*217 Decision will be entered for the respondent.
Exempt Corporation -- Business League -- Section 101 (7), I. R. C. -- An association which, as one of its important activities, published a catalog listing only products of member manufacturers, was performing special services for those members and was not exempt as a business league under section 101 (7), I. R. C.
*894 The Commissioner determined deficiencies in income tax and imposed penalties as follows:
| Year | Income tax | Penalty |
| 1940 | $ 514.82 | $ 128.71 |
| 1941 | 758.93 | 189.73 |
| 1942 | 995.58 | 149.34 |
*218 The questions presented for decision are, (1) whether the petitioner was exempt from income tax, as a business league, within the meaning of section 101 (7) of the Internal Revenue Code, and, (2) if not exempt, whether the delinquency in filing returns for the taxable years was due to a reasonable cause.
FINDINGS OF FACT.
The petitioner was organized in 1917 as an unincorporated association of manufacturers of original electrical equipment for motor vehicles and motorized equipment. It was incorporated in 1939 as a nonprofit corporation under the laws of the State of Michigan. It filed its returns for the taxable years with the collector of internal revenue for the district of Michigan.
The petitioner has no capital stock. Its purposes are stated in its articles of incorporation and bylaws as follows:
The purposes of this corporation are to promote friendly intercourse and cooperation among its members, to eliminate unfair trade practices destructive of the interests of the public, of employees, and of employers, and to engage in such other lawful activities, not involving pecuniary profit to its members, as will promote the best interests of its members and of the industry in *219 which they are engaged, namely, the manufacture, distribution, and servicing of original equipment for motor vehicles and motorized equipment, such as electrical and carburetion equipment, locks, keys, switches, magnetos, shock absorbers, speedometers, governors, guages, windshield wipers, and such other products as are allied or related thereto.
*895 The membership of the petitioner during the taxable years was divided into three separate groups, according to function, namely, the manufacturing division, the distribution division, and the field division.
The manufacturing division, on September 15, 1941, consisted of nineteen companies engaged in the manufacture and sale of original equipment for motor vehicles and motorized equipment such as that above mentioned. Any individual or firm engaged in business in any of the three branches of the industry was eligible for membership, subject to the approval of the board of directors, provided the applicant was not also a distributor of or dealer in automobiles or trucks. The entrance fee for membership in the manufacturing division was $ 250 and the annual dues were $ 300.
The distribution division, on September 15, 1941, consisted*220 of seventy concerns, each of which represented at least one manufacturing member by selling its products to wholesalers on a contractual basis and by maintaining certain service facilities. There was no entrance fee for membership in the distribution division, but annual dues of $ 100 were required.
The field division, on September 15, 1941, consisted of over 2,200 members, who acted officially as service companies and rendered warranty service for at least one manufacturing member. Their facilities included car drive-in service. There were no entrance fees or dues for membership in the field division.
Members of the manufacturing and distribution divisions were subject to assessments. An assessment of $ 21,000 was levied against the manufacturers in a prior year. Members of the field division were not subject to assessment.
The members of the manufacturing and distribution divisions had the exclusive right to vote and hold office. The field division had no right to vote. Members of the field division could make suggestions as to the operation of the corporation. They were consulted through a "Field Division Advisory Council."
Each division acted at times as a separate unit, *221 holding meetings, adopting such rules and regulations, and engaging in such activities as it desired, subject to the control of the board of directors.
One of the main activities of the petitioner has been the holding of meetings which bring its members together to discuss matters of common interest. Two well attended meetings on a national scale, each lasting a week, are held each year. They were discontinued during the war due to transportation and hotel difficulties. The petitioner schedules between 700 and 750 personal conferences at these meetings between various members who have matters to discuss. A report is mailed to each member after each meeting, covering the events of the *896 week and containing information about the matters that were discussed and any decisions or suggestions that were made. Sectional meetings are held in different parts of the country in addition to the national or general membership meetings, and from time to time meetings are conducted at which members are provided information as to the servicing of units in the most efficient manner and as to the servicing of equipment in the field.
The petitioner has, since 1927, published a catalog which*222 lists, under the year and model of each make of passenger car, motorcycle, truck, and tractor, the parts which are produced by the manufacturing members of the petitioner. The purpose of the catalog is to bring together in one reference manual a list of various related parts made by the manufacturing members for many different makes and models of cars and mechanized equipment. A service station operator, by referring to this catalog, can quickly and accurately determine the price and order number of parts needed, without having to examine several different books or catalogs. The catalog is published every other year in peacetime and a supplement is issued in the intervening years. The catalog is available to nonmembers as well as members at the same prices. The prices vary with the quantity purchased. Ninety-four per cent of the catalogs sold in 1942 was purchased by members. Forty-five per cent of those was purchased by members of the field division and about an equal percentage was purchased by members of the distribution division. The manufacturing members supply the data for the catalog, which are compiled, arranged, and edited by the employees of the petitioner at its*223 office. There is no other single source from which the information contained in the catalog can be obtained. The printing is done by an outside printer. The average price and the number of copies of the catalog sold for the years 1940 to 1942 were as follows:
| Year | Average price | Number sold |
| per copy | ||
| 1940 | $ 0.53 | 50,768 |
| 1941 (supplement) | 0.13 to 0.18 | |
| 1942 | 0.55 | 102,614 |
The 1942 edition is the last published edition of the catalog, due to the suspension of automobile production after that date, and the sales above stated were spread over a period of more than three years.
Each manufacturer member may use four pages in the catalog for advertising purposes. He must pay only for that space which he uses. The manufacturing members continued to publish their own catalogs.
*897 The petitioner has published a tune-up system and specification charts since 1934. This consists of a set of charts for each make and model of passenger car, setting forth adjustment specifications and instructions for parts that are commonly checked during the tune-up of a motor, such as starters, generators, carburetors and distributors. They provide an accurate and convenient source *224 of information to the mechanic who is tuning up a car. These charts have always been available to anyone who wished to purchase them. The prices charged for the different sets of tune-up charts varied, depending upon the number of car model years covered by the particular set, the list price for the two-year set being $ 12.50, and for the ten-year set $ 36.75. Members of the association were given a discount of approximately 20 per cent from the list price.
The association also engaged in the following activities which were of minor importance:
(1) The sale of an inventory system to provide the industry and particularly the small service stations with a simple method of maintaining some control over their inventories. The system consists of inventory cards and cabinets.
(2) The sale of signs and electros available to members so that they may identify themselves as such.
(3) The sale of bins, boxes, and jars specially designed to meet requirements for stocking and displaying parts. This activity was discontinued when private concerns began to manufacture and sell such articles. There was but little activity in the distribution of these articles by the association during the period*225 in question.
(4) Some of the manufacturing members produce educational films for the purpose of instructing, training, and educating automotive mechanics. This material was turned over to the association in order to broaden its availability. The association sold a small number of film projectors during 1940 and 1941 to those members desiring them to exhibit the aforementioned films, but this activity has been discontinued.
The petitioner has conducted a traveling school, with sessions in different parts of the country, at which instruction has been given in improved methods of servicing the parts manufactured and distributed by members of the association. This activity was suspended during the war, but its revival is now under consideration.
The petitioner issues educational bulletins and news letters. Thirty-five bulletins and eleven news letters were published during the years in question. They dealt with such matters as the wage laws, OPA regulations, War Manpower regulations, and news of events and persons of interest to the industry.
*898 Special committees of the association investigated trade practices, problems, and trends and made recommendations to the association, *226 based on their observations. For example, one committee investigated the possibilities of the trends pertaining to the civil aviation parts and service business, which is rather related to the type of business of the association's members. Another committee investigated the possibilities of standardizing a certain form used in the business to avoid confusion presently existing.
The association never advertised any of the services furnished by it. Their availability was made known by means of letters and circulars distributed to members and previous purchasers. No commissions have ever been paid to anyone in connection with the distribution of the services.
The services furnished by the petitioner, with the exception of signs and electros, were available to anyone. However, the actual use of those services was almost entirely by members.
No publications comparable to the catalogs or tune-up charts have been put out by any other organization. The only other source of the information found therein is the catalogs and service manuals of the individual manufacturers, which pertain only to the products manufactured by them. No inventory cards particularly adapted to the automotive*227 service are available from any source other than the petitioner. Similarly, no bins, jars, and boxes particularly adapted to the storage of the automotive parts manufactured and distributed by members of the petitioner were available from any other source during the period they were distributed by the petitioner.
Use has been made by vocational schools of the films and tune-up charts. The catalog has been used by branches of the armed services interested in motorized equipment.
The association maintains one small office and a small storeroom. Its staff of employees during the taxable years consisted of an executive secretary, who acts as general manager, two women who act as stenographers and clerks, and one part time bookkeeper. The petitioner employs no salesmen or any other person working outside its office.
Compensation paid to employees during the period in question is shown in the following table:
| Year | Executive | All other | Total |
| secretary | compensation | ||
| 1940 | $ 5,902.09 | $ 6,287.91 | $ 12,190.00 |
| 1941 | 4,456.25 | 5,269.32 | 9,725.57 |
| 1942 | 5,206.25 | 5,576.38 | 10,782.63 |
*899 All employees were compensated on a salary basis. No salary or other compensation*228 was paid to any officer, director, or member of the petitioner.
The association has never made any distribution to its members by way of dividends. Membership is nonassignable and upon termination of membership no refund of dues or other form of payment is made to the member withdrawing. Dissolution of the association has not been contemplated. The surplus of the association at the end of the years indicated was as follows:
| 1926 | $ 7,183.92 |
| 1932 | 18,778.94 |
| 1939 | 19,902.96 |
| 1942 | 33,591.97 |
No special charge was made by the association to its members in connection with the general activities above discussed. Such activities were financed with the funds of the association. The objective of the petitioner in establishing the cost of services for which a specific charge was made, such as catalogs, tune-up systems, inventory cards, and bins, jars, and boxes, was not to make either a profit or loss, but to break even on the operation. The petitioner has attempted to determine separately the net income or loss from its general activities, and the net income or loss from the sales and services furnished by it since 1939 in order to know whether it has sustained a profit or loss*229 from each phase of its activities. Receipts from membership dues and entrance fees were credited directly to general income, and receipts from sales were credited directly to income from sales. Those items of expense which could be charged directly against general income or income from sales were so charged; the remainder was apportioned between the two phases of the association's activities. Thus, convention expenses were charged directly against general income, while out-of-pocket expenses on sales, freight and express expenses, and upkeep expenses on tune-up systems were charged directly against income from sales. The remainder of the expenses of the association were charged at the end of each year 25 per cent against general income and 75 per cent against sales, because those in charge believed that such an allocation was about in proportion to the time spent in the two activities. The expenses which were so apportioned included salaries, stationery, postage, rent, taxes, and similar items.
The following schedule shows the income from, expenses of, and losses and profits from, the general activities and from sales for the taxable years in accordance with the above described*230 accounting system of the petitioner: *900
| General association income and | |||
| costs | |||
| Year | |||
| Membership | Miscellaneous | General | |
| dues | income | association | |
| costs | |||
| 1940 | $ 12,575.00 | $ 229.81 | $ 7,702.92 |
| 1941 | 12,625.00 | 595.31 | 5,521.57 |
| 1942 | 13,500.00 | 760.60 | 5,605.27 |
| Income and cost of sales | |||||
| Year | |||||
| Receipts | Expenses | Net profit | Net | ||
| for all | or (loss) | income all | |||
| sales | Out-of-pocket | Indirect | from sales | activities | |
| 1940 | $ 39,725.77 | $ 23,127.68 | $ 16,135.84 | $ 462.25 | $ 5,564.14 |
| 1941 | 15,954.96 | 6,241.60 | 13,579.70 | (3,866.34) | 3,832.40 |
| 1942 | 30,802.76 | 20,446.00 | 14,853.95 | (4,497.19) | 4,158.14 |
The books of the petitioner were kept upon an accrual basis.
The petitioner returned to the Commissioner a questionnaire on Treasury Department Form 1024 and mailed with it an information return on Form 990 on July 8, 1942, claiming exemption from Federal income taxation as a business league under section 101 (7) of the code. The Commissioner wrote a letter to the petitioner on September 18, 1942, rejecting its claim. He stated therein, inter alia:
* * * The evidence further shows that a very substantial part of your*231 income is derived from sales activities and the furnishing of services in connection therewith. No part of your net income inures to the benefit of any private member or individual.
* * * *
Inasmuch as the evidence presented shows that you perform particular services for individual members and are engaged in activities of a kind ordinarily carried on for profit, it is held that you fail to qualify as an exempt corporation under the provisions of section 101 (7) of the Internal Revenue Code.
The petitioner wrote a letter to the Commissioner on November 4, 1942, asking that the Commissioner reconsider the matter. The Commissioner reaffirmed his prior ruling on April 12, 1943. The petitioner filed income tax returns for the years 1940, 1941, and 1942 on May 18, 1943. The notice of deficiency, dated May 16, 1945, states that the petitioner is "not an exempt corporation under section 101" and gives no further explanation of that holding.
The Commissioner also explained:
Inasmuch as your returns were not filed within the time prescribed by law, 25 per centum of the tax has been added thereto for the taxable years 1940 and 1941, and 15 per centum of the tax for the year 1942, in accordance*232 with the provisions of section 291 (a) of the Internal Revenue Code.
Since timely income tax returns were not filed it is mandatory that these penalties be imposed.
The petitioner was not an exempt business league during the years 1940, 1941, or 1942.
The failure of the petitioner to file timely returns for the years here in question was not due to reasonable cause.
The stipulation of facts is incorporated herein by this reference.
*901 OPINION.
Section 101 (7) of the Internal Revenue Code provides that a business league which is not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual shall be exempt from taxation. The regulations applicable to the taxable years here involved contain the following with reference to business leagues:
A business league is an association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit. It is an organization of the same general class as a chamber of commerce or board of trade. Thus its activities should be directed to the improvement *233 of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons. An organization whose purpose is to engage in a regular business of a kind ordinarily carried on for profit even though the business is conducted on a cooperative basis or produces only sufficient income to be self-sustaining, is not a business league. [See Regulations 103, sec. 19.101(7)-1 and Regulations 111, sec. 29.101(7)-1.]
The petitioner does not contend that the above provision of the regulations is an improper one. It has been applied repeatedly in cases like this and it now would seem to have the force and effect of law.
One argument only of several made by the respondent need be discussed. He contends, inter alia, that the publication of the catalogs prevents the petitioner from qualifying as an exempt business league. The catalogs listed only products of the manufacturing members of the petitioner. A catalog is a form of advertising generally used by such manufacturers to promote sales. An association formed for the sole purpose of publishing and distributing catalogs for members would be performing a particular service*234 for them and clearly would not be within the definition of a business league given in the regulations. The petitioner allocated a large part of its overhead expense to the services it rendered in connection with the catalogs. A large part of its annual receipts was from sales of the catalogs. Those receipts were, apparently, insufficient to pay the expenses of publication and losses occurred which had to be made up from dues. These and other facts show that the preparation and publication of the catalogs was one of the important activities of the petitioner from both a time and a money standpoint. It was not merely incidental to some other dominant activity.
The publication of the catalogs was not directed to the improvement of business conditions generally, but was a particular service, the performance of which benefited the member manufacturers as opposed to their nonmember competitors. It advertised specifically the goods which the manufacturing members were engaged in selling. The fact *902 that the products of all manufacturing members were listed in the one catalog even though some of those articles were sold in competition with those of other manufacturing members*235 does not save the petitioner's case. It was not the kind of an association which Congress intended to exempt and it does not qualify for exemption under the regulation. Whether the decision would be different had the catalogs listed all articles being manufactured in the whole industry need not be decided at this time.
The petitioner states in its brief that it "is not primarily concerned with the question of penalties," but it argues that the delay in filing its returns was due to reasonable cause, since, whatever the ultimate decision in the case may be, there was at least justification for the belief on the part of the petitioner that it was exempt from tax as a business league and for it to wait until the Commissioner advised it to file returns. The record does not disclose any reasonable cause for the petitioner's delay in filing its returns. It could easily have avoided all question of penalties by simply filing the returns when they were due and finding out later whether or not it was exempt from tax.
Decision will be entered for the respondent.