*770 EXEMPTION - BUSINESS LEAGUE - REVENUE ACT OF 1928, SECTION 103(7); REGULATIONS 74, ARTICLE 528. - Taxpayer held not entitled to exemption from income tax under that statutory provision.
*1167 The respondent determined an income tax deficiency for the calendar year 1931 against the petitioner in the sum of $465.43. The taxpayer contests the deficiency on the ground it is exempt from such tax under the Revenue Act of 1928, section 103(7).
FINDINGS OF FACT.
The petitioner was organized in May 1917 as the Cooperative Credit Association of Alameda County, under title XX, division 1, part 4 of the Civil Code of the State of California, which provided for the organization of cooperative associations which might operate thereunder on a profit or nonprofit basis. The name of the petitioner was changed in 1925 to, and still is, Retailers Credit Association of Alameda County. Its officers consisted of a president, vice president, secretary, and treasurer, who were elected by its 11 directors. The directors were elected by*771 its members, each of whom had an equal vote. The actual operation of petitioner was carried out by a manager appointed by the directors.
Petitioner has its place of business in Oakland, California. It has no stockholders but is composed of members, each of whom pays a membership fee of $5 to join. This membership is evidenced by a certificate of membership. The membership is composed of persons, firms, and corporations engaged in retail business in Oakland and other East Bay cities, and dentists, and other professional men, whose practice makes it desirable to inquire into the credit standing of their patients and clients.
The articles of incorporation of petitioner set out the purposes for which it was incorporated, in article II thereof, as follows:
(a) To carry on the business of furnishing to members of the association at rates and upon terms to be fixed in the by-laws of said association, information, reports and statements concerning the financial standing and credit rating of individuals, firms and corporations.
(b) To act as the agent of the members of said association upon terms to be fixed by the by-laws in the collection of moneys, accounts, property, and*772 other things of value due the members of the association.
(c) To act as the assignee of claims for money, accounts, property and other things of value due to the members of the association, upon terms to be fixed by the by-laws of said association, and in its own name as such assignee, to sue for, compromise, collect and pay claims, accounts, moneys or other things of value due to the members of the association.
(d) To engage in, conduct and carry on the business of a general mercantile credit agency and to do any and all things necessary to the conduct of such business.
(e) To encourage the prompt payment of bills and accounts due to the members of the association and generally to do any and all things looking to the establishment of a higher degree of efficiency in the conduct of credit business between retail mercantile establishments, retail and wholesale dealers, banks, real estate operators, merchants and all other persons, firms or corporations doing business with the general public.
*1168 (f) To gather all information available with reference to the credit standing of persons, firms and corporations and to report thereon upon such terms as may be provided*773 for by the by-laws to the members of the association.
(g) To assist in securing legislation, local, county, state and federal which will encourage better credit conditions and to aid in the enforcement of such legislation.
(h) To purchase, or otherwise acquire, own, hold, lease, mortgage and sell real and personal property, particularly such real and personal property as may be desirable or convenient to carry out the purposes of this association and to secure and maintain the necessary offices and plants, and to properly equip the same.
(i) To purchase or otherwise acquire, own, hold, sell, transfer and pledge shares of the capital stock or other securities of any corporation or association which may be necessary, convenient or desirable for furthering the best interests of the association and to exercise in relation thereto all the rights of wonership.
Petitioner was a member of a national organization of approximately 1,200 credit associations.
Petitioner furnishes credit reports on natural persons, exclusively, and to its members, only. A charge for each such report is made, exclusive of the membership fee, which charge may be and has been changed from time to time*774 by petitioner. Petitioner also collects accounts due its members. This service is also limited to its members, for which services the member pays petitioner a commission. During the tax year involved, this particular service was operated at a loss.
Petitioner renders other services from which it derives no income. These services include advertising campaigns for the encouragement of the public to pay their bills promptly; arranging and executing group settlements in which embarrassed debtors are physically assisted by petitioner in allocating available funds to the reduction of indebtedness; furnishing "reciprocal reports" for members; minimizing competition among retailers; issuing information to members on marriages, divorces, deaths, bankruptcies, and other matters affecting credit; conducting classes for the education of members' employees on credit practices; and actively supporting or opposing local, state, or national legislation affecting credit matters. The group settlements mentioned were effected only where a member of the association was involved.
There were no corporations similar to petitioner furnishing all the services petitioner provided, in the locality*775 it served during 1931. But, there were privately owned corporations, for profit, furnishing credit reports and collection services for which charges were made, in the same locality, during the same time.
Petitioner had accumulated profits of $32,587.53 from its operations during the years prior to 1931. It made a net profit of $6,878.61 during the year 1931. No part of petitioner's profits has *1169 ever been distributed as dividends. The association has used its profits to enlarge and expand its business in order that it might render better service to its members. The entire surplus of the association was invested in equipment peculiar to the service it was performing in 1931 in the locality served, except as to a limited amount which was no more than sufficient to carry its current expenses. It was the intention of petitioner to maintain the price of its services, for which it charged, at a point which would enable it to make only sufficient profit to care for the expanding needs of the business. With respect to profits and dividends, section 1, article XII of the bylaws of petitioner provides:
SECTION 1. Any profits made by the Association shall be devoted, first, *776 to the payment of any and all outstanding debts of the Association; second, to improvements or betterments in the plant, equipment and service of the Association; and third, to the payment of dividends, in equal amounts to each and all of the members of the Association; but nothing herein contained shall be so construed as to limit the power of the Directors to pass or suspend the payment of any dividend or to withhold the division of any profits when, in their opinion, it is to the best interests of the Association so to do.
The petitioner's claim for exemption from capital stock tax for the taxable year ended June 30, 1933, was sustained by the Commissioner of Internal Revenue on the ground that it was entitled to that exemption within the provisions of section 215(c)(1) of the National Industrial Recovery Act and section 701(c)(1) of the Revenue Act of 1934, as a corporation within the meaning of section 103 of the Revenue Act of 1932 or section 101 of the Revenue Act of 1934.
The activities of the petitioner were substantially the same during and before 1931 as they were thereafter.
Petitioner, during the calendar year 1931, within the meaning of the Revenue Act of 1928, *777 section 103(7), Regulations 74, article 528, construing the same, was neither a business league, chamber of commerce, real estate board, or board of trade; was organized for profit; and part of its net earnings, during that year, inured to the benefit of its members.
OPINION.
LEECH: The petitioner reported a net income of $6,878.61 for the calendar year 1931. It paid no tax on that income upon the ground that it was an exempt corporation under the Revenue Act of 1928, section 103(7). 1 The respondent denied petitioner the exempt *1170 status, as claimed, and accordingly determined the pending deficiency. The only issue presented is whether the respondent was correct in his denial of petitioner's asserted exemption from income tax under the cited statutory provision.
*778 The rule that a taxing act shall be construed strictly against the Government in the inclusion of income within its purview is reversed where the taxpayer seeks the benefit of an exemption from such tax. To secure such exemption, the taxpayer must not only carry whatever burden of proof the determination of the pending deficiency imposes (Helvering v. Taylor,293 U.S. 507">293 U.S. 507), but must proceed perceptibly further and bring itself strictly within the provisions of the act creating the exemption. Central Cooperative Oil Association,32 B.T.A. 359">32 B.T.A. 359, and cases therein cited.
Under the cited statutory provision, the protection of which petitioner seeks, the taxpayer, to prevail, must establish clearly the existence of three conditions. These are: (1) That no part of the net earnings of petitioner inured to the benefit of any individual during the year 1931; (2) that petitioner was not organized for profit; and (3) that, during the year 1931, petitioner was either a business league, chamber of commerce, real estate board, or board of trade within the intendment of the quoted section.
As to the first condition, it is admitted here that no dividend*779 in money or property has ever been paid to its members by petitioner. However, this fact is not conclusive of the existence of that condition. Profit can result to members in other ways than from the distribution of such dividends. Houston Belt & Terminal Railway Co. v. United States,250 Fed. 1; Fort Worth Grain & Cotton Exchange,27 B.T.A. 983">27 B.T.A. 983. Obviously, the expenses of the many incidental services which petitioner was rendering its members and for which it made no charge were paid from its current income from those services for which a charge was made, or from its surplus, built up from those charges. It necessarily follows, we think, that petitioner's profits, in that way, inured to the benefit of its members enjoying those services for which no charge was made. Northwestern Jobbers Credit Bureau v. Commissioner, 37 Fed.(2d) 880, affirming 14 B.T.A. 362">14 B.T.A. 362.
With reference to the second condition, it is true that the enabling act of California, under which petitioner was incorporated, permitted the organization of petitioner as a nonprofit company. It is likewise true that there is testimony in the record*780 that petitioner was not organized nor operated for profit. However, an examination of its purposes set out in its articles of incorporation, as well as the activities in which it was engaged, leads us unavoidably to the conclusion that the primary purpose for which the petitioner was organized and operated was the furnishing of credit reports and the *1171 collection of accounts for its members. In our judgment, these activities are such as are ordinarily carried on for the purpose of making profit. Northwestern Jobbers Credit Bureau v. Commissioner, supra.It is true these profits were to be limited to the necessities of its expanding business. But, that petitioner contemplated earning a profit appears from its bylaw providing for the allocation of those profits and the discretionary payment of dividends. Rubber Co. v. Good-year,76 U.S. 788">76 U.S. 788. In fact, petitioner, until the tax year, had made a profit of $32,587.53, and in 1931 undoubtedly derived a profit of $6,878.61, which the respondent here seeks to tax. We conclude the petitioner here was organized for profit. *781 Northwestern Jobbers Credit Bureau v. Commissioner, supra; and Fort Worth Grain & Cotton Exchange, supra.
In connection with the third condition, it is obvious petitioner was neither a chamber of commerce, real estate board, or board of trade. Our inquiry then is limited to whether, during 1931, it was a "business league" within the intendment of the quoted section.
The regulations of the respondent, construing this term as it has appeared in each of the revenue acts since that of 1918, at least so far as here relevant, have remained substantially unchanged. These regulations have been approved as properly construing the controlling statutory provision. Uniform Printing & Supply Co. v. Commissioner, 33 Fed.(2d) 445; affirming 9 B.T.A. 251">9 B.T.A. 251; certiorari denied, 280 U.S. 591">280 U.S. 591. See margin for Regulations 74, article 528, construing the controlling statutory provision. 2
*782 Aside from any other reason that precludes petitioner here from the essential designation of "business league" under that regulation, we think the conclusion is unescapable that the petitioner, during 1931, was "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 * * *." The taxpayer's primary purpose and business was the furnishing of credit reports and the collection of accounts for its members. These are the only real *1172 purposes appearing definitely in its articles of incorporation. Its income arises, at least principally, if not wholly, from those activities. During some years one of those activities may result in losses, and the other profit. In other years, the converse is true. But the profits always arise from one or both of those activities. It is true petitioner engaged in numerous other gratuitous activities, as advertising campaigns for the encouragement of prompt payment of accounts payable by the public, and other movements that are indeed laudable and of public benefit. But these*783 activities were merely incidental to its primary purpose and business of furnishing credit reports to and collecting accounts for its members, from which its income and profits were derived. Northwestern Jobbers Credit Bureau v. Commissioner, supra;Fort Worth Grain & Cotton Exchange, supra.That regular business of supplying credit reports and collecting accounts, for members, was a business ordinarily carried on for profit. Uniform Printing & Supply Co. v. Commissioner, supra;Northwestern Jobbers Credit Bureau v. Commissioner, supra;Fort Worth Grain & Cotton Exchange, supra.The Court of Appeals for the Second Circuit, in construing the statutory provision controlling here, in the case of Produce Exchange Stock Clearing Association, Inc. v. Helvering, 71 Fed.(2d) 142, said:
* * * The numerous subdivisions of section 103 of the Revenue Act of 1928 (26 USCA § 2103), and the corresponding provisions in the earlier acts, specify organizations which, in the great majority of instances, are evidently granted exemption because of the benefit*784 to be derived by the public from their activities. Cf. Trinidad v. Sagrada Orden263 U.S. 578">263 U.S. 578, 581 [Citations] There is reason why these should be favored, but none is apparent for exempting an association which merely serves each member as a convenience or economy in his business. This is the distinction which the Board of Tax Appeals and the courts have taken in applying the provision in question to somewhat analagous situations. [Citations.]
That expression seems pertinent here.
Though the petitioner was held by the Commissioner of Internal Revenue to be an exempt corporation within the provisions of the presently applicable and above quoted provisions of the revenue law, in connection with capital stock tax, and although an administrative officer of the State of California may have held it to possess the qualifications necessary to its present asserted exemption, our jurisdiction is original and is controlled solely by the factual record presented here. Upon that record, the respondent's denial of the disputed exemption is sustained.
Reviewed by the Board.
Judgment will be entered for the respondent.
SMITH, TRAMMELL, 3 VAN FOSSAN, *785 and MURDOCK concur in the result solely upon the ground that the peitioner is not a "business league."
Footnotes
1. SEC. 103. EXEMPTIONS FROM TAX ON CORPORATIONS.
The following organizations shall be exempt from taxation under this title -
* * *
(7) 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; * * * ↩
2. ART. 528. 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 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 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. 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 common business interest, even though all of its income is devoted to the purpose stated. A stock exchange is not a business league, a chamber of commerce, or a board of trade within the meaning of the law and is not exempt from tax.
3. This concurrence was noted during Mr. Trammell's term of office. ↩