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istration of justice. Educational corporations may include an association whose sole purpose is the instruction of the public. This is true of an association to promote acquaintance with the Spanish language and literature, although it has incidental amusement features; of an association to increase knowledge of the civilization of another country; and of a Chautauqua association whose primary purpose is to give lectures on subjects useful to the individual and beneficial to the community and whose amusement features are incidental to this purpose. But associations formed to disseminate controversial or partisan propaganda are not educational within the meaning of the statute. Societies designed to encourage the performance of first class orchestral music are not exempt, the purpose being merely to provide a high grade of entertainment. Scientific corporations include an association for the scientific study of law, to the end of improvement in its administration.
(2) Where a religious corporation owns a large quantity of farm land and works it, and also manufactures and sells clothing and other articles for profit, it is not operated exclusively for religious purposes and is not exempt, even though its property is held in common and its profits do not inure to the benefit of individual members of the society.
(3) It does not prevent exemption that private individuals, for whose benefit a charity is organized, receive the income of the corporation or association. The statute refers to individuals having a personal and private interest in the activities of the corporation, such as stockholders. If, however, a corporation issues "voting shares,” which entitle the holders upon the dissolution of the corporation to receive the proceeds of its property, including accumulated income, the right to exemption does not exist, even though the by-laws provide that the shareholders shall not receive any dividend or other return upon their shares. (Art. 517.)
CHAMBERS OF COMMERCE, ETC.
Law. Section 231. .... (7) Business leagues, chambers of commerce, or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private stockholder or individual;
REGULATION. A business league is an association of persons having some common business interest, which limits its activities to work for such common interest and does not engage in a regular business of a kind ordinarily carried on for profit. Its work need not be similar to that of a chamber of commerce or board of trade. An association engaged in furnishing information to prospective investors, to enable them to make sound investments, is not such a league, since its members have no common business interest, and
it is not exempt, even though all of its income is devoted to the purpose stated. A clearing house association, not organized for profit, no part of the net income of which inures to any private stockholder or individual, is exempt provided its activities are limited to the exchange of checks and similar work for the common benefit of its members. An association of persons who are engaged in the business of carrying freight and passengers by boats propelled by steam, which is designed to promote the legitimate objects of such business, and all of the income of which is derived from membership dues and is expended for office expenses and the salary of a secretary-treasurer, is exempt from tax. An incorporated cotton exchange, whose shares carry the right to dividends, is organized for profit and is not exempt. (Art. 518.)
LAW. Section 231. .... (8) Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare;
REGULATION. A corporation having capital stock and possessing a charter which authorizes it to buy, improve and sell real estate is organized for profit within the meaning of the statute and is not exempt from tax as a civic league or organization, even though it no longer exercises such powers for profit and is operated exclusively for the promotion of social welfare. (Art. 519.)
Law. Section 231. .... (9) Clubs organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net earnings of which inures to the benefit of any private stockholder or member;
REGULATION. The exemption applies to practically all social and recreation clubs which are supported by membership fees, dues and assessments. If a club, by reason of the comprehensive powers granted in its charter, engages in traffic, in agriculture or horticulture, or in the sale of real estate, timber, etc., for profit, such club is not organized and operated exclusively for pleasure, recreation or social purposes, and any profit realized from such activities is subject to tax. (Art. 520.)
MUTUAL INSURANCE COMPANIES, ETC.
For laws and regulations in regard to mutual fire insurance, telephone and other companies, see Chapter XXXV, “Insurance Companies.”
CO-OPERATIVE SOCIETIES,53 ETC.—
Law. Section 231. .... (11) Farmers', fruit growers', or like associations, organized and operated as sales agents for the purpose of marketing the products of members and turning back to them the proceeds of sales, less the necessary selling expenses, on the basis of the quantity of produce furnished by them;
REGULATION. (a) Cooperative associations, acting as sales agents for farmers or others, in order to come within the exemption must establish that for their own account they have no net income. Cooperative dairy companies, which are engaged in collecting milk and disposing of it or the products thereof and distributing the proceeds, less necessary operating expenses, among their members upon the basis of the quantity of milk or butter fat in the milk furnished by such members, are exempt from the tax. If the proceeds of the business are distributed in any other way than on such a proportionate basis, the company will be subject to tax. A farmers' association is not exempt from taxation where in accounting to farmers furnishing produce for the proceeds of sales it deducts more than the necessary selling expenses incurred. (b) Cooperative associations acting as purchasing agents are not expressly exempt from tax and must make returns of income, but rebates made to purchasers, whether or not members of the association, in proportion to their purchases may be excluded from gross income in computing the net income subject to tax. Any profits made from non-members and distributed to members in the guise of rebates are, of course, subject to tax. (Art. 522.)
CORPORATIONS SERVING EXEMPT CORPORATIONS.—
LAW. Section 231. .... (12) 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 ;54
FEDERAL LAND BANKS.
Law. Section 231. .... (13) Federal land banks and national farm-loan associations as provided in section 26 of the act approved July 17, 1916, entitled “An Act to provide capital for agricultural development, to create standard forms of investment based upon farm mortgage, to equalize rates of interest upon farm loans, to fur
53[Former Procedure] Co-operative associations were not specifically mentioned in the law before 1918.
"[Former Procedure] Such corporations were taxable under the 1913 law, T. D. 2137 (January 30, 1915).
nish a market for United States bonds, to create Government depositaries and financial agents for the United States, and for other purposes”;
PERSONAL SERVICE CORPORATIONS.55—
Corporations of this type were first distinguished from corporations in general by the 1918 law which defined them as follows:
Law. Section 200. .... The term "personal service corporation" means a corporation whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor; ....
For regulations and procedures, see Chapter XXII.
Establishing a right to exemption.-A corporation is not exempt from the tax simply and only because it is not primarily organized and operated for profit. If it does not come within one of the fourteen classes enumerated above, it is taxable even though the purpose of the corporation may not be to operate for the profit of its members or stockholders.
Not all the corporations mentioned in the above classes are unconditionally exempt. In all cases where a condition is inserted, such as that no part of the net earnings shall inure to the benefit of any private stockholder, the right to exemption must be demonstrated in accordance with the following regulation:
REGULATION. In order to establish its exemption, and thus be relieved of the duty of filing returns of income and paying the tax, it is necessary that every organization claiming exemption, except personal service corporations, file an affidavit with the collector of the district in which it is located, showing the character of the organiza
*See Chapter XXII.
**[Former Procedure] As the 14th type of exempt corporation the previous law gave the following: "Joint-stock land bank, as to income derived from bonds or debentures of other joint-stock land banks or any federal land bank belonging to such joint-stock land bank."
tion, the purpose for which it was organized, the sources of its income and its disposition, whether or not any of its income is credited to surplus or may inure to the benefit of any private stockholder or individual, and in general all facts relating to its operations which affect its right to exemption. To such affidavit should be attached a copy of the charter or articles of incorporation and by-laws of the organization. Upon receipt of the affidavit and other papers by the collector, he will inform the organization whether or not it is exempt. If, however, the collector is in doubt as to the taxable status of the organization, he will refer the affidavit and accompanying papers to the Commissioner for decision. When an organization has established its right to exemption, it need not thereafter make a return of income or any further showing with respect to its status under the law, unless it changes the character of its organization or operations or the purpose for which it was originally created. Collectors will keep a list of all exempt corporations, to the end that they may occasionally inquire into their status and ascertain whether or not they are observing the conditions upon which their exemption is predicated. As to personal service corporations see section 218 of the statute. .... (Art. 511.)
If there be any doubt as to the status of a corporation under the law, it should file a return (in blank, if desired) and attach thereto a statement setting out fully the facts mentioned above. This will enable it to avoid the imposition of penalties should the Treasury later hold the organization to be taxable.
Section 231 is applicable to both foreign and domestic corporations alike, except that foreign building and loan associations, and co-operative banks are not exempt. If doubt exists whether a foreign corporation comes or does not come within the classes of exempt organizations enumerated, it will be required to present an affidavit showing all the material facts to the Treasury, which will examine the claim and determine its status.
Exempt corporations must withhold taxes and furnish information.—A corporation exempt as to its income is not thereby exempt from “the withholding requirements57 nor
"See Chapter X.