*2988 1. Held, That the petitioner is not an exempt corporation under the provisions of section 231(7) of the Revenue Act of 1926.
2. In the circumstances of this proceeding, interest received on monthly credit bank balances of trust funds for which no accounting is required and which is used by the trustee in its business operations is income to such petitioner in the year in which it is received.
*363 The respondent asserts a deficiency in income tax for the fiscal year ended June 30, 1926, in the amount of $1,209.63. Two issues are submitted for the consideration of the Board - (1) Whether the petitioner is an exempt corporation under the provisions of section 231(7) of the Revenue Act of 1926, and (2) whether interest on bank deposits of trust funds was income to the petitioner in the taxable year.
FINDINGS OF FACT.
The petitioner is a Minnesota corporation with its principal office and place of business at St. Paul. It was incorporated in 1906 and since that date has been actively pursuing the purposes set forth in its articles of incorporation. *2989 Its authorized capital stock is $10,000, divided into shares of the par value of $10 each.
In the taxable year the petitioner's articles of incorporation pertinent to the issues here were as follows:
ARTICLE I.
* * * The general nature of the business of this corporation shall be to operate a bureau for the conduct, management, preservation, care and disposition of the business, property and assets of persons, co-partnerships and corporations which shall become financially embarrassed, insolvent or bankrupt, and in connection therewith, through its officers or other persons, attorneys or agents employed by it to act for and represent creditors at creditors' meetings or other meetings in the selection of receivers, trustees or other agents for the care or management, or sale or other disposition of the property of such insolvents, bankrupts or others who are in embarrassed circumstances and to act generally for creditors and others in the preservation, management and disposition of the property and assets of such insolvents, bankrupts or others in embarrassed circumstances, and in the adjustment, collection and securing of such claims.
To obtain and furnish to its stockholders*2990 and such other persons as shall desire its services, information as to the financial standing and other information affecting the credit and rating of the customers and proposed customers of its stockholders and other patrons, and operate a department for this purpose.
To act generally in the interest of the jobbing trade in the prevention and prosecution of imposition, injustice and fraud and take such lawful steps as it shall deem proper and necessary to induce the passage of such laws as will promote the general welfare and security of the trade, and to act generally for creditors in the adjustment, collection and securing of claims.
ARTICLE II.
This corporation is not organized for the purpose of any pecuniary gain for stockholders, and it shall not declare or pay any dividend upon its capital stock. All earnings not consumed in operating expenses shall be kept in a fund to be disbursed from time to time upon the order of the Board of Directors to further the purposes of the corporation. This corporation shall not sell or negotiate the sale of any stocks, bonds or securities of any kind as an investment and shall not be conducted as a financial investment for profit.
*2991 *364 The petitioner's gross profits and the sources thereof in the taxable year were as follows:
| Gross profit from operations: | |
| Bureau earnings | $53,999.45 |
| Postage, stationery and stenographic services | 12,133.05 |
| Interchange Department earnings | 30,511.16 |
| Financial statement earnings | 535.79 |
| Commissions | 12,199.61 |
| Miscellaneous income and bad debts recovered | 524.97 |
| 109,904.03 |
The item of bureau earnings listed in the above statement of gross profits in the amount of $53,999.45 represents fees paid to the petitioner for its services as receiver in bankruptcy, trustee in bankruptcy, common law trustee, and other amounts earned by it in connection with its business of handling bankrupt properties in conformity with the purposes set forth in the articles of incorporation. The item of $12,199.61 represents commissions received by the petitioner in payment for its services to properties or firms in business difficulties that did not result in bankruptcy proceedings. In this connection the petitioner takes charge of the business of concerns in financial distress, advances funds for the continued operation thereof, and supplies management, direction and*2992 advice that frequently result in rehabilitation and continued operation. For its services in connection with bankruptcies it receives the fees allowed by law and the courts, and for its advice, management and direction in connection with firms financially embarrassed but not in receivership or trusteeship it receives a commission of 7 1/2 per cent on all amounts paid to the creditors of such concerns as the result of its services.
The petitioner maintains what is called a department for the interchange of information among its stockholders. In this connection it furnishes "ledger information" relating to the credit of business firms, both to its shareholders and to others. For this service it received compensation in the taxable year in the amount of $30,511.16.
The stockholders of the petitioner are wholesale dealers and jobbers of merchandise of various sorts in Minnesota, Wisconsin, Iowa, the Dakotas and Montana. Not more than one share is owned by any firm. No dividends have ever been declared or paid by the petitioners.
For the taxable year the petitioner timely made and filed a corporation tax return on Form 1120 A, which disclosed gross income, deductions therefrom, *2993 and net income in the amount of $11,129.23, and in the place for the computation of tax attached the following statement:
This corporation is exempt as a "Business League" under the provisions of Sec. 231(7) of the Revenue Acts of 1924 and 1926 and no tax is payable on this return.
*365 This return is filed for the reason that we have in the past filed returns of income. Proceedings are now before the Bureau with regard to exemption in prior years.
Upon audit of such return the Commissioner disallowed the petitioner's claim for exemption and determined tax liability in the amount of $1,205.63.
The parties filed the following stipulation, which is received and adopted by the Board:
Item "5" on petitioner's return for the fiscal year ending June 30, 1926, in the amount of $5,317.48, includes an item of $4,746.83 representing interest (exclusive of interest on Liberty bonds) derived from amounts designated on petitioner's books as trust funds.
OPINION.
LANSDON: The first contention of the petitioner is that it is an exempt corporation under the following provision of the Revenue Act of 1926:
SEC. 231. The following organizations shall be exempt from taxation*2994 under this title -
* * *
(7) Business leagues, chambers of commerce, or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.
It is well established that taxpayers seeking the benefits of exemptions must prove strict compliance with all the statutory conditions authorizing the classification claimed. ; . It follows, therefore, that to prevail here this petitioner, even if it be conceded that it is a business league, must prove that it is not organized for profit, and that no part of its net earnings inures to the benefit of any private shareholder or individual.
The second, third, and fourth paragraphs of article I of the petitioner's articles of incorporation set forth three categories of purposes for which it was incorporated. The second paragraph outlines activities that certainly are not of interest to all the stockholders except as to the profits that may flow from them, since there is no evidence that the petitioner limited this phase of its business to concerns that*2995 were indebted to its shareholders. The general purposes there enumerated authorize operations from which profit is usually realized. The evidence herein discloses that in the taxable year the petitioner received more than $65,000 as fees and commissions for the services it rendered to firms and individuals, none of whom are shown to have been stockholders.
*366 The petitioner is aware of this situation and argues that it is not the source but the destination of income that must be considered. It admits that its activities in some departments of its business result in profit but contends that this alone is not sufficient to bar it from classification as an exempt corporation. In support of this position it relies largely on . In that case the Supreme Court held that profit resulting from certain commercial transactions was a negligible factor, since gain therefrom was not the end to which they were directed. In this proceeding something like two-thirds of the total income of the petitioner is derived from transactions from which profits flow, and which were not incidental to other activities. This is a situation*2996 entirely diverse from that in the Trinidad case, supra, in which a negligible amount of income was derived from transactions purely incidental to the real purposes of the corporation. In our opinion that decision establishes no rule that is controlling here.
Even if we accept the petitioner's theory that it is destination, and not origin, that governs, we are not satisfied that the facts here show that no part of the net earnings of the petitioner inures to the benefit of any private shareholder or individual. It is true that there have been no distributions of cash to any stockholders, but all the net income and surplus are held for use in the furtherance of the purposes set forth in paragraphs 3 and 4 of article I of the articles of incorporation and such purposes are manifestly and avowedly for the service, benefit and advantage of every stockholder. Without the earnings and the accumulated surplus from the activities authorized in paragraph 2, each stockholder would be required to pay substantial fees or assessments in order to secure the services enumerated in paragraphs 3 and 4. In these circumstances we think the net earnings of this petitioner inure to the benefit*2997 of each one of its individual shareholders as effectually as if there were actual distributions of cash dividends from surplus. .
The petitioner's second contention is that the Commissioner erroneously included the amount of $4,746.83 in its taxable income for the year involved. In the conduct of its activities enumerated in paragraph 2 of the first article of its articles of incorporation, the petitioner has constantly on deposit in certain banks substantial sums which are the property of its clients or of the various firms that it serves in an advisory capacity, on which it receives interest based on monthly credit balances. The parties agree that such deposits are trust funds. The petitioner insists that the interest on such deposits is nothing more than an addition to funds held in trust and therefore not income to it but to the beneficial owners of the deposits. The *367 respondent has determined that such interest is income to the petitioner.
The evidence discloses that clients' accounts have not been credited with the interest in question and that there is no way to determine what amount thereof, if*2998 any, should be allocated to any particular firm. No client has ever claimed or received any part of such interest. The directors of the petitioner have ordered that the interest so received shall be used in business operations. There is no showing that either by contract or in law the petitioner is liable to its clients for the interest. Certainly the amount here in controversy falls within the statutory definition of income and as such is taxable. The petitioner received the interest in question, which it used for its own purposes. In these circumstances we are of the opinion that such interest was income to it in the taxable year. The determination of the Commissioner on this point is approved.
Decision will be entered for the respondent.