*276 Decision will be entered for the respondent.
1. Held, petitioner is not exempt from income taxes as a corporation organized and operated exclusively for charitable purposes. Sec. 101 (6), I. R. C. 1939.
2. Petitioner is taxable as a trust, and not as a corporation.
3. Petitioner has failed to prove error in the disallowance by respondent of certain amounts claimed by petitioner as charitable contributions for the taxable years 1947 and 1948.
4. Additions to tax for delinquency and negligence were proper, under the facts. Secs. 291 (a), 293 (a), I. R. C. 1939.
*924 The respondent has determined deficiencies in income tax and *277 additions to tax for delinquency and negligence pursuant to sections 291 (a) and 293 (a) of the Internal Revenue Code of 1939 against the petitioner for the calendar years 1946, 1947, 1948, and 1950. The tax and additions are in the total amount of $ 903,755.86. Petitioner claims to be exempt from income tax for the above taxable years by virtue of section 101 (6) of the Internal Revenue Code of 1939. The principal issues are, (1) whether petitioner was so exempt, (2) if not exempt, whether it is taxable as a trust or as a corporation, and (3) whether respondent properly determined that petitioner is liable for the additions to the tax for delinquency and negligence.
FINDINGS OF FACT.
A stipulation of facts filed by the parties is incorporated by this reference as a part of our findings.
Petitioner was formed on or about August 10, 1944, by deed of trust by and between I. Lawrence Lesavoy (hereinafter sometimes called Lesavoy) as settlor, and Murray Landy, Lesavoy, and David Getz, as trustees. Petitioner has at all material times maintained an office in Allentown, Pennsylvania.
The trust was expressly stated to be irrevocable, and the trust instrument left Lesavoy no power to amend*278 or otherwise interfere with the trust or its assets in his capacity as settlor.
The purposes of petitioner were set forth in the deed of trust as "wholly charitable, educational, religious and scientific." In furtherance of the above general purposes and not in limitation thereof, a number of specific purposes were mentioned. The deed provided that the trust should be fully administered and terminated in accordance *925 with its purposes not later than 25 years following Lesavoy's death. The trustees were given the discretionary power to terminate the trust at an earlier date.
Petitioner received contributions during the years 1944 to 1950, inclusive, in amounts as follows:
| 1944 | 1 $ 40,050 |
| 1945 | 32,850 |
| 1946 | 90,625 |
| 1947 | 15,700 |
| 1948 | 9,439 |
| 1949 | 400 |
| 1950 | 2,750 |
*279 Petitioner filed a United States Treasury Department Form 990 for each of the taxable years 1944 to 1949, inclusive, and Form 990-A for 1950 with the collector of internal revenue for the first district of Pennsylvania. Petitioner did not file for any of the years involved a corporate income tax return, excess profits tax return, or a fiduciary income tax return.
On or about June 4, 1945, petitioner submitted to the respondent a written request for a ruling that it was exempt under section 101 (6) of the Internal Revenue Code of 1939. David Getz submitted an Exemption Affidavit in support of such application. Petitioner submitted a statement of receipts and disbursements to December 31, 1944, and thereafter, upon respondent's request, a statement covering the period August 1944 to June 30, 1945. On July 31, 1945, the respondent ruled that petitioner was exempt under the provisions of section 101 (6) of the Internal Revenue Code of 1939. The ruling was expressly stated as being based upon the evidence presented by petitioner, and informed the trustees that they would not be required to file income tax returns for petitioner "unless its character, the purposes for which it was *280 organized or its method of operation is changed." The ruling provided that any such changes should be reported immediately to the collector at Philadelphia for determination of their effect upon petitioner's exempt status.
At the time of the above request and ruling petitioner had not acquired any operating property of a kind customarily owned and operated by nonexempt commercial organizations for profit. Nothing then submitted by or on behalf of petitioner indicated that such action was contemplated. In answer to a request on the affidavit form to state all activities in which petitioner was at that time engaged, Mr. Getz stated "Making charitable contributions."
I. Lawrence Lesavoy and members of his family were interested in a number of business enterprises, predominantly in the textile field. *926 He was president and majority stockholder of Blossom Products Corporation (hereinafter sometimes referred to as Blossom), which was engaged in the business of manufacturing textile products; the other stockholders were members of his family. Lisle Mills was a textile manufacturing enterprise, owned and controlled by a brother and brother-in-law of Lesavoy; it was originally operated*281 as a partnership, but was later incorporated. Fabrics Corporation, Paper Corporation of America, Perkiomen Mills, Inc., and Rayon Corporation of America were corporations owned or controlled by Lesavoy or by Blossom. As of January 1, 1949, Penn State Mills, which was controlled by brothers of Lesavoy, became the successor to Blossom, which no longer remained in active business.
Cotton yarn was a basic material used by Blossom and Lisle Mills in their operations. In 1945 and early in 1946 cotton yarn was in very short supply. Although Blossom had priorities in 1945 and 1946 in respect of cotton yarn for its Government or military contracts, it had no similar priorities for yarn in connection with its production for the civilian market. Blossom was in a position to use any additional yarn it might acquire for nongovernmental purposes, and its needs were, in effect, all it could get. At that time there was a so-called black market in which cotton yarn was sold at higher prices than were permitted by law; as a consequence, the amount of cotton yarn available at legal prices was greatly reduced, and such yarn was very difficult to obtain.
Clover Spinning Mills, Inc., was a corporation*282 engaged in the business of producing cotton yarn in Clover, South Carolina. Its stock was owned or controlled by two brothers, Cary and Henry M. Boshamer. For at least several years prior to 1946 Blossom and Lisle Mills had been purchasing some cotton yarn from Clover Spinning Mills, Inc., and representatives of Blossom had made various attempts to obtain greater amounts of cotton yarn from it.
On or about March 18, 1946, petitioner acquired the properties formerly used in the business of Clover Spinning Mills, Inc. The dominant purpose of such acquisition was to provide a source of supply of cotton yarn for Blossom and any other textile enterprise owned or controlled by Lesavoy or members of his family. On or about January 15, 1946, David Getz, one of the trustees of petitioner and an attorney, acting on petitioner's behalf, entered into a contract to purchase all of the outstanding stock in Clover Spinning Mills, Inc., from the Boshamers for $ 822,847. The price was determined by arm's-length bargaining. The contract provided for a downpayment of $ 100,000 with two series of notes to the Boshamers for the remaining $ 722,847. Before March 18, 1946, a payment of $ 50,000 was*283 made on the notes. Petitioner acquired the assets of the enterprise on or about March 18, 1946, after several intermediate conveyances and liquidations *927 more fully described in the stipulation. In addition to the unpaid obligations on the notes, which petitioner assumed, there was also a preexisting first mortgage in the amount of $ 45,500 upon the Clover properties.
Petitioner received contributions in the amount of $ 80,500 on or about March 15, 1946, and it obtained loans from Blossom in the amount of $ 170,000 and from Lisle Mills in the amount of $ 25,000. It was as a result of these contributions and loans that petitioner was able to make the initial payments for the acquisition of the Clover enterprise and to finance its initial operations. The parties have stipulated that the contributions in the amount of $ 80,500 consisted of the following items:
| A check from Penn State Underwear Mills | $ 20,000 | ||
| being designated as contributions from | |||
| David A. Lesavoy (brother) | $ 6,666.67 | ||
| Harry Lesavoy (brother) | 6,666.67 | ||
| Eugene Lesavoy (brother) | 6,666.66 | ||
| Blossom Products Corp | 25,000 | ||
| Perkiomen Mills, Inc | 2,000 | ||
| Rayon Corp. of America | 2,500 | ||
| Fabrics Corp. of America | 3,000 | ||
| Lisle Mills | 8,000 | ||
| A check from Lesavoy Associates | 20,000 | ||
| being designated as contributions from | |||
| I. Lawrence Lesavoy (trustee) | 9,000.00 | ||
| Charles Lesavoy (brother) | 7,000.00 | ||
| Shirley Joan Lesavoy (wife of I. L.) | 2,000.00 | ||
| Rose Deutsch (sister) | 2,000.00 | ||
| $ 80,500 |
*284 Other contributions to petitioner during the year 1946 were as follows:
| Paper Corp. of America | $ 10,000.00 | |
| Iobst, Getz, and Twining | 125.00 | 10,125 |
| Total for 1946 | $ 90,625 |
It was contemplated that petitioner would pay for the Clover enterprise largely out of tax-exempt profits.
Prior to March 18, 1946, but after arrangements had already been made for petitioner's acquisition of the Clover enterprise, Cary Boshamer was instructed not to make shipments of yarn to regular customers, but to accumulate the yarn and ship it to Blossom. After acquisition of the Clover assets and during the years involved herein petitioner conducted the business previously carried on by Clover Spinning Mills, Inc., namely, the manufacture and sale of cotton yarn. Such business activities of petitioner are those customarily engaged in by commercial companies in the business of manufacture *928 and sale of yarn, with which companies petitioner was in competition during the taxable period involved. The business was managed for petitioner by Cary Boshamer, who had several successive contracts of employment with petitioner, but was subsequently discharged after the tax years here*285 involved as a result of differences arising between him and the Lesavoy interests.
For approximately 2 years before March 18, 1946, when petitioner acquired the assets formerly used in the business of Clover Spinning Mills, Inc., Blossom and Lisle Mills together purchased yarn from Clover Spinning Mills, Inc., in quantities ranging in amounts from 4 per cent to 10 per cent of its monthly output.
The following table shows the purchases of cotton yarn by Lisle Mills, Blossom, and Penn State Mills from petitioner, as well as the total sales by petitioner of cotton yarn, for the periods indicated:
| Purchases from petitioner by Lisle | Total sales of | ||
| Mills, Blossom, | petitioner | ||
| Period | and Penn State Mills | ||
| Mar. 18 to | Lisle Mills | $ 128,138.65 | |
| Dec. 31, 1946. | Blossom | 1,514,376.43 | $ 1,902,487.43 |
| $ 1,642,515.08 | |||
| 1947 | Lisle Mills | 13,441.50 | |
| Blossom | 198,736.72 | $ 2,477,869.03 | |
| $ 212,178.22 | |||
| 1948 | Blossom | $ 111,668.36 | $ 2,139,415.28 |
| 1949 | Penn State Mills | $ 417,217.92 | $ 1,669,143.56 |
| 1950 | Penn State Mills | $ 290,775.46 | $ 2,027,116.33 |
The following table shows the total purchases by Blossom for the years 1946-1948, inclusive, and by Penn State Mills for 1949 and*286 1950:
| 1946 | $ 3,765,253.06 |
| 1947 | 3,236,637.50 |
| 1948 | 2,272,585.37 |
| 1949 | 3,274,431.41 |
| 1950 | 2,822,051.21 |
The parties have stipulated an estimate that 90 per cent of these purchases were of cotton yarn.
Sales by petitioner to Blossom, Lisle Mills, and Penn State Mills were at the same prices charged other customers. There was nothing unique about the yarn manufactured by petitioner.
During the years 1946 to 1950, inclusive, petitioner made the following payments with respect to the notes referred to above and the preexisting first mortgage on the Clover properties:
| First | ||
| Year | Notes | mortgage |
| 1946 | $ 161,718.28 | $ 9,100 |
| 1947 | 114,685.31 | 9,100 |
| 1948 | 120,582.22 | 9,100 |
| 1949 | 83,033.79 | 9,100 |
| 1950 | 32,356.00 | 9,100 |
*929 On various occasions, at least in 1948, when the market price of raw cotton and cotton yarn had declined, after Blossom had placed orders for cotton yarn to be shipped by petitioner and after petitioner had purchased or committed itself to purchase raw cotton at the higher market price with which to fulfill Blossom's order, Blossom would cancel the unfilled portion of its order and then place a new order for yarn at the then prevailing lower *287 market price. In that manner, Blossom shifted to petitioner the burden of decreases in the market price of cotton and cotton yarn, and to that extent, at least, petitioner was being operated for the benefit of Blossom.
On its Forms 990 and 990-A filed for the years 1944 to 1950, inclusive, petitioner listed as sums disbursed for charitable purposes the following amounts:
| 1944 | $ 3,910.00 |
| 1945 | 20,934.30 |
| 1946 | 13,353.96 |
| 1947 | 30,233.37 |
| 1948 | 28,002.52 |
| 1949 | 11,535.50 |
| 1950 | 4,242.75 |
In the notice of deficiency respondent disallowed the following amounts claimed as contributions:
| 1947 | |
| United Jewish Appeal | $ 10,000.00 |
| Jews of Europe, Inc | 100.00 |
| Linden Hall for Children | 2,554.11 |
| 1948 | |
| Linden Hall for Children | 124.12 |
In connection with the alleged payment to the United Jewish Appeal, referred to as U. J. A., petitioner's Form 990 for 1947 listed a payment in the amount of $ 17,500. That amount, however, represented merely a pledge made by petitioner in 1947, and of that amount petitioner paid U. J. A. only $ 7,500 in 1947. Petitioner attempted to make the remaining $ 10,000 available to U. J. A. in the following manner: Blossom had certain funds in pounds sterling*288 in England which it could not legally convert into dollars which could be withdrawn from England; petitioner gave $ 10,000 to Blossom and Blossom, in turn, undertook to give 3,500 pounds sterling to U. J. A. in fulfillment of the remainder of petitioner's pledge to U. J. A. However, U. J. A. was unable to obtain the funds from England by reason of existing regulations, and in 1952 Penn State Mills (successor to Blossom) returned the $ 10,000 to petitioner. Petitioner has never *930 paid the $ 10,000 to U. J. A., although it has made other payments in later years to U. J. A. pursuant to entirely different pledges.
There was no such organization in 1947 or 1948 as "Linden Hall for Children." Linden Hall was the name of a property in Rhinebeck, New York, owned by Lesavoy and carried in the name of one of his brothers. It was not operated as a charitable institution, although Lesavoy had given consideration to converting it into a summer camp for children, and had taken some preliminary steps toward that end. His brother deeded it to him on February 13, 1950, and he, in turn, deeded it to petitioner the following day. Petitioner offered no evidence with respect to the alleged*289 contribution of $ 100 to Jews of Europe, Inc.
From the formation of petitioner to and during the taxable years ended December 31, 1950, except as may otherwise appear in these findings, no part of the earnings or net profits of petitioner was distributed to any person, and the earnings of petitioner were applied in payment of interest, reduction of indebtedness, the conduct of petitioner's business, acquisition of machinery, and were disbursed for charitable purposes. No part of petitioner's activities has been the carrying on of propaganda or otherwise attempting to influence legislation. Prior to and during the taxable years none of petitioner's trustees nor any member of their families received any compensation from petitioner for personal services. The only disbursements made by petitioner to any trustee were reimbursements for expenses actually incurred by such trustee in attending to the affairs of petitioner.
Question 9 in the Form 990 filed by petitioner for 1946 was as follows: "Have you had any sources of income or engaged in any activities which have not previously been reported to the Bureau? (Yes or No) If so, attach detailed statement." Petitioner answered*290 "Yes" and on the botton of that page appears the statement, "Purchased Clover Spinning Mills Co., Clover, So. Carolina, March 18, 1946." No statement was attached. The operations of the yarn business were reflected in its Forms 990 for 1946 and subsequent years, but only in a general manner. It was not revealed by petitioner, either for the year 1946 or for any subsequent year, that a substantial quantity of the yarn manufactured by Clover was sold to businesses controlled by Lesavoy and members of his family or that the Clover enterprise was operated for the benefit of such businesses. No information other than the foregoing was offered by petitioner to indicate any change of activity.
On December 19, 1951, in a letter to the trustees of petitioner, respondent revoked his former ruling of July 31, 1945, and determined that petitioner was not entitled to exemption under section 101 (6), Internal Revenue Code of 1939.
*931 Petitioner was not operated during the taxable years in question exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals. A substantial purpose of its operation during *291 those years was to provide an assured source of yarn, if needed, for businesses controlled by Lesavoy and members of his family.
Petitioner has failed to prove that respondent erred in disallowing certain amounts claimed as charitable contributions for the years 1947 and 1948.
Petitioner is taxable as a trust, and not as a corporation.
Petitioner could not, in good faith, rely during the taxable years involved on respondent's ruling of July 31, 1945. It could not reasonably assume that the new factors introduced in 1946 were not sufficiently pertinent to warrant direct and prompt action to bring the attention of the respondent thereto. Such information as petitioner did submit was insufficient promptly to apprise respondent, and did not satisfy the requirement set forth in the ruling with respect to notice of changes. The failure to file Federal income tax returns during the years in question was due to willful neglect and not to reasonable cause. The deficiencies determined by respondent for the taxable years before us were due to negligence on the part of petitioner. The additions for delinquency and negligence are proper.
OPINION.
We have found as a fact that petitioner was*292 not operated during the taxable years exclusively for charitable purposes, and we are fully satisfied that a substantial purpose of petitioner's acquisition and operation of the Clover enterprise was to benefit businesses controlled by Lesavoy and members of his family. The evidence was at times conflicting, and some of the strong evidence against petitioner came from Cary Boshamer, who had become hostile to petitioner and the Lesavoy interests. Nevertheless, we had ample opportunity to hear and observe the witnesses on the stand, and we are convinced that Boshamer's testimony was truthful. The chief purpose in acquiring Clover was to assure a continuing supply of cotton yarn to businesses controlled by Lesavoy and his family. This purpose was not disproved by showing that the sales of yarn to such businesses were made at the same prices charged other customers. In times of short supply, with maximum prices controlled by law, the greatest advantage may well lie not in favorable price discrimination, but in being sure of an adequate supply at a legitimate price. We have no doubt on all the evidence before us, including the figures showing the sharply increased sales of cotton*293 yarn to Blossom and *932 Lisle Mills immediately after March 18, 1946, 2 that the dominant purpose in petitioner's acquisition of Clover was to benefit businesses controlled by the Lesavoy family. Moreover, the evidence showed that, on occasion, Blossom was able to and did shift to petitioner the burden of a decrease in the market price of raw cotton and cotton yarn which Blossom would otherwise have borne. It may be quite true that petitioner's accumulated earnings will ultimately find their way into charitable organizations. That fact, however, satisfies only one of the conditions prerequisite to exemption under section 101 (6). Furthermore, we are satisfied, on this record, that such was at best only a secondary objective in the operation of petitioner during the tax years before us, and that the dominant purpose was to benefit business enterprises controlled by Lesavoy and his family. The existence of the latter purpose is inconsistent with exemption under section 101 (6).
*294 In view of our conclusion as to the purpose for which petitioner was operated it becomes unnecessary to consider the question, on which there are conflicting decisions, as to whether the exemption is available where the earnings of a commercial enterprise are dedicated to charitable uses. Compare C. F. Mueller Co., 14 T. C. 922, reversed 190 F. 2d 120 (C. A. 3); Willingham v. Home Oil Mill, 181 F. 2d 9 (C. A. 5); and Roche's Beach v. Commissioner, 96 F. 2d 776 (C. A. 2); with John Danz, 18 T.C. 454">18 T. C. 454, affirmed 231 F. 2d 673 (C. A. 9); Donor Realty Corporation, 17 T.C. 899">17 T. C. 899; Joseph B. Eastman Corporation, 1502">16 T. C. 1502; United States v. Community Services, Inc., 189 F. 2d 421 (C. A. 4), certiorari denied 342 U.S. 932">342 U.S. 932; Ralph H. Eaton Foundation v. Commissioner, 219 F. 2d 527 (C. A. 9); and Bear Gulch Water Co. v. Commissioner, 116 F. 2d 975*295 (C. A. 9), certiorari denied 314 U.S. 652">314 U.S. 652. The instant case goes far beyond that problem. Here we have a commercial business that was acquired by a presumably otherwise tax-exempt foundation for the purpose of benefiting private business enterprises owned or controlled by the Lesavoy family. That purpose was the dominant factor in the petitioner's operation of the Clover mill, and it is incompatible with exempt status under section 101 (6). In C. F. Mueller Co. v. Commissioner, the Court of Appeals was careful to state (190 F. 2d at p. 122):
It is clear that we are not here dealing with a corporation the purpose of which is to benefit, directly or indirectly, private interest. See Better Business *933 v. United States, 1945, 326 U.S. 279">326 U.S. 279, 66 S. Ct. 112">66 S. Ct. 112, 90 L. Ed. 67">90 L. Ed. 67; Universal Oil Products Co. v. Campbell, supra [181 F. 2d 451 (C. A. 7), certiorari denied, 340 U.S. 850">340 U.S. 850]. * * *
That element, which was thus absent in the Mueller case, 3 is present here, and we deem it of crucial*296 significance, wholly apart from our views as to the basis for the decision in the Mueller case itself. And in the light of our conclusion, it also becomes unnecessary to determine whether any part of petitioner's earnings inured to the benefit of any private shareholder or individual.
*297 Petitioner has raised an issue in its pleadings as to whether it should be taxed as a corporation or as a trust. Its evidence does not overcome the Commissioner's determination in this respect, which treated petitioner as a trust. Cf. John Danz, 18 T. C. 454, affirmed 231 F. 2d 673 (C. A. 9).
Petitioner has challenged the Commissioner's disallowance of certain amounts claimed as contributions in 1947 and 1948. In view of our findings with respect to those alleged contributions we hold that the Commissioner did not err in this regard.
The final issue relates to the additions for delinquency and negligence determined by respondent. Secs. 291 (a) and 293 (a), I. R. C. 1939. Petitioner could not reasonably rely during the taxable years before us upon the ruling of the respondent made in 1945 under a set of facts so materially different from that existing in all later taxable years. Forms 990 filed by the petitioner clearly did not constitute such notice as was contemplated by the ruling, nor could petitioner reasonably assume that it did. Petitioner could not in good faith expect that such notice as was contained therein*298 would promptly and adequately apprise respondent of the situation existing after the acquisition of the assets of Clover, and enable him promptly and intelligently to reappraise petitioner's right to exemption under section 101 (6). And finally, petitioner may not blithely assume that it must necessarily remain exempt despite any such changes. Its failure to make and file returns required by law for the years in question was due to willful neglect and not to reasonable cause. A part of the deficiencies for those years, particularly in the light of its neglect adequately to keep respondent informed was due to negligence, but without intent to defraud. The additions to the tax were properly determined.
Decision will be entered for the respondent.
Footnotes
1. The stipulation fails to disclose the amount originally transferred to petitioner upon its creation, and that amount is apparently included in the $ 40,050 which is stipulated as representing the contributions received by petitioner in 1944.↩
2. The evidence shows a decrease in sales of Clover yarn to Blossom in 1947 and 1948. That decrease was apparently attributable not only to the poor quality of some of the yarn, but also to the fact that Cary Boshamer, who managed Clover and had a substantial interest in having petitioner discharge its liability on the notes to him, reduced the shipments of yarn when Blossom failed to make payments as promptly as had been contemplated. Moreover, shipments increased substantially in 1949, when Blossom was succeeded by Penn State Mills, which was thought by Boshamer to be in a better financial position than its predecessor.↩
3. In the Better Business Bureau case, cited above by the Court of Appeals in the Mueller opinion, the Supreme Court said (326 U.S. at p. 283):
In this instance, in order to fall within the claimed exemption, an organization must be devoted to educational purposes exclusively. This plainly means that the presence of a single noneducational purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly educational purposes.The Better Business Bureau case involved a claim for exemption under section 811 (b) (8) of the Social Security Act which the Court there held to be governed by the same factors as the exemption from income tax under section 101 (6)↩ (1939 Code).