*1889 BUSINESS LEAGUE, EXEMPTION. - The petitioner was incorporated for the purpose of and engaged in the business of a general adjustment and mercantile collection agency and more particularly the work of gathering and disseminating mercantile and credit information, of acting as agent and representative of others in collecting and litigating claims, of holding, selling, encumbering and realizing upon real and personal property in the adjustment and settlement of claims and of bankrupt concerns, and of auditing accounts. Petitioner charged fees designed to produce a profit over the cost of all services rendered. Its net profits were used to maintain a surplus and to enable it to render valuable services at cost and less than cost or entirely gratis to members of the St. Louis Association of Credit Men which nonprofit and nonbusiness organization held all of petitioner's capital stock, except qualifying shares, and controlled petitioner by the election of its directors. Held that during 1925, 1926, and 1927 petitioner was not exempt from Federal income tax as a business league within the meaning of section 231(7) of the Revenue Acts of 1924 and 1926, under authority of Northwestern Jobbers' Credit Bureau v. Commissioner of Internal Revenue, 37 Fed.(2d) 880.*1890
*232 These two proceedings, which have been consolidated for hearing and decision, have been brought for a redetermination of deficiencies in petitioner's income taxes and penalties as follows:
| Calendar year | Deficiency | Penalty |
| in tax | ||
| 1925 | $925.35 | $231.34 |
| 1926 | 604.81 | 151.20 |
| 1927 | 1,071.28 | 267.82 |
| Total | 2,601.44 | 650.36 |
*233 The only issue is whether petitioner is exempt from Federal income tax for the said years, as a business league within the meaning of section 231(7) of the Revenue Acts of 1924 and 1926.
FINDINGS OF FACT.
The petitioner, whose offices are at St. Louis, was incorporated in 1908, for a term of 50 years, under the laws of the State of Missouri and more particularly under the provisions of Article IX, Chapter 12, RevisedStatutes of 1899, governing the formation of manufacturing and business corporations. Its articles of incorporation state that it was formed for the following purposes:
To conduct a general adjustment and mercantile collection business; to gather and disseminate mercantile*1891 and credit information and reports; to act as agent and representative of others in securing, collecting and litigating claims and holding and realizing upon property in so doing; to audit accounts, books of record and estates; to buy and sell notes and accounts in connection with the adjustment and settlement of claims; to acquire and own, sell, encumber, and dispose of real and personal property in connection with the adjustment and settlement of claims; to do all acts necessary for the carrying out of the purposes for which the corporation is formed.
Upon organization, and also during the years under review, petitioner's capital stock was $2,500, divided into 100 shares having a par value of $25 each. The petitioner was organized and its stock was subscribed by members of the St. Louis Association of Credit Men. Petitioner's stock was sold with the understanding that no interest or dividends would be paid thereon and that if and when the petitioner became financially able the stock would be purchased and held as treasury stock.
Several years prior to the years under consideration the petitioner purchased all of its outstanding capital stock at par. Ninety-one shares were*1892 issued without consideration to three trustees appointed by the president of the St. Louis Association of Credit Men and nine shares were issued without consideration to the petitioner's nine directors as qualifying shares. The stock was so issued during the years under review, and the nine qualifying directors' shares have been successively issued to the petitioner's various successive directors who are elected by the said three trustees for the St. Louis Association of Credit Men. That association is a nonprofit and nonbusiness organization existing under a pro forma decree in accordance with the laws of Missouri, and was "organized for the purpose of rendering more uniform, and establishing more firmly, the basis upon which credits in every branch of commercial enterprise may be founded, which shall include a demand for the reform of laws, Federal and State, unfavorable to honest debtors and creditors, and the enactment of laws beneficial to commerce; also to improve existing methods for the diffusion of information; to gather and disseminate *234 data in relation to the subject of credits, to amend business customs, whereby commercial interests may be benefited and*1893 the welfare of all may be advanced." The St. Louis Association of Credit Men derives its income or revenue from the annual dues of $35 paid by its members, consisting of the various corporations, firms, partnerships or individuals doing business in the city of St. Louis.
Since its organization the petitioner has continuously operated in accordance with the purposes for which it was incorporated and hereinbefore set out. Subsequent to the time petitioner purchased its own capital stock, it has had no paid-in capital and there have been no regular members of the petitioner organization. It has always constituted simply a service department for the use and benefit of the credit departments of the various members of the St. Louis Association of Credit Men, and also the members of other similar organizations in other cities which are affiliated with the National Association of Credit Men. The management and operation of petitioner has been controlled by the St. Louis Association of Credit Men through the election of petitioner's directors by the three trustees for the said association. For services rendered the petitioner charged fees designed to cover the cost of operation, but*1894 until 1923 the undertaking was operated at a loss and it was necessary to make up the deficiency by contributions from the St. Louis Association of Credit Men (about $7.50 out of each member's annual dues) and loans from the members of that association.
In February, 1923, the petitioner's indebtedness amounted to about $30,000. At that time a new manager was employed, who, with the@ aid of the directors, worked out a new schedule of fees and charges designed to produce a profit over the expenses of operation. Within a period of about eighteen months all of petitioner's indebtedness was paid and the new schedule of fees and charges was continued in effect during the years under review and up to the date of the hearing on this proceeding, for the purpose of building up a surplus and also for the purpose of extending gratuitous services rendered by the petitioner to the members of the St. Louis Association of Credit Men. Petitioner's surplus amounted to $21,169.99 at the close of the year 1925; $27,944.47 at the close of the year 1926; and $39,067.44 at the close of the year 1927. A portion of that surplus has been invested in bonds for the purpose of acquiring additional revenue. *1895 Petitioner's directors serve without compensation. No dividends have ever been paid and on December 30, 1925, the articles of incorporation were amended so as to state specifically that no interest or dividends shall be paid, but that the net income, if any, shall be used in the furtherance of the purposes of petitioner. During the years 1925, 1926, and 1927 petitioner's expenses amounted to approximately $80,000 a year, including salaries paid to its manager and 65 employees, *235 stationery, postage, telegrams, rent, etc. At the time of the hearing petitioner's expenses had increased to about $100,000 a year, due to a further expansion of gratuitous services rendered, which cost petitioner $35,000 or $40,000 a year.
The activities of the petitioner were divided into three main departments - the Interchange Department, the Estate Department, and the Collection Department. The work of the Interchange Department consisted of gathering and disseminating mercantile and credit information and reports. When a member of the St. Louis Association of Credit Men, or a member of some other similar association affiliated with the National Association of Credit Men, requested a*1896 report on the business record of a certain customer or prospective customer, the petitioner ascertained from its records, compiled through a central or national bureau, the various firms in different cities with which that customer is or has been dealing, and then sent to each of them a questionnaire which they voluntarily filled out as to high and low credit extended, times sold, amount sold, amount past due, method of payment, etc., and returned to petitioner, who consolidated the information into one report termed an interchange report. A reciprocal copy of the report was sent free of charge to each of the firms contributing information, and the member requesting the report paid petitioner a fee of 75 cents. The Interchange Department also furnished, upon request, various types of special mercantile and financial information as to merchants and business concerns located in St. Louis and other cities, which information petitioner secured by telegraph or long-distance telephone and sometimes by requesting another credit bureau to send an investigator out to secure the desired information. For such service the member requesting it paid to petitioner only the actual cost of securing*1897 the desired information. The only income derived from the activities of the Interchange Department was from the fees charged for the interchange reports.
The activities of the Estate or Adjustment Department consisted of liquidating insolvent concerns, the temporary management and reorganization of firms in financial difficulties, the institution of bankruptcy or receivership proceedings, the negotiation of settlements and of extensions of credits, and the acceptance of assignments for the benefit of creditors. If a member got into financial difficulties it could request the petitioner's aid or a member could bring in any debtor and request petitioner's aid. The petitioner would make an analysis of the debtor's situation and determine the best course to follow. It would then call into conference or communicate with all of the debtor's creditors and work out a solution for the benefit of all concerned. If bankruptcy proceedings were necessary an attorney was secured to take the necessary steps. In *236 other instances the petitioner would take over the debtor's business, under an assignment, and liquidate it or reorganize it. The petitioner received payments for the*1898 benefit of and for distribution to creditors and charged each one a fee of from 1 to 2 1/2 per cent of the amount recovered for the services rendered. In some instances the fees charged amounted to more than the actual cost to petitioner and in other instances they amounted to less than cost. Petitioner often arranged and conducted conferences between debtors and creditors without charge to any of the parties.
The activities of the Collection Department consisted of collecting debts owed to members. The method employed was to write letters to the debtor, for which no charge was made. If the first letters brought no results the petitioner would telegraph or telephone and write additional letters on the basis of a charge of 2 per cent if the debt was paid, but if not paid no charge was made. If it became necessary to bring suit the matter was turned over to an attorney and the member would be charged upon the basis of a commercial law league rate, i.e., 15 per cent on the first $500; 10 per cent on the next $500; and 5 per cent on all amounts over $1,000, but two-thirds of that fee would be paid to the attorney.
During the years under review the petitioner's profits which*1899 were not added to surplus were used to extend and improve the services rendered by petitioner, such as employing additional or more expert employees so that more detailed analyses could be made and to extent gratuitous services rendered such as the making of an analysis of a member's business if it should have losses or become slow in paying its debts or lose trade, and render assistance in keeping the firm in business. Such services were valuable to the recipients thereof and any ordinary commercial credit bureau would have charged regular fees therefor. The petitioner built and maintained its surplus for purposes of keeping the organization on a sound financial basis and so that it would be in a position to keep its trained organization intact in the event business generally should become good and the petitioner's services would not be needed to the extent that they are when business generally is not good. The usual credit reports of petitioner were made possible by the cooperation of members of associations of credit men all over the country, which associations are affiliated with the National Association of Credit Men, which acts as a central bureau for gathering and disseminating*1900 credit information. Petitioner's services as a whole were of much greater value to the members of the St. Louis Association of Credit Men than the cost thereof to them, due to the fact that valuable services were rendered merely at cost or less than cost to petitioner or entirely gratis.
*237 The petitioner filed no income-tax returns for the years 1925, 1926, and 1927, but the collector made returns for it after an examination of its books and records. There is no dispute as to the correctness of the respondent's computation of petitioner's net income in the amount of $9,118.07 for the year 1925; $6,480.10 for the year 1926, and $9,935.47 for the year 1927, and the taxes computed thereon, if petitioner is found to be subject to Federal income tax for the said years.
OPINION.
TRUSSELL: The only issue involved in these proceedings is whether the petitioner is exempt from Federal income tax for the years 1925, 1926, and 1927 within the meaning of section 231(7) of the Revenue Acts of 1924 and 1926, which provides:
SEC. 231. The following organizations shall be exempt from taxation under this title -
* * *
(7) Business leagues, chambers of commerce, or boards*1901 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.
It is well settled that an organization claiming exemption from tax must prove clearly that it is within the provisions of the act granting such exemption and, further, such provisions must be strictly construed. A business league to be exempt must meet both of the tests prescribed in the above quoted section. See .
The petitioner was organized under the provisions of the Missouri statutes governing the formation of manufacturing and business corporations, that is, corporations organized for profit. Its articles of incorporation state that its business is a general adjustment and mercantile collection agency and more particularly the work of gathering and disseminating mercantile and credit information, of acting as agent and representative of others in securing, collecting and litigating claims, of holding, selling, encumbering and realizing upon real and personal property in connection with the adjustment and settlement of claims, and of auditing accounts, books of record*1902 and estates. The record discloses that in the transaction of its business, the petitioner has exercised all of those powers and, further, petitioner freely admits that during the years 1925, 1926, and 1927, and also during prior and subsequent years, it not only operated its business at a profit, but purposely charged fees designed to produce a profit over and above the cost of all services rendered.
The petitioner's net profits were not distributed by the declaration of dividends, but were used to build up a surplus amounting to $21,169.99 in 1925, $27,944.47 in 1926, and $39,067.44 in 1927, and in addition thereto to increase the value of the services rendered without *238 increasing the fees charged therefor and also to extend the amount of valuable gratuitous services rendered. The petitioner's business was not limited to any particular class of firms and, in fact, in representing others in liquidating insolvent and bankrupt businesses, petitioner acted for all creditors concerned whether they were members of the Association of Credit Men or not. The services which petitioner rendered merely at cost and less than cost to it, and the gratuitous services were for the*1903 benefit of the members of the St. Louis Association of Credit Men, which organization through its own appointed trustees, held all of petitioner's capital stock, except for the directors' qualifying shares, and controlled petitioner's activities by the election of its directors.
In the case of , the business activities of the appellant corporation were almost identical to the activities of the petitioner in the case at bar, and the court in holding that it was organized for profit, said:
* * * The business which appellant was authorized to do, and which it has done, includes lines of work ordinarily performed by mercantile agencies trust companies, attorneys at law, creditmen and collection agencies, with a view to making a profit. There is no claim that appellant intended to transact this work without making a profit, and the fact that it has been profitable is shown by the amount of a net income for the year in question of $11,129.33 and by a surplus of $46,361.14, with a capital stock of $2,170.
With respect to the question of whether the said net profits of the*1904 Northwestern Jobbers' Credit Bureau inured to the benefit of its shareholders, the court said that while no cash or property was distributed as dividends, the appellant used its net profits in providing services for which it did not receive the full cost thereof, that the shareholders and other individuals received the benefit of those valuable services which were reasonably necessary in the proper conduct of their business and that in such manner the appellant's net profits did inure to the benefit of its shareholders and to private individuals.
Under authority of the decision in the , we hold that during the years 1925, 1926, and 1927, this petitioner was not a business league, "not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual," and that it was not exempt from Federal income tax during those years within the meaning of section 231(7) of the Revenue Acts of 1924 and 1926.
Petitioner contends that a corporation coming within the exemptions provided by section 231 may have a net income, and we agree with*1905 that contention to the extent that such net income is earned merely as an incident to the main altruistic purpose of the *239 corporation such as in the cases of , and . The facts in the case at bar clearly establish that petitioner earned net profits in carrying on the business it was organized to engage in, which business is one ordinarily carried on for the purpose of making an income. The petitioner also contends that if profits be earned the destination of such profits rather than the source is the determining factor and that inasmuch as its stock was held by the St. Louis Association of Credit Men, a nonprofit and nonbusiness organization, its net profits could not inure to the benefit of any private shareholder. However, the Act provides, as one of the conditions for exemption, that the net profits shall not inure "to the benefit of any private shareholder or individual." The facts of record establish that petitioner's net profits were used in rendering services at cost and at less than cost or entirely gratis to the members*1906 of the St. Louis Association of Credit Men and that such services were valuable and necessary to the conduct of their business. In our opinion that constituted an inurement of the benefits of petitioner's net profits to private individuals within the meaning of the Act.
Petitioner relies upon the decision in the case of , in which case it was held that that association, organized for the purpose of maintaining a hay association; promoting uniformity in customs and usages of merchants; inculcating principles of justice and equity in business; facilitating the speedy adjustment of business disputes; inspiring confidence in the business league; disseminating valuable commercial and economic information; and generally securing to its members the benefits of cooperation in the furtherance of their legitimate pursuits and promoting the welfare of Kansas City, was exempt from Federal income tax. That decision was affirmed by the Circuit Court of Appeals of the Eighth Circuit on December 16, 1929, as reported in *1907 , and the same court on January 10, 1930, handed down the decision in case of , and in distinguishing the two cases, pointed out that the Hay Dealers Association operated no business, while the chief, and not incidental, purposes of the Jobbers' Credit Bureau were its activities for which it received a substantial income. That differentiation applies with equal force to the case at bar, and the Hay Dealers case, supra.
The petitioner's activities fall within that class of enterprises ordinarily carried on for profit in one form or another to those engaged in or served by such enterprises. Cf. A-1 Cleaners & Dyers Co., 14 B.T.A. 1314; ; *240 and ; affd., ; certiorari denied, .
Judgment will be entered for the respondent.