*2223 1. The petitioner was not organized exclusively for religious, charitable, scientific, literary, or educational purposes and is not exempt from taxation under section 231 of the Revenue Act of 1921.
2. Certain amounts were permanently set aside by the petitioner during the years 1922 and 1923 for charitable and like purposes specified in section 214(a)(11) of the Revenue Act of 1921 and are deductible in those years.
*19 These proceedings are for the redetermination of deficiencies in the tax of the James Sprunt Benevolent Trust for the years 1922 and 1923 in the respective amounts of $2,663.95 and $2,156.58. The proceedings were consolidated for hearing and decision. The petitioner contends, first, that it is exempt from taxation under section 231 of the Revenue Act of 1921, and, in the alternative, that it is entitled to the deduction of certain amounts permanently set aside in each of the taxable years for the purposes specified in section 214(a)(11) of the Act.
FINDINGS OF FACT.
James Sprunt, deceased, creator*2224 of the James Sprunt Benevolent Trust, was a resident of Wilmington, N.C., and was an officer and stockholder of Alexander Sprunt & Son, Inc., a corporation organized under the laws of North Carolina in the year 1919 to engage in the business of buying and selling cotton. The corporation was the successor of a partnership of the same title which had been conducting the business for many years. The corporation had an authorized capital stock of $3,000,000, par value $100 per share. Shares of $2,000,000 par value were issued upon organization.
*20 At the time the corporation was organized the several partners of the predecessor partnership had large credit balances due them upon the partnership books. A part of these credit balances was capitalized in the corporation and stock was issued therefor. The corporation retained the remainder of the credit balances in its surplus and issued therefor to the respective owners so-called "certificates of paidin surplus" in the nature of debentures. About $1,000,000 par value of such certificates were issued. They bore interest at 7 per cent, payable semiannually. These certificates were not authorized in the corporation's charter*2225 or by any state authorities. The corporation has consistently paid the interest to the certificate holders as it became due.
James Sprunt was a large holder of the above described certificates. On June 1, 1921, he executed an instrument entitled "The James Sprunt Benevolent Trust," by which he created a trust fund of $500,000 par value of such certificates to be devoted to certain religious, educational, and other uses as hereinafter more fully set forth. The instrument reads as follows:
WHEREAS, I, James Sprunt, of Wilmington, North Carolina, have had a yearning for many years to provide for the temporal support of a son or grandson or a blood relation who will be called to the Gospel Ministry of the Southern Presbyterian Church and preach the unsearchable riches in a life time of consecration. And realizing that a preparation for the Gospel Ministry involves not only personal consecration but a life of hardship which often is not compensated by the inadequate provision for the common comforts essential to health, I do now create this trust fund of five hundred thousand dollars, for this purpose and for kindred purposes hereinafter designated, in the manner and form following, *2226 to-wit:
1. I appoint the following as a board of Trustees to handle, conserve and administer this trust fund, namely:
James Sprunt.
James Laurence Sprunt.
Louis E. Hall.
Edward Jenner Wood.
William H. Sprunt.
Walter P. Sprunt.
2. I hereby deliver to the said trustees of this trust fund, a certificate of "Paid-in Surplus" of Alexander Sprunt & Son, Incorporated, of the par value of $500,000.00 (five hundred thousand dollars).
3. The trustees are to reinvest these funds from time to time as in their judgment seems best and wisest.
4. The Board of trustees shall consist of at least five members and of not more than seven members.
5. When he is of age my grandson, James Laurence Sprunt, Junior, shall become a member of this board.
6. A quorum shall consist of a majority of the Board of Trustees, and said majority shall have power to act.
*21 7. A majority of the Board of Trustees shall have power to elect successors to the Board, in case of resignation or death, but only members of the Southern Presbyterian Church are eligible for membership.
8. The Trustees shall have power to act on occasions when changing conditions from year to*2227 year might raise questions which cannot be forseen or provided for, in accordance with the broadest and most liberal interpretation of its original purposes.
9. It is the desire of the maker of this trust that the principal be conserved intact, only the increment of the invested funds being used, but this is left to the discretion of the trustees.
10. The duration of this trust shall be for an indefinite period, subject entirely to the will and discretion of the Board of Trustees. It is my wish however that the trust be maintained as long as it seems to serve the purpose for which originally intended.
11. When, at such future date as may be determined upon by the Trustees, it shall be deemed best to liquidate the Trust, composed of the remaining principal and balance of accrued interest, the trustees shall as far as practicable make said liquidation in such manner and form and to such purposes as in their opinion the maker of this trust should desire, were he able to foresee the changing conditions.
12. The first and primary purpose of this trust is, as hereinbefore mentioned, to provide any direct male or female descendant of my parents, Alexander Sprunt and Jane*2228 Dalziel Sprunt, who is also a member of the Southern Presbyterian Church, who may make application to this Board, with funds for preparation, and partial or full support in the ministry of the Gospel, or in Missionary work at home or abroad under the Southern Presbyterian Church, provided such person or persons shall be deemed by the Trustees worthy to be a beneficiary or beneficiaries under this trust. It is my desire that in such cases the trustees shall provide the cost of such preparation and subsequent support, on liberal lines, and in the event of the death of any beneficiary leaving a dependent family it shall be the duty of the Trustees to make suitable provision at their discretion, it being my desire and purpose to make such provision for the pecuniary support that the mind may be made tranquil under a comfortable sense of comparative security from lack support so that both life and living may be consecrated to the great cause of winning souls. Perhaps my daily prayer may be realized after I am gone, and so to that end I have founded this trust fund.
13. Ten percentum (10%) of the interest or increment of the invested money of this trust may be appropriated monthly*2229 or quarterly or yearly, through the agency of the church treasury, or otherwise, for the benefit or relief of underpaid Presbyterian Ministers or Missionaries of Wilmington Presbytery, and, or, in foreign or home missions.
14. A part of this trust fund, not exceeding one fifth of the increment, may be used annually at the discretion of the Trustees for the private relief or assistance of any worthy lineal descendants of Alexander Sprunt and Jane Dalziel Sprunt, regardless of their church affiliations.
15. I direct the Trustees to pay through the First Presbyterian Church, of Wilmington, N.C., ten thousand dollars yearly, for a period of five years after my death, to the Kiang Yin China Mission Station of this church.
16. I direct the Trustees to pay through the First Presbyterian Church, of Wilmington, N.C., twelve hundred dollars ($1,200.00) yearly, for a period of five years after my death, to the Marion Sprunt Mission Kindergarten at Delgado.
*22 17. I direct the Trustees to pay to Davidson College, of Davidson, North Carolina, the sum of fifty thousand dollars ($50,000.00) either in lump sum when convenient, or in annual installments, as may be in their judgment*2230 wisest.
18. I direct that the sum of two hundred dollars ($200.00) be paid annually out of this trust fund to each of the Trustees as a honorarium.
Signed, sealed and delivered to the said trustees, this 1st day of June, nineteen hundred and twenty one, at Wilmington, North Carolina, in the presence of these witnesses:
(Signed) JAMES SPRUNT, (Seal)
Witnesses:
(Signed) W. G. FARMER,
W. L. FISHER.Codicil to the "James Sprunt Benevolent Trust"
I hereby direct that the sum of ten thousand dollars ($10,000.00) be paid yearly, in quarterly payments, from this trust fund, to the First Presbyterian Church of Wilmington, N.C., said amount to be used in connection with the religious, benevolent and local work of the said church, in such manner and for such purposes as the Elders of this church, or their successors, may deem best. These payments shall begin at my death and shall continue for a period of twenty years.
I further direct that item number fifteen of the trust, which provides for payment of ten thousand dollars yearly to Kiang Yin China Mission Station for a period of five years after my death, shall now read ten thousand dollars for a period of twenty*2231 years instead of only five years.
Witness my hand and seal this 10th day of May nineteen hundred and twenty four.
(Signed) JAMES SPRUNT, (Seal).
Witnesses:
(Signed) W. H. SPRUNT,
WALTER P. SPRUNT.
At the time the trust was created James Sprunt was about 75 years of age. He was deeply interested in religious and charitable work and in the last ten years of his life gave more than a million dollars of his fortune, exclusive of the trust fund, for such purposes. He died in 1924.
Upon execution of the above trust instrument $500,000 par value of the certificates was transferred to the trustees by James Sprunt and thereafter were retained in the safety vaults of Alexander Sprunt & Son, Inc.
During the taxable years 1922 and 1923 the corporation made no payments to the trustees on account of the trust fund, but credited the trust each year with the 7 per cent interest due on the $500,000 of certificates. The corporation used this accumulated interest in its business and credited the trust with an additional 6 per cent interest thereon each year. The trust had no other income during *23 the taxable years. The corporation was indebted to the trust on account*2232 of interest on December 31, 1921, December 31, 1922, and December 31, 1923, in the respective amounts of $17,500, $53,574.43, and $92,409.83.
The accounts of the trust were kept on the accrual basis. A ledger was the only book used by the trustees in keeping the accounts. Entries for all interest credits and for all disbursements were made in the ledger by the trust auditor. On December 31, 1922, the following disbursements entries were made in the trust ledger:
| To relief of underpaid Presbyterian ministers and missionaries, | |
| article 13 of the trust | $ 3,500 |
| To Davidson College, article 17 of the trust | 25,000 |
| To trustees' compensation, article 18 of the trust | 1,200 |
| Total | 29,700 |
Identical entries were made in the ledger on December 31, 1923, for that year.
Davidson College is an educational institution organized as a corporation under the laws of the State of North Carolina and located at Davidson, N.C. The college is operated exclusively for educational purposes and no part of the net earnings of the college corporation inures to the benefit of any private stockholder or individual.
The First Presbyterian Church of Wilmington, N.C., is an association*2233 organized and operated exclusively for religious and charitable purposes, and no part of the net earnings of the said association inures to the benefit of any private stockholder or individual.
None of the above amounts credited to beneficiaries in 1922 and 1923 in the trust ledger were actually paid out by the trustees in those years. The amounts credited to underpaid Presbyterian ministers or missionaries under article 13 of the trust have not been paid up to the present time. The equivalent of the amounts credited to Davidson College in 1922 and 1923, $50,000, was paid to the college by the trustees in 1926 and claimed as a deduction by the trust in its return for that year. The trustees received none of the amounts credited to them as compensation until the year 1925. They received $1,500 in that year and $6,600 in the following year. Interest on all of these amounts accruing up to the time of their payment by the trustees was credited to the trust fund upon the books of the corporation.
OPINION.
SMITH: The petitioner contends, first, that it is exempt from taxation under section 231 of the Revenue Act of 1921. This section reads in part as follows:
*24 *2234 That 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 stockholder or individual.
The respondent, relying upon certain dicta in , contends that the petitioner is neither a corporation, community chest, fund, or foundation, but that it is a "trust" and is therefore not entitled to exemption under the above quoted section of the statute. We are of the opinion that there is no merit in this contention. Manifestly, a fund or foundation may be a trust. If the trust is organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, and no part of the net earnings of such trust inures to the benefit of any private stockholder or individual, the trust is exempt under section 231(6) of the*2235 Revenue Act of 1921. The mere fact that the fund or foundation takes the form of a trust does not bar it from exemption.
We are of the opinion, however, that the petitioner's claim for exemption must be denied upon the broader ground that the trust here was not organized exclusively for religious, charitable, scientific, literary, or educational purposes within the meaning of the statute. The primary and principal purpose of the trust as plainly expressed by the creator was "for the temporal support of a son or grandson or a blood relation who will be called to the Gospel Ministry of the Southern Presbyterian Church." Article 14 of the trust authorizes the trustess to pay out not exceeding one-fifth of the increment of the trust fund "for the private relief or assistance of any worthy lineal descendants of Alexander Sprunt and Jane Dalziel Sprunt regardless of their church affiliations." The authorities, which we have reviewed at length, seem unanimously to agree that purposes such as these are not public charities in a legal sense and are not entitled to the privileges, such as exemption from taxation, generally accorded such charities. *2236 "* * * A gift for 'the support of those of my children and their descendants who may be destitute,' is not a charity." Perry on Trusts and Trustees, vol. 2, p. 1163. "* * * Charity is generally defined as a gift for public use. Such is its legal meaning. * * *" . "* * * A charity is a gift to a general public use, which extends to the rich, as well as to the poor. * * *" .
The benefits conferred by the first and fourteenth articles of the trust under consideration were available only to the creator's blood *25 relations. This, we think, was a private use. It excluded the public. This, we think, bars the petitioner from exemption from income tax under section 231(6) of the Revenue Act of 1921.
The petitioner further contends that if it is not exempted from taxation under section 231, then it is entitled under sections 219(b) and 214(a)(11) of the 1921 Act to deduct certain amounts permanently set aside for religious, charitable, and educational purposes in each of the taxable years, as follows:
| 1. For Relief of Underpaid Presbyterian Ministers | |
| or missionaries of Wilmington Presbytery (Article | |
| 13 of the trust) | $ 3,500 |
| 2. For First Presbyterian Church of Wilmington, | |
| North Carolina, to be used for the Kiang Yin China | |
| Mission Station of that church. Payments of | |
| $ 10,000 are to be made yearly for 20 years after | |
| the death of the creator (Article 15 and Codicil) | $200,000 |
| 3. For First Presbyterian Church of Wilmington, | |
| North Carolina, for Marion Sprunt Mission Kinder- | |
| garten at Delgado. Payments of $1,200 are to be | |
| made yearly for 5 years after death of creator | |
| (Article 16) | 6,000 |
| 4. For Davidson College, Davidson, North Carolina | |
| (Article 17) | 50,000 |
| 5. For First Presbyterian Church of Wilmington, | |
| North Carolina, for religious, benevolent and | |
| local work of that church. Payments of $10,000 | |
| are to be made yearly for 20 years after death of | |
| creator (Codicil) | 200,000 |
| 6. Trustees' Honorarium (Article 18) | 1,200 |
*2237 The respondent denies that the amounts in question were paid or permanently set aside within the meaning of the statute during the taxable years 1922 and 1923.
It will be seen that the disputed amounts fall into two classes. Those which, under the provisions of the trust agreement, were to be paid yearly beginning after the death of the creator, including items 2, 3, and 5 above, and those that were payable yearly or immediately upon creation of the trust or at the discretion or convenience of the trustees, including items 1, 4, and 6.
The amounts comprising the first and principal group are, we think, not deductible. None of them was paid or permanently set aside during the taxable year by the trustees. The petitioner argues, however, that the amounts were permanently set aside by the trust instrument itself and are deductible independently of any of the acts of the trustees. We do not so construe the statute and the trust agreement. In the first place, the annual payments to the First Presbyterian Church for the Kiang Yin China Mission Station (article 15), the Marion Sprunt Mission Kindergarten (article 16), and for local religious and benevolent work (codicil) were*2238 not directed or authorized to be made until after the death of the creator. This did not occur until the year 1924. The payments were to extend over a number of years and were to be made out of the increment of *26 the trust fund if possible. The creator of the trust did not direct, and there is nothing to indicate that he contemplated, that the total or any part of these amounts should be set aside at a time prior to the year in which they should become payable. No segregation of the corpus of the trust fund was directed by the creator but all of the benefits were to be paid out of the increment of the entire fund if possible (article 9).
In this contention the petitioner relies upon . That case, however, presented an entirely different situation. The testator there had directed in his will that all of his residuary estate be paid to certain charities. In holding that the income during process of administration of such residuary estate was exempt, we said:
We think that Congress intended by subdivision (b) of section 219 that all or any portion of the gross income of an estate should be deductible*2239 when, conformable to and in pursuance of the provisions of the will, it was appropriated and dedicated finally and for all time to charitable and religious uses as specified in section 214(a)(11), so that, thereafter, there would be no change which would destroy the character of such action. The executors were charged by the will with the duty of apportioning the residuary estate among the charitable, religious, and educational institutions as specified in the will after the payment of all specific legacies, expense of administration, etc. * * *
* * *
* * * The will directed that the residuary estate "wheresoever and whatsoever" be distributed to the exempt institutions. When the executors received the income it became a part of the residuary estate and was permanently set aside for and belonged to the exempt institutions. It was, thereforeA proper deduction by the estate.
All of the trust fund here was not, under the provisions of the trust instrument, "appropriated and dedicated finally and for all time to charitable and religious uses as specified in section 214(a)(11)" and in the absence of any authorized act on the part of the trustees it can not be determined what*2240 part, if any, of the income of the trust fund was permanently set aside for such uses.
In the other group are items 1, 4, and 6 above, including the amounts credited in the trust ledger for relief of underpaid Presbyterian ministers and missionaries, for Davidson College, and for trustees' compensation. These items, we think, are deductible. The trustees were authorized to make these payments during the taxable years. Pursuant to such authorization, they set up the amounts to be paid in the trust ledger to the credit of the beneficiaries named. These book entries were made at the close of the taxable years 1922 and 1923, the total of the amounts set up in each year being several hundred dollars less than the interest accrued on the principal fund. It seems to us that it was an expedient if not necessary course of action on the part of the trustees, and a reasonable exercise of their discretionary powers, to set aside in this manner out of the increment *45 of the fund these amounts for future payment. The trust accounts were kept on the accrual basis. The fact that there was no actual segregation of the amounts in question but that they were allowed to remain in the*2241 hands of the custodian of the principal fund as interest-bearing loans does not establish that they were not permanently set aside, but rather indicates that they were. The statute is not specific in this requirement. It is sufficient, we think, that the amounts remain readily identifiable and subject to immediate appropriation to their respective uses as authorized by the trust instrument.
The $200 per year compensation payable to each of the trustees was an ordinary and necessary expense of the trust, and since the trust books were kept on the accrual basis the amounts are deductible in the taxable years.
The respondent in determining the deficiencies herein asserted computed the petitioner's tax liability at the surtax rates only, upon the theory that the trust income consisted of dividends from the corporation. At the hearing had in these proceedings the respondent, on motion granted, moved to increase the deficiencies for each of the years on the ground that the evidence adduced establishes that the petitioner's income was derived from interest rather than from dividends and is, therefore, taxable at both the normal and surtax rates. The facts conclusively support the*2242 respondent's contention in this respect and the recomputation should be made in accordance therewith.
Judgment will be entered under Rule 50.