*4 Decision will be entered for the petitioner.
Petitioner is an association of employers. Its primary purpose was to advance and maintain the "open shop" principle in industry. Held, under the facts, petitioner is a business league and, as such, is exempt from paying income taxes by virtue of section 101 (7) of the Internal Revenue Code.
*1449 This proceeding involves deficiencies asserted against Associated Industries of Cleveland for income taxes, declared value excess profits taxes, and excess profits taxes, plus penalties thereon, for the years and in the amounts as follows:
| INCOME TAX | ||
| Year | Deficiency | Penalty |
| 1921 | $ 447.93 | $ 111.98 |
| 1922 | 684.99 | 171.25 |
| 1923 | 1,035.10 | 258.77 |
| 1924 | 1,402.50 | 350.62 |
| 1926 | 1,206.80 | 301.70 |
| 1927 | 1,605.63 | 401.41 |
| 1928 | 156.14 | 39.03 |
| 1929 | 486.69 | 121.67 |
| 1930 | 1,421.96 | 355.49 |
| 1931 | 83.42 | 20.85 |
| 1932 | $ 51.68 | $ 12.92 |
| 1934 | 367.54 | 91.89 |
| 1935 | 817.04 | 204.26 |
| 1936 | 2,697.88 | 674.47 |
| 1937 | 193.39 | 48.35 |
| 1938 | 851.35 | 212.84 |
| 1941 | 1,589.70 | None |
| Total | 15,099.74 | 3,377.50 |
| Declared value excess | |||||
| Excess profits tax | profits tax | ||||
| Year | Year | ||||
| Deficiency | Penalty | Deficiency | Penalty | ||
| 1921 | $ 2,319.51 | $ 579.88 | 1941 | $ 969.74 | None |
| 1934 | 133.65 | 33.41 | |||
| 1935 | 297.10 | 74.27 | |||
| 1936 | 1,448.27 | 362.07 | |||
| 1937 | 160.71 | 40.17 | |||
| 1938 | 794.02 | 198.50 | |||
| Total | 5,153.26 | 1,288.30 | Total | 969.74 | None |
*6 *1450 The petitioner did not file returns for taxable years ended December 31, 1921, to December 31, 1935, inclusive. Under date of September 28, 1939, the petitioner was informed by the collector of internal revenue for the eighteenth district of Ohio that it was not exempt from taxation and was instructed to file returns for the years 1936, 1937, and 1938. The petitioner, on June 27, 1940, filed income and excess profits tax returns for the taxable years ended December 31, 1936, 1937, and 1938. The income and declared value excess profits tax return for the taxable year ended December 31, 1941, was filed on March 16, 1942. All of these returns were filed with that collector under protest.
The principal question for determination is whether petitioner is a business league within the meaning of section 101 (7) of the Internal Revenue Code and corresponding sections of prior revenue acts and, therefore, entitled to exemption from these taxes. If petitioner is found not to be entitled to the exemption, there is no dispute as to the amounts of tax due, but it will be necessary to determine whether respondent erred in asserting delinquency penalties for failure to file returns*7 for the years here involved within the times prescribed by law.
The facts have been presented by written stipulation of the parties, oral testimony, and documentary exhibits. The facts stipulated are found to be as stipulated.
FINDINGS OF FACT.
Petitioner is, and at all times material to this proceeding was, an unincorporated association of persons, firms, and corporations, with its offices at Cleveland, Ohio. It was organized on or about May 17, 1920, under the name of "The American Plan Association of Cleveland," and it continued to operate under that name until June 25, 1930, when its name was changed to "The Associated Industries of Cleveland."
In 1919 various groups of men in Cleveland met to consider the critical labor problems and difficulties confronting industry in that city in the period immediately following the First World War. Industrial operations in Cleveland were being seriously disrupted by strikes. A committee of the Cleveland Chamber of Commerce was among the groups working on the problem. Many employer members of the chamber were not satisfied with the way in which that committee was handling the matter, and this was one of the reasons for the formation of*8 the petitioner organization in 1920. Its original name was the American Plan Association. The original founders and members of the association consisted of about 20 persons, firms, and corporations in the community, including some of the principal industrial concerns. The number of members rapidly increased to about *1451 200, and eventually reached 500 to 600. Petitioner's members employ a large part of the industrial workers of the community, including about 75 per cent of the workers employed in metal trades. Virtually every phase of Cleveland industry is represented in petitioner's membership, which included, among others, steel producers, metal fabricators, laundries, bakeries, dairies, meat packers, and service trades. Petitioner is primarily an employers' association. Its regular membership is available only to employers of 5 or more persons. A few persons who are not employers hold associate membership in petitioner association.
At the time of its organization petitioner adopted a constitution, the material provisions of which were:
| ARTICLE II | |
| Sec. 1. -- The principles of this Association are to secure | Principles |
| and perpetuate for employers and employees freedom of contract, | |
| irrespective of religious, political, industrial or labor | |
| organization; to perpetuate justice and liberty for all who live | |
| within our community, and to uphold the right under the | |
| Constitution of the United States of every individual in the | |
| enjoyment of life, liberty and property. | |
| Sec. 2. -- The purpose of this Association is to provide the | |
| means whereby the executive heads of the industries engaged in | |
| Cleveland and vicinity may meet to discuss, for the benefit of | |
| all engaged in industry, the various problems of common | |
| interest; thereby promoting a better understanding among its | |
| members, concerning industrial subjects of mutual interest, | |
| particularly those relating to labor, production and finance, | |
| and through cooperation to improve employment, industrial and | |
| community conditions for both employer and employee. | |
| ARTICLE III | |
| Sec. 1. -- Active members of the Association shall be firms, | Active Members |
| corporations, partnerships, or individual employers, within the | |
| limits of Cuyahoga County, employing five or more persons, and | |
| shall be represented by one or more executives. Each firm, | |
| corporation, partnership, or individual employer shall have | |
| one vote. | |
| * * * * | |
| Sec. 3. -- Any firm, corporation, partnership, or individual | |
| employer, elected as a member of this Association, shall be | |
| governed by the Constitution and By-Laws of said Association. | |
| * * * * | |
| ARTICLE IV | |
| Sec. 1. -- The Association shall be managed by a Governing | Governing |
| Board, elected annually, consisting of nine members, who shall | Board |
| choose from among their number a Chairman and Vice-Chairman, | |
| who, together with the Officers of the Association, shall | |
| have the right to vote on all matters coming before the | |
| Governing Board. | |
| Sec. 2. -- The officers of the Association shall be a | Officers |
| President, two Vice-Presidents, and a Treasurer, who shall be | |
| elected by the members for a term of one year, at the annual | |
| meeting of the Association. | |
| * * * * | |
| Sec. 8. -- The Governing Board shall be vested with full | Authority of |
| power to interpret the Constitution, and to put into effect the | Governing |
| resolutions and decisions of the Association, and by a | Board |
| two-thirds vote of all of its members to make or change By-Laws | |
| for its own government, which shall not conflict with the | |
| Constitution; to appoint standing and special committees; to | |
| fill vacancies which may occur in offices, in the committees | |
| and in its own body (unexpired terms); exercise supervision | |
| over receipts and expenditures; to fix the terms, conditions | |
| and compensation of employees, to authorize the expenditure of | |
| the Association's funds and exercise supervision over all | |
| receipts and disbursements; to take such action and to do all | |
| acts and things on behalf of the Association and its members | |
| which it may deem to be for the interest of the Association. | |
| Sec. 9. -- The Governing Board shall hold regular monthly | |
| meetings at such time and place as it may arrange, and may be | |
| subject to call for special meetings by the President, or upon | |
| the written request of three members of the Board, the | |
| Secretary shall call a special meeting. | |
| * * * * |
*9 *1452 The constitution also set forth, inter alia, the method for the election of new members to the association, the terms under which members might be expelled or withdraw from the association, the dues to be paid by members, and the procedure to be followed in the election of officers and members of the governing board. Provision was made for meetings of the governing board and of the association as a whole and for the amendment of the constitution. The bylaws of the association defined the duties of the various officers and provided for the employment of a secretary.
The original constitution was amended from time to time in various respects and the subect matter of the bylaws was incorporated into the constitution. The constitution was last amended on June 25, 1930, and it provides, inter alia, as follows:
| ARTICLE II | |
| * * * * | |
| Sec. 2. -- The purposes of this association are: First, to | Purposes |
| provide a means whereby the active executives in the business | |
| of any person, firm or corporation eligible for membership in | |
| this Association may meet to discuss industrial problems of | |
| common interest to themselves, their employees and the | |
| community in general. | |
| Second, to supply a medium through which employers, employees, | |
| and others may cooperate for the improvement of employment | |
| relations and the betterment of industrial conditions. | |
| Third, to place before the public facts which will lead to a | |
| better understanding of the problems of industry and the | |
| importance of a right solution of these problems to the general | |
| welfare. | |
| ARTICLE III | |
| Sec. 1. -- There shall be two classes of members -- active | |
| and associate. | |
| Sec. 2. -- Active members of the Association shall be firms, | Active |
| corporations, partnerships, or individual employers employing | Members |
| five or more persons. Each active member shall be entitled to | |
| one vote at all meetings of the Association, but may be | |
| represented by one or more executives in the various activities | |
| of the Association. | |
| Sec. 3. -- Associate members shall be persons who are not | Associate |
| eligible for active membership and who are not active executives | Members |
| in the business of any person, firm or corporation eligible for | |
| membership but not a member of this Association. Associate | |
| members shall not be entitled to vote or hold office. | |
| * * * * | |
| Sec. 5. -- Active and associate members shall be governed by | |
| the Constitution of this Association. | |
| * * * * | |
| Sec. 8. -- Members shall have the right to withdraw from the | Withdrawals |
| association upon the payment of any and all dues and accrued | |
| indebtedness up to the end of the quarter in which the | |
| withdrawal notice is given * * *. | |
| Sec. 9. -- No expulsion or withdrawal, either voluntary or | |
| involuntary, of any member shall vest in such member any right to | |
| repayment of any sum or sums, or any portion thereof, that such | |
| member may have contributed to the funds of the Association, | |
| but all such sum or sums, however invested, shall be retained | |
| by, and belong to the Associated Industries of Cleveland free | |
| from any claim of such member. | |
| Sec. 10. -- The annual dues of active members shall be based | Dues |
| on the average number of persons employed during the preceding | |
| calendar year. The "average number of persons" herein | |
| mentioned shall include all factory, office, executive and other | |
| persons. | |
| The Board of Governors shall fix the rate of dues per such | |
| person which shall be levied upon active members from time | |
| to time, provided, however, that said rate shall not exceed | |
| 8 1/3 cents per such person per month. | |
| Sec. 11. -- The annual dues of associate members shall be | |
| $ 10.00 per year, payable in advance. | |
| Sec. 12. -- Additional funds may be provided by assessments | Special |
| levied on active members. Before such assessments may be levied | Assessments |
| they shall first be authorized by a two-thirds vote of the | |
| members of Governing Board, and then approved by a two-thirds | |
| vote of the active members of this Association present at a | |
| regular or special meeting called for this purpose. | |
| ARTICLE IV | |
| * * * * | |
| Sec. 5. -- The Governing Board shall employ a General Manager | Duties -- |
| and a Secretary who shall be empowered to use all lawful means | General |
| to carry out the purposes of this Association as defined by the | Manager, |
| Board of Governors. One person may be employed by the Board | Secretary |
| to fill both positions. | |
| * * * * | |
| ARTICLE V | |
| Sec 1. -- The association shall be managed by a Board of | |
| Governors consisting of fifteen members of the Association | |
| * * * | |
| Sec. 2. -- The General Manager of this Association shall be | |
| ex-officio a member of the Governing Board. |
*10 *1454 In other respects the constitution as amended in 1930 contains substantially the same provisions as the constitution originally adopted.
The statement of principles of the association has remained unchanged through the years. The statement of purpose contained in the original constitution, set forth above, was changed in 1923 to read as stated in article II immediately above.
From its inception petitioner's officers and the members of its board of governors have been men of prominence in Cleveland industry. The paid staff of the association has increased as the scope of its activities has expanded and in 1941 consisted of the general manager and secretary, William Frew Long, and five other men, together with general office personnel. Petitioner's officers and the board of governors participate actively in the work of the association. The board of governors determines the policies of the association. William Frew Long, who was general manager of the association during the entire period here in question, has had much experience in representing the interests of management in labor relations work.
Early in its existence petitioner divided its membership into various membership*11 or trade groups, one group for each type of industry represented within its membership. It was intended that each such group should, in effect, be a small local trade association and meet under the guidance of a member of petitioner's staff to consider problems peculiar to members of the group. Theoretically, there were 72 such groups in 1941 but, actually, only 3 or 4 have met with any regularity over the years and only about one-quarter of the groups have ever met at all. A member of petitioner's staff generally attends each group meeting and prepares such minutes thereof as are desired or necessary, although minutes are seldom kept. The meetings are usually conducted as luncheon meetings at local hotels. Petitioner *1455 furnishes such secretarial service as a group may desire, which consists of keeping any records of the group and sending out notices of group meetings. Three or four of the groups have funds of which petitioner acts as custodian and keeps records of income and disbursements. Petitioner makes payments out of each such group fund only as directed by the group.
Petitioner also organized a small number of "executive groups" which, in 1934, consisted of *12 the employment and factory executives group, the production standards group, the compensation law group and the employee representation group, the last named having only a brief existence. The other "executive" groups met only a few times a year during the period 1933 through 1937. The first three executive groups are respectively composed of minor executives of member companies such as personnel managers, production managers, and plant executives who deal with workmen's compensation problems. The members of these groups meet to consider common problems in their fields of interest.
Petitioner had an annual meeting in January or February of each year which had an average attendance of 1,000 to 1,200 persons and at which there was a speaker on a subject of current interest. The mayor of Cleveland and other public officials attended these annual meetings.
Almost all of petitioner's income is derived from dues paid by members. The maximum annual dues paid by any member is limited to $ 2,500 and the minimum amount is $ 30. Petitioner has only a small number of associate members, which category includes professional men and others not eligible for active membership. In the calendar*13 years 1936 through 1941, for example, the total income and expenditures of petitioner, the amount of dues received from active and associate members, and the current assets of petitioner were:
| Dues | |||||
| Year | Total | Total | Current | ||
| Active | Associate | income | expenditures | assets * | |
| members | members | ||||
| 1936 | $ 57,602.49 | $ 205 | $ 59,501.09 | $ 47,432.21 | $ 21,222.32 |
| 1937 | 58,246.94 | 180 | 60,545.49 | 59,206.22 | 7,723.56 |
| 1938 | 59,842.48 | 200 | 61,660.34 | 55,043.54 | 14,340.36 |
| 1939 | 47,067.48 | 110 | 48,567.84 | 54,873.90 | 8,034.30 |
| 1940 | 57,506.46 | 190 | 59,072.70 | 60,240.59 | 6,866.41 |
| 1941 | 73,810.93 | 130 | 75,331.23 | 60,510.73 | 21,686.91 |
In the middle 1920's petitioner began to build up a reserve for contingencies in order to establish a fund on which it could draw in lean years when receipts from dues might fall off. The fund has been accumulated from the annual excess of income over expenditures, and *1456 it amounted to $ 50,250.92 during 1936 through 1941. The reserve fund is held in trust *14 by a local bank and invested in mortgages and Government bonds. Petitioner's constitution does not provide for the disposition of this fund or other assets in the event of dissolution of the association, nor has petitioner made any other provision relevant thereto. No part of the earnings of the association has ever been distributed to its members.
Petitioner receives some income from "dues" paid by socalled "contributing members." These "contributing members" are companies which joined the association with the stipulation that their membership be kept secret. The number of such members has varied from 5 to 20 over the years and each of them has paid approximately the same amount as "dues" as it would have paid if an active member. The sums received by petitioner from these contributing members amounted to $ 1,559 in 1933, $ 2,458.75 in 1934, $ 4,225.35 in 1935, $ 2,451.25 in 1936, and $ 2,255.75 in 1937. Petitioner has also received some out-and-out contributions from time to time from persons or organizations which desired to give financial support to petitioner's program, but which were not eligible for or did not desire actual membership. Petitioner received, for example, *15 $ 1,605 in 1936 and $ 570 in 1937 from such contributors. The Corporation Service Bureau, a private detective agency, contributed $ 1,800 in 1934 and five to six hundred dollars in 1935. These particular contributions will be again referred to in these findings. More complete data as to other amounts paid by "contributing members" or contributed is not contained in the record.
Petitioner's purpose has been to establish in Cleveland what its members consider to be "industrial peace and sound industrial relations." Petitioner's primary objective has been the advancement and maintenance of the "open shop" principle in Cleveland industry. An "open shop" is defined by petitioner as being a shop in which both union and nonunion men can work and be retained, promoted, and discharged on the sole basis of their merit and without any reference to their membership or nonmembership in any labor organization. Petitioner has vigorously opposed all attempts by labor unions to establish closed shops in Cleveland industry, whether in the plants of members or nonmembers, and it has taken the attitude that "each defeat of a closed shop assault is a victory for the entire industrial community." *16 On the other hand, petitioner has excluded from its membership companies which would not employ union members as a matter of principle. Petitioner has also endeavored to present to the public the position taken by industry, i. e., the management of industry, on various matters.
Whenever a plant of one of petitioner's members is affected by a strike, petitioner offers its services to assist in bringing the strike to *1457 a quick termination. Petitioner urges its members to permit it to participate in the negotiations for settlement in order to prevent the strike from being settled on a closed shop basis. Petitioner is prepared to furnish the employer with such pertinent information as the employer may need in the negotiations, such as data on the rate of wages paid in the particular industry involved. Petitioner's services in the negotiations are available to nonmembers as well as to members whenever petitioner can be helpful in maintaining the open shop principle, and no charge has ever been made for such services. Petitioner does not undertake to act as mediator in the negotiations nor take complete charge of handling the strike situation on behalf of the employer. Petitioner*17 does not participate in the actual writing of a contract between the employer and the workers or union. Petitioner, however, has been called upon on seven or eight occasions in its existence to represent the employer in cases where the parties to a labor dispute have agreed to submit the dispute to arbitration.
When petitioner is advised by a member that its workers have struck or are about to strike, it examines the conditions of employment in the plant, the wage scale, the foremen's and the employer's attitudes towards the workmen, and the business conditions. After such examination petitioner advises the employer as to whether there is any merit in the demands of the workers. On occasion members of petitioner's staff have consulted and negotiated with the business agents of the various unions. In early 1938, for example, a large part of petitioner's efforts were devoted to such matters.
By reason of its long and extensive experience in dealing with labor disputes, petitioner is able to furnish valuable advice to such of its members as may desire it. Some of petitioner's members, particularly the larger companies, have never called upon petitioner for advice and assistance *18 in times of labor difficulties. Petitioner has given much publicity to the services which it could render to members in times of labor difficulties.
A substantial reference library has been accumulated at the association's headquarters and the maintenance of the library is the chief duty of one of the men in petitioner's employ. The library contains books of reference and a "subject file" which includes all available information on such subjects as bonuses, profit sharing, vacation plans, and other industrial problems. The material in the library is available to members and to the general public.
An employment department was established by petitioner in 1922 and was maintained until 1942, when there was no further need for it. The employment department had an office separate and apart from the association's headquarters. In one of its publications in 1934 the association stated that it "operates a free employment bureau, *1458 one of the largest of its kind in the country, through which members may procure competent help in any line of work." Members of the association were urged to keep the department apprised of the number and kind of employees needed or about to be laid*19 off. In the event that a company notified the department that it intended to lay off certain categories of workmen, the department would endeavor to get in touch with another company which desired to hire such workmen and refer the men to the other company. This service was performed in order to prevent loss of time to the men and to prevent injury to the "experience rating" of the company which was releasing the employees. At the employment office, job openings were listed on a blackboard and job seekers were referred to companies interested in hiring men. The association's staff did not inquire into the qualifications of anyone seeking work. This and all other details of employment were handled by the company to which the applicant was referred. No charge was made by the association to either employers or applicants for the service. The employment department also served as a medium through which petitioner was able to ascertain the viewpoints of workmen on working conditions in various plants of its members. Jobseekers were encouraged to talk about their experiences in plants in which they had been employed, and unfavorable comments were investigated by the employment department*20 and called to the employer's attention by petitioner, with recommendations for changes if the situation called for them. The information thus gathered was helpful in bringing to light unrest brewing among employees which might lead to strikes.
If the plant of one of petitioner's members was closed by a strike, petitioner did not undertake to bring in men from other cities to act as strikebreakers. However, petitioner would refer jobseekers to a strikebound plant just as it would to any other plant, except that the persons sent to the plant were generally advised that they were going into a strike situation. Petitioner also utilized newspaper advertisements in obtaining workmen to refer to plants closed by strikes.
The association has assisted its members and also nonmembers, in cases of strikes, in obtaining guards for the protection of property and employees. Petitioner's staff knew where men for work of this type could be secured, and would tell the employer where to get such men or would get in touch with someone who could get a group of such men together. Petitioner never hired these guards but merely acted as a referral agent.
Petitioner has assisted its members from time*21 to time in acquiring operatives for the purposes of uncovering cases of theft, threatened destruction of property, sabotage, or union activities in the plants of members. In such cases petitioner referred the member to Corporation Service Bureau, Inc., a detective agency, or to some other detective agency which handled industrial investigations. None of these *1459 agencies were in any way affiliated with petitioner and petitioner played no part in directing the work of the investigators. In three or four cases during the early 1930's the bureau billed petitioner for its services to a member and petitioner, in turn, billed the member. This was done to accommodate members who wanted to conceal the fact that a detective agency had been engaged from their office employees. Petitioner made no charge for this service, except in one case where a $ 10 service charge was made. In 1935 petitioner stopped rendering this billing service. During 1934 and 1935 the Corporation Service Bureau, Inc., made voluntary contributions to petitioner, amounting to about $ 2,400 in all. These contributions were made for the purpose of establishing good will and with the hope that petitioner would*22 refer such of its members as desired industrial investigations to the bureau exclusively. After petitioner refused to refer members only to the bureau, no further contributions were made. For a period of about one year petitioner had one man in its employ who did the same type of industrial investigation as was done by the bureau. The record does not disclose the extent of his activities nor the period when he was active.
In 1930 there was considerable labor unrest in Cleveland, which petitioner's governing board and general manager ascribed to "communistic activities." Petitioner employed a few men to investigate the activities of alleged communists, particularly as they pertained to industry. The investigators listened to speeches in Cleveland's public square and went into industrial areas in order to ascertain the nature of the "communistic" activities; they also obtained employment in some industrial plants where the "communists" were active. They reported their findings to a member of petitioner's staff. Petitioner received much information on "communistic" activities from voluntary informants, who were given small sums to reimburse them for their expenses. Petitioner *23 was interested in this matter because the alleged communists had established unions, one of which called a strike in the plant of one of petitioner's members. Petitioner's investigators made a thorough investigation of that strike. The investigation of "communistic" union activities was limited to plants of members of the association.
The number of men employed by petitioner in connection with the "communistic" investigation never exceeded five and the average was about three. The men were employed for only short periods of two or three months and were paid by petitioner. In one case, a company contributed about $ 150 to help finance the investigation. This project came to an end in early 1935.
In about 1934 petitioner's general manager appeared before a Congressional Committee investigating subversive activities and furnished that committee with the information which the association had gathered *1460 on the "communists." This committee was known as the Fish Committee.
Petitioner cooperated with a committee on subversive activities of the Cleveland Chamber of Commerce, which made a report in January of 1935 and credited petitioner with having furnished much of the information*24 contained in the report. As a result of this report the City Council of Cleveland instituted an investigation. Petitioner's general manager became concerned that the investigation might result in the public disclosure of the names of his informants and, therefore, destroyed most of petitioner's financial records for the years prior to 1936, which records listed the names of and payments to these informants.
From its early years of existence petitioner has sponsored and assisted in the establishment of various types of vocational training within the Cleveland public school system. This training was developed to meet the needs of industry, including petitioner's members. Special schools, under the name of the Cleveland Trade School, were established within the public school system, with daytime and evening classes, to give such training. The association raised a fund for the equipment and supplies required in the pattern-making and foundry schools, which schools are recognized as being outstanding and have been used as models in the establishment of similar schools in other cities. Classes for the training of foremen are among those sponsored by the association. In 1941 petitioner*25 actively cooperated with the Cleveland Board of Education and local colleges in the training of workers for defense plants. Petitioner publicized these courses, solicited students, paid the expenses of teachers in the schools to various conventions, assisted in the development of the curriculums of the schools, and sponsored contests among the apprentice students. Petitioner encouraged its members to post bulletins in their shops urging their workmen to attend these classes. In recent years one of the men on petitioner's staff has devoted his entire time to the matter of vocational training. The general manager of the association has for some years represented industry on the advisory committee for industrial training of the Cleveland Board of Education. In 1940 and 1941 he was also a member of the state advisory committee for the conservation of manpower in defense industries.
The association is particularly interested in the reclassification of jobs so as to use workmen at their maximum skills. This entails studying a job so as to determine that part of it which requires a skill and then revising the job so as to have the skilled workman spend his entire time on work requiring*26 skill and assigning the other portions of the job to men of lesser ability.
Since its early years petitioner has sponsored meetings of representatives of its members who handled workmen's compensation matters *1461 for the purpose of interchanging opinions and experience on compensation matters, safety methods, and safety codes. Petitioner has appeared before public bodies in connection with the formulation of safety codes for various industries and at times it assisted some of its members in presenting their case at such hearings.
Petitioner regularly publishes bulletins which are distributed to its members, public officials, and others. These bulletins cover a wide variety of subjects, but mostly deal with labor relations problems from the standpoint of management. The bulletins serve to present the association's views on various matters and to give publicity to various meetings and undertakings. For example, the 1941 bulletins, besides covering many other topics, analyzed the "Ball Anti-Strike Bill," then pending in Congress, publicized vocational training courses and the availability of trainees from the vocational schools, and discussed the handling of grievances in *27 plants, labor pirating, occupational deferments under Selective Service, the utilization of Negroes in industry, and the collection of scrap needed for the defense effort. During 1931 and prior years the association also published a regular magazine, called "Public Interest," in which the principles of the association were expounded. The magazine was circulated mainly to nonindustrialists and to the employees of some companies; it was also sent to petitioner's members. Petitioner on occasion has purchased full page newspaper advertisements or used radio broadcasts for the purpose of presenting its views to the public.
Petitioner is a member of the National Industrial Council, which is composed of 125 organizations such as the petitioner located throughout the country. Included in the membership of the National Industrial Council are 7 or 8 chambers of commerce which have special departments engaged in the same type of activity as that of the petitioner. These chambers of commerce are located in cities where there are no organizations such as the petitioner and which, therefore, have established special departments to deal with labor relations matters.
Petitioner has worked closely*28 with the National Industrial Council, the National Association of Manufacturers, and other employers' organizations which are concerned with labor relations matters. In 1936, for example, the petitioner and the National Industrial Council cooperated in staging a series of broadcasts over a Cleveland radio station in order to "present industry's viewpoint via an entertainment medium" to the public. Similarly, the National Association of Manufacturers, commonly known as the NAM, and the petitioner in 1937 jointly sponsored a "labor-relations clinic" in Cleveland, at which various labor problems including legislation and recent court decisions were discussed. Petitioner frequently distributes to its members literature prepared by the National Association of Manufacturers on labor legislation and problems. In 1936 petitioner arranged for and raised *1462 the funds for the publishing of a series of full page advertisements in Cleveland newspapers which had the purpose of presenting "industry's viewpoint" on various matters to the public; these advertisements were published over the petitioner's name, although the text was prepared by NAM and the publication was part of a NAM publicity*29 campaign.
Petitioner, through its officers and members of its staff, has frequently appeared before committees of Congress and committees of the Ohio State Legislature in connection with pending legislation relating to labor laws. Petitioner has bitterly opposed legislation which it considered detrimental to the interests of its members and has cooperated extensively with other groups such as NAM in such matters. A great deal of work is done by petitioner in this legislative field. Members of the petitioner association receive frequent bulletins and other communications from it on pending or new legislation, rulings, regulations, and court decisions pertaining to labor matters.
Members of petitioner's staff frequently address meetings of other organizations such as church and school groups, Kiwanis and Rotary Clubs, parent teachers associations, and trade associations for the purposes of presenting industrial management's viewpoint on current problems and explaining the aims of the association.
Two men on petitioner's staff spend most of their time in making surveys pertaining to various labor problems. These surveys include studies of prevailing or average wages paid for various*30 classifications of labor. The studies are furnished to petitioner's members and can be used by them in determining their wage scales and in negotiations with unions. The results of these wage surveys have on occasion been furnished to governmental agencies. In 1941 petitioner also made a survey of industrial facilities in the Cleveland area which could be used for defense work and submitted it to a governmental agency.
Petitioner has participated and assisted in the suppression of labor racketeering and offered rewards for the apprehension of persons who have committed acts of violence in connection with such racketeering.
The full scope of petitioner's operations can be best illustrated by considering in some detail its activities in one of the taxable years, namely, 1941. In that year petitioner conducted and participated in numerous meetings and undertakings relative to industrial problems arising out of the national defense program. On January 29 William Frew Long, petitioner's general manager, addressed the annual meeting of the association on "The National Defense," his address later being printed and widely distributed in three pamphlet parts under the titles "Defense *31 Workers," "The Threat of the Closed Shop," and "Cooperative Collective Bargaining." In February the production management and industrial relations groups within petitioner organization were addressed by the state adviser on occupational deferments *1463 on the deferment of essential workers; and at that time petitioner offered to assist its members in Selective Service matters. In March petitioner participated in staging a 2-day conference at which Army and Navy officers and Cleveland industrialists considered industrial problems in connection with the national defense effort. In July petitioner distributed suggested forms of employee records to its members, which forms embodied certain recommendations of the Federal Bureau of Investigation for data on the citizenship of prospective employees in defense plants. In August the associate manager of petitioner, J. H. Walker, participated in the annual conference of the Ohio State Safety Council. Petitioner cooperated with the Cleveland public school system and with local colleges in making surveys of the types of training required for defense workers to meet the needs of Cleveland industry and in publicizing the training programs. *32 In this connection petitioner arranged for a series of radio broadcasts over a 13-week period to publicize the training opportunities. Petitioner also cooperated with the Cleveland public schools in calling the attention of its members to the program offered by the school system for the training of foremen. In October petitioner conducted a dinner meeting at which its members heard discussions on social security and Federal tax matters. In cooperation with the National Association of Manufacturers, petitioner inaugurated in November a series of meetings of clergymen and industrialists in order to achieve "better mutual understanding." Also in November petitioner sponsored a one-day clinic on priorities and allocations. Petitioner also took charge of the collection of scrap in the Cleveland area and received a citation for its services from the War Production Board. Petitioner cooperated with the authorities which were taking a census of commercial vehicles and urged its members to submit the information required. Petitioner also urged its members to arrange for proper industrial nursing facilities for their employees. In various bulletins to its members petitioner urged the*33 greater employment of Negroes in industry. In a bulletin dated July 16, 1941, petitioner offered to help companies which had facilities for handling subcontracts to get in touch with interested governmental agencies and prime contractors.
The Cleveland Chamber of Commerce, with which petitioner has constantly cooperated, is the only organization in Cleveland which has engaged in activities similar to those of the petitioner. However, since the chamber's membership includes many businesses not engaged in industrial work, its activities are much broader in scope than petitioner's and it has not gone into the labor relations field to the same extent or in as much detail as petitioner.
The association does not exist for the purpose of performing particular services for individual members. Services which are rendered *1464 to individual members are incidental to the accomplishment of the petitioner's primary objectives.
Petitioner's members, reasonably and in good faith, considered that its activities were directed to the improvement of business conditions in connection with their employment of labor.
The petitioner is a business league not organized for profit and no part of its*34 net earnings inures to the benefit of any private shareholder or individual.
Tax returns were not filed by petitioner prior to September 28, 1939, because it believed that it was exempt from tax.
OPINION.
The question for decision is whether petitioner is a business league within the meaning of section 101 (7) of the Internal Revenue Code, which provides that "Business leagues, chambers of commerce, real-estate boards, 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" shall be exempt from taxation. The various revenue acts in effect throughout the period here material have contained similar provisions. Although the term "business league" is not defined in the code or the preceding statutes, it is defined in section 19.101 (7)-1 of Regulations 103 and in corresponding sections of the earlier regulations applicable to the taxable years here involved. 1
*35 A statute creating an exemption must be strictly construed and any doubt must be resolved in favor of the taxing power. Accordingly, if petitioner is to avoid taxation because it is a "business league," as it contends, it must meet the tests laid down by the statute and the Commissioner's regulations which have persisted through the successive reenactments of the statute. In this connection it must be remembered that the recurrent enactment of the statute carried with it the executive interpretation thereof as expressed in the regulations. Retailers Credit Assn. v. Commissioner, 90 Fed. (2d) 47, and Underwriters' Laboratories v. Commissioner, 135 Fed. (2d) 371.
*1465 Petitioner is a "business league" within the letter of the statute. As pointed out by the court in Crooks v. Kansas City Hay Dealers' Assn., 37 Fed. (2d) 83, the term "business" is very comprehensive and embraces everything about which a person can be employed, and the term "league" is defined as an agreement or covenant between two or more parties or persons for the accomplishment of some purpose by their*36 cooperation. Combining the two definitions of business and league, we can say that the combined definition literally covers the petitioner organization. An important part of the business of petitioner's active members was the employment of labor; and through petitioner the members cooperated in endeavoring to employ labor under circumstances and upon terms deemed by its members to be advantageous to them. See also Retailers Credit Assn. v. Commissioner, supra.
Furthermore, we think that petitioner qualifies as a "business league" under the tests laid down in the regulations. It is an unincorporated association of persons, firms, and corporations having a common business interest and its purpose is to promote that interest. The common business interest which has brought and held petitioner's diversified membership together is generally stated in article II of the association's constitution. However, upon reviewing petitioner's actual activities it is clear that the real business interest which petitioner's members have in common is the desire to establish what the members consider to be "industrial peace and sound industrial relations in the*37 community" by advancing and maintaining the "open shop" principle in industry. The members have endeavored to establish employment and labor conditions which are stable and desirable from their standpoint. They wanted a readily available labor market from which they could obtain skilled labor upon such terms and conditions as they considered most favorable to themselves. To develop and insure the labor conditions which they deemed desirable they banded together to form the petitioner association. Through it they have opposed all interference with this free labor market from within or without the community and have sought to reduce labor strife and difficulties to a minimum. To bring about and maintain the conditions which they desire, they have, acting through the petitioner, waged bitter war on the closed shop and on all restrictive governmental regulation in labor matters. They have also used the petitioner as a medium through which they have presented their views on various matters to the public.
The pertinent requirements of the Commissioner's regulations may be paraphrased as follows: (1) It must be "an association of persons having a common business interest"; (2) its *38 purpose must be to promote that common business interest; (3) "its activities should be directed *1466 to the improvement of business conditions of one or more lines of business"; (4) it should not be engaged in a regular business of a kind ordinarily carried on for profit; and (5) its activities should not be confined to "the performance of particular services for individual members." 2
We have already pointed out that requirements numbered (1) and (2) clearly have been met.
However, we have been gravely troubled by the question of whether petitioner has satisfied the requirement*39 numbered (3) above to the effect that "its activities should be directed to the improvement of one or more lines of business." If it were left to our own unaided decision whether petitioner's activities led to a real and permanent improvement in the employment problems and labor relations of its members, and thus in an improvement of its members' business, we should have to go far outside the record before us in order to reach an answer which would satisfy us. 3 We do not consider that the burden of such a decision is upon us. If petitioner's members were of the opinion that its activities were directed to the improvement of labor conditions in their lines of business, if this opinion was one which could be held by reasonably prudent business men under the same circumstances of time and place, and if the activities themselves were legal when carried on, we must conclude that this requirement of the regulations has been met. It is our duty to construe the revenue statutes of the United States, not to formulate and apply a code of industrial ethics. We, therefore, consider it unnecessary for us to express any judgment concerning the social, political, or economic wisdom or morality*40 of petitioner's activities.
In connection with our discussion on this point, we call attention to the fact that by section 101 (1) of the Internal Revenue Code exemption from taxation is granted to "labor * * * organizations."
No contention is made by respondent that petitioner's activities were illegal or contrary to public policy when they were engaged in. From the entire record we can not escape the conclusion that petitioner's members believed in good faith that their business interests and the interests of business in general were being improved by petitioner's activities, and, further, that this belief was one which could be held by reasonably prudent business men under the same circumstances of time and place.
We know of no requirement that the purpose of a business league, as that term is used in the statute, must be the betterment of a geographical *1467 community rather than the advancement of the*41 selfish interests of a community of businesses having a common objective.
Respondent contends that petitioner does not comply with the requirement of the regulations that in order to come within the definition of a business league the association must not have the purpose of engaging in a regular business of a kind ordinarily carried on for profit. As pointed out by the court in Retailers Credit Assn. v. Commissioner, supra, the proper interpretation of this rule is that, if the purpose to engage in such business is only incidental or subordinate to the main or principal purposes required by the statute and regulations, then the exemption can not be denied on the ground that the purpose is to engage in such a business. See also Commissioner v. Chicago Graphic Arts Federation, Inc., 128 Fed. (2d) 424, wherein it is stated:
Where the business league has proper purposes without prohibited ones, then, if it operates in conformity to it [the statute as interpreted by the regulations], it is entitled to exemption. To come within the exemption, however, its activities must be directed to the improvement of business *42 conditions or to the promotion of the general objects of one or more lines of business as distinguished from the performance of particular services for individual persons, but if the services are only incidental or subordinate to the main or principal purposes required by the statute, then exemption cannot be denied on the ground that the purpose is to engage in a regular business of a kind ordinarily carried on for profit.
We have already pointed out that petitioner's activities were directed to the improvement of business conditions of one or more lines of business within the meaning of the regulations. It is true that certain of the association's activities, such as the employment service, were activities normally engaged in by others as a regular business and for profit. However, the real and principal purpose of petitioner was to establish what the members considered to be "industrial peace and sound industrial relations in the community by advancing and maintaining the 'open shop' principle in industry." The employment service and its other activities of the kind ordinarily carried on for profit were only incidental and subordinate to that main purpose. Commissioner v. Chicago Graphic Arts Federation, Inc., supra,*43 and American Fisherman's Tuna Boat Assn. v. Rogan, 51 Fed. Supp. 933. As a matter of fact, petitioner dropped the employment service in 1942 without materially changing the nature and scope of its operations.
With regard to the requirement of the regulations numbered (5) above, respondent also makes the contention that the association's members received pecuniary benefits by virtue of their membership, since they were getting from it particular services which they would otherwise have to buy. This contention is based upon the statutory provision that in order for a business league to be exempt from taxation no part of its net earnings may inure to the benefit of any private *1468 shareholder or individual. In determining whether net earnings inure to the benefit of any private shareholder or individual, each case must stand on its own facts. Commissioner v. Chicago Graphic Arts Federation, Inc., supra;Waynesboro Manufacturers Association, 1 B. T. A. 911. Net earnings or profit may inure to the benefit of shareholders or members of a business league in other ways than in dividends*44 or other distributions of money. Northwestern Jobbers' Credit Bureau v. Commissioner, 37 Fed. (2d) 880, and Northwestern Municipal Assn., Inc. v. United States, 99 Fed. (2d) 460, 463. However, as stated by the court in the Northwestern Municipal Association case:
Under the statute, in connection with the inquiry whether the net earnings of the organization claiming exemption as a business league inure to the benefit of private stockholders or individuals, especially where its activities are multifarious and for some of which it makes a charge and for others none, the court often considers which of its activities represents the main purpose of its operations and which are incidental thereto. If its main purpose is to benefit its shareholders or individuals it is not exempt. On the other hand, if benefit to the individuals is secondary and incidental, it is exempt. * * *
Of course each individual member of the petitioner association perhaps profited or considered that it profited by such success as the association had in the accomplishment of its main purpose. Similarly, when a member was confronted with a*45 strike situation and received wage data and counsel from the association, that member received an individual benefit. However, petitioner's raison d'etre was not to furnish services to individual members which they could purchase elsewhere, but to serve the interest of the entire community of members by furnishing the support of the whole association to a member who needed it. The rendering of such service to a member was but part and parcel of a whole scheme of establishing and maintaining "sound industrial relations" (from the viewpoint of the members) by the concerted action of all the members acting through the association. It must be remembered that the petitioner's fundamental tenet was that "each defeat of a closed shop assault is a victory for the entire industrial community." See Retail Credit Association of Minneapolis v. United States, 30 Fed. Supp. 855.
The fact that petitioner has established no program for the distribution of its assets in event of dissolution does not require a holding that its net earnings may inure to the benefit of its individual members. "Some hazy, indefinite theory of how a member of the association might*46 eventually receive something in case of its dissolution should not be permitted to defeat the intention of Congress to exempt associations of this character from income taxes." Crooks v. Kansas City Hay Dealers' Assn., supra.
In determining whether petitioner is an organization of the same general class as a chamber of commerce or board of trade, as required *1469 by the regulation, we think it significant that petitioner's origin in part, at least, stemmed out of certain activities undertaken by the Cleveland Chamber of Commerce in the labor relations field in 1919 and 1920. After petitioner was organized it cooperated in many matters with the local chamber of commerce, and both were interested in labor relations problems in Cleveland. However, the chamber's activities were broad in scope and it did not concentrate on the labor problems of the manufacturing community to the extent that petitioner did. It is particularly significant that the National Industrial Council, to which petitioner belongs, includes a number of chambers of commerce in its membership. We, therefore, believe that petitioner is an organization of the same general class*47 as a chamber of commerce or board of trade. Cf. Retailers Credit Assn. v. Commissioner and Crooks v. Kansas City Hay Dealers' Assn., supra.
Inasmuch as petitioner qualifies as a business league under the definition contained in the applicable regulations, and since it is not organized for profit and no part of its net earnings inures to the benefit of any private shareholder or individual, the respondent erred in determining that the petitioner was not exempt from taxation under the provisions of section 101 (7) of the Internal Revenue Code and the corresponding provisions of prior revenue acts.
Decision will be entered for the petitioner.
Footnotes
*. Current assets at end of calendar year, not including reserve fund held in trust. Fixed assets during 1936-1941 consisted only of furniture and fixtures valued at $ 600.↩
1. Sec. 19.101 (7)-1. Business leagues, chambers of commerce, real estate boards, and boards of trade↩. -- 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 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. An association engaged in furnishing information to prospective investors, to enable them to make sound investments, is not a business league, since its activities do not further any common business interest, even though all of its income is devoted to the purpose stated. * * *
2. There is no requirement, by statute or regulation, that either a business league, or a labor organization, in order to be considered exempt as such, must refrain from carrying on propaganda or influencing legislation. Such a requirement is only applicable to a corporation or other organization operated "for religious, charitable, scientific, literary or educational purposes." See sec. 101 (6), I. R. C.; Regulations 103, sec. 19.101 (6)-1↩.
3. For an interesting discussion of this general subject, see Mason, Brandeis, New York 1946, pp. 299-315.↩