*2693 A contribution, made by a corporation to an association, with which to erect and equip a hospital for employees of the corporation held under the facts of record to have had a direct relation, and produced a direct benefit, to the corporation and the sum so contributed allowed as a deduction under section 234(a)(1) of the Revenue Act of 1918.
*1265 This proceeding results from the determination of the respondent of a deficiency in income and profits taxes for the calendar year 1920 in the amount of $46,000. Petitioner assigns as error the failure of the respondent to find that a donation of $100,000 made by petitioner to the Laura Eldridge Hospital Association for the benefit of its employees and for their dependents was for the purposes connected with the operation of its business and allowable as a deduction from income. Respective counsel have filed a stipulation of facts and from the same we make the following findings of fact.
FINDINGS OF FACT.
(1) Petitioner is a common law trust association existing under and by virtue of a certain*2694 declaration of trust dated January 1, 1919, wherein I. H. Kempner and D. W. Kempner of Galveston County, Texas, and W. T. Eldridge, Jr., and G. D. Ulrich of Fort Bend County, Texas, are trustees, and such trust association has its chief or principal place of business at Sugar Land, Fort Bend County, Tex.
(2) The organizers of the petitioner were officers and stockholders of the Imperial Sugar Co., the Sealey Mattress Co., and the Sugarland Manufacturing Co., which companies owned and operated a sugar refinery, mattress factory, merchandising company, other manufacturing establishments, bank, printing establishment, electric light and power plant, farm, and other lesser activities at the company town of Sugar Land, Tex. On January 1, 1919, the Sugarland Industries was organized and all the properties of the above named companies were transferred to it. During 1919 and 1920 petitioner owned and operated such properties, which included lands and buildings in the company town of Sugar Land and approximately 20,000 acres of adjoining land. Practically the only property in the company town or in its vicinity which was not owned by the petitioner consisted *1266 of rights of*2695 way for highways, quasi-public institutions and a railway serving the town which was owned by the Sugarland Railway Co. The industries gave employment to several hundred persons, all of whom are housed in the company town and adjacent thereto. Sugar Land is about 23 miles from Houston, Tex., which was the nearest place having hospital facilities for the care of the sick and injured employees of the petitioner and their families.
(3) The Laura Eldridge Hospital Association was created by a Declaration of Trust dated December 1, 1920.
(4) At a meeting of the Board of Trustees of the Laura Eldridge Hospital Association, held December 20, 1920, with the full board present, officers were elected and the trustees accepted the donation of $100,000 and 10 acres of land from the Sugarland Industries.
(5) On December 14, 1920, the petitioner executed a deed conveying 10 acres of land to the Laura Eldridge Hospital Association. On December 31, 1920, the petitioner entered on its books the following entry:
| (Journal Entry 690) | |||
| 12-31-1920 | Profit and Loss Account | $100,000.00 | |
| to | |||
| Hospital Fund Account | $100,000.00 | ||
| Donation made to Laura T. Eldridge Hospital Association for | |||
| the benefit of the Sugarland Industries employees and their | |||
| dependents. |
*2696 This represents its donation to the Hospital Association referred to in paragraph (4). Petitioner kept its books on the accrual basis. On February 28, 1921, the hospital fund was debited $115,000 and "Accounts Payable, C. B. Gillespie, Treasurer" credited with the same amount; also, checks in the amounts of $ 75,000 and $15,000, dated March 1, 1921, and in the amount of $ 25,000, dated February 27, 1922, were paid to the treasurer of the Hospital Association. The checks were deposited to the credit of the Hospital Fund in the Imperial Bank & Trust Co., which is a branch of the Sugarland Industries.
The entry of February 28, 1921, charging the Hospital Fund Account with $115,000 and crediting "Accounts Payable, C. B. Gillespie, Treasurer" with the same amount was made to correct an error in posting and to set up the amount in accounts payable, where it was intended originally that it should be posted.
(6) From 1920 until March, 1922, temporary hospital facilities were provided in buildings owned by the petitioner. In March, 1922, the buildings erected by the Hospital Association were occupied. In 1921 hospital equipment costing $14,169.79 was acquired and installed in temporary*2697 quarters. In 1922 a frame building was erected to *1267 serve as hospital quarters, and by the close of that year the total investment in the hospital building and equipment aggregated $29,928.58.
(7) There was originally contributed to the fund $100,000 in cash by the petitioner and $50,000 by the Sugarland Railway Co. Additional contributions were made of $7,000 by the petitioner and $2,000 by the railway company. There were accretions to the fund through interest earned in the amount of $38,540.35, and income derived wholly from fees charged to hospital patients in the amount of $21,248.40. The total expenses of the hospital up to December 31, 1926, were $50,454.02, and the net worth at that date was $183,334.83. The net operating deficit of hospital over the six-year period was $29,500.
(8) Because many of the records for 1920 and 1921 were destroyed by fire, no exact data is on record as to the total expense incurred by the petitioner for hospitalization of its employees in 1919 and 1920, although it is known that 32 persons were sent to Houston hospitals in 1918 and 47 in 1919, out of a total of 74 accidents in 1918 and 171 in 1919 requiring medical or surgical*2698 attention. The number of employees treated in the hospital in 1923 was 96; in 1924 the number was 152; in 1925 the number was 172; and in 1926 the number was 201, making the total number of patients treated during these four years 621.
Prior to the creation of the Hospital Asociation no hospital facilities for the care of employees were available at Sugar Land, nor at any place nearer than Houston, which is 23 miles distant.
The petitioner had difficulty in maintaining an efficient staff and an adequate supply of labor at reasonable salary and wage scales. The purpose in creating the Hospital Association and making a donation thereto was to insure the petitioner an adequate, stable supply of loyal labor.
The labor turnover for the years 1918, 1919, and 1922 was as follows:
| Year | Average number of employees | New employees |
| 1918 | 397 | 1,164 |
| 1919 | 530 | 1,456 |
| 1922 | 595 | 726 |
(9) In 1920 there was allowed by the respondent a deduction of $49,608.41, which was contribution made by the petitioner to the Sugarland Independent School District. The petitioner secured permission from the State Board of Education to establish an independent *1268 school*2699 district, primarily for the use of the children of its employees. Of the total school attendance of this district, 90 per cent were children of employees of petitioner; 6 per cent children of the railway employees, and 4 per cent children of outsiders.
(10) Petitioner is owned in equal proportion by W. T. Eldridge, Sr., and I. H. Kempner. Eldridge lives at the company town, Sugar Land, and in 1920 and since was and is actively engaged in the management and conduct of the affairs of the petitioner. Kempner lives in Galveston, and in 1920 and since was and is in complete charge of all the financial affairs of the petitioner and is actively engaged in the conduct and management of its affairs. Galveston is the port of entry for the Cuban raw sugar on which the refinery operates about nine-tenths of the time. Kempner handles the customs and other matters incident to the entry of the sugar.
Both Eldridge and Kempner are men of large independent means and did not receive any salary or other compensation from the petitioner for their services in 1920.
OPINION.
MILLIKEN: Petitioner assigns as error the refusal of the respondent to allow as a deduction, pursuant to section*2700 234(a)(1) of the Revenue Act of 1918, the sum of $100,000 which was contributed in the year 1920 to the Laura Eldridge Hospital Association. Congress, unlike in the case of individuals (section 214), has not allowed as deductions contributions made by corporations, and for the contribution here in question to be allowed as a deduction we must find that the same bore a direct relation, with consequent direct benefits, to the business of petitioner. Section 234 enumerates many deductible items such as interest, taxes, losses, depreciation and bad debts. The portion of the section here in question - "All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business" - is general in its application and resort must be had to the facts obtaining in each case to determine if a given expenditure is within the intendment of the statute.
The business of the petitioner was carried on with substantial profit during the year 1920 as well as for prior and subsequent years. In the year 1920 the net taxable income of the petitioner was $656,623.18. The business is carried on at Sugar Land, Tex., which is referred to in the stipulation as*2701 a "company town." In 1920 the town had a population of less than 2,000 persons. Petitioner owned and operated everything in the town with the exception of quasi-public institutions and the railroad serving petitioner. It gave employment to several hundred persons, all of whom were housed and lived in Sugar Land or adjacent thereto. In 1920 the school attendance of the *1269 independent school district at Sugar Land was made up of 90 per cent of the children of the employees of the petitioner. There were no hospital facilities at Sugar Land to serve the employees of the petitioner and the nearest facility available was at Houston, Tex., which is 23 miles distant. Many accidents occurred in carrying on the business and there must have necessarily been sickness in the families of the employees. The labor turnover was large and the stipulation states that the petitioner, in order to secure an adequate, suitable and loyal supply of labor, made the donation to the Laura Eldridge Hospital Association.
We do not think the petitioner in making the expenditure made it in the role of the philanthropist, but rather as a business proposition wherein the expenditure represented a*2702 consideration for a benefit flowing directly to it and as an incident of its business. As a result of the contribution the esprit de corps pervading the employees was reflected in their work. The labor turnover was less, as subsequent years testify, and we have no doubt that the benefit flowing from the contribution was not only reflected in the increased efficiency of the employees, but also in the product manufactured.
One of the trends of modern business is represented by the expenditure. If the interests of the employees are safeguarded, both the employer and the employee benefit. The expenditure, under the facts obtaining, does not savor of charity or philanthropy.
The facts in this proceeding bear close analogy to the facts obtaining in proceedings where we have allowed like or similar expenditures as deductions - see ; ; ; and nd the expenditure does not represent a mere indirect relation or benefit nor was it a part of a general plan for civic betterment whereby*2703 the place in which the corporation did business, as well as others not directly connected with petitioner, derived as much or more benefit as in the cases of , and .
Counsel for respondent, in brief filed, raises a question as to whether the expenditure was paid or incurred in the year 1920. We think the stipulation of facts is adequate to answer the contention. Petitioner kept its books of account in the year 1920 on an accrual basis. The donation was made in the year 1920, and deed conveying the real property was executed in the year 1920, the liability was recorded on the books of the petitioner in the year 1920 and the donation was accepted by the donee in the year 1920.
The respondent was in error in failing to allow the deduction claimed.
Judgment will be entered under Rule 50.