Missouri in the case of Franta v. Bohemian Roman Catholic Cent. Union (63 S. W. 1100) (Mo.) stated as follows:

Money contributed by the members of a club to a common fund to be applied to the relief and assistance of the particular members of the club when in sickness, in want of employment, or other disability is not a charitable fund. It is not charitable to give to your friend because of friendship, nor to your associates in the society because of your duty imposed by the laws of the society. Institutions of this character have been regarded in the law not as charitable institutions, but as mutual insurance societies or mutual benefit societies (Young Men's Protestant Temperance and Benevolence Society v. The City of Fall River, supra), which would not be exempt under the statute unless operated on the lodge system. The court in that case stated that

A society whose principal income is derived from a fixed, compulsory contribution from its members which is to constitute a fund to be used exclusively for the benefit of its menrbers could not be held to be either a benevolent or a charitable society within the meaning of the statute.

In view of the foregoing it is the opinion of this office that the pension fund organization of the M Company is not a corporation or association organized and operated exclusively for charitable purposes. Accordingly, it is held that it is not exempt under the provisions of section 231 of the Revenue Act of 1918. In view of the opinion quoted above, in which this Committee concurs, it is recommended that the action of the Income Tax Unit in holding that the pension fund organization of the M Company is not such an organization as is exempt from tax under the provisions of section 231 of the Revenue Act of 1918, nor under any provision of the Revenue Act of 1916 as amended by the Revenue Act of 1917, be sustained.

SECTION 231, ARTICLE 517: Religious, charitable, scientific, and educational corporations.

18-21-1611 T. D. 3164 (Ct. D. 11)

INCOME TAX-REVENUE ACT OF 1918-DECISION OF COURT.

1. EXEMPT CORPORATIONS-EDUCATIONAL INSTITUTIONS, WHERE PROFITS INURE TO PRIVATE STOCKHOLDERS.

A corporation organized for the purpose of conducting a military school for profit, the stock of which is owned entirely by the officers, directors, and teachers of the institution, is not exempt from income tax as an educational institution, no part of the net earnings of which inures to the benefit of any private stockholder or individual, within the meaning of subdivision 6, section 231, Revenue Act of 1918.

2. PRIVATE STOCK HOLDERS OR INDIVIDUALS-OFFICERS, DIRECTORS, AND TEACHERS OF MILITARY SCHOOL.

The term "private" is not used in the statute in contradistinction to "official," whether the latter be used in a military or an institutional sense, but as the antonym of "public," the supposed beneficiary of the benevolent activities of an institution devoted exclusively to public betterment; private pecuniary profit and gain is the test to be applied, and the officers, directors, and teachers of a military school corporation, owning the stock thereof, are "private stockholders" within the meaning of the Act.

3. DEDUCTIONS-FAILURE TO APPEAL TO COMMISSIONER OF INTERNAL REVENUE. A taxpayer can not claim a deduction in court for the first time, where, in its claim for refund filed precedent to bringing suit, it did not claim the right to such deduction or assert that it had failed to take it in computing net income in its return, or that it had failed to take credit for it, and where, consequently, a claim for the deduction was never presented to the Commissioner of Internal Revenue for his decision

4. DEDUCTIONS-EXPENSES-CAPITAL INVESTMENTS-COST OF NEW BUILDINGS. No deduction as expenses is allowed by the law in any case in respect of any amount paid out for new buildings, or for permanent improvements or betterments made to increase the value of any property or estate.

TREASURY DEPARTMENT,

OFFICE OF COMMISSIONER OF INTERNAL REVENUE,

Washington, D. C.

To collectors of internal revenue and others concerned:

The appended decision of the District Court of the United States for the Western District of Missouri, dated March 23, 1921, in the case of The Kemper Military School v. George F. Crutchley, collector, is published for the information of internal revenue officers and others concerned. M. F. WEST,

Acting Commissioner of Internal Revenue.

Approved May 11, 1921:

A. W. MELLON,

Secretary of the Treasury.

DISTRICT COURT OF THE UNITED STATES FOR THE WESTERN DIVISION OF THE WESTERN DISTRICT OF MISSOURI.

The Kemper Military School, plaintiff, v. George F. Crutchley, defendant.

[Decided March 23, 1921.]

MEMORANDUM OF FINAL HEARING.

VAN VALKENBURGH, Judge:

The plaintiff in this action seeks to recover the sum of $52,166.81 income taxes with interest and penalty alleged to have been illegally exacted from the plaintiff by the defendant for the year 1918. The basis of plaintiff's alleged right to recover the above sum is that it is exempt from tax as an educational institution, which was organized and operated exclusively for educational purposes, and that no part of its net earnings inures to the benefit of any private stockholder or individual. This defense is asserted under the following exemptions specifically provided by the Congress :

"Corporations organized and operated exclusively for religious, charitable, scientific, 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 plaintiff was incorporated June 15, 1909, under the provisions of chapter 12, article 9, of the Revised Statutes of Missouri, 1899, governing the formation of private corporations for manufacturing and business purposes. This` statute appears as article 7 of chapter 33, of the Revised Statutes of 1909, concerning private corporations, and deals with corporations organized for pecuniary profit and gain. Plaintiff was not organized under the article of the same chapter, which deals with benevolent, religious, scientific, educational, and miscellaneous associations not intended for pecuniary gain or profit.

The school was originally of individual ownership. For many years prior to its incorporation it was owned by Colonel T. A. Johnston, now its president and principal stockholder. He purchased it originally for approximately $12,000; since which time large additions and betterments have been made, until its present total assets are shown to be $348,796.01, its liabilities $96,522.88, and its net resources $252,273.13. Its present attendance totals about 435 pupils. In 1918 and 1919, during war activities, it had a few over 500. In 1918 the charge was $600 per pupil for tuition, board, and lights. The charge now has been raised to $700. In addition thereto it sells to the pupils uniforms and books, upon which it makes a profit.

It receives minor items of income from other sources which do not require detailed consideration.

For the calendar year 1918 its gross income amounted to $205,153.26, of which the sum of $5,083.11 was received from sources other than tuition. After making statutory deductions the net income remaining amounted to $79,788.01. The figures involved are not in dispute except as to some claims for deduction to which reference will be hereafter made.

When the school was incorporated Colonel Johnston transferred the property to the corporation, receiving stock therefor. The remaining shares of stock were subscribed for by teachers, and the officers and board of directors are made up of such. These teachers paid for their stock out of their earnings. A dividend of 6 per cent has been paid upon all stock since the date of the incorporation.

That the corporation is operated exclusively for educational purposes may be conceded. If the law had stopped there and had evidenced the purpose of exempting all such, the contention of the government would be without merit, but the law further provides that, not only must the corporation be organized and operated exclusively for educational purposes, but that no part of its net earnings should inure to the benefit of any private stockholder or individual. The case of State ex rel J. L. Spillers v. Johnston, 214 Mo., 656, in which this same school was under discussion, is not in point. There the school was exempt under a provision of the state constitution and statute which exempts from taxation real estate "used exclusively for schools." The element of private pecuniary gain was not involved; and, furthermore, the construction of a state court upon a state constitution or law could not affect a federal statute of different intendment and uncontrolled by state laws.

This corporation, while devoted to educational purposes, was confessedly organized for private pecuniary profit and gain. Its teachers all receive salaries. In addition thereto, they have all, including Colonel Johnston, received an annual dividend of 6 per cent upon their stock since the date the corporation was organized. While under the terms of the statute we are concerned chiefly with net earnings, nevertheless it may appropriately be remarked that the increase in value of the school property inures to the stockholders of this business corporation. It might, at any time, be sold, and the purchase price divided proportionately to such holdings. Upon ultimate dissolution the holders of these shares of stock would receive the proceeds of the property, including accumulated income.

The chief insistence is that because all the shareholders are officers, directors, and teachers in the institution, they are not "private stockholders or individuals." This involves a narrowness of definition that can not be entertained in view of the obvious purpose and spirit of the Act. The distinction is not between private and official, whether the latter be used in a military or an institutional sense. The word "private" as here used is the antonym of "public," a private stockholder as distinguished from the general public-the supposed beneficiary of the benevolent activities of an institution devoted exclusively to public betterment. Private pecuniary profit and gain is the test to be applied. This corporation was, and is, undeniably organized and operated for that purpose.

It does not detract, even in small degree, from the merit and worthy service of the plaintiff, as a valuable institution of learning, to hold, as we must, that it is not exempt from the tax imposed.

Plaintiff further contends that:

"Even if it were liable to pay said taxes, they should not be collected for the year 1918 because it expended in the necessary furniture and fixtures the sum of $13,086.68, and for buildings and other necessary improvement $81,188.35, amounting in the aggregate to $94,275.03, which amount was expended for the upkeep and expansion of the plaintiff's plant and for the comforts and necessities of said school."

To this claim the defendant answers that plaintiff, in its appeal to the Commissioner of Internal Revenue in its claim for the abatement of said taxes and for refund, never at any time asserted or claimed that it had failed to take credit for any deduction in its said return of income for the year 1918, which it was entitled to take, in computing its net income for that year, under the Act of Congress, and that said claim was never at any time presented by the plaintiff to the Commissioner of Internal Revenue for his consideration and decision thereon; further, that in computing its net income for the year 1918 plaintiff deducted, in its said return of income for said year, a reasonable allowance for

1

the exhaustion, wear and tear of the property used in its trade or business, including a reasonable allowance for obsolescence. These allegations of the answer are sustained by the testimony. The law provides for a reasonable allowance for exhaustion, wear and tear, etc., as conceded by defendant, and as claimed by plaintiff in its return and allowed by the collector and Commissioner. It further provides that in computing net income no deduction shall in any case be allowed in respect of any amount paid out for new buildings, or for permanent improvements or betterments made to increase the value of any property or estate. It follows that this claim for deduction, in the sum of $94,275.03, or any part thereof, can not be indulged.

It appearing that the grounds upon which plaintiff relies for recovery are untenable, and there being no dispute that the amount of the tax levied was correct, if plaintiff's contentions are not sustained, it follows that judgment must be entered for the defendant, and it is so ordered.

SECTION 231, ARTICLE 518: Business leagues.

5-21-1419

O. D. 786

An association of credit men through its credit interchange bureau and its adjustment bureau acts as receiver and trustee for insolvent or embarrassed businesses and otherwise protects the interests of its members in cases of insolvency, and produces for its members, larger dividends from bankrupt or embarrassed estates than they would receive if the association were not active on their behalf. For these services the association charges a fee which covers the cost of the services. The financial statement of the association shows that the fees and disbursements in connection with these activities amount to about 45 per cent of the total budget of the association, so that the activities are more than incidental.

Held, that the association is not exempt from taxation under section 231 (7) of the Revenue Act of 1918. A business league, or other organization, is not entitled to exemption under this section if it conducts an ordinary commercial enterprise, whether the enterprise actually produces a gain, a loss, or neither; and the fact that such commercial enterprise is conducted on a cooperative basis, or so as to produce only sufficient income to be self-sustaining, is not ground for exempting a business which is otherwise taxable.

SECTION 231, ARTICLE 521: Mutual insurance companies and like organizations.

14-21-1551

O. D. 866

A number of manufacturers incorporated as a reciprocal indemnity exchange to insure their business against fire loss on the reciprocal and inter-insurance plan through an attorney in fact having the power to issue policies, collect premiums and adjust losses.

While the subscriber's contract provides that there shall be no joint funds, the rules of the association show that the provision is not carried out in letter or spirit. The advance payments are not all made directly to the attorney but direct to the exchange and are charged in the nature of advance premium deposits.

Provision is made in the rules of the association for cancellation of the policies on a short rate basis. In view of the above facts it is held that the association does not come within the exemption provided in paragraph 10, section 231 of the Revenue Act of 1918, and will therefore be required to file returns of annual net income. (O. D. 538, C. B. 2, p. 210, overruled.)

SECTION 231, ARTICLE 521: Mutual insurance companies and like organizations.

15-21-1564 Sol. Op. 99

INCOME TAX-SECTION 231(10), REVENUE ACT OF 1918.

Where a farmers' mutual fire and lightning insurance company makes assessments on its members for the sole purpose of meeting estimated future losses and expenses, and where there is an unexpended balance of the assessment or assessments so made on hand at the end of the year, which balance is retained by the company to meet losses and expenses in the ensuing year, the fact that the company makes such assessments and has on hand at the end of the year such a balance does not take it out of the class of exempt organizations named in section 231(10) of the Revenue Act of 1918.

The question presented is whether a farmers' mutual fire and lightning insurance company is an exempt organization within the meaning of section 231 (10) of the Revenue Act of 1918, where it makes assessments to meet estimated future losses and expenses and has on hand at the end of the year an unexpended balance from such assessments.

Section 231 (10) of the Revenue Act of 1918 provides that the following organizations, among others, shall be exempt from taxation:

(10) Farmers' or other mutual hail, cyclone, or fire insurance companies, mutual ditch or irrigation companies, mutual or cooperative telephone companies or like organizations of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting expenses.

It appears from the evidence submitted that the M Company was incorporated under the laws of Missouri, Revised Statutes, chap. 61, art. 11, sec. 7154, et seq., providing for the organization of farmers' mutual fire and lightning insurance companies for the sole purpose of mutually insuring the property of members, the statute limiting the operation of the company to the county in which organized. It is clear from the evidence that the company is of a purely local character, and that its operating expenses are fair and reasonable. The company charges no stipulated cash premium, but makes an annual assessment on what it estimates will be needed during the coming year to meet expenses and losses. In some years the expenses and losses consume a great portion of the assessment; in other years there is a large balance on its hands.

It is clear that section 231 (10) does not attempt to define or restrict the meaning of the word "assessments" except to provide that they shall be collected from members "for the sole purpose of meeting expenses." If assessments are for the purpose named and if they are not of a kind to affect the mutuality of the company, they come within the section quoted.

Assessments are made by mutual fire insurance companies either after losses occur or in anticipation of such losses. It is thought that the majority of such companies at the present time make assessments to meet estimated future losses, the assessments being made quarterly, half-yearly, or yearly, as the case may be. The advantages of making assessments in this manner are obvious, avoiding as they do operating expenses incidental to the making of a large number of