 257; 55-439, GCM 1955-2 Cum.Bull. league (1) strate that: it is civic or a 24100, 192. This em 1944 Cum.Bull. organized organization; (2) it is not aspect of the phasis on social the (3) exclusively operated profit; it is the also in accord with subsection is authority; promotion weight judicial the of social welfare. Debs some of Fund, not the apparently Radio Inc. v. Commis- have Memorial courts viewed “organiza modifying (2 1945). sioner, as word “civic” 148 F.2d 948 Cir. part requirement v. See States 7. ter of it. United forth at the set end Membership Corp., earnings 158 subsection, Pickwick Elec. the that net 1946); 272, (6 Han F.2d Cir. charitable, 276 exclusively devoted edu- Gagne, Imp. v. 92 F.2d 888 over Soc. cational, ap- purposes, or recreational (1 1937). Erie Cir. But see Endowment range pears to narrower of ac- involve a (3 States, 151, F.2d 156 v. United 316 tivities than term “social wel- does the 1963). Cir. clear, however, fare.” It is the language only leg- rulings, of the subsection and its “civic” is treated the history “leagues” qualifying “or- not islative the limitation as does being apply organizations ganizations,” re- not by the latter term all covered by phrase simply garded subsection, the the but to the as modified em- organizations operations. dealing ployee in the described lat- social welfare with 930 along “leagues,” promo- and have Tax Court the constitute the tions” simply themselves tion of social welfare. concerned These therefore organization already has been which we have outlined some with whether detail, conducting op largely exclusively conducted New things City v. erations, York area and such Foundation included see Veterans (10 library as the F.2d maintenance of a 281 912 Cir. free United Gagne, Soc., Socialism, 1960); Imp. Communism the labor Inc. v. Hanover Amalga movement, 1937); sponsorship public the 888, (1 Cir. 92 F.2d 891 Commissioner, symposia, promotion Housing Corp. forums and v. mated contests, composition essay per curiam, 817, 825, 108 musical B.T.A. aff’d 37 pamphlets 1940), (2 and ing circulation of other courts discuss- F.2d 1010 Cir. important public result matters interest. have about the same reached agree organizations” talking We but these activities involved about “civic promotion defining social welfare as in the limited sense “civic” “community spon 501(c) term used “municipal” or closely Code. This re court has terms characterized in broader sored” but promotion pro general concept welfare as lated volving serving “purposes welfare, bene- Consumer- see motion of social community whole,” Commissioner, 186 as a Coop. ficial v. Farmer Milk cert, denied, promotion 68, 1950), of man- (2 “welfare Cir. F.2d generally 803, 931, kind” in the manner L.Ed. 1360 U.S. S.Ct. religious charitable, educational and or- (1951); Pickwick Elec. United States ganizations provisions 272, exempted Corp., Membership like 158 F.2d Fund, Radio 1946); of the Code. Debs Memorial (6 Radio Memorial Debs Commissioner, supra, Commissioner, supra.9 148 F.2d Fund, Inc. v. Inc. v. petitioner, at 951. These de- supported the little activities of also This view signed in history main legislative explana to stimulate increased one finds public interest in the affairs and when was arts provision, for tion of the general citizenry provide laws, part the tax Sec first made becoming 1913, better c. means informed G(a) the Income Tax tion amounted, apparently concern, to matters of Stat. think, furthering that the result of a belief as a included to the we of the bene- religious, exempting

provision then community ficial interests of organizations or educational charitable promote whole and therefore served to many enough non to cover not broad social welfare. profit ben whose activities general urges public. Briefs and See us to efited Statements, Petitioner further *8 welfare, characterize, Fi promoting Committee Senate as social (1913). Cong., nance, 2001 1st Sess. activities were 63 the various cultural which pe we, Therefore, too, Tamiment, that will assume at and which were conducted organiza league operation as or with that area’s is a “civic connected titioner peti Our at tion,” and, appears a commercial vacation resort. that also lectures, to the con tention is directed profit inures to makes no which tioner certs, plays, and which were art exhibits any individual, private we of the benefit regularly held the resort’s sum peti now concern ourselves with whether season, annual Tamiment’s and to mer operated exclusively for the tioner has four-day We chamber music festival. promotion social welfare. Court, however, agree the Tax activities, activities, petitioner’s considered in their rela Certain of these Tamiment, operation involving operation the total not the commercial tion to resort, promotion of social found not Tamiment were did involve the Inc., Forest, F.2d v. Lake 305 9. But see Erie Endowment v. United sioner 1962). States, 156; (4 supra, at Commis- 817-818 316 F.2d 931 every interpretation, They simply part so as foreclose at all. were operation non-exempt purpose operation as a for a parcel Tamiment’s necessary insubstantial, how resort, matter but rather and were commercial interpreted “primarily.” spot luxury been to mean cater- vacation of a features Fund, Debs Memorial Radio v. Com- ing young clientele. Inc. adult intellectual to a missioner, 952; supra, Pennsylvania’s 148 F.2d at see state director of As the below, Sugarman Pomeroy, agency & promotion Business Income testified tourist Exempt Organizations, perhaps programs, Va.L.Rev. while cultural such (1960). way, Tamiment, higher Stated another quality were * * * single presence ordinary programs “the of a com- not unusual [non-exempt] purpose, if substantial resorts the Poconos mercial nature, destroy guests exemption type will sought re- who to draw the gardless importance or frequented number Tamiment. These * * * truly [exempt] broadening purposes.” and beneficial no doubt while guests paying en- Better Business Bureau v. United who Tamiment’s very 279, 283, therefore, 112, 114, and, re- U.S. them, S.Ct. joyed (1945). L.Ed. sense, incidental doubtless of some mote community general aid to the petitioner’s opera- It was the nature of members, guests cannot these tion of Tamiment as a commercial resort imagination con- any stretch competition other such active to the com- more beneficial sidered area, coupled businesses in the Poconos munity more whole or as a running relationship with the which the general welfare, as those motive aggrega- of Tamiment bore the total statu- to define the have used terms been petitioner’s activities, tion of that caused golfing, tory phrase, than Tamiment’s petitioner the Tax Court conclude that dancing swimming, activities. See exclusively operating was not for the Forest, Inc., Lake su- Commissioner v. promotion social court welfare. That Coop. pra; Milk Consumer-Farmer particular upon laid stress fact Commissioner, supra. petitioner’s expenditures genuine important but a constituted come now the social welfare activities We petitioner’s opera question of its total revenues and whether fraction small Tamiment, paled comparison ac- itself with the total tion of the resort activity involving petitioner promotion surplus car- cumulated consistently welfare, prevents had ried following obtaining 501(c) years. a Section creased over the organization operated table, up as an drawn the Tax Court findings exclusively promotion as to of social basis of “exclusively” activities, excellently welfare. financial demon- The word used given point: has not strates this statute been a strict Fiscal Expenditures for Accumulated earned ended Total surplus Sept. 30 activities Revenues *9 $1,913,550.32 $968,004.85 $13,378.44 1953 956,911.51 2,036,911.38 1954 28.550.86 918,558.59 2,124,602.33 1955 47.636.86 44,684.76 2,226,080.50 942,612.55 1956 979,579.07 70,718.27 2,307,097.89 1957 932 organization’s petitioner particular Moreover, spent a substantial determine right exemption expanding largely portions an its and revenues basis Tamiment, operations improving at of the effect its facilities have on the large public. extremely petitioner’s purpose In to those terms of addition an during 1956, having oper- as demonstrated fact its facilities been made ations, year as under here review. demonstrated actual the taxable year spent operations During petitioner effect which a total those have on the capital community part, petition- A $221,302.34 it for additions. is a regarded petitioner’s comparison primarily er cannot be between balance as a so- organization figures for cial welfare sheet for that and those entitled a 501(c) previous year (4) exemption, that of the Section indicates but rather additions, organization spent capital it must be total amount for viewed as an primary purpose $200,000 whose spent at fact be- than Tami- more running come the buildings, equipment, “per- of a commercial re- ment sort.11 inventory,” with

manent the remainder being spent equipment on books argues, however, Petitioner library. petitioner’s York New relationship existing despite the between expenditures its Tamiment and the agree Tax Court We amount its revenues devoted to the circumstances, petition that, under these promotion welfare, of social its Tami Tamiment foreclosed er’s resort no more an income ment is than organization that it is an determination producing operation designed to finance exclusively promotion of operated for the its and hence Scripture Press social welfare. See exemption is to an under the entitled States, 285 F.2d United Foundation v. According “destination of income” test. denied, (Ct.C1.1961), 368 U.S. cert. test, developed to that first this Cir (1962). 7 L.Ed.2d 82 S.Ct. largely in 1938 cuit the basis True, from petitioner’s revenues none of Supreme Court’s decision in Trinidad v. been turned over Tamiment have ever Sagrada Orden, etc., supra, the fact person,10 peti private profits organization exempt an otherwise con formally declared tioner’s operation ducts a commercial should not originally set certificate forth organization prevent qualifying organized incorporation it was when exemption for an if the net income there aof social was to conduct activities by realized is destined to used for ex may Moreover, it well welfare nature. purposes. empt Consumer-Farmer Milk currently responsible persons be that Commissioner, supra; Coop. v. Debs Me directing petitioner’s operations sin Fund, Inc. morial Radio Commissioner v. honestly cerely or that their believe Revenue, supra; of Internal Bohemian ganization’s primary purpose is still the Gymnastic Higgins, F. Ass’n Sokol v. promotion of welfare. Neverthe (2 1945); Beach, Cir. 2d 774 Roche’s Inc. granted less, to social wel (2 Commissioner, 96 F.2d 776 like is made fare recognition 1938). pub which the of the benefit argument ac lic from their social welfare While derives Sagrada etc., Orden, completely unpersuasive, tivities, we think Trinidad v. 578, 581, 68 L.Ed. the destination test 263 U.S. S.Ct. that to use only (1924), petitioner think fair from the tax and we this would operated opinion, admittedly 11. eazdier izz our that an As noted Were rumiing organization non-profit primary purpose operates on a for non-profit tbe requirements resort, it is difficult to basis one of the vacation large 501(c) segment imagine of its rev which must under where a be met expanding (4). qualify exemp- go would if not toward order enues *10 tion, organization improving facilities, op- and ac an must also be and cumulating resort surplus. exclusively large reserves of erated for social welfare. corporation’s unnecessarily application and of the churches various broad an be agencies. The Court out of subordinate held would be test and one which the exempt corporation spirit was that the taxation, noting from keeping and the with “says exemption. that des- the statute The social the welfare nothing income, ought per- about the source the used to not to be tination test where, entity escape makes the destination the ultimate taxation but to mit an exemption.” 581, 44 here, at de- test 263 U.S. much its revenues are so at 68 L.Ed. 458. expanding its commercial facili- S.Ct. voted increasing surpluses, and so ties and its argument fails to What spent actually little its revenues are Sagrada recognize in is the Court that is for that it discussing corporation’s when Orden factually primary purpose that the clear operations producing took care income organization really is not holding distinguish its between mere running motion of social welfare but production property income for the operation. a commercial trading merchandising activi- its and also ties, been a distinction which Sagrada Orden, etc., supra, Trinidad provi- recognized Code current in certain Supreme upon Court decision relied in 1956. Com- in effect which sions were original by this for court as basis (l)-(3) 512(b) 501(c) (2) pare and § § test, development of the destination 502; H.R.Rep.No.2319, 81st see § using support provides for in no that test (1950). Thus, Cong., 2d Sess. organization exempt an order to such as discussing the Government’s in Court fact, analysis petitioner. a careful case, position in characterized that Court in case of the facts before the put as immaterial both aside one which demonstrates that use the destination prop- from the that “the income the fact carry here de- test would be rule exclusively was devoted erties” Re- Sagrada veloped very far from Orden ligious, pur- charitable and educational principles from the which were afield poses, the fact that the “and also limited Sagrada there set forth. The Court trading, such, purely if it can called interpreted which Orden pursuit pur- those incidental to any liability corpora- tax shielded from poses, and is in no a distinct or ex- sense “organized exclusively operated tion venture,” at 44 explain- ternal U.S. S.Ct. religious, charitable, scientific, or for 458; and, 68 L.Ed. after purposes, part no net educational ing using corporation prop- its how to the income of inures benefit produce actually ad- erties incomewas any private stockholder or individual.” hering furthering pur- to and its The Government conceded the en- poses, -the turned to a discussion Court organ- tity, Philippine corporation, was corporation’s trading activities. religious, operated ized charitable emphasized The Court the fact that the purposes and educational quite corporation’s sales part of net inured to the bene- selling small, any did not involve to the individual, private fit of but claimed competition others, public or operated exclusively that it not “engaging really could be called purposes those because of some income trade”: producing operations on. carried great respects wine, of the income “As the transactions bulk rents, commercially articles, think derived consisted of chocolate and they we engaging properties do not trade interest and dividends on amount corporation any proper It term. is not which the owned and held. sense of the selling consisting it, to the The rest of about claimed that there competition or in with others. The of the total income realized 2.8% bought corporation merely supplied taxable articles organ volved, profits plaintiff’s represented sale within the own use agencies chocolate, wine, of them and other articles used ization —some *11 sup religious strictly use, Beach, the others for Commissioner, Roche’s Inc. v. purely decision, uses are which incidental to the The Roche’s Beach ra.12 plaintiff carrying granted exemption work which the on. an to “feeder” or a yield ganization profit is That the transactions some which did not itself conduct negligible exempt in the circumstances a factor. activities but all which channeled gain profits admittedly Financial is not exempt organi the end to which of its to they 582, zations,13 seriously directed.” at U.S. S. has been undercut 206, subsequent overruling 68 L.Ed. 458. Ct. at a amendment to the Internal Revenue Code enacted course, petition- bar, In the case Congress 301(b), in 1950. Section Rev operation anything resort er’s Poconos 1950, 994, 906, enue Act of c. 64 Stat. actively competes small, for and it but amending 101, § Internal Revenue Code public’s other commer- the business with and now found in 502 of the § More in the Poconos area. cial resorts Internal Revenue Code of 1954. While corporation importantly, the unlike the organizations exempt the held in the two has, Sagrada case, petitioner over Orden opera later cases conducted commercial portions years, applied substantial tions finance their educational or social oper- expanding its business its income oper such commercial large building up ac- and to the ations merely ations were found to be incidental surplus. cumulations educating main their tasks of either promoting social welfare. Neither of sup- Moreover, find no substantial we opera these cases involved commercial port petitioner’s position petitioner’s, tions on the scale of and in through has, the cases in which this court them, neither of nor in the Roche’s Beach test, application the destination matter, organiza case for that organizations was exempt despite held certain using portions conducting opera- tion substantial of its their of commercial rev Fund, large surpluses tions. Debs Memorial Radio Inc. enues accumulate Gym- Commissioner, supra; expand Bohemian producing v. its income facilit Higgins, supra; nastic Ass’n v. Sokol ies14 12. In the one other case in operations which this limited business could be car- apply court had occasion to the destina exemption. ried on without loss of test, Coop, Milk tion Consumer-Farmer F.2d at 779. Commissioner, (2 186 F.2d 68 Gymnastic 14. In Bohemian Ass’n Sokol v. 1950), denied, cert. 341 U.S. 71 S.Ct. Higgins, an educational and recreational organiza (1951), 95 L.Ed. 1360 association realized from the oc- tion under examination was found not to renting casional some its facilities to organized operated exclusively regular public, opera- and from the purposes. Inasmuch open tion of a bar and restaurant to the largely the decision turned on the conclu public grossed $66,000 during about organization’s sion that 1942. There is no indication financially, benefited individual members amount, this guide is of little aid to us as a to the $3,000, duced a net income of about was proper handling present case. surpluses used to accumulate or to add majority gave opera- One of the reasons the fixed assets of the commercial tion, except part possibly the result reached was that of that re- corporation exempt organi- would have been had $700 flected increase it, itself, administering exempt inventory. been zation’s Fund, activities. 96 F.2d at 776. The dissent- In Debs Memorial Radio Inc. v. ing judge, Hand, X, position Commissioner, originally C. whose a radio station taxability corporations organized only public as to the of feeder service broad- eventually by congressional casting, finding distress, confirmed itself financial existing statute, portion clarification of the then undertook to use a of its broad- argued given casting programming then time for commercial Though operations. limited class of feeder to finance its exclusive, figures precise intended to be and also ease included broadcasting dicated if that even were con- distribution ducting activities itself time between service and com-

935 gross helpful ing any part their that more revenues to think We expand operations, guidance their proper tax treatment own as to the declared petitioner be found taxable. view of this think it can we to be accorded inconsistent, Con would be somewhat amendments deal- certain remedial ing taxability gress problem to the Internal Rev with the of the in 1950 added organizations, permit 1939 have been other to an en- enue Code and which tity exempt like to attain sta- intact into the 1954 Code.15 carried over devoting energy tus while them, considerable to now 502 of the One of Section improving expanding already existing an designed clarify Code, to was large operation. Moreover, business the already law, to it and we have alluded Congressional purpose behind 1950 briefly. Overruling decision this provision enactment of both the feeder Beach, Inc. v. Commis in Roche’s court 502 now in Section and the unrelated extending sioner, prohibited supra, ex business income amendment now Sec- organizations, emptions or to to “feeder” organizations prevent 511 tion was to primarily as those are conducted exempt competing tax with status from which turn over but business- unfairly ordinary, taxed business charitable, profits to all of their S.Rep.No.2375, Cong., entities. See 81st organizations. welfare, Another or like 26-31, (1950), 35-36 U.S.Code 2d Sess. amendment, 511 of the 1950 Section now 3053; Congressional p. H. Service Code, imposed a on the tax “unrelated R.Rep.No.2319, Cong., 2d 81st Sess. 36- organizations income” certain business ; H.R.Doc.No.451, 38, 41-42 81st exempt from taxation. While otherwise And, Cong., (1950). 2d while Sess. squarely amendments is of these neither appears that amendment the Section 511 situation, applicable we existing change supposed to was light they think do shed some determining exempt status, tax rule confronting problem us. Congressional purpose think that we provision16 behind both it and feeder Code, 502 of apply us not instructs the destination entity exempt status to which denies an broadly deny exempt status to test but to engaged business, primarily even entity petitioner, has an directed ultimately though its net income is all improv- so much its revenues toward truly organizations, exempt channeled ing ability compete its as commercial regard to does so without whether through operation the accumulation of gross particular feeder’s income large surpluses expansion and the of its improve expand first its own used producing facilities. organ capacity All as business. feeder izations, not interested in us- even those Affirmed. legislation programs taxable 15. For a mercial year, discussion background history, appears majority see Veterans it time, evening prime and all total time, Foundation v. United F.2d public (10 1960); devoted service Cir. United States Improvements Community Services, Inc., broadcasts. the sta- F.2d 421 largely through (4 denied, 1951), facilities were tion’s made cert. 342 U.S. foundations, (1952). advances from charitable but 72 S.Ct. L.Ed. 694 improved direct- course those facilities amendment, course, 16. The feeder ly purposes well served service designed away explicitly ex- to take tax produce helped income. sizable No empt from an class of or- status entire surpluses accumulated; fact, enjoyed exemp- ganizations which had up court noted that to the end of the up And, time. as noted tion to that period operat- under review the station’s above, to the extent the treatment ing expenses operating had exceeded its which are not feeders receipts by $37,000. some change, should be consistent affected, degree, amendment also to some organizations. status Judge tedly objective. (dissenting): camp HAYS, Circuit purpose” such “commercial as the *13 majority unable to cite is the Not Supreme Court found in Better Business single authority support its con- States, 279, Bureau v. United 326U.S. it, departing is, clusion, from a as I see 112, (1945). opera S.Ct. L.Ed. 67 Its controlling authority firmly estab- line of designed any group tion is not to benefit many years in our own circuit. lished for Nothing “economically.” See Consumer-Farmer justifies in the case before us Coop. Commissioner, Milk v. 186 F.2d 68 past. In fact the this break with the (2d 1950), denied, 931, cert. 341 U.S. cry equities case out for the con- of the (1951); 71 S.Ct. 95 L.Ed. 1360 application construction tinued American Institute Economic Re relevant statute which this court search v. United 302 F.2d 934 long so followed. (Ct.C1.1962), denied, cert. 372 U.S. majority opinion The dismisses (1963), S.Ct. L.Ed.2d 141 hardly worth serious consideration the oper- To the extent camp that the Camp contention that such activities at purposes, ated for “cultural” i. e. educa- following Tamiment as social wel- art, music, literature, etc., polities, tion in fare activities: encouragement experiment in the Weekly art, music, lectures on litera- theater, music, sculp- and of excellence ture, affairs, anthropology, psy- current painting, surely pur- ture and then its relations; chology and human poses purposes. were social To welfare Weekly and in- concerts vocalists purpose what other is to be ascribed its reputa- international strumentalists of provision of rest and recreation for tion; young people cultural interested these purposes impossi- ? It seems me to be Daily on music and lectures concerts any ble to find rational formulation of pianist; professional a resident purposes camp of the which can be day fea- An annual four music festival phrased terms other than social turing outstanding or- chamber music significant, believe, welfare. It is I string quartets; and chestras majority attempt does not even experimental A subsidized theatrical formulate alternative. professional composed group direc- of a suggestion some There is ma- arrang- writers, composers, lyricists, tor, jority opinion that the activities costumes, ers, designers scenery camp cannot be social welfare activities others, actresses, actors, dancers and charge participants. if a is made to the original produced plays; which new and proves position to be This absurd, on reflection produc- professional A orchestra for from tax since would eliminate theatre; tions in the charge tui- universities which professional charge A resident artist art tion, hospitals which for medical charge giving galleries teacher instruction without services, mu- art and historical drawing; painting charge fees, seums admission charge pew rentals, churches painting sculpture Exhibitions of every examples almost im- some aginable prize painting. an annual organiza- type social welfare question opin- majority The which the that the activi- tion. fact to concede ion fails to is: answer camp would ties of welfare charge If provided these the other activities if activities free camp pur- practically were not for social welfare concede the correctness poses, purpose petitioner’s position. what their ? assuming arguendo camp It is conceded that is not But cul- operated earning purpose aspects oper- for the tural and recreational profit any objective except camp an admit- ation of the do have a social authority purpose, then, designed they clear that word are not since private profit.) this circuit bound to the destination test, purpose i. e. the that the rule majority’s analysis is deficient activity is a social welfare if respect. another material It refers to profits operation of the from the “busi proportion “revenue” ** objec used ness” are for social welfare “expanding is devoted to its Sagrada increasing Orden, surpluses.” tives. facilities and Trinidad *14 reproduced in Both 578, 204, here the table U.S. 44 68 S.Ct. L.Ed. 458 page 931, argument presented on is (1924); Beach, Roche’s Inc. v. Commis “surpluses” if as “facilities” and sioner, 1938) (2d ; F.2d 96 Cir. 776 Bohe separate items, two distinct as if Gymnastic Higgins, mian Ass’n Sokol had, camp in addition its “facilities” (2d 1945) ; 147 F.2d 774 Cir. Memorial Debs some million two three hundred thousand Fund, Commissioner, Ra dio Inc. v. away dollars salted somewhere in cash. (2d 1945). 148 F.2d 948 Cir. See also largest part Of course the Willingham Mill, v. Home Oil 181 F.2d “surpluses” represented by is its “fa- (5th Cir.), denied, 9 cert. 340 U.S. surplus” cilities.” “Accumulated earned ; 71 S.Ct. 95 L.Ed. 624 Lichter merely bookkeeping is item liabil- Foundation, Welch, Inc. v. 431 ity 247 F.2d which balances assets. (6th 1957); Cir. Boman v. Commission Moreover, the “revenue” to which the er, (8th 1957). 240 F.2d 767 majority gross refers is the revenue be- Using says any expenses. fore But, majority: deduction of gross way suggests revenue this that ought “The destination test not to majority any organ- would hold that permit entity escape be used large ization operation which has a here, where, taxation so much of money terms cannot be a social welfare expand- its revenues are devoted to operation. (The attempt distinguish ing its commercial and in- facilities largely the destination cases is on based creasing surpluses, its little so argument operations that the in those actually spent of its revenues are cases resulted smaller revenues than activities, social welfare it is present case.) course, is, in the There factually primary pur- clear that the justification support whatsoever to pose organization really is not position. Nothing such a in the statute promotion of social welfare but any suggests or in running the cases that the opera- aof commercial operation bearing size of an tion.” organiza- it whether is a social welfare authority Not is there no whatso- tion. exception ever for such to the destin- analysis test, majority’s significant ation but the If we use the much more scrutiny. figure is, operating revenue, situation cannot survive of net majority saying, effect, gross expenses operation, What the less revenue organization properly that, excluding that no be can we find even cultural organization grams classified a social welfare proportion concededly proportion expenditures if devotes a certain of its expanding facilities, ranges years income to what- 1956 to 1960 from may expan- (and be the of such ever 53% 89% 53% (Eepeated majority use question). sion. tax fol- lowing “commercial” to word describe the table also that if shows the ex- per- camp penditures should not for cultural activities are prejudice expenditures mitted to consideration of the added to the which are ad- They operations. mittedly large very welfare, real character of those are, course, opera- proportion operating not “commercial” revenue went purposes. tions in the or usual ordinary sense the total of the two

938 Contributions Teague

Industrial Democracy* 4,000.00 4,000.00 4,000.00 3,000.00 3,000.00 $ $ $ ? Brandéis University 2,000.00 2,500.00 ____ - — University of _ _ _ Scranton 100.00 Physical recreation expenditures 24,228.13 28,147.33 22,981.39 31,578.95 27,146.67 Total —“Costs of other 29,828.13 33,146.67 34,578.95 32,147.33 26,981.39 activities” *15 “Cultural programs activities” per 10S,071.51 82,746.41 97,792.47 91,164.60

Judge 87,178.45 Pierce (1) Total by excluded Judge Pierce from “social welfare” 114,159.84 125,743.55 137,899.64 114,893.74 130,939.14 expenditures Operating (2) 232,487.58 219,619.38 276,082.70 258,311.51 119,147.03 revenue Adjusted (3) operating (item revenue (2) less item 81,719.74 above) 84,253.29 145,143.56 132,567.96 (1) 118,327.74 (4) “Social welfare” expenditures

per 44,684.76 72,610.13 78,194.54 83,751.40 Judge $ $ $ $ $ Pierce 70.718.27 (5) Per cent (4) which item is of item 64 89 above * students, program, among on were for the These contributions education country. campuses of universities this ranged imposed a on the business in the tax unrelated to reserves Additions organizations years other- certain 1960 from 1956 to 24% 4% Admittedly taxation. re- wise from operating The revenue. addition operating applicable revenue serves was neither of these statutes is 20% lending petitioner. support Far from majority, to the reached conclusion majority support to find seek The Congress adopted that these stat- the fact adoption two conclusion their first, Congress particular remedy in 1950. The situations utes statutes Code, they dealt, excluding of the withdrew with which now Section organizations. application the social or- from “feeder” their ganizations Code, 501(c) other, now described Section 511 Endowment United support Erie v. conclusion See (4), seem to would 1963). 151, 156 (3d Congress n. 21 with the F.2d satisfied pe- applicable working statute quite It seems to me clear basis change. How- and intended titioner logic authority, as well as because speculate ever, on the Con- we need not equities we of the case with which Report gressional since presented, are decision of on Finance the Rev- the Committee Tax Court must be reversed. (Sen.Rep.No.2375, 81st Bill enue of 1950 Cong., Sess., 2d 1950-2 Cum.Bull. Congressional 504-505) U.S.Code Serv- 1950, p. 3080, respect to stated with ice statutory amendments: many important “It note exempt from in- now section 101 of the come tax under Internal Revenue Code [of 1939]

not affected these tax measures. * * * * * * include civ- These organiza- leagues; ic STEVENSON, Ernest Appellee, * * * tions; *16 “ * * * In fact it not intend- BOLES, Otto C. Warden of the West Vir- imposed ginia that the tax ed on unrelated Penitentiary, Appellant. State business income will have effect No. 9202. tax-exempt status of or- United Appeals States Court of ganization. organization An Fourth Circuit. exempt prior to the enactment of Argued Jan. 1964. bill, continuing this if the same ac- tivities, April 28, still would Decided after ” * * * this bill becomes law. we are If look statutes

support position other, for one or the

majority’s view accumulation ground

surplus withdrawing is a ex

emption powerful is dealt a blow con

sideration of Section 504 of the Code expressly provides exemption

shall be denied charitable and education organizations

al “if the amounts accumu

lated out of income the taxable year any prior year or taxable

actually paid out the end of the tax

able unreasonable — carry amount duration in order out charitable, educational, pur or other

pose constituting or function the basis * * for [their] Social subject are not provisions ma of Section 504. The reading

jority is, then, clearly in error in

the limitations of Section 504 into the organizations. section on social welfare notes facts then therefor; other to assist under the then ex- debtedness titled to an isting civic, political laws, educational, provisions provi- the tax organiza- movements and later came to embodied economic sions which be relating ground 501(c) (4) exemption 1. the Educa- The limitation eventually property might Law was inserted at direction tion some of its Secretary of York private State of New persons. inure to the benefit petitioner had make it clear claims, and the Government Petitioner authority power operate school. by deny, petitioner’s that, does not upon stand, its dissolution laws assets that, 2. No claim made because in ac Society distributed would have American Socialist demise cy pres. petitioner cordance with the doctrine thereafter and the failure of by-laws relating to dis- See v. Richmond Hose Co. No. revise its Sherman dissolution, (4th upon App.Div. 417, property position of 175 N.Y.S. 8 Dep’t 1919). qualify for a Section fails to substantially assets, solely form in op- the same was connected with the 501(c) Code. of the 1954 eration of Tamiment. By year from 1941 Tamiment’s Tamiment had be- largest through year repre come the the taxable one the most phase modern of its de summer vacation sented a second distinct resorts by growth Pennsylvania, ranging velopment, one much marked with rates per day rapid per person. $12 ready than that $19 more and substantial As al- experienced. noted, previously This was mani the American Socialist So- ciety op considerable increases the Rand fested School of Social erating Science, expenses pe motivating and in the value of forces behind the creation titioner’s fixed assets and accumulated of Tamiment as a site for sum- surplus. analysis petitioner’s retreats, An mer had both ceased to exist. figures years open The resort balance sheet these to the competed assets, shows that vacation resorts employed $398,663.93 stood at had in Poconos. It more than 400 persons By $1,124,229.91 peak creased to season through 1956,3 advertised newspapers, the end of the taxable itself