*1021 1. EXEMPTION - CHARITABLE ORGANIZATION. - Where a corporation is not both "organized and operated exclusively" for educational or other purposes named in the Revenue Act of 1924, section 231 (6), held it is not exempt from income tax thereunder. James Sprunt Benevolent Trust,20 B.T.A. 19">20 B.T.A. 19, followed.
2. INCOME - TRUSTEE FOR CHARITABLE PURPOSE. - Where certain individuals caused certain property to be conveyed to petitioner without cost to it with the understanding that such property together with the income derived from its sale, was to be devoted to a definite charitable use, namely, the establishment and maintenance, in perpetuity, of a school for children under the influence of the Christian Science faith, and, under such conditions, attempted application of the fund by petitioner for its own individual use would be subject to restraint by a court of equity and a constructive trust declared, it is held that income accruing from the sale of such property, in carrying out the purposes intended, was not taxable to petitioner.
*1117 This proceeding involves a deficiency in income taxes for the fiscal year ending June 30, 1925, in the sum of $12,021.99.
The amendment to the petition included herein the fiscal years ending June 30, 1924, 1926, and 1927. Since the respondent has not determined any deficiencies for other than the fiscal year ending June 30, 1925, this Board has no jurisdiction in respect of any other years. The proceedings are, therefore, dismissed so far as they relate to other than the fiscal year ending June 30, 1925. .
The petitioner, by its assignments of error, raises four issues, which are:
1. Whether the petitioner is entitled to an exempt status for the fiscal year ending June 30, 1925, under the provisions of section 231(6) and section 213(b)(3) of the Revenue Act of 1924.
2. Whether the petitioner received the property by purchase or in trust for the furtherance of educational purposes.
3. Whether if a profit was realized, the taxability of same must be deferred until the tract of land acquired by petitioner is disposed of that it may be determined whether*1023 or not the transaction results in net income.
4. Whether respondent employed the proper method in arriving at the simulated net income of petitioner.
FINDINGS OF FACT.
The petitioner was incorporated in 1920 under the laws of the State of California as a private educational institution. Its stock, since incorporation, has been owned in equal parts by two Misses Cooper and a Miss Stevens. The school was originally organized in 1911 by the two Misses Cooper, who were later joined by Miss Stevens, for the purpose of training and instructing children and wards of Christian Scientists.
The school progressed from its inception, but the organizers drew no salaries and used the small profits for the purchase of additional property for the school. In 1923 the net value of the property of petitioner was approximately $12,000.
*1118 In 1923, because of the lack of recreation facilities for the older children, petitioner found it impossible to continue and was preparing to close the school and rent the buildings to provide its stockholders with income upon which to live. When the parents of the children in the school became aware of this condition they became much disturbed*1024 as the discontinuance of the school would leave them without a school for children operated under the influence of the Christian Science faith. They were intensely interested in the maintenance of such a school. A meeting was called, attended by some sixty parents, at which the situation was discussed and an informal organization of the parents was effected. A study of the situation was determined upon to work out some method of securing the continued operation and maintenance of a school of the character desired. One plan considered was to procure a loan for this petitioner, upon a guarantee or endorsement of the parents, of sufficient funds for it to acquire the necessary properties for its continued operation. In connection with this plan a certain paper was executed and signed by a number of the parents as follows:
LOS ANGELES, CALIFORNIA,
April 13th, 1923.
We the undersigned hereby agree to be one of twenty or more signers to a guarantee to a certain Bank or Trust Company in Los Angeles, California, to be selected by Berkeley Hall School. This guarantee not to exceed Two hundred fifty Thousand Dollars ($250,000) and to be secured by fifty or more acres of land*1025 in Los Angeles County in the Beverly District as outlined at a meeting held this date at Berkeley Hall School.
This guarantee was, however, not used. One of the parents of the children, a Mr. Gilchrist, who had been quite active in the efforts of the parents to work out some solution of the problem, was a prominent real estate operator, experienced in subdivision work. This man learned of a tract of land available for purchase in Beverly Hills, California, consisting of approximately 77.3 acres. Upon approaching the owners of this tract, the Rodeo Land & Water Co., he secured an offer from this company that it would give an option to purchase the tract for $462,180, payable $100,000 upon the execution of the conveyance and the balance at stated intervals. For a 10-day option this company required a deposit of $10,000, to be forfeited if the option was not exercised.
A meeting of the parents was immediately called by Gilchrist and informed of the offer. A plan was submitted by him for a subdivision of the property into lots and a sale of all the property with the exception of approximately seven acres which would be set aside for school buildings. The price set upon the*1026 lots sold was to be fixed in amounts to return sufficient money to pay the purchase price of the entire tract, plus approximately $80,000 which it was estimated would be necessary to erect the school buildings required. Under *1119 this plan it was proposed that the parents would purchase the lots at the prices fixed and any lots not sold in this way would be offered to the public. It was contemplated that the parents would be able to dispose of these remaining lots to their friends and associates.
This plan appeared feasible to the parents, who thereupon directed that the option be procured. Certain of the parents advanced the required sum of $10,000, although receipt therefor was taken in the name of petitioner. It was understood that if the option was exercised this amount would be returned to them, both of which occurred. The option was thereupon procured by the payment of the $10,000 advanced and was taken in the name of petitioner.
Immediately upon the signing of the option, Gilchrist platted its subdivision into lots and computed a sale price for each lot. This sales price was determined by assigning to each lot a proportionate amount of the cost of the entire*1027 tract and a proportionate amount of the estimated cost of subdivision. To the cost of each lot as thus determined there was added in each instance a proportionate amount of the sum necessary to pay the cost of the seven acres set aside as a location for the school and the $80,000 determined upon as necessary to be raised for the erection of the school buildings. Upon completion of these computations Gilchrist presented them at a meeting of the parents and the subdivision of the property was exhibited to them with the prices which each lot would carry. The parents were called upon to subscribe for the purchase of as many lots as possible on this agreed basis. The parents made a very substantial response to this request and subscribed for a large number of lots, some of them taking as many as five lots, the particular lot or lots subscribed for being then and there selected by the purchasers.
Thereupon the Bank of America of Los Angeles, California, was requested to act as trustee for the purpose of taking title to the tract of land in question, executing the conveyances of the several lots, collecting the proceeds of sale and paying the development costs and the several payments*1028 to be made to the Rodeo Land & Water Co. It was contemplated that the bank would be required to advance approximately $135,000 for the making of the initial payments and that this amount would be repaid to it from the proceeds of lot sales, but before it would agree to accept the trust and obligate itself to make the necessary advance, the bank required the parents individually to guarantee such advance and this guarantee was thereupon executed by them in this amount. It afterward developed that this guarantee was unnecessary as the down payments on lots sold were sufficient to meet all the payments required of the bank as trustee.
Upon the bank agreeing to act as trustee in the subdivision of the property, the parents caused to be executed a deed of trust *1120 which designated the bank as trustee, the Rodeo Land & Water Co. as the seller of the property, and the petitioner, Berkeley Hall School, as beneficiary. It signed the trust instrument at the request and direction of the committee of the parents' organization which was handling the matter. The three stockholders and officers of petitioner were women without business experience. The president of petitioner signed*1029 the trust instrument merely because directed to do so and upon the assurance that its execution would make possible the execution of the plan conceived by the parents for the establishment of a school for children under the influence of the Christian Science faith.
The sale of all the lots in the subdivision was effected within a very short period. All but two or three of the lots were sold before the examination of the title to the tract had been completed and conveyance of the property had been made to the trustee by the Rodeo Land & Water Co. When that title was finally transferred to the trustee there had already been delivered to it by Gilchrist, who was in charge of sales, executed contracts for lot purchases and deeds covering these, for execution by the trustee, in respect of nearly every lot in the subdivision. The cash at that time in the hands of the trustee, and representing down payments on these lot purchases, was in excess of the $100,000 initial cash payment required to be made to the Rodeo Land & Water Co.
The parents of the children of the school operated by petitioner had no intention, in arranging for and effecting the acquisition of this property by petitioner, *1030 that the amounts voluntarily paid by them in excess of the cost of such lots, together with the benefits and income resulting from their activities in the sale of lots and represented ultimately by the cash and land transferred by the trustee to the petitioner, should inure in any way to the personal benefit of petitioner and its stockholders. It was at all times their intention that this property and the profits accruing thereon in the course of the transaction, initiated and carried through by them, should constitute a fund for the establishment and maintenance in perpetuity of a school for children at Beverly Hills, California, to be operated under the influence of the Christian Science religion. This plan and purpose of the parents of the children was at all times understood and acquiesced in by petitioner and its stockholders. It realized always that the properties which would come into its hands as the result of the several transactions above described, carried out at the instance of the parents of the children and without cost to petitioner, would be received by it for use only for the purposes for which intended by the parents, namely, the establishment in perpetuity of*1031 a school of the character desired. That the purpose of the transactions in the acquisition of this property was charitable *1121 was recognized by the Bank of America as trustee an its charge for acting in this capacity was for that reason reduced to one third of the usual and customary amount.
The lots in question were ultimately disposed of and the profit realized by the Bank of America as trustee in the taxable year 1925 was the sum of $111,883.88. Those profits are the basis for the pending deficiency. The trustee paid over to petitioner the funds in its hands remaining after payment of the purchase price of the tract to the Rodeo Land & Water Co. and the payment of development and trustee's expenses. The amounts so paid to petitioner were entered upon its books in a separate account from its own funds and were expended under direction of a committee of the parents' organization in the erection of buildings upon the seven-acre tract. The trust of the Bank of America was terminated in 1927 by the transfer of the title to the seven-acre tract mentioned, by quitclaim deed, to petitioner as "beneficiary" of the trust.
Petitioner, upon receipt of the property coming*1032 to it as "beneficiary" of the trust in question, itself made an effort to secure the perpetuation of this fund or foundation in accordance with the desire and intention of the parents' organization. A prominent member of the Christian Science Church made a trip to Boston, Massachusetts, to the headquarters of the church and asked, for petitioner and the parents' organization, that the church accept a transfer of the properties from petitioner and act as the permanent trustee in administration of the fund. This request was refused by the church for the reason that its activities were limited to those religious. Under its rules it could not assume as trustee the operation of a school. Steps were thereupon taken to effect the same result through a permanent trustee other than the Christian Science Church and at the time of the hearing of this proceeding this arrangement had either been finally completed or was then being effected. Pending the appointment of a permanent trustee the property has been administered by a board of trustees on which the three stockholders of petitioner have membership.
Respondent concluded the trust above mentioned with the Bank of America as trustee*1033 was such a trust as is described in section 704(b) of the Revenue Act of 1928, 1 and, since on September 18, *1122 1928, such trustee filed its election under the provisions of that section to have its income taxed to its "beneficiary", the petitioner, the pending deficiency was determined.
OPINION.
LEECH: The petitioner is a corporation*1034 which owned and operated a school for children of persons in Los Angeles, California, who were interested in Christian Science. It was about to discontinue this school in 1923 because of a lack of necessary facilities. When the parents of some of the students of the school learned of its proposed discontinuance they discussed the situation among themselves and finally adopted a plan to secure necessary real estate and a sufficient sum of money to provide and perpetuate in Los Angeles a school for children of persons interested in Christian Science. In order to obtain the real estate and the necessary cash this group of parents planned to obtain a tract of land, retain a plot for the school, and subdivide and sell the remaining lots at a sufficient profit to create the fund desired. The Bank of America was named as trustee to purchase the property, subdivide it, sell and convey the lots, and finally to transfer to the petitioner the plot retained for the school and the fund realized from the profit in the sale of the lots. The petitioner understood this plan and was party to it. The petitioner was called a "beneficiary" of the trust of which the bank was trustee. But it was thoroughly*1035 understood by all intersted parties that when the petitioner should receive the plot of ground and the net proceeds from the sale of the lots it would receive these things, not for its own use and benefit, but in a fiduciary capacity only. These net proceeds were turned over to the petitioner by the bank in 1925. The Commissioner has determined the present deficiency in the income tax of this petitioner on the theory that these net proceeds received by the petitioner in 1925 represent income to the petitioner in its ordinary corporate capacity.
Petitioner contends that it is personally exempt from income tax under section 231(6) of the Revenue Act of 1924 2 as a corporation "organized and operated exclusively for educational purposes no part of the net earnings of which inures to the benefit of any private shareholder or individual." This position is untenable. Petitioner is a private corporation, organized for profit. The mere fact that it has not distributed its earnings to its stockholders is not controlling. It has such right and there is nothing which precludes its exercise. Consequently it is not entitled to the exemption provided. *1123 *1036 ; . Cf. ; ; ; .
But the taxability of this fund in petitioner's hands, on the facts here disclosed, must be resolved by the application of other principles. Respondent has proposed and is insisting upon the pending deficiency against petitioner, not as trustee, but in its individual capacity. Cf. . Thus, none of the fund in dispute is taxable here, unless received by this petitioner for its "separate use, benefit and disposal", *1037 , and subject to its "unfettered command." . Obviously, the funds supporting the present deficiency had no such character in petitioner's hands.
It appears clear upon careful consideration of the record that the fund in question reqresents the voluntary contribution of the organization of parents of the students at petitioner's school, and the result of the labors of these parents in effecting sales of lots under a plan conceived and carried out by them. The purpose of this plan was the establishment and maintenance, in perpetuity, of a school for children under the influence of the Christian Science faith. This purpose and plan of the parents was definitely understood by petitioner. Petitioner paid no money. The petitioner was used only as a convenience in carrying out the plan. The only consideration passing from it for its receipt of the disputed funds and the real estate was petitioner's agreement to accept them in accordance with that plan and purpose. That this property and presently disputed proceeds were so received by petitioner is further supported by the evidence*1038 of the action taken by petitioner immediately thereafter. These proceeds, always kept in a separate account from petitioner's individual funds, were, from the time of their receipt, administered by a committee representing the organization of parents interested in the plan. The petitioner and the parents' organization attempted to effect the charitable object through the appointment of the Christian Science Church as a permanent trustee of the property and fund, as soon as received. Following failure in that effort, they continued to perfect the necessary arrangements to secure the use of the property and fund in perpetuity for the purpose specified.
Respondent proposes the present deficiency against petitioner as "beneficiary" of such a trust as is described in the Revenue Act of 1928, section 704(b), supra, which is said to conclude us here because of its retroactive application. But "beneficiary", as there *1124 used, has its ordinary and generally understood meaning in the law of trusts, which does not include petitioner on the present record. See *1039 ; ; . Petitioner has never treated this fund or property as its own. It did not receive either of them for use in its individual corporate purposes. All of petitioner's disclosed actions indicate an understanding on its part that its receipt and holding was, not in its individual corporate capacity, but as trustee of a trust created for the purpose of providing and perpetuating a school for the children of students and friends of Christian Science. This was a juristic, charitable trust of which incefiniteness of the beneficiaries is characteristic. ; ; . If and when petitioner receives compensation from this trust for the operation of the trust's school, another and different tax question arises.
It is true that the title as taken by this petitioner to the real estate was by an absolute transfer and not one expressing a trust. However, the rule appears clear in California that in the case of such*1040 a transfer, whether of real or personal property, if made with the understanding on the part of the grantee of the property that it will be held in trust for definite private purposes, and such understanding or agreement is the consideration for the transfer, its use for any purpose other than that agreed upon will be restrained by a court of equity under a constructive trust declared. ; ; ; ; ; ; ; ; ; ; ; ; ; ; ; ; *1041 . The same result would follow here where such agreement was to hold in trust for a public or charitable purpose. Political Code of California 1923, art. 8, secs. 470, 472; General Laws of California 1931, Acts 8698, 8699, 8700, 8701; ; affd., . Thus, even if respondent were proceeding against this petitioner, as trustee, the fund, the subject of the pending deficiency, would probably be exempt under the Revenue Act of 1924, section 231(6), supra.
Consequently, if petitioner attempted to distribute this property or fund to its stockholders or to devote it to any other purpose than that intended and clearly understood, it could have been restrained from doing so. A fortiori, it can not be held here that receipt of any *1125 part of this fund or property represented income to petitioner. .
Reviewed by the Board.
Decision will be entered for the petitioner.
SEAWELL, dissenting: I am unable to agree with the conclusion reached by the Board under what appears to me to be the plain*1042 undisputed facts of this case.
In 1923 petitioner was a private corporation conducting a school for profit. What other powers and privileges it had do not appear, as its charter was not offered in evidence. It needed for the school more space and added facilities. The Rodeo Land & Water Co. owned 77.3 acres of land which it wished to sell. Petitioner did not need all of the land for the school and it did not have the capital to buy the whole tract. Some of its friends agreed to guarantee to a bank payment of certain loans it needed for money with which to make certain advance payments on petitioner's contract to purchase the land. The Rodeo Land & Water Co. agreed to sell the land to petitioner. The loans from the bank were never made and the guarantors were never liable for any sum on account of their agreement. A scheme was worked out whereby petitioner was enabled to purchase the land without outside aid. A Mr. Gilchrist, a friend of the school, a realtor, surveyed, platted, and subdivided the land. A contract was entered into by the Bank of America, designated as trustee, the Rodeo Land & Water Co., designated trustor, and petitioner, designated beneficiary, in which*1043 it was recited that the trustor had agreed to sell to the beneficiary said land for $462,180, and that $100,000 thereof had already been paid by the petitioner from advanced sales of lots. Petitioner was to pay the remainder of the pruchase price from the sale of other portions of the land, and petitioner was to bear the expense of laying out and grading the streets, the installation of water mains, telephone and electric poles, and other development costs. The trustee itself made no payments and none of the guarantors or the trustee at that time or any time thereafter made any payment on the purchase price of the land. The land was placed in the hands of the trustee in order to secure the payment by the beneficiary to the trustor and to facilitate the transfer of title to lots sold by the beneficiary. The scheme was carried out. The trustee held the funds received from the sale of lots; paid the expenses of Gilchrist for making the subdivision; paid itself for the acceptance of the trust *1126 $250 and certain percentages on the sale price of lots executed by it, and a closing fee of $250 and paid and discharged the obligations of the petitioner, the beneficiary, to the*1044 Rodeo Land & Water Co., the trustor; then the trustee quitclaimed the schoolhouse lot and other portions of the 77.3 acres and paid the profits on the sales, more than $100,000, to the petitioner.
The property turned over to petitioner was not a gift and therefore is includable in gross income and section 213(b)(3) of the Revenue Act of 1924, relied on by petitioner, is not applicable. The further provision of law, section 231(6), relied on by petitioner, also is not applicable because the net earnings of petitioner inure to the benefit of the private shareholders of petitioner.
Footnotes
1. SEC. 704. (b) For the purpose of the Revenue Act of 1926 and prior Revenue Acts, a trust shall, at the option of the trustee exercised within one year after the enactment of this Act, be considered as a trust the income of which is taxable (whether distributed or not) to the beneficiaries, and not as an association, if such trust (1) had a single trustee, and (2) was created and operated for the sole purpose of liquidating real property as a single venture (with such powers of administration as are incidental thereto, including the acquisition, improvement, conservation, division, and sale of such property), distributing the proceeds therefrom in due course to or for the denefit of the beneficiaries, and discharging indebtedness secured by the trust property and (3) has not made a return for the taxable year as an association. ↩
2. SEC. 231. (6) Corporations, and any community chest, fund, or foundation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder 0r individual. ↩