*240 In Docket No. 1617 decision will be entered in favor of respondent as to deficiencies in tax but in favor of petitioner as to penalties. In Docket No. 1618 decision will be entered under Rule 50. In Docket No. 1684 decision will be entered for respondent.
1. Petitioner in Docket No. 1617 is an unincorporated association of employees of a corporation. Its purposes and objects are to provide care for the employees of the corporation in sickness, to make provision for their families at time of death, and to assist in assuring material comfort during temporary or permanent disability. The major portion of its receipts is from dues paid by the members, who are all employees of the corporation. During the taxable years 1926 and 1927 it also received contributions from the corporation as provided in article IX of its bylaws and some interest and dividends on investments. Held, petitioner is not exempt from taxation as a charitable institution under either paragraph (6) or (8) of section 231 of the Revenue Act of 1926, Philadelphia & Reading Relief Association, 4 B. T. A. 713, followed; held, further, the payments received from the corporation*241 which it deducted as ordinary and necessary business expenses in computing its own net income for taxation were not gifts to petitioner under section 213 (b) (3) of the Revenue Act of 1926 and should be included in petitioner's gross income for the taxable years 1926 and 1927. Petitioner, because of the retroactive provisions of section 137 of the Revenue Act of 1942, is exempt from taxation for years beginning with 1928.
2. Upon the advice of counsel and in good faith, believing that it was not subject to taxation, income tax returns were not filed by the C. R. Lindback Foundation for the taxable years 1926 and 1927, but delinquent returns were filed on April 2, 1942, for those years, which was nearly one year prior to the determination of the deficiencies. Held, the Foundation's failure to file returns on time was due to reasonable cause and not to willful neglect, and delinquency penalties should not be imposed. Dayton Bronze Bearing Co. v. Gilligan, 281 Fed. 709, followed.
3. Where two individuals made voluntary contributions to the above association, one in 1938, 1939, and 1940, and the other in 1939 only, held, the contributions *242 are not "charitable" contributions and are not deductible from the gross income of the individuals under section 23 (o) (2) of the Revenue Act of 1938 or of the Internal Revenue Code as amended.
*653 These consolidated proceedings involve deficiencies in income tax and penalties determined by respondent against petitioners as follows:
| Docket | Calendar | |||
| Petitioner | No. | year | Deficiency | Penalty |
| C. R. Lindback Foundation | 1617 | 1926 | $ 667.93 | $ 166.98 |
| 1927 | 1,066.97 | 266.74 | ||
| C. R. Lindback | 1618 | 1938 | 3,100.00 | |
| 1939 | 3,100 00 | |||
| 1940 | 4,231.98 | |||
| Estate of William B. Griscom | 1684 | 1939 | 620.00 |
Petitioner C. R. Lindback claims an overpayment of tax for the year 1938 of $ 496.
In a statement attached to the deficiency notice in Docket No. 1617 the respondent notified the C. R. Lindback Foundation as follows:
*244 In view of the fact that your organization is not included in any of the classes of organizations which are exempt under the provisions of section 231 of the Revenue Act of 1926, you are subject to the tax imposed by that Act.
Petitioner in Docket No. 1617 by appropriate assignments of error alleges that the respondent erred in not holding that petitioner was exempt from taxation during the calendar years 1926 and 1927 under either paragraph (6), (8), (10), or (11) of section 231 of the Revenue Act of 1926. In its brief petitioner argues only that it is exempt under either paragraph (6) or (8), and it has apparently abandoned that part of its assignments of error relative to paragraphs (10) and (11) of section 231. In the alternative, petitioner alleges that the respondent erred in adjusting a net loss of $ 12,000 reported by petitioner for each year to a net income of $ 6,947.65 for 1926 and to a net income of $ 9,903.50 for 1927 by means of the following adjustments:
| Adjustment | 1926 | 1927 |
| (a) Contributions received | $ 12,000.00 | $ 12,000.00 |
| (b) 1925 deficiency | 699.47 | |
| (c) Deposits retained | 6,248.18 | 9,903.50 |
In a statement attached to the deficiency notice in Docket*245 No. 1617 the respondent explained the above mentioned adjustments as follows:
(a) Contributions made by Abbotts Dairies, Inc., have been included in gross income.
(b) Deduction for deficiency of prior year eliminated.
(c) Deduction for retained deposits eliminated.
Petitioner in Docket No. 1617 also alleges that in any event the respondent erred "In imposing penalties against petitioner in the absence of evidence of wilful neglect and in the face of evidence that there was reasonable cause for failure to pay the taxes now in dispute."
*654 In Docket No. 1618 the respondent made adjustments to net income as disclosed by petitioner's returns, as follows:
| Adjustment | 1938 | 1939 | 1940 |
| Rents | $ 210.73 | ||
| Contributions | 5,000.00 | $ 5,000.00 | $ 5,000.00 |
| Net long term loss | 2,490.59 |
By appropriate assignments of error petitioner contested all of these adjustments, except rents, and in addition alleged that the respondent erred in not allowing petitioner a credit for two dependents in 1938. At the hearing counsel for respondent conceded that petitioner was entitled to a credit for two dependents in 1938, and counsel for petitioner withdrew the issue relative to the net long*246 term loss, thus leaving for our consideration only the adjustment for contributions, which the respondent in a statement attached to the deficiency notice in Docket No. 1618 explained as follows:
(b) Contribution made to the C. R. Lindback Foundation, Philadelphia, Pennsylvania, has been disallowed. It has not been shown that the Foundation is an organization within the purview of section 23 (o) of the Revenue Act of 1938. (Internal Revenue Code for the years 1939 and 1940.)
In Docket No. 1684, the respondent made only one adjustment to the net income as reported for the year 1939 and that was the disallowance of a contribution of $ 2,000 made to the C. R. Lindback Foundation, which disallowance was appropriately assigned as error, the issue being the same as the sole remaining issue in Docket No. 1618.
FINDINGS OF FACT.
Many of the facts have been stipulated. The stipulation is incorporated herein by reference.
Petitioner in Docket No. 1617 is the C. R. Lindback Foundation, hereinafter sometimes referred to as the Foundation. It was organized on January 10, 1925. The Foundation is and was, in 1925 and at all other times herein mentioned, an unincorporated association of the *247 employees of a corporation now known as Abbotts Dairies, Inc., hereinafter sometimes referred to as Abbotts.
Petitioner in Docket No. 1618 is C. R. Lindback, hereinafter sometimes referred to as Lindback, and is an individual and resident of the city of Philadelphia, Pennsylvania. His Federal income tax returns for the calendar years 1938, 1939, and 1940 were duly filed with the collector of internal revenue for the first district of Pennsylvania at Philadelphia. The return for 1938 showed a tax for the year 1938 of $ 64,572.57, with a first payment made on March 13, 1939, of $ 16,143.14. The petition was filed on May 12, 1943.
*655 Petitioner in Docket No. 1684 is the estate of William B. Griscom, deceased, William B. Griscom, Jr., Mary L. Griscom, and Pennsylvania Co. for Insurance on Lives and Granting Annuities, executors. On February 5, 1940, William B. Griscom, then an individual and resident of the city of Philadelphia, Pennsylvania, filed his Federal income tax return for the calendar year 1939 with the collector of internal revenue for the first district of Pennsylvania at Philadelphia.
Abbotts is engaged in the collection and distribution of milk and milk products*248 in the city of Philadelphia, Pennsylvania, and its vicinity within a radius of 100 miles. Its main office is in that city. It also operates a creamery in Wisconsin, where less than 10 percent of its personnel are employed.
The office of the Foundation has at all times been maintained at the main office of Abbotts and its affairs have been conducted at that place.
Bylaws 1 were adopted for the Foundation on March 1, 1925, and active operation thereunder commenced on that date. These bylaws were amended on November 1, 1925, April 1, 1927, August 1, 1929, January 1, 1934, June 30, 1937, and February 19, 1940.
The Foundation was created as a result of the efforts and under the direction of Lindback, then and now president of Abbotts, and he suggested the purposes, policies, and principles of organization which should be embodied in the bylaws, but he was never a member, officer, or manager of the Foundation. The intention of Lindback was*249 to create an organization that would be ready to help employees who really needed help when they were sick or happened to have an accident or when they reached the age for retirement after a specified number of years of service with the company.
Article I of the bylaws dealt with the name of the Foundation and also provided that Abbotts would be referred to in the bylaws as "Company."
Article II of the bylaws dealt with the purposes and objects of the Foundation. The original article was divided into two sections and provided as follows:
Section 1. The purposes and objects of the Foundation are to provide care for employees in sickness, make provision for their families in time of death, and to assist in assuring material comfort in old age.
Sec. 2. Sick benefits shall be payable to members absent from work on account of sickness; death benefits shall be payable at death to the family of the member; and pensions shall be paid to members eligible therefor on account of disability to work or completion of necessary length of service in the employ of the Company.
Article II was not substantially changed by the amendments. In the last amendment of February 19, 1940, it provided as follows:
*250 *656 Section 1. The purposes and objects of the Foundation are to provide care for employees of the Company in sickness, make provision for their families at time of death, and to assist in assuring material comfort during temporary or permanent disability to work.
Sec. 2. Sick benefits shall be payable to members absent from work on account of sickness or accident, as per Article XI. Accidents shall be in usual pursuit of duties for Company, in every case where such words appear in these By-Laws.
Death benefits shall be payable to the family of the member, as prescribed in Article XII.
Permanent Disability benefits shall be paid to members eligible therefor after recommendation of the Medical Director, as per Article XIII.
Pensions shall be paid to members eligible therefor on account of disability to work, as per Article XIII.
Sec. 3. Benefits for accidents or illness incurred other than in the pursuit of duties for Company, may be awarded only at the discretion of the Board of Managers.
Membership in the Foundation has always been open to all employees of Abbotts, subject to certain reasonable regulations in the bylaws regarding length of employment and condition of health. *251 Beginning with the 1934 amendment of the bylaws, membership in the Foundation was known as either "full beneficial" or "limited." The latter was available to employees only after full beneficial membership had been denied for inability to pass satisfactory physical examination, or upon action of the board of managers granting an exception. No documents, certificates, or policies were issued to the members, but each member received a membership card and a copy of the bylaws when he became a member. The average age of members ran from 40 to 45.
Articles VI and VII of all editions of the bylaws were headed "Membership" and "Dues," respectively, and provided for weekly dues from members in fixed amounts, dependent either on compensation or class of membership, or both. Membership in the Foundation, whether full beneficial or limited, was also divided into classes of employees of Abbotts according to earnings as follows:
Class A -- earnings up to $ 25 per week
Class B -- earnings over $ 25 but not over $ 35 per week
Class C -- earnings over $ 35 per week.
The original bylaws provided for dues of 25 cents, 35 cents, and 50 cents per week from class A, B, and C members, *252 respectively. This rate was doubled for each class in the amendments of November 1, 1925, and has remained stationary ever since for both full beneficial and limited members, except for the period from January 1, 1934, to June 30, 1937, when the bylaws provided that the dues from limited class A, B, and C members should be 5 cents, 10 cents, and 15 cents per week, respectively. Beginning January 1, 1934, those members who paid 25 cents per week additional were entitled to an additional $ 1,500 of death benefits.
*657 Article IX of the bylaws has remained substantially the same in all of the seven editions mentioned above. The original article was headed "Contributions" and provided as follows:
The Company agrees that it will pay to the Foundation each month, beginning with the month of March, 1925, the sum of One Thousand Dollars ($ 1,000) which amount shall become part of the general funds of the Foundation and be used for any of its purposes and objects. The Foundation may also receive and use for said purposes and objects any other contributions from any other sources.
The receipts of the Foundation constituted the following: (1) Dues paid by members; (2) moneys paid*253 voluntarily by Abbotts; (3) moneys paid voluntarily by Lindback and Griscom; and (4) interest and dividends on investments. The amounts received from each of these sources during the years 1925 (ten months only in 1925) to 1940, inclusive, were in aggregate as follows:
| (1) | (2) | (3) | (4) | |
| Contributions | Contributions | |||
| Dues from | from | from | Receipts from | |
| members | Abbotts | individuals | investments | |
| Amount | $ 970,966.86 | $ 200,000 | $ 27,200 | $ 74,252.20 |
| Percentage | 76.30% | 15.72% | 2.14% | 5.84% |
No salary or other compensation was paid at any time to anyone except to doctors, technicians, or clerical help who were actually needed to carry on the Foundation's activities.
The cash disbursements made by the Foundation during the years 1925 (ten months only in 1925) to 1940, inclusive, were in the aggregate as follows:
| Special | |||
| Benefits | Operating | awards and | Excess of |
| paid | expenses | other | receipts |
| expenditures | |||
| $ 1,026,010.85 | $ 99,809.17 | $ 11,314.46 | $ 140,353.08 |
Of the above mentioned aggregate benefits paid the following amounts were paid during the years 1926, 1927, 1938, 1939, and 1940 for sickness and accident, death, disability, and pensions, *254 less compensation awards:
| 1926 | 1927 | 1938 | 1939 | 1940 | |
| Sickness and | |||||
| accident | $ 34,820.37 | $ 32,111.02 | $ 71,652.27 | $ 67,096.18 | $ 73,228.93 |
| Death | 3,732.61 | 1,550.00 | 21,166.50 | 17,435.00 | 17,979.00 |
| Disability | 2,923.00 | 2,548.00 | 16,218.32 | 20,937.68 | 19,344.33 |
| Pensions | 1,606.50 | 1,638.00 | 3,408.75 | 3,859.00 | 6,581.00 |
| 43,082.48 | 37,847.02 | 112,445.84 | 109,327.86 | 117,133.26 | |
| Less compensation | |||||
| awards | 2,611.23 | 1,489.29 | 6,291.98 | 4,551.70 | 4,463.35 |
| Total benefits | |||||
| paid | 40,471.25 | 36,357.73 | 106,153.86 | 104,776.16 | 112,669.91 |
*658 At all times all moneys belonging to the Foundation were held for the purpose of paying the benefits and expenses. Nothing has ever been paid anyone by way of profit.
No refunds, cancellations, or surrender values were payable or paid at any time to members who resigned from the Foundation and it was understood that anything such member paid in would go to help the rest of the members who remained, when they were in need.
Article III of the bylaws has remained substantially the same in all of the editions. The original article was headed "Management" and provided in part as follows:
Section 1. The management of*255 the Foundation shall be vested in a Board of Managers consisting of the Chairman and eight members.
Sec. 2. The Chairman shall be appointed by the President of the Company and shall serve continuously until a successor is appointed.
Sec. 3. At the first meeting of the Board, the Chairman shall appoint four members who shall represent the management of the Company * * *. At said meeting the Chairman shall also appoint four members who shall represent the employees, none of whom may be heads of departments or hold a higher position.
Sec. 4. At the first election of the members they shall elect four members of the Board to represent them and the members so elected shall immediately succeed the four members selected by the Chairman at the first meeting of the Board. * * *
Sec. 5. The Board of Managers shall have general charge of all matters pertaining to the Foundation and shall elect or appoint all officers except the Chairman.
Sec. 6. In addition to the Chairman there shall be a Vice Chairman, a Secretary, and a Committee of Management of three or more as may be determined by the Board.
Sec. 7. The Chairman shall be the chief executive officer of the organization and shall preside*256 at all meetings of the Board.
Sec. 8. The Vice Chairman shall act in the event of the disability or the absence of the Chairman.
Sec. 9. The Secretary, who need not be a member of the Board, shall keep all of the records for the Foundation and shall record the minutes of all meetings of the Board and shall perform the duties also of a Financial Secretary.
Sec. 10. The Committee of Management shall be immediately responsible for the administration of the three main purposes and objects of the Foundation. The members of this Committee may be any of the members of the Foundation but the Chairman shall always be a member of the Board.
The 1937 and 1940 editions of the bylaws made provision under article III for a finance committee of three to be appointed by the chairman of the board with the qualification that the chairman of such committee shall be the treasurer of the Foundation.
Article IV of the bylaws was headed "Meetings" and provided for regular monthly meetings to be held by the board of managers.
Article V of the bylaws was headed "Elections" and provided for an annual election of one-half of the members of the board of managers who represented the employees. Such *257 elected members were to serve for two years. The 1940 edition of section 2 of article V provided as follows:
*659 Sec. 2. In view of the fact that Foundation membership is geographically scattered so widely as to make personal attendance at a meeting impossible as a practical matter, all balloting, for Directors or otherwise, shall be by mail on signed ballots. The Board of Managers shall determine the form of the ballot, instruct the Secretary as to time of mailing and shall fix the date that balloting shall cease. Ballots will be mailed to last known address of each member, returnable to the Secretary, and results of such balloting shall be announced by the Secretary.
Article VIII of the bylaws was headed "Funds" and made provision for such matters as custodian, records, disbursements, and investments. Beginning with the 1934 edition, section 5 of this article provided:
Sec. 5. The Foundation may carry its own risks or have the power to re-insure its risks in some form of group insurance if that should be deemed advisable by the Board of Managers.
Articles X, XI, XII, and XIII of the original bylaws were headed "Sick Benefits," "Death Benefits," "Pensions," and "*258 Award of Benefits," respectively. Beginning with the November 1, 1925, edition these articles were shifted around so that they were thereafter headed as follows:
Article X -- Award of Benefits
Article XI -- Sick Benefits
Article XII -- Death Benefits
Article XIII -- Pensions
In the 1937 and 1940 editions article XIII was headed "Permanently Disabled Benefits -- Pensions."The articles of the bylaws dealing with sick benefits provide, among other things, that members shall be eligible after four weeks' (later changed to two weeks) membership in the Foundation; that benefits shall be the regular weekly wage but not in excess of $ 50 per week; that in case of accidents while on duty the amount of compensation awarded under the Workmen's Compensation Act shall be deducted from the amount of the benefits; that benefits shall be payable while the employee is incapacitated by reason of sickness or accident incurred in line of duty; that all cases of sickness or accident must be reported; that no benefits shall be paid to members drawing pensions or for disability due to misconduct; that no benefits shall be paid for time lost on account of operations involving chronic irregularity*259 unless passed by the board of managers; and that benefits for accidents or illness incurred other than in the pursuit of duties for Abbotts shall be awarded only at the discretion of the board.
The articles of the bylaws dealing with death benefits provide, among other things, that members shall be eligible after six months' membership; that $ 250 shall be payable upon the death of members having less than two years of service with the company; that $ 500 shall be payable upon the death of members having more than two years *660 of service with the company; and that after January 1, 1934, an additional $ 1,500 shall be payable upon the death of those members who paid 25 cents per week additional dues. These articles also provide that where the family of the deceased member is unable to pay the funeral expenses the Foundation shall pay the undertaker's bill up to $ 100 (increased to $ 250 in 1934), and where no relative can be found to take care of the funeral the Foundation shall take charge and provide burial at a cost not to exceed $ 250.
The articles of the bylaws dealing with pensions and with "permanently disabled benefits -- pensions" provide, among other things, that *260 all members who shall have been in the service of the company for 20 years shall at the age of 70 become eligible for a pension of one-half of their weekly wage, but not in excess of $ 25 per week; and that the same pension shall apply to all members who become permanently disabled from accidents or sickness incurred while in the line of duty.
The articles of the first five editions of the bylaws dealing with the award of benefits are identical and provide as follows:
The Board of Managers from time to time may appoint a committee for the purpose of deciding all questions as to benefits and may make such investigations as it finds necessary. In the event of any disagreements relative to the award of benefits final action thereon shall be taken by the Board and a majority vote shall be conclusive.
The articles of the last two editions of the bylaws dealing with the award of benefits are identical and provide as follows:
Section 1. The Board of Managers from time to time may appoint a committee for the purpose of deciding all questions as to benefits, and may make such investigations as it finds necessary. In the event of any disagreements relative to the award of benefits, final action*261 thereon shall be referred to the President of the Company.
Sec. 2. All other questions or controversies of whatsoever character arising in any manner as between any parties or persons in connection with the C. R. Lindback Foundation or the operation thereof, whether as to the construction of language or meaning of the By-Laws and Regulations or as to any writing, decision, instruction, payment, or acts, in connection therewith shall be submitted to the Board of Managers whose decision shall be final.
Article XIV of all the editions of the bylaws is identical and provides that "The fiscal year shall be January first to December thirty-first, inclusive."
Article XV of the first five editions of the bylaws was headed "Amendments" and of the last two editions it was headed "General." All seven editions provided that the board of managers could by an affirmative vote of a majority at any regular or special meeting alter or amend the bylaws and regulations to take effect prospectively. The last two editions of article XV contained a new section reading as follows:
*661 Sec. 3. The rights, privileges, duties and liabilities of the members, officers, and members of the Board*262 of Managers, the interpretation and construction, validity and effect of the provisions of these By-Laws and Regulations and all the actions taken pursuant thereto, shall be governed by the Laws of the Commonwealth of Pennsylvania.
Prior to 1934 the practice of the board of managers in respect to applications for sick benefits was to delegate its discretion to a subcommittee. This subcommittee met once each week and acted on each application according to its discretion. In the event of conflict or disagreement within the subcommittee in particular cases, such cases were presented by the subcommittee to the full board for final action. After 1934 the subcommittee continued to function, but in the ordinary run of applications for sick benefits the medical director was empowered to approve the payment of benefits for the subcommittee. All questionable cases were still acted upon finally by the board. At all times during the life of the Foundation the board exercised its own discretion in each case which came before it and frequently overruled the subcommittee and medical director.
During the entire period of existence of the Foundation, both under the bylaws and in actual practice*263 the ultimate responsibility and authority with respect to benefits and as to whether benefits would or would not be granted was vested in the board of managers.
In the administration of their functions the board of managers, pursuant to section 3 of article II (adopted November 1, 1925, and continued without substantial change thereafter), article XIII (effective in the years 1925-1937), and sections 1 and 2 of article X (effective in the years 1937-1940) in some instances acted with liberality.
When there was any doubt respecting the payment of benefits, the benefit of the doubt was resolved in favor of the employee, and the board of managers took full advantage of the discretionary opportunities which the board had under the bylaws to do a job in the interest of the human side of the problem.
In actual practice benefits were paid in some cases for such period of time as the board of managers approved, without regard to the limitation period of the bylaws in any given case.
In actual practice and pursuant to the revision of article X of the bylaws (effective after June 30, 1937), cases in which the board of managers could not agree were referred to Lindback for two reasons: (1) Because*264 they were of opinion that since he had set up the policy of the organization he could best determine what action should be taken, and (2) because Lindback's contributions helped to make up the Foundation's deficits.
Notwithstanding the fact that the bylaws did not provide therefor, in conjunction with Abbotts the Foundation maintained a dispensary available both to members and Abbotts' other personnel, the expenses *662 of which dispensary were paid for proportionately by the Foundation and Abbotts.
Notwithstanding the benefits provided by the Foundation, Abbotts maintained independent workmen's compensation insurance, for which it paid premiums to an insurance company, through which medium its employees were paid compensation in accordance with the provisions of the Workmen's Compensation Laws of the Commonwealth of Pennsylvania.
Benefits were paid by the Foundation without regard to the position taken by the workmen's compensation carrier, but if workmen's compensation was paid, the employee reimbursed the Foundation for the amount of the workmen's compensation payment.
When the Foundation was organized, the contributions of members and the benefits provided for in the bylaws*265 were not based on an actuarial computation, and the Foundation was aware from the start that it might have to rely upon the donations of individuals to meet such deficits as might be sustained.
Upon the advice of counsel, income tax returns were not filed by the Foundation for the taxable years 1925, 1926, and 1927, but delinquent returns were filed on April 2, 1942, for those years and subsequent years to and including the taxable year 1941. No request was at any time made to the Commissioner of Internal Revenue for a ruling as to whether or not the Foundation was exempt within the provisions of section 231 of the Revenue Act of 1926 and corresponding provisions of subsequent revenue acts and of the Internal Revenue Code.
Attached to the delinquent returns filed for the years 1926 and 1927 was a protest statement, the body of which was as follows:
On advice of counsel that The C. R. Lindback Foundation of Abbotts Dairies, Inc., now known as The C. R. Lindback Foundation, as a voluntary employees' beneficiary association was exempted from taxation, no income tax return has heretofore been prepared or filed. The association was organized on a mutual insurance or beneficial basis *266 for purely non-profit purposes. It has always been conducted without benefit of any kind to any private shareholder or individual. It has existed solely for the purpose of paying life, sick, accident or other benefits to its members. It has accomplished this purpose by the collection annually of amounts from members in excess of eighty-five percent (85%) of the association's income. The cost of conducting the association's affairs and carrying on its purposes has been met in part by voluntary contributions of the members' employer. Hence this return is filed under protest.
Petitioner, the C. R. Lindback Foundation, believed in good faith that it was exempt from taxation and its failure to file the returns on time was due to a reasonable cause and not to willful neglect.
Abbotts in its income tax returns for the years 1925 to 1940, inclusive, claimed and was allowed its contributions made to the Foundation as deductions for ordinary and necessary business expenses.
Lindback voluntarily paid the Foundation $ 5,000 in 1938, $ 5,000 in *663 1939, and $ 5,000 in 1940. In his returns for each of said years he claimed the amount so paid as an item of deduction as a charitable contribution.
*267 During the year 1939, William B. Griscom, an officer and stockholder of Abbotts, and chairman of the board of managers of the Foundation at that time, voluntarily paid the sum of $ 2,000 to the Foundation, which he claimed as an item of deduction as a charitable contribution in his income tax return for said year.
The contributions made by Lindback and Griscom described in the two previous paragraphs were made at the request of the Foundation's officers and after Lindback and Griscom had been advised by them that additional money was needed to meet expenses and benefit expenditures during those years.
OPINION.
Briefly, the issues which we previously stated in greater detail are:
(1) Is the Foundation in Docket No. 1617 exempt from taxation for the years 1926 and 1927 under either paragraph (6) or (8) of section 231 of the Revenue Act of 1926?
(2) If not exempt from taxation under (1) above, should the $ 12,000 contributed by Abbotts to the Foundation for each of the years 1926 and 1927 be excluded from the Foundation's gross income for those years as a gift under section 213 (b) (3) of the Revenue Act of 1926?
(3) If both (1) and (2) are decided in favor of the respondent, is the *268 Foundation liable for the penalties?
(4) Are petitioners in Docket Nos. 1618 and 1684 entitled to deduct the contributions made to the Foundation in 1938, 1939, and 1940 under section 23 (o) (2) of the Revenue Act of 1938 and of the Internal Revenue Code as amended?
We shall consider these issues in the order stated.
1. Paragraphs (6) and (8) of section 231 of the Revenue Act of 1926 are in the margin. 2
*269 At the outset it may be noted, as stated by the respondent's counsel at the hearing, that the Foundation is exempt from taxation for all *664 years after 1927 under section 137 of the Revenue Act of 1942, which was made retroactive to and including the Revenue Act of 1928.
Is the Foundation exempt from taxation for the years 1926 and 1927? The parties have stipulated that the Foundation "is and was at all times herein mentioned an unincorporated association" of the employees of Abbotts. It would thus come within the term "corporation" as that term is defined in section 2 (a) (2) of the Revenue Act of 1926. 3 In his brief the respondent has conceded that no part of the net earnings of the Foundation inured to the benefit of any private shareholder or individual. The question under section 231 (6) is therefore narrowed to whether the Foundation was or was not "organized and operated exclusively for * * * charitable purposes."
*270 The respondent contends that because the principal income of petitioner is from dues paid by its members it can not qualify as a charitable institution depending upon gifts or funds from other sources. In support of this contention the respondent cites Philadelphia & Reading Relief Association, 4 B. T. A. 713, as being "on all fours with the instant case." In that case we said (p. 726):
* * * A society whose principal income is derived from a fixed regular compulsory contribution from its members, which is to constitute a fund to be used exclusively for the benefit of its members is not a charitable society.
In that case we also said, p. 728:
Here, for definite contributions, paid by its members at regular recurring periods, the Association undertakes to pay its members certain definite sums in the event of sickness, accident, or death. Whatever it may be called, the scheme is that of insurance. The relation of the Association to its members is contractual, rather than charitable. Nor is it a benevolent institution. No aid is furnished from generosity or liberality. None such is pretended. On the contrary, for a pecuniary consideration the Association*271 agrees to pay a definite sum in the cases specified. If it fails to perform its contracts with its members, they may be enforced in the courts by suit. Certainly, under circumstances such as we have present in this case, it can not be successfully maintained that petitioner is a corporation or association, organized and operated exclusively for charitable purposes, and, hence, it is not entitled to exemption from tax under the provisions of section 231 (6) of the Revenue Act of 1918.
Petitioner contends that its charitable quality is not destroyed by reason of the fact that the beneficiaries themselves make contributions to its fund, and in support of this contention it cites Union Pac. Ry. Co. v. Artist, 60 Fed. 365; Y. M. C. A. Retirement Fund, Inc., 18 B. T. A. 139; and G. C. M. 19028, Internal Revenue Cumulative Bulletin 1937-2, p. 125. In the first case cited a railroad company maintained *665 a hospital for its employees by means of contributions of 25 cents per month from each employee and of from $ 2,000 to $ 4,000 per month contributed by itself. It was sued by one of its*272 employees who, while a patient at the hospital, had sustained an injury through the negligence of one of the hospital attendants. The Circuit Court of Appeals, Eighth Circuit, held that the hospital was a charitable institution and that, therefore, the railroad company was not liable for the injuries in question where it exercised ordinary care in selecting the attendant. The case presented no question of taxation and was decided long before Philadelphia & Reading Relief Association, supra.In the second case we held that a corporation which was organized and operated solely for the purpose of providing annuities for superannuated secretaries of the Y. M. C. A. and which derived its funds principally from public contributions was exempt from taxation under the provisions of section 231 (6) of the Revenue Act of 1926. In so holding we specifically distinguished that case from the Philadelphia & Reading Relief Association case upon the ground that in the latter case the principal income was derived from a fixed regular compulsory contribution from its members, whereas in the Y. M. C. A. Retirement Fund, Inc., case the principal income was derived*273 from the generosity or liberality of others. In G. C. M. 19028 it was held that an employees' organization engaged in administering a fund contributed partly by the employees, partly by the employer, and partly by others was exempt as a charitable organization, "notwithstanding the employee beneficiaries may be required to make regular contributions to the fund, provided such contributions represent a minor portion" (italics supplied) of the organization's income.
In the instant proceeding, the contributions by the members of the Foundation represented a major portion of the Foundation's income, and for this reason we hold that it is controlled by Philadelphia & Reading Relief Association, supra, rather than by the authorities cited above as relied upon by petitioner. See also Employes' Benefit Association of American Steel Foundries, 14 B. T. A. 1166; and Pontiac Employees Mutual Benefit Association, 15 B. T. A. 74; Shell Employees' Benefit Fund, 44 B. T. A. 452.
Petitioner also contends that "The most important factor in determining whether or not an *274 employees' organization is a charity is whether the benefits are fixed and contractual, or indefinite and dependent upon the exercise of discretion by the administrators of the fund." It argues that the bylaws of the Foundation gave the board of managers such a wide discretion as to render both the beneficiaries and the benefits uncertain and that this factor should take the instant proceeding out of the class of such cases as Philadelphia & Reading Relief Association, supra. We are not convinced by this argument *666 In the administration of any fund for the benefit of employees who are in need of relief of one kind or another there must by necessity be vested in the administrators of the fund a certain amount of discretion so that all employees will be treated with an approximate degree of fairness. We do not think that the amount of discretion vested in the board of managers of the Foundation by its bylaws or the amount of discretion actually exercised by the board requires us to make a holding here contrary to our holding in Philadelphia & Reading Relief Association, supra.We think the controlling factor is the*275 amount of dues actually contributed by the members themselves. Where such contributions constitute the major portion of the income the organization more nearly resembles an insurance institution than a charitable institution. The benefits which the members receive are not charity, but represent something which they are entitled to receive, largely on account of dues which they themselves have paid in to the Foundation. We hold that for the years 1926 and 1927 petitioner is not exempt from taxation under paragraph (6) of section 231 of the Revenue Act of 1926. The same holding is required relative to petitioner's claim for exemption under paragraph (8) of section 231, since one of the factors essential for exemption is that petitioner's net earnings be "devoted exclusively to charitable * * * purposes."
2. During each of the years 1926 and 1927 Abbotts contributed $ 12,000 as provided by article IX of the bylaws of the Foundation to the general funds of the Foundation to be used for any of its purposes and objects. The respondent has included these contributions in the Foundation's gross income. Petitioner (the Foundation) contends they were gifts to it and should be excluded*276 under section 213 (b) (3) of the Revenue Act of 1926, set forth in the margin. 4
The respondent relies principally upon our holding in Philadelphia & Reading Relief Association, supra, wherein we held at page 731 that certain amounts contributed to that association, the petitioner there, by the United States Railroad Administration in 1919, and the Philadelphia & Reading Railway Co. and/or the United States Railroad Administration in 1920 were "not donations in any proper meaning of that term," but were "income to the petitioner, and, accordingly, subject to tax."
Respondent also cites in support of his contention on*277 this point our *667 more recent decision in Shell Employees' Benefit Fund, supra. In that case, among other things, we said:
* * * The contributions made by the employer were not gifts, and they are none the less income because of the provision of the bylaws that the employer was under no obligation to make them [citing cases]. The corporation did not intend them to be gifts, as is shown by its failure to call them gifts or to express otherwise such intention, and by its treatment of them on its tax returns as ordinary and necessary business expenses. * * *
On the authority of Philadelphia & Reading Relief Association, supra, and Shell Employees' Benefit Fund, supra, we sustain respondent on this point.
3. Is the Foundation liable for the penalties? Section 3176 of the Revised Statutes as amended by section 1103 of the Revenue Act of 1926 provides in part as follows:
* * * In case of any failure to make and file a return or list within the time prescribed by law, or prescribed by the Commissioner of Internal Revenue or the collector in pursuance of law, the Commissioner shall add to*278 the tax 25 per centum of its amount, except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax. * * *
We do not think the penalties should be imposed. The parties have stipulated that "Upon the advice of counsel, income tax returns were not filed by the C. R. Lindback Foundation for the taxable years 1925, 1926 and 1927 but delinquent returns were filed on April 2, 1942 for said years * * *." Advice of reputable counsel that a taxpayer was not liable for the tax has been held to constitute reasonable cause for failure to file on time where it was accompanied by other circumstances showing the taxpayer's good faith. Dayton Bronze Bearing Co. v. Gilligan, 281 Fed. 709; Adelaide Park Land, 25 B. T. A. 211; Agricultural Securities Corporation, 39 B. T. A. 1103; affirmed on another point, 116 Fed. (2d) 800.
The holding of the court in Dayton Bronze Bearing Co. v. Gilligan, supra, may be summarized*279 from the court's opinion as follows: Where a corporation believing in good faith, on reasonable grounds and after taking advice of reputable counsel, that it was not liable for munitions tax, made no return within the time prescribed by statute, but later, on advice of the collector, made a voluntary return without prejudice, the imposition of the penalty for failure to make timely return prescribed by Revised Statutes, section 3176, is not authorized. We think the facts in the instant case bring it within the ambit of the court's opinion in the Dayton Bronze Bearing Co. case and we so hold. Petitioner's assignment of error as to the imposition of penalties is sustained.
*668 4. Lindback voluntarily contributed $ 5,000 to the Foundation in each of the years 1938, 1939, and 1940. Griscom, now deceased, voluntarily contributed $ 2,000 in 1939. Section 23 (o) (2) of the Revenue Act of 1938 and of the Internal Revenue Code, as amended, are for the purposes of the question here involved substantially the same. The material provisions of the Revenue Act of 1938 are in the margin. 5 Contrary to what we have held as to the contributions made by Abbotts, there can be no doubt*280 in our opinion that the contributions by Lindback and by Griscom were gifts as that term is used in section 213 (b) (3) of the Revenue Act of 1926.
*281 However, under the first issue we held that for the years 1926 and 1927 the Foundation was not "organized and operated exclusively for * * * charitable * * * purposes." There was no substantial change in the organization or operation of the Foundation during the years 1938, 1939, and 1940. It is true that, by reason of section 137 of the Revenue Act of 1942, the Foundation has been rendered exempt from taxation for all years back to and including 1928, but gifts to a corporation or unincorporated association which is exempt from taxation are not necessarily deductible by the donor in computing his net income for taxation. Such contributions in order to be deductible must come within the provisions of section 23 (o) (2) and the contributions here do not come within those provisions. We hold, therefore, that the above mentioned contributions made to the Foundation during the years 1938, 1939, and 1940 are not deductible as "charitable" contributions under section 23 (o) (2) of the Revenue Act of 1938 and of the Internal Revenue Code, as amended.
In Docket No. 1617 decision will be entered in favor of respondent as to deficiencies in tax but in favor of petitioner as to penalties.*282 In Docket No. 1618 decision will be entered under Rule 50. In Docket No. 1684 decision will be entered for respondent.
Footnotes
1. All references to bylaws in this report are to the bylaws of the Foundation.↩
2. Sec. 231. The following organizations shall be exempt from taxation under this title --
* * * *
(6) Corporations, and any 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;
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(8) Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes;↩
3. Sec. 2. (a) When used in this Act --
* * * *
(2) The term "corporation" includes associations, joint-stock companies, and insurance companies.↩
4. Sec. 213. For the purposes of this title, except as otherwise provided in section 233 --
* * * *
(b) The term "gross income" does not include the following items, which shall be exempt from taxation under this title:
* * * *
(3) The value of property acquired by gift, bequest, devise or inheritance (but the income from such property shall be included in gross income).↩
5. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * * *
(o) Charitable and Other Contributions. -- In the case of an individual, contributions or gifts payment of which is made within the taxable year to or for the use of:
* * * *
(2) A domestic corporation, or domestic trust, or domestic 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, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation;
* * * *
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. * * *↩