*894 St. John's Orphan Asylum, a charitable corporation, owns and operates a home for orphan or dependent boys between the ages of 7 and 12. It also owns the St. Francis Industrial School, which is separately endowed and to which it transfers each year approximately 60 boys who have reached the age of 12. For a number of years prior to the taxable year the income from the endowment fund had been insufficient to meet the expenses of the school and it had been the custom of petitioner to pay the deficit. In the taxable year and prior to the selection of the boys to be transferred from the orphan asylum to the school, petitioner entered into a written agreement with the corporation to the effect that she would pay to the school the amount of its expenses in maintaining the boys to be transferred that year. For that year, and in accordance with her custom in previous years, she paid the amount of the school's deficit, including the sum computed under the written agreement. Held, that petitioner's payments pursuant to the agreement were essentially contributions to a charitable institution and did not entitle her to credit for dependents.
*239 This proceeding was brought to redetermine a deficiency in income tax for the year 1933 in the amount of $1,002.67. The only issue is whether the petitioner is entitled to reduce net income by way of a credit for dependents. Among the claimed dependents were 64 boys transferred in the taxable year from St. John's Orphan Asylum and the Catholic Children's Bureau to the St. Francis Industrial School. In the petition, however, issue is raised in respect of the credit claimed for only 61 boys.
FINDINGS OF FACT.
Petitioner is an individual residing at Torresdale, Philadelphia, Pennsylvania. She filed her Federal income tax return for the year 1933 with the collector of internal revenue at Philadelphia.
St. John's Orphan Asylum in Philadelphia is an incorporated charitable institution, operated under the direction and supervision of the Archbishop of the Archdiocese of Philadelphia. In 1933 and 10 or 12 years prior thereto, its average enrollment was between five and six hundred boys from St. Vincent's Hospital. They remain at St. John's Orphan*896 Asylum until they have completed the course of study or have reached the approximate age of 12 years, when provision is made for their further care and training elsewhere.
*240 The St. Francis Industrial School at Eddington, Pennsylvania, is owned by St. John's Orphan Asylum, but is separately operated and maintained. A part of its operating expenses is provided by an endowment fund originally established by petitioner's sister in 1888, when the school was founded. From time to time thereafter and prior to the hearing in this proceeding various individuals, including petitioner's counsel, made contributions to the endowment fund. The enrollment in the school ranges between 245 and 255 and is never less than 245. The school provides a four-year course of study and training along industrial and commercial lines. It also provides a home, food, clothing, and medical and dental care for the boys enrolled. The requirements for entrance are that the boy be able to pass at least the fifth grade and that he be an orphan or that the parents be separated. In June of each year the Catholic Children's Bureau in Philadelphia is advised as to the number of graduates from the school, *897 and the number of places so vacated by graduation usually is filled by transfers from St. John's Orphan Asylum. In June 1933, 64 boys were received at the school; 59 were transferred from St. John's Orphan Asylum and 5 came directly from the Catholic Children's Bureau.
Many of the children received by St. Vincent's Hospital, St. John's Orphan Asylum, and the St. Francis Industrial School were originally committed to the Catholic Children's Bureau by the Municipal Court for the City of Philadelphia. In that city there are several placing agencies for children, among which are the Children's Aid Society, the Catholic Children's Board, and the Jewish Welfare Organization. The usual procedure in the municipal court is that the children are committed upon the recommendation of the various agencies. In the case of Catholic children, the Catholic Children's Bureau is ordinarily requested to make provision for the care of the child. Where the court considers it necessary, an order is entered allowing the institution selected a certain sum each week for the child's maintenance.
A majority of the boys transferred to the St. Francis Industrial School in 1933 were originally committed*898 to St. John's Orphan Asylum or the Catholic Children's Bureau under court orders providing specified sums for their maintenance. Upon their transfer to the St. Francis Industrial School, however, those orders were vacated and it was necessary that some other means of maintenance be provided. In each instance the nearest relative of the boy had signed an agreement which permitted the boy's transfer to the school. Throughout the period during which the boys remained in one of the various institutions the officials were trying to place them in private homes or with relatives. Most of the boys transferred to the school during 1933 were orphans, or had lost one parent. In *241 some instances the father had deserted or was separated from his wife. In so far as the record shows, each boy so transferred was destitute and had no known means of support.
For a number of years the income from the endowment fund of the St. Francis Industrial School had been insufficient to pay the expenses of the school and in each year it had been petitioner's custom to contribute the difference. The director of the school would submit an itemized monthly statement to petitioner and she would*899 make monthly payments to take care of the deficit.
After a conference with the Archbishop in May of 1933, the following instrument was drawn by petitioner's attorney and on May 10, 1933, executed by the petitioner and for St. John's Orphan Asylum by the Archbishop, D. J. Dougherty, its president:
This Agreement made the 10th day of May, 1933, between St. John's Orphan Asylum, a Corporation organized under the laws of the Commonwealth of Pennsylvania, hereinafter called "First Party," and Louise Drexel Morrell, of the City of Philadelphia, Commonwealth of Pennsylvania, hereinafter called "Second Party."
WHEREAS, there are boys at St. John's Orphan Asylum who have reached the usual age for transfer or discharge, and for whom it is now necessary to make provision, as they are entirely without means of support, and
WHEREAS, these boys are acceptable for admission to St. Francis Industrial School, at Eddington, Pa., which is a part of this Corporation, but the income from the endowment of said School is insufficient to maintain any additional students, and
WHEREAS, the Second Party has agreed to assume the expense of maintaining said boys at St. Francis Industrial School, if*900 they be admitted,
Now THIS AGREEMENT WITNESSETH, that, for and in consideration of the mutual promises and covenants herein contained, the parties agree, to and with each other, as follows:
1. First Party shall admit to St. Francis Industrial School the boys whose names and ages are set forth in Schedule "A", which is attached hereto, for whom it shall provide thereat all necessary maintenance, including food, shelter, clothing, tuition, medical and dental services, for the period of one year from the date hereof.
2. Second Party shall pay to First Party the entire expense of maintaining the boys as aforesaid, in such installments as may be convenient for Second Party, but the whole amount thereof is to be paid to First Party within the period of one year from the date hereof.
IN WITNESS WHEREOF, the First Party has hereunto caused its Corporate Seal to be affixed and these presents to be signed by its President and attested by its Secretary, and Second Party has hereunto set her hand and seal the day and year aforesaid.
[Signed] ST. JOHN'S ORPHAN ASYLUM
By: D. J. DOUGHERTY,
President.
Attest:
GEORGE V. MITCHELL,
Secretary.
LOUISE DREXEL MORRELL.
*901 *242 When the above agreement was executed schedule A, showing the names of the boys to be transferred, was not made out or attached because at that time it was not known which boys would be selected for transfer by the "Superior" at St. John's Orphan Asylum. It was understood, however, that approximately 60 boys in the upper class would be selected and a list of the names attached to the agreement at some later date. Subsequently a list containing the names of 59 boys transferred from St. John's Orphan Asylum and 5 boys transferred directly from the Catholic Children's Bureau was attached to the agreement. The 64 boys so listed constituted the total year 1933. year 19339
The endowment fund for the St. Francis Industrial School is handled by Drexel & Co. of Philadelphia and the income is turned over to the director of the school in monthly payments and is used by him to pay current operating expenses. In 1933 the total income from the endowment fund was $52,000, and, as in several of the years preceding, was insufficient to meet the expenses of the school. By reason of that fact the petitioner, as in previous years, received monthly bills showing the additional amount*902 required to meet current monthly expenses. No separate accounts were kept by the school to show or cover the expenses of providing for the 64 boys named in schedule A to the above agreement. The sums received from Drexel & Co. and petitioner were used by the school to pay current running expenses and the monthly bills submitted to the petitioner did not show that the money had been spent for the support and maintenance of any particular boy or group of boys. On December 1, 1933, the director of the school sent the following statement to petitioner:
December 1, 1933
Mrs. Edward Morrell,
San Jose,
Torresdale, Phila., Pa.
To
St. Francis Industrial School, Dr.
Eddington, Penna.
In accordance with the written Agreement between the Institution and Mrs. Morrell:
| Board and Tuition of sixty-one boys for the months of July, August, September, October, November and December at $33.33 1/3 per month | $12,200.00 |
| Board and Tuition of John Scattone for the months of July and August at $33.33 1/3 per month | 66.67 |
| Board and Tuition of John Haederer for the month of July at $33.33 1/3 per month | 33.33 |
| Board and Tuition of Frederick Galgani for the months of June, July, August, September, October, November & December | 233.33 |
| Total | $12,533.33 |
*903 *243 The director's estimate of the average cost of providing for one boy for a period of one month was $33.33 1/3 and that estimate was approved by petitioner. She paid the total amount shown sometime during December 1933. The record does not show whether she received a further bill on December 1, 1933, to cover the deficit, if any, in current operating costs.
The total operating expenses of the school for the year 1933 were approximately $88,000 and the petitioner paid to the school the difference between the income from the endowment fund and the total operating expenses. The amount so paid included the amount of $12,533.33 covered by the statement of December 1, 1933, above set forth. Several years prior to 1933 the total operating expenses of the school, the amount received from its endowment fund, and the amount contributed by the petitioner were approximately the same as for the year 1933.
In her income tax return for 1933 petitioner claimed a credit against net income for 64 dependents in the St. Francis Industrial School in the total amount of $12,533.33 and the credit so claimed was disallowed by the respondent in his determination of the deficiency herein. *904 The petitioner has been allowed the full deduction in respect of contributions to charitable organizations provided by the statute.
OPINION.
TURNER: The sole question presented for our determination is whether the payment of $12,533.33 made by the petitioner to the St. Francis Industrial School should be allowed as a credit for dependents under section 25(d) of the Revenue Act of 1932. 1 The record shows that the petitioner regularly and for a number of years prior to the taxable year had been contributing monthly amounts sufficient to cover the difference between the income from the school's endowment fund and its operating costs. The school used those funds, together with the income from the endowment fund, for the purpose of carrying on its activities, which included housing, feeding, educating, and otherwise maintaining approximately 250 boys who were selected and transferred to it by the Catholic Children's Bureau or St. John's Orphan Asylum. It is conceded by the respondent that the payments so made by the petitioner *244 were deductible as contributions to a charitable organization under section 23(n) 2 of the act, subject only to the limitations provided therein. *905 The petitioner now claims that, by reason of the execution of the instrument of May 10, 1933, and the inclusion therein of the names of the boys who entered the school during that year, the amount so paid to the St. Francis Industrial School during 1933 constituted, to the extent of $12,533.33, payments made for the chief or sole support of 64 boys within the meaning of section 25(d).
*906 We have examined the facts carefully and are unable to subscribe to the application of the statute contended for. In the first place, the mere fact that an agreement to make a contribution is reduced to writing does not convert it into something different, and in the second place, the facts definitely show that the petitioner continued to do what she had done before, that is, to contribute to the St. Francis Industrial School an amount sufficient to make up the excess of its operating expenses over the income from its endowment fund, and from the funds derived from its endowment and the contributions so made by the petitioner the St. Francis Industrial School supported and maintained the boys in question. The listing of inmates or anticipated inmates of a charitable institution in an agreement to contribute to such an institution does not convert the individuals named into dependents within the meaning of section 25(d), supra, and in determining taxable income the allowance for such contributions is to be made under section 23(n), supra, and not as credits for dependents.
Decision will be entered for the respondent.
Footnotes
1. SEC. 25. CREDITS OF INDIVIDUAL AGAINST NET INCOME.
There shall be allowed for the purpose of the normal tax, but not for the surtax, the following credits against the net income:
* * *
(d) CREDIT FOR DEPENDENTS. - $400 for each person (other than husband or wife) dependent upon and receiving his chief support from the taxpayer if such dependent person is under eighteen years of age or is incapable of self-support because mentally or physically defective. ↩
2. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * *
(n) CHARITABLE AND OTHER CONTRIBUTIONS. - In the case of an individual, contributions or gifts made within the taxable year to or for the use of:
* * *
(2) a corporation, or trust, or community chest, fund or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual;
* * * to an amount which in all the above cases combined does not exceed 15 per centum of the taxpayer's net income as computed without the benefit of this subsection. * * * ↩