*2109 A corporation organized and operated solely for the purpose of providing annuities for superannuated secretaries of the Y.M.C.A., which derives its funds from public contributions and from voluntary contributions by associations and employees of the Y.M.C.A., no part of the net earnings of which inures to the benefit of any private shareholder or individual, is exempt from taxation under the provisions of section 231 of the Revenue Act of 1926.
*139 The respondent has asserted deficiencies in income taxes for the years 1926 and 1927, in the respective amounts of $5,074.56 and $9,133.28. The single question presented for determination is whether the petitioner is exempt from taxation under the provisions of section 231 of the Revenue Act of 1926.
*140 These proceedings were consolidated for hearing and decision. They were consolidated for hearing only with Frederick H. Rike, Docket No. 24335.
FINDINGS OF FACT.
The petitioner is a corporation created by the following special act of the Legislature of New York:
AN ACT To incorporate*2110 the Young Men's Christian Association Retirement Fund, for the benefit of employed officers of the Young Men's Christian Association after their retirement from active service.
The People of the State of New York, represented in Senate and Assembly, do enact as follows:
Section 1. F. Wayland Ayer, James H. Post, Sereno P. Fenn, Lucien T. Warner, Gerald W. Birks, John R. Mott, L. Wilbur Messer, Alfred E. Marling and Raymond P. Kaighn, and their successors, are hereby created a body corporate by the name The Young Men's Christian Association Retirement Fund.
§ 2. The purpose of such corporation shall be to establish and maintain a retirement fund for the benefit of those who have been employed officers of any Young Men's Christian Association when they shall have retired from active service and who become eligible to the benefits of the said fund under the conditions to be established by the board of trustees of the corporation created by this act.
§ 3. The corporation hereby created shall have power to take and hold, by bequest, devise, gift, purchase or lease, either absolutely or in trust for any of its purposes, any property, real or personal, without limitation as*2111 to the amount or value, except such limitation as the legislature shall hereafter impose; to convey such property and to invest and reinvest any principal and deal with and expend the principal and income in such manner as in the judgment of the board of trustees will best promote its objects. The persons named in section one of this act, or a majority of them, shall hold a meeting and organize the corporation and adopt a constitution and by-laws not inconsistent with the constitution and laws of this state, which constitution from time to time shall be subject to amendment. The constitution and by-laws shall prescribe the number of trustees by whom the affairs and business of the corporation shall be managed, the qualifications and powers of said trustees and any other provisions for the management and disposition of the property and regulation of the affairs and fulfillment of the objects of the corporation which may be deemed expedient.
§ 4. Such corporation is not established and shall not be maintained or conducted for pecuniary profit and shall have the status of a religious, educational or benevolent corporation. None of its trustees, officers, members or employees shall*2112 receive any pecuniary profit from the operation thereof, except reasonable compensation for services in effecting one or more of its purposes. It shall be subject to the provisions of sections thirty-nine and forty-five of the insurance law and the amendments thereof so far as the same are applicable hereto and are not inconsistent with the provisions of this act.
§ 5. This act shall take effect immediately. (Became a Law Apr. 30, 1921, with the approval of the Governor. Passed, three-fifths being present.)
In 1911 a commission of Y.M.C.A. secretaries met and considered the need of a retirement plan. They prepared and filed a report with the convention of the Y.M.C.A. which met in Cincinnati in *141 1913, and a series of resolutions was passed by that body recommending the plan and appointing a board to investigate the feasibility of creating and maintaining such a retirement fund. A convention in 1916 endorsed the progress made, but due to the war no further action was taken until 1919. At the Y.M.C.A. convention in 1919 the trustees were authorized and directed to take such steps as were necessary to raise the required fund and acquaint brother secretaries of*2113 the purposes and intended workings of the retirement plan.
In order to have the fund start off at a definite date without working a hardship on the older men, it was necessary to accumulate an amount known as the accrued liability fund to provide for the years which the older men had already spent in the service. As of January 1, 1920, it was estimated on an actuarial basis that a reserve of $4,000,000 would be necessary to start off the retirement annuities. While they were attempting to collect that amount by popular subscription, a business depression came and by July 1, 1922, when the $4,000,000 had been raised, an additional amount of $1,700,000 was needed. This additional sum was subscribed by various associations of the Y.M.C.A.
The board of trustees adopted a constitution and by-laws and started operation of the retirement fund on July 1, 1922. The material provisions of the constitution and by-laws are as follows:
CONSTITUTION
Article I.
Sec. 2. The object of this Fund shall be to provide certain benefits to secretaries of the Young Men's Christian Assoc ation who retire from active service and are eligible to the benefits of the Fund under the conditions*2114 described in the By-Laws.
Article II.
Sec. 5. The Board of Trustees is empowered to make by-laws for the operation of the Fund in accord with the Retirement Fund Plan as approved by the International Convention of 1919 and not inconsistent with this Constitution.
BY-LAWS
Section 1.
3. "Association" shall mean any Young Men's Christian Association organization * * *.
4. "Secretary" shall mean any (male) person with the status of a full-time salaried officer employed by an Association as described in standing resolutions adopted by the Retirement Fund Board from time to time.
5. "Partic pating Association" shall mean any Association which provides through payments to the Retirement Fund for Association Annuities to any or all of its participating Secretaries and has been so recorded by the Retirement Fund Board and whose payments are not more than six months in arrears.
*142 6. "Participating Secretary" shall mean any Secretary who elects to make the payments required by the Retirement Fund and has been so recorded by the Retirement Fund Board, and whose personal or association payments are not more than six months in arrears.
8. *2115 "Prior Service" shall mean all service, as a Secretary, rendered prior to the formal establishment of the Retirement Fund, on July 1, 1922, which shall be certified in a Prior Service certificate and allowable as provided in Section 7 of these by-laws.
9. "Subsequent Service" shall mean all service, as a Secretary, which shall be rendered after July 1, 1922, and before the Secretary has attained age sixty and on account of which the Association payments to the Retirement Fund shall have been made.
12. "Accumulated Secretarial Payments" shall mean the total of the amounts paid by a Participating Secretary, together with regular interest thereon, standing to his credit in the Secretaries Savings Account.
Section 2.
July, 1, 1922, shall be considered the date on which the Retirement Fund was formally established by action of the Retirement Fund Board * * *.
Section 3.
Participants in the Retirement Fund shall consist of:
1. Associations which have entered into agreement with the Retirement Fund Board to have any or all of their Secretaries covered by the provisions of the Retirement Fund and which have made all the required payments.
2. Secretaries*2116 who have entered into agreement with the Retirement Fund Board and passed the medical or other examinations required by said Board and who have made all the required payments.
Section 4.
1. The members of the Retirement Fund Board shall serve without compensation as members of the Board, but may be reimbursed from the Expense Account for any necessary expenditures incurred in service on said board.
2. The Retirement Fund Board shall elect from its membership a chairman and a treasurer, and shall appoint a secretary, an actuary, an attorney, an auditor and such medical, clerical and other employees as may be necessary.
3. The compensation of all employees of the Retirement Fund Board shall be fixed by said Retirement Fund Board.
Section 5.
1. The Retirement Fund Board shall have full power to invest and reinvest all money in any of the accounts of the Retirement Fund, subject, however, to such limitations and restrictions as are imposed by law upon life insurance companies of New York State in the making of investments of their reserve funds, so far as the same are applicable. * * *
2. The Retirement Fund Board shall credit to the Associations Reserve Account*2117 the interest, dividend, and other earnings from all invested funds. It shall transfer from the Associations Reserve Account to the credit of the Secretaries Savings Account and the Annuity Reserve Account regular interest on the balances of these respective accounts.
*143 5. Except as herein provided, no member and no employee of the Retirement Fund Board shall have any interest, direct or indirect, in the gains or profits of any investment made by the Retirement Fund Board, nor as such, directly or indirectly, shall receive any pay or emolument for his services. No member and no employee of said Retirement Fund Board, directly or indirectly, for himself or as an agent or partner of others, shall borrow any of its funds or deposits, or in any manner use the same except to make such current and necessary payments as are authorized by the Retirement Fund Board; nor shall any member or employee of said Retirement Fund Board become an endorser or surety or in any manner an obligor for moneys loaned by or borrowed of said Retirement Fund Board.
Section 6.
The assets of the Retirement Fund shall be credited, according to the purpose for which they are intended, to one*2118 of four accounts; namely, (1) the Associations Reserve Account, (2) the Secretaries Savings Account, (3) the Annuity Reserve Account, or (4) the Expense Account.
1. The Associations Reserve Account shall all payments made by the Participating Associations and all other moneys which are held in reserve to pay Association Annuities.
Each Participating Association shall pay monthly, or at such other intervals as agreed upon with the Retirement Fund Board, to the treasurer of the Retirement Fund Board, on behalf of each Participating Secretary in its employ, an amount equal to such percentum of such Participating Secretary's salary including bonus as shall be certified by the Retirement Fund Board as necessary to procure for him at the time of retirement the Association Annuity which would be payable to him on account of subsequent service. * * *
In addition to the above payments on behalf of Participating Secretaries, there shall be credited to the Associations Reserve Account all gifts, donations, legacies or other moneys payable or which shall become payable to the Retirement Fund Board for the payment of accrued liabilities or for any other purpose not otherwise provided*2119 for. * * *
2. The Secretaries Savings Account shall show the Accumulated Secretarial Payments from the salaries of Participating Secretaries. Each Participating Secretary shall pay monthly, or at such other intervals as agreed upon with the Retirement Fund Board to the treasurer of the Retirement Fund Board, such percentum of his salary as shall be computed by the actuary to be sufficient with Regular Interest to provide for him on retirement, at age 60, a Secretary's Annuity equal to three-quarters of one percentum (0.75%) of his Final Salary multiplied by the number of years of his service as a Participating Secretary after the formal establishment of the Retirement Fund. * * *
3. The Annuity Reserve Account shall show the reserves on annuities payable to retired Secretaries or their families. Upon the retirement of a Secretary there shall be transferred to the Annuity Reserve Account (a) from the Secretaries Savings Account a credit of the amount of the Accumulated Secretarial Payments and (b) from the Associations Reserve Account a credit of an amount equal to the Association Annuity Reserve. All annuities when paid shall be charged to this account. * * *
*2120 4. The Expense Account shall show such amounts as are credited to the Retirement Fund for the payment of administrative expenses. * * *
*144 Section 8.
1. Should a Participating Secretary at any time be required to discontinue his services as a secretary as a result of circumstances beyond his control, or should a participating Secretary after one year or more of Subsequent Service and Secretarial Payments, voluntarily terminate his service as a Secretary, or desire to discontinue as a participant in the Retirement Fund, he shall be paid on demand (a) the full amount of his Accumulated Secretarial Payments, or, in lieu thereof, should he so elect, (b) an annuity or a deferred annuity which shall be the actuarial equivalent of said Accumulated Secretarial Payments.
2. Should a Participating Secretary die and before retirement, his Accumulated Secretarial Payments shall be paid to his estate or to such person or persons as he shall have nominated by written designation duly executed and filed with the Retirement Fund Board.
Section 11.
Any Participating Secretary who is sixty years of age or over may retire as a Secretary of the Young Men's Christian Association*2121 by filing with the Retirement Fund Board a written statement, duly attested, setting forth at what time subsequent to the execution and filing of said application he desires to cease to be an Association Employed Officer. The filing of said application on forms provided by the Retirement Fund Board shall automatically retire said Participating Secretary at the time specified.
Section 12.
1. On Regular Retirement a Participating Secretary shall receive a Retirement Allowance which shall consist of:
a. A Secretary's Annuity, which shall be the actuarial equivalent of his Accumulated Secretarial Payments, and
b. An Association Annuity of three-fourths of one percentum of his Final Salary for each year of Subsequent Service, and
c. A further Association Annuity of one and one-half percentum of his Final Salary for each year of Prior Service certified on his Prior Service certificate provided his Association Service has been continuous from the date of the formal establishment of the Retirement Fund, on July 1, 1922.
There is no physical examination required of secretaries in order to participate in the benefits.
The petitioner was organized and has been operated*2122 primarily as an aid to the Young Men's Christian Association. Before the creation of the petitioner, that organization lost 55 per cent of the men who entered the work as secretaries within the first two years, and 80 per cent of such men during the first five years. Men specially adapted to Y.M.C.A. work were taken from the service by more lucrative offers of employment when they were at the peak of their ability, largely because of the dread of dependence in old age. After the creation of petitioner, the turnover of employed secretaries dropped approximately 13 per cent per year.
The petitioner is not a stock corporation and has no capital stock and no stockholders. Its income consists of interest on investments and contributions.
*145 Under the methods by which petitioner is now operating there is no need for outside contributions, the income from the principal amount plus the payments of the associations and the secretaries being sufficient to care for the retirement annuities.
The parties have stipulated that the Y.M.C.A. is and was during the taxable years a corporation organized and operated exclusively for religious, charitable or educational purposes and*2123 that it has been exempted from income tax under the provisions of section 231(6).
OPINION.
LANSDON: The single question presented for determination in these proceedings is whether the petitioner is exempt from income tax under the provisions of section 231 of the Revenue Act of 1926, which provides in part as follows:
The following organizations shall be exempt from taxation under this title -
* * *
(2) Mutual savings banks not having a capital stock represented by shares;
(3) Fraternal beneficiary societies, orders, or associations, (a) operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating unde the lodge system; and (b) providing for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or their dependents;
* * *
(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;
* * *
(8) Civic*2124 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;
* * *
(13) Corporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt from the tax imposed by this title; * * *.
The petitioner contends that it is entitled to exemption as a corporation organized and operated exclusively for religious, educational and charitable purposes, as provided in subdivision (6) above, or if such classification should be denied, that it is entitled to exemption under one of the remaining subdivisions of section 231. The respondent urges that the petitioner is not organized exclusively for charitable purposes and that the word "charity" in the statute contemplates a "purely public" charity.
In determining whether property is exempt*2125 as "used exclusively" for certain purposes, the decisions have uniformly held that such *146 language means the primary and inherent use and does not preclude such incidental uses as are directly connected with, essential to, and in furtherance of, the primary use. Cooley on Taxation, 4th ed., vol. II, § 685, and cases there cited. We do not conceive that exemption under (6) above is to be denied merely because some incidental element enters into the operatoin, when the predominant purposes are charitable. Neither do we believe that (6) above was intended to apply only to "purely public" charities. Certainly the exemption is not so restricted by the language used. We do not think that the mere restriction of the beneficiaries of an otherwise charitable corporation to a designaed group or class is sufficient ground upon which to deny exempt classification. See ; ; see, also, Cooley on Taxation, vol. II, § 739.
The respondent argues that exemption statutes should be construed strictly in favor of the sovereign, which is undoubtedly true as general rule*2126 of law. There is, however, at least one exception to the stric-construction rule. As stated by the court in :
The rule of strict construction is in the interest of public policy, and when a higher public policy dictates a more liberal attitude, an exception will be found. Bequests for public purposes operate in aid of good government; they perform by private means what ultimately would have to be done at public expense. In such cases, exemption from taxation is not a matter of grace or favor; it is rather an act of public justice. The reason for the rule of narrow scrutiny does not apply to such cases.
Cf. ; ; ; ; .
*2127 Whether a corporation is charitable in character depends upon its purpose. . If its principal purpose is to give of its material substance or time to benefit those who are in need of such assistance, or will be benefited by such gift or expenditure, then it is charitable. Fletcher Cyc. of Corp., § 100. A corporation engaged in training and furnishing parsons for charitable work has been held exempt from taxation as a charitable institution. . An institution need not be one for the relief of the sick or indigent in order to be a "charity." . An institution is exempt as charitable although the charity dispensed is limited to members and their families. And the fact that a so-called *147 compulsory assessment is made upon beneficiaries or members does not alter the charitable character. In *2128 , the court said:
* * * Tried by this test, the hospitals and medical department of this company are a great public charity. They are supported by the voluntary contributions of this great corporation and of its employes, without the purpose to profit thereby. We say by their "voluntary contributions" not unadvisedly. We have not failed to notice that the defendant in error testified that the contribution of 25 cents a month made by each employe was a compulsory assessment, and that the company took it out of the pay of such employe. But how it could be compulsory does not appear. If it was a part of the pay of the employe, the company could not lawfully take it out without his consent. If he did not consent, then he did not contribute, and the company still owes him the amount of this assessment. If he did consent, he voluntarily contributed the amount of his assessment. * * *
In , the Circuit Court of Appeals held that a Grand Army Post was organized and operated exclusively for charitable purposes. In its opinion the court said:
*2129 * * * We are of the opinion that primarily at least the character of a corporation is determined by its charter. .
See also .
The pettioner was created by a special act of the Legislature of New York, which provides "Such corporation is not established and shall not be maintained or conducted for pecuniary profit and shall have the status of a religious, educational or benevolent corporation." It has no capital stock and is not operated for profit. None of its trustees, officers, members or employees receive any pecuniary profit from its operation. Its function of providing for the old age of Y.M.C.A. secretaries partakes of a charitable character. And it makes no difference whether the petitioner's status is determined by the test urged by the Government in the Pitney case, i.e., "what it actually does," or by that which the court makes the primary test, for its operation has conformed to its charter in all respects.
We think petitioner is entitled to exempt classification. Of its principal fund $4,000,000 was contributed*2130 by the public and $1,700,000 by associates of the Y.M.C.A. which are themselves exempt from taxation. The income from these two foundations, together with the regular contributions made by associations on behalf of their employees and by such employees on their own account, is sufficient to provide the retirement annuities. The situation thus presented is that of a corporation whose purpose is to provide for the old age of the employees of a charitable organization, the funds for which are contributed largely by the public and *148 by the charitable organization whose employees are to be benefited. The act of creation provides that there shall be no pecuniary profit derived by any of the officers, members, or employees and that there shall be no capital stock and no shareholders. Public policy dictates that such a corporation should be exempt from taxation and we think Congress has so provided in section 231 above. It seems clear to us, after reading the above quoted subsections of 231, at least in their cumulative effect, that Congress did not intend to omit such an organization as this petitioner from exempt classification. Such a construction would resultin an unreasonable*2131 discrimination. In Morgan v. Nauts (U.S.D.C.N.D. Ohio, Apr. 19, 1928), the court stated:
* * * Any other construction of the Act would condemn it as permitting by nice use of language a discrimination against an institution as devoted to the public welfare and as well entitled to exemption as any of those coming more precisely within the terms of the statute. The narrow construction contended therefor by the government the court cannot concede. * * *
The facts of the instant case are readily distinguishable from those involved in ; ; and . In the instant case the principal income of petitioner is from interest on the investment of a fund contributed by the public and by the Y.M.C.A. and from contributions by associations of the Y.M.C.A. In the cases cited the principal income of the association seeking exemption was derived from a fixed regular compulsory contribution from its members. In those cases the association undertook to*2132 pay its members certain definite sums in the event of sickness, accident or death in exchange for definite contributions paid by its members at regular recurring periods. In the instant case the beneficiary secretaries paid in fixed regular contributions, but the annuity received represented to a large extent the donations of the public and of the Y.M.C.A., while only a relatively small portion was purchased by the payments of the secretaries. In the cases cited no aid was furnished from generosity or liberality, while in the instant case $5,700,000 was furnished from generosity or liberality, in addition to which many associations of the Y.M.C.A. made regular contributions on behalf of their secretaries.
The petitioner should be granted exempt classification under the provisions of section 231 of the Revenue Act of 1926. Cf.
Reviewed by the Board.
Decision will be entered for the petitioner.
SMITH, STERNHAGEN, and TRAMMELL concur in the result only.
*149 MURDOCK, dissenting: I dissent from the prevailing opinion which points, and can point, to no certain provision of the Revenue*2133 Act for its authority, but which ostensibly finds authority for holding that the petitioner is exempt from tax in the "cumulative effect" of five subsections of section 231. In my opinion the effect of the whole is to exempt nothing that is not exempt by one or more of the parts.
The facts do not disclose the extent to which the petitioner was operated for the mutual benefit and protection of certain Y.M.C.A. employees who made their own contributions on their own behalf so that they might secure mutual benefits and protection. Such men would probably resent the inference that they were in any way the objects of charity. It can not properly be said that the petitioner was operated exclusively for the purposes enumerated in subsections (6), (8) or (13) of section 231. In subsection (3) Congress specifically provided for the exemption of fraternal beneficiary organizations operating under the lodge system. The inference is that such similar beneficiary organizations not fraternal and not operating under the lodge system were not intended to have the exempt status. I can not agree with many of the statements made in the prevailing opinion which purport to be correct statements*2134 of law.