Journal of Accountancy v. Commissioner

*1260 The taxes in controversy are income taxes for the period from April 1, 1921, to December 31, 1921, and for the calendar year 1922 in the respective amounts of $1,204.65 and $1,216.93, in which amounts for the respective years the Commissioner denied claims in abatement. The petitioner alleges that the Commissioner erred in not holding that it was exempt from taxation under section 231(6) of the Revenue Act of 1921.

FINDINGS OF FACT.

The petitioner is a corporation organized on or about March 30, 1921, under the laws of the State of New York, with its principal office in New York City.

In its certificate of incorporation the following appears:

SECOND: The purposes for which it is to be formed are to do any and all of the things hereinafter*2415 set forth to the same extent as natural persons might or could do and in any part of the world:

1. To engage in and carry on the business of manufacturing, stereotyping, electrotyping, printing, lithographing, binding, publishing, buying and selling books, magazines, periodicals, journals, pamphlets, charts and maps and to conduct the general business of printers and publishers: * * *

Following the above quoted portion of the certificate there are seven other subdivisions which state many other purposes for which the corporation was to be formed as for example to acquire, hold and sell real estate and securities and to borrow money. Paragraph "THIRD" of the certificate is as follows:

THIRD: The number of shares of stock that may be issued by the corporation is one thousand (1000) shares of common stock without any nominal or par value.

Immediately after the petitioner was incorporated, all of its stock was issued in the name of A. P. Richardson, a director and the editor of the petitioner, and also secretary of the American Institute of Accountants, who thereupon declared in writing that he held the stock for the benefit of the American Institute of Accountants. He has*2416 received and paid over to the American Institute of Accountants all dividends paid by the petitioner.

*1261 In 1911 a monthly magazine called the Journal of Accountancy was published by the American Association of Public Accountants. The actual printing of the magazine was at that time in the hands of the Ronald Press, but the ownership and editorship of the same were in the hands of the American Association of Public Accountants. In 1916 the American Institute of Accountants was organized as the successor to the American Association of Public Accountants and from that time to 1921 it carried on the work of its predecessor and until the early part of 1921 the magazine was published in the manner above set forth.

In the early part of 1921 the American Institute of Accountants and the Ronald Press, by mutual consent, terminated their arrangement for printing the magazine. The former decided to organize the petitioner corporation to print the magazine. The original directors of the petitioner were prominent members of the American Institute of Accountants, and these men are still directors of and prominent in the activities of the petitioner. The American Institute of*2417 Accountants paid $5,000 in cash for all of the stock of the petitioner.

The American Institute of Accountants is a corporation organized under section 599 of the code for the District of Columbia, relating to the organization of corporations for benevolent, charitable, educational, literary, musical, scientific, or missionary purposes. It has neither capital stock nor stockholders. It has not been required to pay income taxes.

The magazine, The Journal of Accountancy, has been published monthly by the petitioner from the time of its organization to October 1, 1926, the date of the taking of the deposition in this case. At least 75 per cent of the articles contained in each issue of the magazine relate exclusively to scientific questions of accounting. No articles are published in the magazine which do not relate to the profession of accountancy. The remaining 25 per cent of the articles in the magazine consist, for the most part, of editorial comment and a list of literature containing the names of publications dealing with accountancy. A typical copy of the magazine contains the following articles:

Accounting for a modern hotel

Accounting for crude petroleum producers

*2418 Ranch accounting for packing industries

Distinctive features of cotton goods accounts

Receivership accounting

Editorial

Income Tax Department

Correspondence

Book Reviews

The petitioner's subscribers include both members and nonmembers of the American Institute of Accountants, the latter predominating. *1262 The magazine accepted advertising. Some of the magazines are sold through the American News Co. The petitioner's income is derived in part from subscriptions to the magazine, from advertisements, from the sale of single copies of the magazine, from binding of volumes of the magazine, and from miscellaneous small items such as the sale of waste paper. After the taxable years involved in this appeal, the petitioner has also received some income from the sale of a taxt book, The Balance Sheet, by C. B. Couchman, which it published in 1924. The contents of this book are similar to the articles which appear in the Journal of Accountancy. The magazine does not compete to any appreciable extent with any other accounting magazine. The petitioner's net income for the years 1921 to 1926, inclusive, was as follows:

*2419 During this period it declared and paid the following dividends:

These dividends were all paid to the American Institute of Accountants, the beneficial owner under the trust agreement whereby A. T. Richardson held the petitioner's stock. No member of the American Institute of Accountants or any one else connected with it has ever received any dividends or distributions of the net earnings of the American Institute of Accountants. The income of the American Institute of Accountants is used for the running expenses of the organization and any surplus which it may have is devoted to the work of the Institute in improving the science and art of accounting. The principal things which the Institute does for the accounting public generally are:

1. It maintains an accounting library, the most complete in existence, which the public uses as much, if not more, than the members of the Institute.

2. It operates a bureau of information from which members and non-members may obtain information relating to technical questions of accounting about which they may desire to*2420 ask.

3. It prepares examinations for the admission to the American Institute of Accountants, which examinations are used by approximately thirty-five states and territories which conduct examinations for the registration of certified public accountants.

The only other work not heretofore referred to done by the petitioner is the publication, since 1924, of the bulletin of the American *1263 Institute of Accountants. This bulletin relates to the activities of the chapter and committees of the Institute, and other matters such as court decisions relating to accounting questions which may be of general interest to the members of the Institute. This bulletin has always been published at a loss. It does not compete with any other magazine and is not sold at news stands.

OPINION.

MURDOCK: The petitioner claims exemption under the following section of the Revenue Act of 1921:

SECTION 231. That the following organizations shall be exempt from taxation under this title -

* * *

(6) Corporations, any any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention*2421 of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual.

It contends that it was organized and operated exclusively for scientific, literary or educational purposes and that the American Institute of Accountants, the stockholder to the benefit of which all of its profits inured, was not a private stockholder.

The petitioner's certificate of incorporation states that one of its purposes was to engage in the general business of printers and publishers. We see that it was to and did publish a magazine and later published a book. The general business of printers and publishers and the publication of magazines and books are ordinarily profitable activities, the income from which is taxable. Of course the purposes as indicated by the certificate of incorporation may be modified by evidence, see , still, the purposes as stated therein should not be ignored. Bearing in mind the fact that the determination of the Commissioner is presumed to be correct, and noting that, so far as we have been shown, the petitioner's purposes were broad enough to allow*2422 anyone to hold its stock and to allow any kind of printing or publishing to be done for any purposes, we think that the petitioner failed to show that the true purpose of its organization was so much narrower than those nominally contained in the certificate as to bring it within the exempt class.

The petitioner was occupied principally with the profitable publication of a magazine for the American Institute of Accountants. In publishing the magazine there was undoubtedly an intent to advance the science of accounting and to educate those who were willing to buy the magazine and read it with interest, but to say that the petitioner was organized and operated exclusively for scientific *1264 or educational purposes would be incorrect in view of its connection with the American Institute of Accountants. In our opinion the purposes for which the petitioner was organized and operated can not be separated from or be determined without looking to the purposes for which the American Institute of Accountants was organized and operated, and from the facts we certainly can not determine that the petitioner was organized and operated exclusively for any purpose which was independent*2423 of the general purposes of the American Institute of Accountants. The purpose of the one is only clear when considered in connection with the other. One of the purposes in organizing and operating the petitioner was certainly to aid and carry out the program of the American Institute of Accountants.

The Supreme Court of the United States in a case similar to the present one said:

Two matters apparent on the face of the clause go far towards settling its meaning. First, it recognizes that a corporation may be organized and operated exclusively for religious, charitable, scientific or educational purposes, and yet have a net income. Next, it says nothing about the source of the income, but makes the destination the ultimate test of exemption. (.)

In the present case we have seen that the destination of the petitioner's income is the American Institute of Accountants, and this is an additional reason why we must see what sort of an organization this latter is and what its purposes are in order to more clearly understand the real purpose of the petitioner. *2424 The latter contends that the American Institute of Accountants has been held exempt from taxation as a business league, but this would seem to lead nowhere. It does not claim that the Institute is exempt from taxation as a corporation organized and operated exclusively for scientific or educational purposes. In any event, in , we held, upon evidence substantially the same as that submitted here in regard to the Institute, that it was not organized and operated exclusively for religious, charitable, scientific or educational purposes so that a contribution to it would be deductible under section 214(a)(11) of the Revenue Act of 1918. In that case we so held for the reason that the Institute had been organized for purposes other than those named in the statute. The benefits from these purposes were to be enjoyed by a limited number and were not the sort which Congress intended should bring an exemption. Since the purposes of the petitioner can not be separated from those of the Institute, we hold that the petitioner was not organized and operated exclusively for scientific, literary or educational purposes within the meaning of section*2425 231(6) of the Revenue Act of 1921.

*1265 Webster's New International Dictionary, published in 1924 by G. & C. Merriam, gives as the latin derivative of "private," "privatus apart from the state * * *." Some other definitions of the word given in this authority are: "Belonging to, or concerning, an individual person, company, or interest; * * *"; "Not public, not general, separate * * *"; "Not invested with, or engaged in, public office or employment; not public in character or nature * * *." In Bouvier's Law Dictionary, Rawles Third Revision, we find: "Private. Affecting or belonging to individuals as distinct from the public generally. Not clothed with office." Under the word "private" in Words and Phrases, First Series, the first paragraph is as follows:

Mr. Webster says that, in general, "public" expresses something common to mankind at large, to a nation, state, city, or town and is opposed to "private" which denotes that which belongs to an individual, to a family, to a company or corporation. .

Under the heading "private corporation" in the same authority, the following two paragraphs*2426 appear among others:

Corporations are divided into public and private. A bank whose stock is owned by private persons is a "private corporation," although it is erected by the government, and its objects and operations partake of a public nature. The same doctrine may be applied to all insurance, canal, bridge, and turnpike companies. In all these cases the uses may, in a certain sense, be called public, but the corporations are private, as much so, indeed, as if the franchises were vested in a single person. ; 508; . See, also, ; ; . This reasoning applies in its full force to eleemosynary corporations. A hospital founded by a private benefactor is in point of law a private corporation, although dedicated by its charter to general charity. .

*2427 Private corporations are corporations created for private, as distinguished from governmental, purposes, and they are not public in contemplation of the law because it may have been supposed by the Legislature that their establishment would either directly or consequently promote the public interest. ; ; .

Also, under the title "Private Property - Property of a private charity," there is the following paragraph:

The property of a private charitable corporation, though charged with the maintenance of a college or other public charity, is "private property" within the meaning and protection of that clause of the Constitution (art. 1, § 19) declaring that private property shall ever be held inviolate. .

The paragraph just quoted should be considered however, in the light of the decision in *2428 , where the *1266 court, in discussing the question of whether or not property held by a municipal corporation is private property or public property, stated that this class of property might justly be said to be private property in the sense that it is such property as is exempt from being taken or applied to any other public use by the state, or by authority of the state, without compensation being paid.

Counsel for the petitioner states in his brief that the American Institute of Accountants has been held by the Bureau of Internal Revenue to be exempt from taxation as a business league within section 231(7) of the Revenue Act of 1921. The testimony in this regard was as follows:

q. Does the American Institute of Accountants pay any income taxes or has it been held exempt?

Mr. Dortch: If you know. Do you know about it?

A. Well, I filed the certificates. I suppose that is enough. It has been held exempt.

It is obvious that this testimony does not justify a finding that the American Institute of Accountants is a business league or has been held by the Bureau of Internal Revenue to be exempt from taxation*2429 as a business league within the meaning of section 231 (7). Furthermore, even if the Institute were a business league, that fact would be unimportant here. In view of our holding in the George O. May case cited above, the petitioner is not in a position to successfully contend that the American Institute of Accountants holds its stock in the petitioner for such a part of the general public as to take it out of the class of private stockholders, i.e., even if a charitable or educational organization exempt under section 231(6) might not be a private stockholder in a similar case, it does not follow that a business league would not be a private stockholder. A provision of the statute such as this, which is an exemption, must be strictly construed and the taxpayer must establish that it comes squarely within the provisions of the statute. ; . If there can be any doubt about the meaning of the words "private stockholder," then that doubt must be resolved against the taxpayer and in favor of the Government.

After considering the above authorities and others, *2430 we have come to the conclusion that Congress, in using the word "private" in section 231(6), did so with the intent to distinguish between a private stockholder as opposed to a public stockholder or one who held in some official capacity for the public or some part thereof. The American Institute of Accountants in our opinion was a private stockholder of the petitioner and its stock holding was not public in character or nature.

Judgment will be entered for the respondent.