*168 Decision will be entered for the respondent.
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, held not exempt from tax under section 101 (9), Internal Revenue Code. Chattanooga Automobile Club, 12 T. C. 967, followed.
*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 section 101 (9), Internal Revenue Code, and in holding that entrance fees and dues received by petitioner from its members during the taxable year constituted income within the meaning of section 22 (a), Internal Revenue Code.
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.
MembershipSection 1. Any person who is a member of the white race and interested in the objects of this Club shall be eligible for membership.
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.
MeetingsSection 1. The annual meeting of the Club shall be held in February, March or April of each year on such date and at such place within the Commonwealth of Pennsylvania as the Board of Directors, by a majority vote, shall determine. Notice of the holding of such meeting shall be sent to each member at least ten days prior thereto.
Section 2. Meetings other than the annual meeting may be called by the President, either at*173 his own discretion or at the direction of a majority of the Board of Directors, and notice of the time and place of holding same shall be sent to each member at least ten days prior thereto.
Section 3. Twenty-five members shall constitute a quorum for the transaction of business.
* * * *
Article V.
Board of DirectorsSection 1. The Board of Directors shall consist of twenty-seven members to be elected as follows: At the annual meeting in 1926, nine to serve for a period of three years, nine to serve for a period of two years, and nine to serve for a period of one year, and at each annual meeting subsequent to 1926, nine shall be elected for a term of three years to succeed the directors whose terms expire at such meeting.
Section 2. The general management and control of the affairs, funds and property of the Club shall be vested in the Board of Directors, including the election of members to the Club, and the making of rules for the government of the Board and of committees authorized by them.
* * * *
Article VI.
OfficersSection 1. The officers of the Club shall be a President, a Vice-President, and five other Vice-Presidents, a Secretary and a Treasurer, *174 all of whom shall be elected from among the Directors, with the exception of the Secretary who may or may not be a Director. The officers shall be elected at the organization meeting of the Board of Directors to be held immediately following the annual meeting. *1041 Each officer shall serve for a period of one year from his election and until his successor shall have been duly elected and qualified.
* * * *
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.
Public safety activities were developed by petitioner to decrease the high mortality resulting from accidents involving children on the highways going to and from school. Petitioner's Public Safety and Engineering Department organizes safety patrols in the*175 schools, numbering some 20,500 boys and girls designated as patrolmen and guides. Among the items which petitioner uses for this part of its activities are booklets on the subject of the safety patrols, a pamphlet of bicycle safety rules, a highway safety textbook for high schools, advertising posters illustrating the work of the safety patrols and directing the attention of school children towards highway safety, and belts, badges, and insignia for use of safety patrol members.
Traffic engineering activities of petitioner are spread over many fields, including an advisory capacity to state legislatures in the preparation of motoring regulations. The engineering department collaborates with local municipal authorities in such matters as street lighting, modernizing road construction specifications, and removal from highways of hazards dangerous to motorists.
Sign posting services consist of the furnishing and erection of highway signs -- warning signs of dangers, and direction signs. Petitioner has supplied, erected, and maintained about 60,000 such signs at its own expense.
Motor patrols consisted in the taxable year of uniformed patrolmen mounted on motorcycle cars*176 equipped with automobile tools. The patrolmen's duties were the repair of minor mechanical defects on members' automobiles, and the rendering of first aid on the highways. Each patrolman was a graduate of the American Red Cross first aid course.
Safety education activities of petitioner are divided into two parts: (1) the Keystone Motorist, petitioner's monthly organ, which is distributed to every member with no charge other than his membership dues; and (2) radio broadcasting, moving pictures, and the publication of numerous pamphlets. Weekly broadcasts are made over nine radio stations, and contain statements on developments that have occurred *1042 in the motoring world. Petitioner distributes to schools and civic organizations various films dealing with the subject of highway safety. These films are furnished free of charge upon request.
Emergency road service agreements exist between petitioner and about 913 garages throughout petitioner's operating areas. Under these agreements, the garages repair minor mechanical troubles in members' automobiles on the highways, or provide towing service. These services are paid for by petitioner, at no charge to members*177 other than dues. When a member's automobile breaks down outside official operating areas, petitioner reimburses the member for his cost of having similar services performed by a garage with which petitioner has no agreement. During the taxable year about 56,918 emergency road calls were made.
The Touring Bureau, a department of petitioner, at the request of a member will prepare a route schedule for a proposed trip the member intends to make. The route schedule contains complete information as to the roads to follow, highway numbers, streets along the route, turns at corners, and a detailed map of each section of the proposed trip, together with a statement of historical facts relating to points of interest along the route. This route service is accompanied by highway maps upon which the designated route has been delineated. The Foreign Touring Department, a part of the Touring Bureau, aids members in making such arrangements as shipping automobiles and procuring foreign automobile and operators' licenses. An Outing Section of the Touring Bureau specializes in furnishing information for picnics and week end trips. During the taxable year the Touring Bureau handled about*178 131,362 inquiries for travel information.
Bail bond service is provided for members under a contract between petitioner and a national surety company. The surety company furnishes bail to members arrested for violation of motor vehicle laws.
License and notary services performed by petitioner to its members include clerical work involved when the member loses his title or other papers required for distribution of state auto license plates. All notary services incidental to such work are furnished to the member by petitioner without charge.
Insurance activities of petitioner are divided into three parts. Each member of petitioner during the taxable year received a personal accident policy of a limited form, which policy contained a principal coverage in the amount of $ 5,000. The policies are bought by petitioner from an insurance company and the premiums are paid by petitioner; this insurance is a membership benefit.
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.
Automobile finance services by petitioner are rendered through the Keystone Automobile Club Acceptance Co., a Pennsylvania corporation*181 in which petitioner during the taxable year owned 100 per cent of the capital stock. The Acceptance Co. was organized in 1929 by petitioner, which furnished the money for its organization. One function of the Acceptance Co. was to lend money to members of petitioner to enable such members to make insurance premium payments in order that their policies with the above insurance companies would not be canceled by reason of their failure to pay the insurance *1044 premiums. The Acceptance Co. has never declared dividends, either cash or stock. The Acceptance Co. filed Federal income tax returns and paid the taxes during the taxable year. Members of petitioner are not required to use the facilities of the Acceptance Co.
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 | 1 (90.09) |
| 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 Sec. 101 (9) of the Internal Revenue Code, and (2) that even if it is ultimately held that the Club does not come within the meaning of Sec. 101 (9) of the Internal Revenue Code, it still has no taxable income for the reason that it does not enter into any transactions from which profit is*186 derived. Its total receipts result, with very minor exceptions, from dues of members. All expenditures are those which are necessary to carry out the purpose and intent as expressed in the Charter of the Club and for the benefit of Club members. If by chance, at the end of any given year, there remains an excess of receipts over disbursements, such excess is in fact nothing but a trust fund in the hands of the Club as such, and which in fact belongs to the members. * * *
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 section 101 (9) of the Internal Revenue Code.
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 Chattanooga Automobile Club, 12 T. C. 967, from which it is indistinguishable. No basis exists for limiting the action of respondent under the doctrine of estoppel where appropriate enforcement of the law requires a change of position on his part. Agricultural Securities Corporation, 39 B. T. A. 1103, 1114; affd. (C. C. A., 9th Cir.), 116 Fed. (2d) 800;*189 Stern Bros. & Co. v. Commissioner (C. C. A., 8th Cir.); 108 Fed. (2d) 309; affd., 311 U.S. 617">311 U.S. 617. On the authority of Chattanooga Automobile Club, supra,
Decision will be entered for the respondent.