*1751 1. Bequests to charitable and other corporations of the classes described in section 303(a)(3), Revenue Act of 1924, are deductible, in determining the value of the net estate of a decedent, only when both the organization and operations of the corporation concur in fulfilling the statutory purposes, and then only when the purposes are confined "exclusively" to those expressly described in the statute.
2. A corporation, the organization of which is not only to carry out a charitable or educational object, but also to bring about the adoption of a legislative program, is outside the intendment of the statute.
3. A corporation organized "for teaching, expounding and propagating the ideas of Henry George," and "to assist in all proper ways to establish the same in practical operation of law," is held not to be a corporation within the description of section 303(a)(3), notwithstanding the determination of its directors, immediately after organization, to refrain from participation in political campaigns and from lobbying, and notwithstanding that at all times thereafter its operations were confined to education in colleges and libraries.
4. A corporation whose purposes*1752 include the advocacy of Henry George's doctrines and the promotion of social intercourse "among single tax people" is held not to be a corporation whose organization is exclusively charitable, scientific, literary, or educational within section 303(a)(3).
5. Where a corporation is admittedly within the description of the statute, the deduction is not defeated by a remote possibility that under imaginary circumstances there may be earnings, and, if so, that they may inure to private benefit; to defeat the deduction there must be actual net earnings which do inure to such benefit.
*1023 This proceeding involves a deficiency of $4,948.06 in estate taxes. Petitioner claims the deduction of three bequests made by decedent to organizations alleged to fall within the statutory classification of exclusively educational corporations.
FINDINGS OF FACT.
Petitioner is the executor of the will of Robert Schalkenbach, deceased, who died a resident of the city of New York, on November 13, 1924. Decedent's will was duly probated, December 16, 1924. By the forty-first*1753 section, he bequeathed all the residue of his estate to specified trustees for the formation and maintenance of a corporation for teaching, expounding and propagating the ideas of Henry George. By the thirty-sixth section, he bequeathed $5,000 to the Manhattan Single Tax Club. By the thirty-second section, he bequeathed $5,000 to the School for Printers' Apprentices of the city of New York. In computing petitioner's estate-tax liability the Commissioner disallowed the deductions of these three bequests.
1. The Robert Schalkenbach Foundation, Inc., was formed in accordance with the forty-first section of decedent's will, which provides:
FORTY-FIRST: Being firmly convinced that the principles expounded by Henry George in his immortal book entitled "Progress and Proverty" will, if enacted into law, give equal opportunity to all and tend to the betterment of the individual and of society by the abolition of involuntary proverty and its attending evils, I give, devise and bequeath all the rest, residue and remainder of my estate, including lapsed legacies, unto John H. Allen * * * to expend the same and any accretions of income thereof, in such amounts, at such times and in such*1754 manner as to the corporation hereinafter directed to be formed may seem best, for teaching, expounding and propagating the ideas of Henry George as set forth in his said book and in his other books, especially what are popularly known as the single tax on land values and international free trade; and I direct that as soon after my decease as may be practicable the said persons, or as many of them as may be willing to serve, shall form or cause to be formed a corporation under the laws of the State of New York, or, if necessary, by act of the legislature of the State of New York, for the purpose of more effectively carrying out the above stated objects of this trust and shall transfer to such corporation all the moneys they may have received from my estate for said purposes. * * *
The purposes of the Foundation are set forth in the certificate of incorporation as follows:
To keep before the public the ideas of Henry George as set forth in his book "Progress and Poverty" and his other writings, especially what are popularly known as the Single Tax on Land Values and International Free Trade; to secure descussion and consideration of these doctrines and their probable effect upon*1755 social welfare; to assist in all proper ways to establish the same in practical operation of law; to aid in the education of the public in the science of economics and sound principles of taxation; and for these purposes to establish and maintain such facilities as may be necessary for publishing, lecturing and educational activities and/or to give aid to individuals *1024 or other organizations with similar objects and to do all other acts that they may tend to further the objects named.
In pursuance of the above objects to receive and administer funds from the Estate of Robert Schalkenbach, deceased, and any other property that may be donated, devised or bequeathed for any or all of such objects.
The affairs of this corporation shall not be conducted for the pecuniary profit of its members.
The works of Henry George relating to social and economic philosophy are recognized among educators as being important in education. His principal doctrine was known as the single tax on land and contemplates a system of taxation whereby the government or taxing authority will, by means of taxation, appropriate from the owner of land whatever increment or increase in value may*1756 attach to the land other than that contributed by the owner's labor or capital. This is believed by the adherents of the doctrine to require only a change in the machinery or method of taxation, not to contemplate the abolition of capital, labor or interest, and to result in a fairer distribution of wealth, and ultimately, but remotely, an improvement in the social order. It would not, they believe, require a change or destruction of the present methods of government or system of society in the United States.
In accordance with the general plan adopted at the Foundation's first meeting in 1925, it has endeavored to stimulate public interest in the subject of land taxation and the theories of Henry George, as set forth principally in his book entitled "Progress and Poverty." To this end it has engaged in printing, selling and donating this book and other such books and pamphlets expounding George's teachings on economics and taxation, and has prepared condensed expositions of his ideas and appreciations of the man and his works for distribution.
A representative of the Foundation during the winter months travels extensively in the Atlantic, Southern and Mid-Western States, interviewing*1757 professors of economics at various universities and colleges for the purpose of inducing or persuading them to adopt the works of Henry George as text books or collateral reading for their classes. In many schools these books have been already in use, and in others their adoption has been thus procured. The Foundation's representative also urges the use of other books on economics which advocate the taking of land values for the public benefit. He delivers no formal lectures, but has often been asked to speak to classes, and has interested himself in essay contests conducted by the students on the theories of George, inviting questions and debates on both sides. His object has been primarily to dispose of the books by sale, and the great bulk of those distributed by the Foundation have been sold; but in the case of poor institutions twenty or thirty volumes have been donated. Besides gifts to schools, about 1,000 *1025 copies of "Progress and Poverty" have been placed by the Foundation in libraries. No net profit has ever been realized from the disposition of the Foundation's books, the cost being greater than the amount received.
With the exception of incidental office*1758 expenses, substantially all receipts of the Foundation have been expended in the printing and dissemination of these publications. Its sole revenue is derived from the investment of the Robert Schalkenbach legacy, receipts from the sale of books, and a few small contributions. No member of the Foundation has ever received any part of its earnings or other compensation.
The following by-law of the Foundation has been strictly observed:
34. No resolution shall be adopted by the members or directors endorsing any candidate for any elective or appointive public office, nor shall any funds of the corporation be expended in the promotion of any such candidacy or of initiative petitions. The appropriation of any money for the advocacy of or opposition to any proposition submitted to voters shall require the assent of a majority of the directors. No officer shall commit the corporation to the support of any political party or candidacy.
The members of the Foundation further agreed at their first meeting not to do any lobbying or to spend any money for the passage of legislation, but to confine their activities to educational institutions or organizations. They have refrained*1759 from doing or saying anything before a political body.
2. The Manhattan Single Tax Club was founded by Henry George in 1889. Its certificate of incorporation sets forth as its two objects:
First, to advocate the abolition of all taxes upon industry and the products of industry, and the taking by taxation upon land values, exclusive of improvements, of the annual rental value of those various forms of natural opportunities embraced under the general term, LANDS: and
Secondly, to promote social intercourse among single tax people.
The Club is supported by membership dues of $5 from each member and voluntary contributions. In 1924 it occupied a room 12 feet by 30 feet and back private office, part of which was sublet. Its activities consist of occasional meetings, lectures on taxation given principally in colleges of the Eastern and Southern States, the distribution of pamphlets, and the maintenance of a reference library. On special occasions it gives dinners and banquets, the cost of which is defrayed by the sale of tickets. The Club's treasury makes expenditures for the maintenance of its quarters, the salary of its president, the services of a stenographer, and the*1760 cost of printing and distributing lectures. The president devotes a large part of his time to lecturing on taxation from Henry George's standpoint. The Club fosters debates and invites discussions. Every year ends with a deficit.
*1026 3. The School for Printers' Apprentices was first started about twenty years ago as a class to teach boys printing, in the basement of a neighborhood settlement house known as Hudson Guild, at 446 West 27th Street, New York City. It began with $3,000, but after a year's operation it outgrew its quarters, and the Employing Printers' Association and Typographical Union Number Six each contributed $1,000 to help defray its increasing expenses, and continued to make annual contributions thereafter.
The Hudson Guild is a recognized charitable corporation; the Printers' Association is an incorporated organization of employing printers, without stockholders; and Typographical Union Number Six is a labor organization of the printing trade. About 1913 the Association and the Union joined the Guild in the work of the school, and its management was vested in a committee consisting of twelve members, four from each of the three organizations. *1761 The four-year course it offers includes instruction in typography, actual typesetting, English, economics, and stone and metal work.
The Typographical Union and Printers' Association each undertook to and do annually contribute $10,000 to the school with the understanding that:
Whenever at the end of any fiscal year the annual statement shall show a cash balance in the treasury of the school exceeding $5,000, such excess shall be equally divided between the Employing Printers' Section and Typographical Union No. Six. Provided that such excess shall not be so divided, but will remain in the treasury of the School, when it is derived from contributions from other sources than the Employing Printers' Section, Typographical Union No. Six and the tuition fees of the pupils. * * *
The School also received $2,700 annually from the Municipal Board of Education, Very small tuition fees, and occasional legacies. Its equipment, consisting of machines, cases of type, a few tables, and a few books, was all donated, and title thereto was vested jointly in the three supporting organizations by agreement. At the time of such agreement the equipment was appraised at $3,000; further acquisitions*1762 were to be divided upon dissolution between the Printers' Association and the Typographical Union. On November 13, 1924, the equipment was depreciated, out of date, and had little market value.
Paragraph 6 of the School's rules is as follows:
All moneys received from tuition fees from apprentices shall be placed in the general school fund to be devoted to school purposes and not regarded as part of the contribution of either the Printers' League Section of the New York Employing Printers' Association or Typographical Union No. 6.
Paragraph 7 of the School's rules provides that the Printers' Association shall pay the school $25 per year per apprentice, and if the number of apprentices shall be insufficient to require fees aggregating $10,000, the Association shall make up the shortage, and any *1027 excess over the $10,000 shall belong to the general school fund and not be regarded as a contribution. Any employer or printer desiring to have apprentices educated in printing and elementary English sends them to the School.
Paragraph 10 of said rules reads as follows:
In the event of any distribution of unused funds or the closing of the School, the above plan shall*1763 be followed and be based on the total receipts from the beginning of the 1920 School year to the time of distribution.
The School has always been handicapped in its work by a lack of funds. It usually shows a deficit at the end of the year, and in those years in which a balance has been carried forward, it included the contribution of the Board of Education. There has never been any distribution of assets or net earnings among contributors.
OPINION.
STERNHAGEN: In the determination of the decedent's net estate subject to the estate tax imposed by Title III, Revenue Act of 1924, the respondent has disallowed three deductions aggregating $212,988.43 claimed by the estate under section 303(a)(3), which is as follows:
SEC. 303. For the purpose of the tax the value of the net estate shall be determined -
(a) In the case of a resident, by deducting from the value of the gross estate -
* * *
(3) The amount of all bequests, legacies, devises, or transfers, except bona fide sales for a fair consideration in money or money's worth, in contemplation of or intended to take effect in possession or enjoyment at or after the decedent's death, to or for the use of the United States, *1764 any State, Territory, any political subdivision thereof, or the District of Columbia, for exclusively public purposes, or to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to a trustee or trustees, or a fraternal society, order, or association operating under the lodge system, but only if such contributions or gifts are to be used by such trustee or trustees, or by such fraternal society, order, or association, exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals. If the tax imposed by section 301, or any estate, succession, legacy, or inheritance taxes, are, either by the terms of the will, by the law of the jurisdiction under which the estate is administered, or by the law of the jurisdiction imposing the particular tax, payable in whole or in part out of the bequests, legacies, or devises otherwise deductible*1765 under this paragraph, then the amount deductible under this paragraph shall be the amount of such bequests, legacies, or devises reduced by the amount of such taxes; * * *
1. The residuum which was bequeathed by the forty-first provision of the will is taken by the parties without dispute to be *1028 $202,988.43. The corporation was formed pursuant to the will and there is no suggestion that its organization and operations are other than in harmony with the intendment of the will. It is essential, therefore, that both the will and the charter be examined, together with the other evidence, to determine whether the organization and operations of the corporation are exclusively for the purposes enumerated in the statute. The bequest is only deductible when both the organization and operations concur in fulfilling the statutory purposes, William T. Bruckner et al., Trustees,20 B.T.A. 419">20 B.T.A. 419, and then only when the purposes are confined "exclusively" to those expressly described in the statute. Eagan v. Commissioner, 43 Fed.(2d) 881; reversing *1766 17 B.T.A. 694">17 B.T.A. 694.
The will directs that a corporation be formed to carry out the "above stated objects of this trust." The corporation formed is to expend the legacy and its accretions "for teaching, expounding and propagating the ideas of Henry George." These functions of the corporation are expressly set forth as a method of realizing the fulfillment of the testator's underlying belief that the principles of George's "Progress and Proverty" should be enacted into law. This is the prevailing purpose of the bequest and the entire forty-first section must be read as an attempt to effectuate it. Whatever might be said of the phrase "teaching, expounding and propagating the ideas of Henry George," if it stood alone to denote the Foundation's purpose, would be of no significance because the phrase is but a part of the section and the rest is no less important and clear. Read in its entirety, the will shows an intent and purpose not only to educate, but also, and perhaps more so, to bring about legislation. To fulfill this purpose, the corporation was organized, not only to disseminate the ideas of Henry George, have them discussed and considered, and otherwise to educate*1767 the people; but also "to assist in all proper ways to establish the same in practical operation of law."
Although the terms "charitable" and "educational" are hardly definitive and their limits are yet to be determined, this much has been decided, that a legislative program is outside the intendment of the statute, and, having it, a corporation can not claim an exclusively educational or charitable purpose. Slee v. Commissioner, 42 Fed.(2d) 184; affirming 15 B.T.A. 710">15 B.T.A. 710; cf. Bertha Poole Weyl,18 B.T.A. 1092">18 B.T.A. 1092 (now on review).
The corporation, it is true, upon its organization, immediately determined not to participate in political campaigns and to refrain from lobbying, and has adhered to that determination. Its operations up to the present time have, according to the evidence, been confined to education in colleges and libraries. So if the purpose and extent of its operations during any period of time were the criterion, it might be within the statute. But this is not enough. *1029 Both the organization and operations must be confined; and while, in case of ambiguous or obscure language to state purpose, the operations*1768 may help by providing a practical construction, they can not override language otherwise clear. Eagan v. Commissioner, supra.
The reason for this is quite apparent. The deduction is a single event. It applies only in the computation of the estate tax. Once allowed in a final determination, the inquiry is at an end. But the corporation's activities are only restricted by its charter and may be at any time broadened at the will of the directors within its charter purposes. Unless the statutory deduction is based on the corporation's purpose as well as its operations, a new board could later decide to engage in noneducational or noncharitable operations, and thus to use the deducted amount to further a purpose outside the favored classes and frustrate the legislative intent. The existence of the power defeats the deduction, Schoenheit v. Commissioner, 44 Fed.(2d) 476.
Our opinion is, therefore, that the Commissioner correctly disallowed the deduction. But it is necessary to consider some of the arguments advanced by respondent to support the disallowance.
It is argued that because some of the books were sold, even though to colleges*1769 and universities, this gives a commercial aspect to the corporation's activities which keeps it outside the statutory category. The sales were not for profit, but were entirely within the scope of decedent's purpose and the corporation's plan. As they were but the means adopted for the fulfillment of the purpose and function of the bequest, the receipt of a price does not destroy deductibility, if the bequest is otherwise deductible. Trinidad v. Sagrada Orden de Predicadores,263 U.S. 578">263 U.S. 578; Unity School of Christianity,4 B.T.A. 61">4 B.T.A. 61.
Respondent urges that the subject of Henry George's ideas is "bitterly partisan," that the single tax "is a step toward the goal of socialism" and therefore "in some respects is working against the present economic order," and that "the theory sponsored by the Foundation, of its very nature, is controversial and is thought by many to be highly inimical to the present order." It is said, after citing Bertha Poole Weyl,18 B.T.A. 1092">18 B.T.A. 1092 (now pending on review), "that Congress did not intend to include in the category of educational institutions those organizations which disseminate information not only*1770 controversial but opposed to the present economic scheme," and it is submitted by respondent "that if the word [educational] is to be used in any restricted sense, it should be interpreted so as not to foster and encourage institutions of learning which advocate economic changes which are directly at odds with existing economic theories upon which society is founded in this county and which pervade our system of Government."
*1030 The inferences and conclusions thus presented rest upon assumptions as to the significance and effect of Henry George's ideas which are not supported by the evidence. Vague as it may be to say that they involve "a step toward socialism" or a change in the present social or economic order, the testimony is categorically that they do not; that their adoption would required change only in the machinery of taxation to adapt it to a new incidence of tax; that this may be no more drastic than the adoption of an income or other plan of tax; and that its effect outside of the revenues might be no more immediate than any other change in tax. There is evidence that the ideas of Henry George have been embodied in the land taxes of Pittsburgh, Pa., for ten*1771 years. The evidence also is that no part of the Foundation's operations is devoted to political agitation.
Professor Dewey, whose eminence as an educator is well recognized, testified that "no man, no graduate of a higher educational institution, has a right to regard himself as an educated man in social thought unless he has some first-hand acquaintance with the theoretical contribution of this great American thinker." Thus, like the classics, the ideas of Henry George may have an educational significance which may be recognized wholly apart from their social or political validity. Perhaps no one would doubt the deductibility of a bequest to a similar foundation to teach, expound and propagate the ideas of Plato or to promote the distribution of copies of "The Republic," irrespective of the extent to which their adoption might modify our social structure. On the other hand, it would clearly be necessary to stop short of allowing the deduction of bequests to propagate the one side or the other of the current political question of the repeal of the Eighteenth Amendment to the Constitution. Between the extremes the deduction must turn on the evidence in each case. The fact that*1772 there may be differences of opinion about the wisdom or practicability of Henry George's ideas - that the subject is controversial - does not serve to render the teaching and spreading of knowledge about it other than education.
But it is the respondent's ultimate determination of deficiency which is before us and not his justification, Hurwitz v. Commissioner, 45 Fed.(2d) 780, and the determination as to this deduction is sustained because the power to engage in legislative and other noneducational operations deprives the corporation of the exclusively educational or charitable character required by the statute.
2. The petitioner contends that the bequest of $5,000 to the Manhattan Single Tax Club is a proper deduction under section 303(a)(3), and groups the argument at to this with that made to support the legacy to the Foundation. The facts, however, are different, although they lead to the same conclusion. The question whether a corporation is organized and operated exclusively for purposes described *1031 in the statute requires, as we have said, consideration of the stated purposes of its organization as they appear in the charter and its*1773 actual operations, all of which must be exclusively confined to the purposes recognized. William T. Bruckner et al., Trustees, supra.As stated in the certificate, the purposes include the advocacy of Henry George's doctrines and the promotion of social intercourse "among single tax people." Clearly this expressed purpose of organization is not exclusively charitable, scientific, literary or educational, irrespective of how narrowly the corporation may at any given time restrict its operations; and it is unnecessary to consider whether the evidence shows that the corporation has in fact been operated within the restrictions of the statute. The deduction of this bequest was, in our opinion, correctly denied by respondent.
3. Respondent admits that the School for Printers' Apprentices is a corporation organized and operated exclusively for educational purposes, but contends that some of its net earnings may inure to the benefit of a private stockholder or individual and therefore that the bequest to the School of $5,000 may not be deducted. This contention is attempted to be supported by the provision of the Constitution and By-laws of Typographical Union Number*1774 Six, which is set forth as part of Article II, paragraph 3, of the rules of the School. But this provision says nothing about a distribution of net earnings. It seems to provide for a reversion of excessive contributions made by the Employing Printers' Section and Typographical Union Number Six. Nowhere is there a provision for a distribution of net earnings, but, on the contrary, paragraph 6 of the rules indicates that a distinction is recognized between contributions and tuition fees, and requires that the latter shall all be devoted to school purposes. In fact there have been no net earnings, and in ordinary course could be none; and if there were, it is difficult to see how they inure to the benefit of a stockholder. The deduction is not defeated by a remote possibility that under imaginary circumstances there may be earnings and, if so, that they may inure to private benefit; but by actual net earnings which do inure to such benefit.
The bequest to the School should have been allowed to be deducted.
Reviewed by the Board.
Judgment will be entered under Rule 50.
ARUNDELL concurs in the result only.
SMITH dissents on the first point.