*1060 Petitioner is a "trade association" organized under the laws of State of Washington as a nonprofit organization. Its membership is composed of agents of various insurance companies writing fire and liability insurance in King County, Washington. In order to meet a part of its overhead expenses, the members turned over to the association the business of writing policies upon the Port of Seattle, the Seattle school district, King County Hospital, and the Olympic Hotel, which was constructed upon state lands. The dues of the members were thereby reduced. Held, that the petitioner is a business league, exempt from income tax under section 103(7) of the Revenue Acts of 1928 and 1932.
*288 This is a proceeding for the redetermination of deficiencies as follows:
| Year | Deficiency | Penalty | |
| 1931 | Income tax | $134.20 | $33.55 |
| 1933 | Income tax | 688.03 | 172.01 |
| 1933 | Excess profits tax | 250.19 | 62.55 |
The petitioner contends that it is exempt from income tax under section*1061 103(7) of the Revenue Acts of 1928 and 1932 and that in any event it is not liable to penalties for delinquency in filing returns.
FINDINGS OF FACT.
The petitioner was organized in 1917 under the statutes of the State of Washington as a nonprofit corporation. It is the type of organization commonly known as a "trade association." It has no capital stock or corporate shares of any kind. Its membership is composed of agents of various insurance companies writing fire and liability insurance in King County, Washington. Membership in the association carries a membership in the state association which is known as the Insurance Agents League of Washington, which in turn carries a membership in the National Association of Insurance Agents.
A president and other officers and also a board of directors are elected annually. There are no paid officers or employees except a stenographer, who in 1931 had an office in that of the president of the association.
*289 The articles of incorporation state the purposes and objects of the association as follows:
* * * to elevate the standard of the fire insurance business * * * to support and further all the good practices * * * *1062 to discourage and oppose all bad practices in the fire insurance business * * * to promote educational and social features of interest to the members * * * maintain a medium of exchange * * * and for the discussion of ideas * * * looking toward the mutual betterment of the business * * *; to encourage a higher standard of ethics * * *; to compile and disseminate information and data * * *.
The petitioner has a "code of ethics" which also states the purposes and functions of the organization as set forth in the articles of incorporation. Every member upon joining the association is required to sign the code of ethics.
Petitioner was incorporated in 1917 under the name of Fire Insurance Exchange of Seattle. The name was later changed to Insurance Exchange of Seattle, and still later to King County Insurance Association.
Petitioner's original bylaws provided that:
Annual dues for the support of the Association shall be paid by the members, and the said dues to be payable quarterly in advance, and shall be based upon and regulated yearly by the net fire and casualty premiums written during the previous calendar year.
The minimum dues for regular members were $25 per annum. *1063 Associate membership dues were $15 per annum. The bylaws also provided for initiation fees of $50 for regular membership and $10 for associate membership.
Prior to 1931 the petitioner had no income or revenue aside from dues and initiation fees and a small amount received as interest.
The petitioner never had any physical assets of a value in excess of $2,500 and up to the close of 1933 it had accumulated only a negligible amount of money. Its physical assets consist of office furniture and equipment which have a value not in excess of $75 or $100.
Until 1931 all of the expenses of the petitioner were paid out of the dues and initiation fees contributed by the members. In some instances the dues were of sufficiently large amounts to be burdensome to the members. During that year a plan was inaugurated under which the writing of a certain type of policy, referred to in this proceeding as "public business", was taken over by the association for its own benefit. Theretofore, such insurance policies had been written by various members of the association for their own account and for the account of their companies on the Port of Seattle, a municipal corporation; the Seattle*1064 school district, a municipal corporation; King County Hospital; and the Olympic Hotel, which was constructed upon state lands. To centralize the writing of such insurance and to give a *290 better rate and better services to the municipalities, and to eliminate competition in this field, the agent members voluntarily gave up their private business of writing this insurance and the petitioner designated one of its members to write such policies. Thereafter the commissions upon premiums on these policies were paid into the treasury of the petitioner.
The larger portion of the "public business" policies was written on three-year policies and the commissions therefor were paid at various times during the three-year periods. To meet the overhead cost of operation in the interim the members of the petitioner, beginning about 1931, in lieu of paying "dues", made what was termed "advances" to the petitioner. These advances were made with the understanding that a part of them would be refunded from commissions from the "public business."
To conform to this change in its operations the bylaws of the association were amended. Section 1 of article VIII of the amended bylaws is*1065 as follows:
The word "dues" when used in these By-Laws or the word "dividend" or "dividend on public business" when used in these By-Laws shall have a special and limited meaning except where the context requires otherwise. "Dues" shall mean an advance by members to permit the operation and carrying on of the business and affairs of the corporation and to permit the writing and handling of public business. "Dividends" or "dividends on public business" shall be a refunding of a portion of said advances or a credit on the next advance required and it shall not be, or be construed to be, a division or distribution of net profits earned by the corporation, but no member shall be construed to have any right to claim or demand all or any portion of such advance until the Board of Trustees has found and determined what sum is available for return to members and has determined the basis upon which it will be returned.
Section 10 of the same article of the amended bylaws provides:
Dividends on public business shall be payable to members who have been in "good standing" during the entire period for which the distribution is made. The Board of Trustees shall determine the date and amount*1066 of same and to whom and when payable.
The petitioner's profit and loss statements for 1931 and 1933 show commissions on the "public business" policies of $2,292.80 in 1931 and $4,692.28 "accrued" in 1933. Dues were assessed against the members in 1931 in the total amount of $4,725.32, against which $1,405.56 of the commissions on public business was later credited. In 1933 dues were assessed in the amount of $4,452.66 and during that year or early in 1934, as of 1933, $2,112 of commissions on public business was distributed to the members.
No income tax returns were made by the petitioner until the year 1934. At that time an accountant went over the books and advised the *291 petitioner that returns should be filed. Accordingly, the petitioner filed returns for 1931, 1932, and 1933 with the collector of internal revenue for the district of Washington on November 8, 1934. In December 1934 the collector wrote the petitioner as follows:
This office has your income tax returns for the years 1931 to 1933, inclusive. In the letter of transmittal with your returns you state that you have been advised by an accountant that you are required to file annual returns.
Records*1067 in this office indicate that your corporation has never been requested to file returns inasmuch as it was considered as exempt corporation for income tax purposes. * * *
The petitioner in 1931 and 1933 was a business league within the contemplation of section 103(7) of the Revenue Acts of 1928 and 1932, which was not organized for profit and whose net earnings did not inure to the benefit of its individual members.
The delinquency in filing income tax returns for 1931 to 1933, inclusive, was due to a "reasonable cause."
OPINION.
SMITH: The questions presented by this proceeding are (1) whether the petitioner was a business league exempt from income tax for 1931 and 1933, and (2) whether, if not exempt, the delinquency in filing returns for those years was due to a "reasonable cause."
Section 103 of the Revenue Acts of 1928 and 1932 provides:
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.
There can be no question but*1068 that the petitioner qualifies as a business league exempt from income tax for 1931 and 1933, the taxable years involved in this proceeding, unless it is barred from such exemption by reason of the fact that it acted as agent in writing insurance policies on so-called "public business." The respondent contends that by reason of this fact the petitioner engaged in business for profit and is accordingly barred from exemption. The evidence shows, however, that the members waived their commissions upon this public business in favor of the association in order to provide additional revenue for the petitioner's expenses and because it was deemed in the public interest that there should be no competition on the part of the members in the writing of policies upon municipally owned properties. The members nevertheless were required to pay dues or advances, which were rebated only in part upon the receipt by the association of the commissions upon the public business.
*292 In , the Board stated the requirements of this same provision of the taxing statutes, but under a prior law. We there pointed out that it was the*1069 intention of Congress to exempt from income tax organizations such as the petitioner, provided they were (1) not organized for profit, and (2) no part of the net earnings inured to the benefit of any private stockholder or individual. An organization to be exempt under this provision of the statute must meet both conditions of the exemption.
Quite clearly the petitioner was not organized for profit. That was not the purpose of the organization. Nor, in our opinion, was it operated for profit during the taxable years 1931 and 1933, notwithstanding that, through an appointed agent, it wrote so-called "public business" policies. The income from this source served merely to reduce the amount of the dues which otherwise would have had to be contributed by the members.
The evidence shows, too, that no part of the net earnings ever inured to the benefit of any private individual. The income from the public business, as above stated, merely served to reduce the amount of the dues. No member ever received, ever expected to receive, or ever had any possibility of receiving, back from the petitioner in any year an amount greater than or even equal to his advances to the petitioner*1070 for such year.
Exemption from income tax by a business league is not forfeited by the receipt of incidental income from transactions or operations which would be taxable by a corporation engaged in business for profit. In , it was held that the mere fact that an association of this character may receive some income and use that income to carry on its work is no proof that it is organized for the sake of profit. See also .
We are of the opinion that the receipt by the petitioner of commissions on "public business" which served only to reduce the amount of dues payable by the members does not bar the petitioner from classification as an exempt association.
Since the petitioner was exempt from income tax it was, of course, not required to file income tax returns. But in any event the delinquency in filing returns was due to a reasonable cause, even if the petitioner might be held to be taxable. The respondent was therefore in error in determining delinquency penalties.
Judgment of no deficiencies will be entered.*1071