dissenting: I am unable to agree that, on the basis of the facts here presented, we are warranted in disapproving the rulings and determinations of the Commissioner of Internal Revenue, to the effect that neither of the two petitioner corporations qualified, during any of the taxable years involved, as an organization exempt from income taxes.
Both corporations were organized pursuant to a preexisting arrangement which, in my opinion, was not made exclusively for charitable purposes — but which was rather, in principal part, for the benefit of three private individuals. Neither corporation was, in my opinion, operated during any of the taxable years, exclusively for the purpose of performing any true charitable function — but rather for the purpose of permitting said three individuals to obtain the benefit of distributions of corporate profits, without any tax on such profits before distribution and with the distributions being taxed only at capital gain rates, through means of a purported “sale” of the distributing corporation’s stock for-no actual consideration other than the dividends from said stock to which the individuals would have been entitled if such sale had not been made. As regards benefits to charity, the fact is that although both corporations derived large amounts of income during each of the years involved, substantially all such income passed irrevocably, pursuant to the preexisting arrangement, into the hands of the private individuals, and not one cent of the same found its way either into any charitable work or into the hands of any other organization which engaged in such charitable work.
I do not suggest, of course, that tax avoidance motives will invalidate a bona fide business arrangement. But I do suggest that in construing and applying the provisions of a statute which gives tax exemption only when the claimant has been both organized and operated exclusively for charitable purposes, we are entitled to examine all the surrounding facts and circumstances, including the motives of the parties, for the purpose of determining whether the requirements of the statute have been met. The principle is well settled that any taxpayer claiming exemption from tax must bring himself squarely within the terms of the exemption statutes; and that such statutes are to be construed strictly.
The answer to whether the present petitioners were organized exclusively for charitable purposes can, it seems to me, best be found in the events which preceded their organization, rather than in the declarations of their charters. The picture here presented is that early in 1948 a representative of three individuals who owned the stock of an operating corporation (the old Furnace Company) negotiated a plan with representatives of the Shattuck School, whereby the School might, after a deferred period of 5 or 6 years, acquire the stock of the Furnace Company without any outlay of cash or property other than incidental expenses; and whereby, during such deferred period, the three individuals would continue to manage the Furnace Company under a noncancelable management contract, and continue to receive the benefits of the dividends from that company in the form of capital payments, undiminished by any State or Federal income taxes on the Furnace Company’s income. The crux of the plan was first to organize a new corporation for declared charitable purposes (the Foundation), so as to free the school from any possible liability under the plan; to have said Foundation “purchase” the Furnace Company stock from the three individuals, for no other consideration than its own promissory notes which would be unsecured except by the stock thus acquired; to attempt to have both the Furnace Company and the Foundation qualified as tax-exempt organizations; and then, as the tax-free earnings of the Furnace Company flowed into the Foundation as dividends, to have practically all of the proceeds from these dividends pass on to the three individuals as capital payments for the stock. The plan was to continue in operation until the individuals had received $250,000 plus interest; and the management contract with the individuals was to remain in force until such amount with interest had been paid in full. If the arrangement between the parties were terminated, due either to the Foundation not receiving a tax-exempt status, or to default in the payments of principal and interest to the individuals, then the Foundation was to return the stock to the individuals.
If the sole object of the parties had been to give the benefits of the stock to the Shattuck School after the anticipated deferred period of approximately 6 years, it would seem that no such elaborate plan would have been necessary; nor would it have been necessary for the school to divorce itself of all legal interest in the stock by placing it in a new corporation. Such transfer of benefits after a deferred period could, and normally would, have been accomplished by placing the stock in trust or in escrow or under a pledge to secure a gift to take effect in futuro. But if any of these procedures had been adopted, it is obvious that the earnings of the Furnace Company would have continued to suffer the erosion of Federal income taxes, and the dividends would have continued to be taxable to the individuals as ordinary income. Thus, it was essential to the individuals, if they were to obtain the tax benefits, for the transfer of stock to be cast in the form of a “sale,” rather than in the form of a gift to take effect in the fu-. ture; but so far as charity was concerned, a “sale” was not essential for, whatever the form, charity could expect no substantial benefits until after the individuals had first received the $250,000 plus interest.
Whether the $250,000 to be paid to the individuals represented the fair market value of the stock, cannot be determined in the absence of balance sheets, earning statements, or appraisals; and since the Foundation was to obtain the stock without any outlay of-its own capital, it was in no position to force price adjustments by bargaining. Thus it cannot be determined whether the $250,000 measured anything, except the amount which the three individuals had decided to withdraw, before charity would be permitted to receive any substantial benefits.
Was the Foundation operated exclusively for charitable purposes? The indications are that it performed no substantial functions during the years involved, except to passively hold the Furnace Company stock, collect the dividends therefrom, and turn over most of the proceeds from these dividends to the three individuals, pursuant to the preexisting agreement. It received no gift or contribution of capital, other than the original $1,000 donation from the school; and it had no income other than from the Furnace Company stock. It made no distribution to any charitable institution. There is no indication that it had any office, or operating personnel other than its trustees. Its only operating expenses during the first taxable year consisted of $38.90 paid for a filing cabinet, $153.94 paid to an attorney for organization expenses, and $2 paid for telephone; in the second taxable year its only operating cost was $108 paid for attorney’s travel expense; and for the third year there apparently were no operating expenses. During these same 3 years, the Furnace Company had aggregate net income of $173,307.47, of which $139,669.76 was paid as dividends to the Foundation, and of which $133,112.55 then passed to the individuals. Indeed, it would appear that there was no necessity for the Foundation to even handle the dividends, for the “purchase agreement” provided that the Foundation would not permit the Furnace Company to declare or pay any dividends “unless said dividends shall, promptly after the payment thereof, be applied by the Furnace Company [the issuer of the dividends] to or toward the payment and discharge of the outstanding notes [held by the individuals].”
I find nothing in such a picture to indicate that the Foundation was operated during the taxable years involved, exclusively for charitable or benevolent purposes. We, of course, have no jurisdiction to consider whether it might qualify for exemption in some future year. Indeed, whether it would then have income, how such income would be distributed, or what the provisions of the then existing exemption statutes might be, can only be conjectured.
I find no authority in the statute for granting exemption to an organization which is organized and operated solely to hold stock, collect the income, and devote such income to deferred payments on the stock, even though there may be an expectation that income for charity may become available at some future date. Section 101 (14) pertains particularly to corporations organized to hold title and collect income therefrom; but it grants exemption only where there is a “turning over” of the entire income, less expenses, to an organization which itself is exempt from tax. The Foundation definitely did not meet these requirements. To grant it exemption under section 101 (6), when its activities as a holder of stock do not meet the requirements of section 101 (14), would appear to render the latter section meaningless.
Finally, I cannot agree that the Furnace Company is entitled to exemption under section 302 (d) of the Eevenue Act of 1950, as added by section 601 of the Eevenue Act of 1951. This section does not itself provide any exemption. It merely states, in substance, that a corporation shall not be denied exemption under section 101 by reason of carrying on business for profit, if dll the net earnings inure to the benefit of another organization of one of only three specified types: “[1] an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly organized body of pupils * * *, or [2] to the benefit of a hospital, or [3] an institution for the rehabilitation of physically handicapped persons * * No other type of institution is specified, even though other types are comprehended within section 101 (6). To me the conclusion is inescapable that Congress did not intend to provide exemption to a so-called feeder company, unless the institution receiving the benefit of its income is an existing institution of one of the three specified types. It is obvious that the Foundation, which received substantially all the operating Company’s earnings, did not maintain a school, a hospital, or an institution for the rehabilitation of physically handicapped persons ; and most of its income actually went into the hands of private individuals. Even as to any future income which the Foundation might have for distribution in later years, the ultimate beneficiary cannot be determined, for no particular beneficiary is named in the Foundation charter, and until its trustees make a selection, it is impossible to foresee what the selection may be. Thus, here we have at most a charter declaration of a general charitable purpose, which is not sufficient to meet the requirements of the exemption statute.
I would approve the determinations of the Commissioner and deny the claims of both petitioners to exemption from tax. I would further hold, however, that the Foundation is not taxable with the dividends from the Furnace Company, not because it is exempt but because it held only a naked title to the stock, and that the beneficial ownership of the dividends was in the individuals.
Atkins, J., agrees with this dissent.