Before WATERMAN,*fn* SMITH and HAYS, Circuit Judges.
This is a petition to review a decision of the Tax Court of the United States which upheld the Commissioner of Internal Revenue's determination of a deficiency of $25,784.43 in the federal income tax of petitioner, People's Educational Camp Society, Inc., for its fiscal year ending September 30, 1956. The Tax Court rejected petitioner's claim that it was exempt from the income tax under Section 501(c)(4) of the Internal Revenue Code of 1954 as a nonprofit civic organization operated exclusively for the promotion of social welfare, rejecting it on the ground that such an exemption was precluded because of the relationship which petitioner's operation of a large commercial resort bore to its totality of activities. We agree that petitioner was not entitled to the exemption.
A complete statement of the facts surrounding petitioner's operations, including a detailed breakdown of its financial activities, can be found in the opinion of the Tax Court, reported at 39 T.C. 756.Our summary thereof follows:
Petitioner is a New York membership corporation with its principal offices in New York City. It was organized in 1920 by persons associated with the Rand School of Social Science, an institution then operated by the American Socialist Society and engaged in conducting adult classes and presenting lectures and programs related to the dissemination of information on the labor movement and socialist principles. During 1920 officials and friends of the Rand School became interested in purchasing a tract of 2,196 acres of land in the Pocono Mountains of Pennsylvania, with an eye toward developing on the tract a campsite where the Rand School's faculty, students and friends might gather during the summers to carry on their studies and develop programs in which they were interested. After the school's executive secretary had acquired an option to purchase the land for about $21,000, petitioner was organized to take title to the property and develop the summer camp, which was eventually given the name "Tamiment," the name of a lake nearby.
Petitioner, organized as a New York membership corporation, has never issued any shares of stock and has never had any stockholders. Its operations are conducted by a group of individuals known as members, whose number may never exceed 35 and whose election to membership is governed by petitioner's by-laws. Any person may be elected to membership who has publicly endorsed the principles of socialism for at least two years, and whose membership has been recommended by petitioner's Board of Directors and has been approved by those persons already members. None of petitioner's officers or directors receive any salary or other compensation, but the managing director and associate director, who conduct petitioner's day-to-day operations, do receive salaries as do petitioner's other employees.
When petitioner was organized its certificate of incorporation set forth its objects in the following terms:
"To organize, conduct and maintain summer camps and centers for instructive and recreative purposes; to build, purchase, own, lease, manage and operate camps, dormitories, dining halls, recreation rooms, play grounds, reading rooms, halls and other buildings for the purpose of said corporation as herein set forth; to diffuse a general knowledge of literature, art and science through the medium of lectures, publications and dramatic performances; to borrow money for the corporate purposes of the corporation and to issue bonds, notes or other evidences of indebtedness therefor; to assist other educational, civic, political and economic movements and organizations; to cooperate with such organizations and movements and to initiate such movements, but said purposes shall not extend to those objects for which corporations may be formed pursuant to the Education Law, nor shall any activities of the said corporation be conducted for pecumiary profit to its members."*fn1
As of the time of the Tax Court proceedings below, petitioner's by-laws provided that upon dissolution all its property was to revert to the American Socialist Society, although that Society, along with its Rand School of Social Science, had ceased to exist in 1956. As of this time no steps had been taken to amend the portion of the by-laws relating to the disposition of petitioner's property upon dissolution, nor had any alternative plan for dissolution been contemplated.*fn2
From the opening of Camp Tamiment for occupancy in July of 1921, it began to experience considerable growth. During its first twenty years its growth was steady though moderate. By 1941 the camp's annual gross income had increased to $281,633.87, and the value of its fixed assets had increased to $398,663.93. Except for the years 1925 and 1932, when small losses were incurred, Tamiment has each year consistently shown a profit, and, except for the period from 1921 to 1923 when petitioner received contributions, it has been entirely self-sustaining. In January of 1936, and again in January of 1939, petitioner obtained rulings from the Commissioner of Internal Revenue that, on the basis of facts then available, petitioner was entitled to an exemption under the then existing provisions of the tax laws, provisions which later came to be embodied in substantially the same form in Section 501(c)(4) of the 1954 Code.
Tamiment's operations from 1941 through the taxable year 1956 represented a second distinct phase of its development, one marked by a growth much more rapid and substantial than that previously experienced. This was manifested by considerable increases in operating expenses and in the value of petitioner's fixed assets and accumulated surplus. An analysis of petitioner's balance sheet figures for these years shows that petitioner's assets, which stood at $398,663.93 in 1941, had increased to $1,124,229.91 by 1951. By the end of the taxable year 1956,*fn3 the year here under discussion, these assets had grown to $2,301,604.74. During these same periods petitioner's surplus, designated in its balance sheet as "reserves," had increased from $311,079.97 in 1941, to $1,573,452.14 in 1951, and to $2,226,080.50 in 1956. Petitioner's annual revenues showed like increases after 1941, with the figures for petitioner's total gross revenues from all sources for 1941, 1951, and 1956 being, respectively, $290,804.60, $840,364.23, and $942,632.55.*fn4 The overwhelming portion of petitioner's gross revenues*fn5 and expenses*fn6 during the period under examination, as well as of the increase in the value of its assets, was connected solely with the operation of Tamiment.
By the year 1956 Tamiment had become the largest and one of the most modern summer vacation resorts in Pennsylvania, with rates ranging from $12 to $19 per day per person. As already noted, the American Socialist Society and the Rand School of Social Science, the motivating forces behind the creation of Tamiment as a site for summer retreats, had both ceased to exist. The resort was open to the public and competed with other vacation resorts in the Poconos. It employed more than 400 persons during the peak season and it advertised itself through newspapers, magazines and brochures as "Tamiment in the Poconos."
Tamiment's principal guest quarters in 1956 consisted of more than 160 furnished cottages, capable of accommodating about 900 persons, and located adjacent to a dining hall with a seating capacity of 1000. Set apart from the main complex of cottages was a group of bungalows known as Sandyville, designed for use by families with children, and which adjoined a play school and a small store. The other physical facilities which dotted Tamiment's grounds were of the type not uncommon to luxury vacation resorts catering to a young adult clientele: an administration building; a library; a lecture and concert hall; a ballroom building; an 18-hole golf course with a clubhouse containing a cocktail lounge; another clubhouse and dining terrace overlooking Lake Tamiment; a theater building; and facilities for various outdoor sports.
Also, Tamiment's activities included organized programs in the fields of drama, music and art, all available to guests of the resort free of charge. On Saturday evenings and Sunday afternoons the theater building was the scene of a dramatic or musical production staged by a theater group employed by petitioner for that purpose, and throughout the rest of the week the building was used for the exhibition of motion pictures. Orchestras hired on theater evenings to play for musical comedies and revues were customarily used after the performances to provide music at dances. Each week during the summer season vocalists and musicians performed concerts or gave recitals, and a lecture dealing with a topic connected with the arts or with public affairs was also weekly fare for those staying at the resort. Throughout each summer season an art director employed by petitioner gave free art instruction to interested guests, and professional artists were invited to display their works there and offer them for sale.
The most outstanding single cultural attraction at Tamiment was presented each year early in the summer vacation season, a chamber music festival featuring an orchestra and string quartet. The festival was open to members of the general public as well as Tamiment's paying guests, but a moderate fee was charged those attending who were not staying at the resort.
Though the operation of Tamiment constituted the great bulk of petitioner's activities during the period under review, petitioner also carried on other activities at the time, chiefly in New York City. In 1951 it acquired from the American Socialist Society a building in the city which housed the Rand School of Social Science, the school's library, the offices of an independent publication called the New Leader, and the principal corporate office of petitioner. When the American Socialist Society was dissolved in March of 1956, and the operations of the Rand School accordingly ceased, petitioner acquired all of the assets of the school's library and, after renovating it and hiring personnel to staff it, began itself to maintain and operate the library. Containing one of the largest and most complete collections of material dealing with the labor movement, Socialism, and Communism, the library was made freely available to all persons engaged in research in those fields.
Acting under the name of "Tamiment Institute," petitioner also undertook to sponsor and promote various other programs of public interest, mostly in New York City.In order to stimulate interest in American string quartet composition, petitioner promoted annual composition contests in this field of music, awarding prizes to original works adjudged the best.An annual book award luncheon was conducted, at which a prize was awarded by petitioner for the best biographical book of the year. Petitioner launched several programs to foster thought and discussion about important public issues. It discussed such issues from time to time in public service advertisements which it sponsored, and in pamphlets which it published and circulated itself. It also conducted numerous essay contests for college and university students. An annual public forum was held at which prominent citizens aired their views on matters of public concern, and, along these same lines, annual seminars were sponsored at Tamiment before the opening of the resort's summer season at which scholarly papers were read and discussed.
On March 3, 1956, the Commissioner of Internal Revenue wrote to petitioner, ruling that, inasmuch as petitioner was primarily engaged in operating a commercial enterprise, it was no longer to be accorded an exemption from federal income taxes. Petitioner filed a corporate income tax return for its fiscal year 1956 but claimed exemption from the tax, and the Commissioner asserted against it a deficiency of $25,784.13. In the Tax Court proceedings below petitioner did not contest the correctness of the deficiency figure, but unsuccessfully defended on the sole ground that it was not liable for any tax at all since it was entitled to an exemption under Section 501(c)(4) of the 1954 Code. Section 501(c)(4) provides for an exemption from the income tax in the case of:
"(4) 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."
Petitioner, of course, seeks to take advantage of that part of the subsection exempting "[civic] leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare."*fn7 To do so, petitioner must meet the three statutory conditions set forth in the subsection and demonstrate that: (1) it is a civic league or organization; (2) it is not organized for profit; (3) it is operated exclusively for the promotion of social welfare. Debs Memorial Radio Fund, Inc. v. Commissioner, 148 F.2d 948 (2 Cir. 1945).
Conditions (1) and (2) do not require extensive treatment. While at least one court has given the subsection a rather limited construction by defining the initial word "civic" narrowly and then regarding it as modifying both "leagues" and "organizations," Erie Endowment v. United States, 316 F.2d 151, 156 (3 Cir. 1963), neither party to these proceedings has raised any question as to the emphasis to be placed upon the word "civic" or the interpretation to be accorded it in construing Section 501(c)(4). Rather, they have both tacitly assumed that, even if the term does connote a limited genre of exempt organizations characterized by something other than social welfare operations, petitioner may be so classified, and they have confined themselves to an analysis of whether petitioner's operations in 1956 were exclusively of a social welfare nature.
This emphasis on the broader term "social welfare" is in line with the current regulations covering the subsection, which do not appear to give the word "civic" any real independent limiting effect but which only deal with organizations "operated primarily for the purpose of bringing about civic betterment and social improvements," Reg. § 1.501(c)(4)-(1)(a)(2), and is also in line with revenue rulings interpreting this and predecessor subsections,*fn8 e. g., Rev. Rul. 55-495, 1955-2 Cum. Bull. 259; Rev. Rul. 55-439, 1955-2 Cum. Bull. 257; GCM 24100, 1944 Cum. Bull. 192. This emphasis on the social welfare aspect of the subsection is also in accord with the weight of judicial authority; some courts apparently have not viewed the word "civic" as modifying "organizations" along with "leagues," and have therefore simply concerned themselves with whether an organization has been exclusively conducting social welfare operations, see Veterans Foundation v. United States, 281 F.2d 912 (10 Cir. 1960); Hanover Imp. Soc., Inc. v. Gagne, 92 F.2d 888, 891 (1 Cir. 1937); Amalgamated Housing Corp. v. Commissioner, 37 B.T.A. 817, 825, aff'd per curiam, 108 F.2d 1010 (2 Cir. 1940), and other courts have reached about the same result by talking about "civic organizations" but not defining "civic" in the limited sense of "municipal" or "community sponsored" but in broader terms closely related to the general concept of the promotion of social welfare, see ConsumerFarmer Milk Coop. v. Commissioner, 186 F.2d 68, 70 (2 Cir. 1950), cert. denied, 341 U.S. 931, 71 S. Ct. 803, 95 L. Ed. 1360 (1951); United States v. Pickwick Elec. Membership Corp., 158 F.2d 272, 276 (6 Cir. 1946); Debs Memorial Radio hf0nd, Inc. v. Commissioner, supra.*fn9 This view is also supported by the little legislative history one finds in explanation of the provision, for when it was first made a part of the tax laws, Section G(a) of the Income Tax of 1913, c. 16, 38 Stat. 114, 116, it was apparently included as a result of a belief that the provision then exempting religious, charitable or educational organizations was not broad enough to cover many nonprofit organizations whose activities benefited the general public. See Briefs and Statements, Senate Committee on Finance, 63 Cong., 1st Sess. 2001 (1913). Therefore, we, too, will assume that petitioner is a "civic league or organization," and, as it also appears that petitioner makes no profit which inures to the benefit of any private individual, we now concern ourselves with whether petitioner has operated exclusively for the promotion of social welfare.
Certain of petitioner's activities, not involving the commercial operation of the Tamiment resort, were found by the Tax Court to constitute the promotion of social welfare. These activities, which we have already outlined in some detail, were largely conducted in the New York City area and included such things as the maintenance of a free library on Socialism, Communism and the labor movement, the sponsorship of public forums and symposia, the promotion of musical composition and essay contests, and the circulation of pamphlets discussing important matters of public interest. We agree that these activities involved the promotion of social welfare as that term is used in Section 501(c)(4) of the Code. This court has characterized the promotion of social welfare as involving the serving of "purposes beneficial to the community as a whole," or the promotion of the "welfare of mankind" in the manner generally of the charitable, educational and religious organizations exempted by like provisions of the Code. Debs Memorial Radio Fund, Inc. v. Commissioner, supra, 148 F.2d at 951. These activities of petitioner, designed in the main to stimulate increased interest in the arts and public affairs and to provide the general citizenry with means for becoming better informed as to matters of public concern, amounted, we think, to the furthering of the beneficial interests of the community as a whole and therefore served to promote social welfare.
Petitioner further urges us to characterize, as promoting social welfare, the various cultural activities which were conducted at Tamiment, and which were connected with that area's operation as a commercial vacation resort. Our attention is directed to the lectures, concerts, plays, and art exhibits which were regularly held during the resort's summer season, and to Tamiment's annual four-day chamber music festival. We agree with the Tax Court, however, that these activities, considered in their relation to the total operation of Tamiment, did not involve the promotion of social welfare at all. They were simply part and parcel of Tamiment's operation as a commercial resort, and were necessary features of a luxury vacation spot catering to a young adult intellectual clientele. As the director of Pennsylvania's state tourist promotion agency testified below, such cultural programs, while perhaps of a higher quality at Tamiment, were not unusual programs for ordinary commercial resorts in the Poconos that sought to draw the type of guests who frequented Tamiment. These activities, while no doubt broadening and beneficial to Tamiment's paying guests who enjoyed them, and, therefore, in a very remote sense, doubtless of some incidental aid to the general community of which these guests were members, cannot by any stretch of the imagination be considered any more beneficial to the community as a whole or any more promotive of the general welfare, as those terms have been used to define the statutory phrase, than Tamiment's golfing, swimming, or dancing activities. See Commissioner v. Lake Forest, Inc., supra; Consumer-Farmer Milk Coop. v. Commissioner, supra.
We come now to the important question of whether petitioner's operation of the resort Tamiment, not in itself an activity involving the promotion of social welfare, prevents the petitioner from obtaining a Section 501(c)(4) exemption as an organization operated exclusively for the promotion of social welfare. The word "exclusively" as used in the statute has not been given a strict interpretation, so as to foreclose every operation for a non-exempt purpose no matter how insubstantial, but rather has been interpreted to mean "primarily." Debs Memorial Radio Fund, Inc. v. Commissioner, supra, 148 F.2d at 952; see Sugarman & Pomeroy, Business Income of Exempt Organizations, 46 Va. L. Rev. 424, 425 (1960). Stated another way, "the presence of a single * * * [non-exempt] purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly * * * [exempt] purposes." Better Business Bureau v. United States, 326 U.S. 279, 283, 66 S. Ct. 112, 114, 90 L. Ed. 67 (1945).
It was the nature of petitioner's operation of Tamiment as a commercial resort in active competition with other such businesses in the Poconos area, coupled with the relationship which the running of Tamiment bore to the total aggregation of petitioner's activities, that caused the Tax Court to conclude that petitioner was not operating exclusively for the promotion of social welfare. That court laid particular stress upon the fact that petitioner's expenditures for genuine social welfare activities constituted but a small fraction of its total revenues and paled in comparison with the total accumulated surplus which petitioner carried and which it had consistently increased over the years. The following table, drawn up by the Tax Court on the basis of its findings as to petitioner's financial activities, excellently demonstrates this point:
Fiscal year Total Revenues h Expenditures for Accumulated earned
ended Sept. 30 social welfare surplus
1953 $968,004.85 $13,378.44 $1,913,550.32
1954 956,911.51 28,550.86 2,036,911.38
1955 918,558.59 47,636.86 2,124,602.33
1956 942,612.55 44,684.7 6 2,226,080.50
1957 979,579.07 70,718.27 2,307,097.89
Moreover, petitioner spent substantial portions of its revenues in expanding and improving the facilities at Tamiment, with an extremely large addition to those facilities having been made during 1956, the taxable year here under review. During that year petitioner spent a total of $221,302.34 for capital additions. A comparison between petitioner's balance sheet figures for that year and those for the previous year indicates that of the total amount spent for capital additions, more than $200,000 was spent at Tamiment for buildings, equipment, and "permanent inventory," with the remainder being spent on books and equipment for petitioner's New York library.
We agree with the Tax Court that, under these circumstances, petitioner's operations at Tamiment foreclosed a determination that it is an organization operated exclusively for the promotion of social welfare. See Scripture Press Foundation v. United States, 285 F.2d 800 (Ct. Cl. 1961), cert. denied, 368 U.S. 985, 82 S. Ct. 597, 7 L. Ed. 2d 523 (1962). True, none of petitioner's revenues from Tamiment have ever been turned over as profits to any private person,*fn10 and petitioner's formally declared purpose as originally set forth in its certificate of incorporation when it was organized in 1920 was to conduct activities of a social welfare nature. Moreover, it may well be that the persons currently responsible for directing petitioner's operations sincerely and honestly believe that their organization's primary purpose is still the promotion of social welfare. Nevertheless, the exemption granted to social welfare and like organizations is made in recognition of the benefit which the public derives from their social welfare activities, Trinidad v. Sagrada Orden, etc., 263 U.S. 578, 581, 44 S. Ct. 204, 68 L. Ed. 458 (1924), and we think it only fair to determine a particular organization's right to an exemption largely on the basis of the effect its operations have on the public. In terms of petitioner's purpose as demonstrated by the fact of its operations, and as demonstrated by the actual effect which those operations have on the community of which it is a part, petitioner cannot be regarded as primarily a social welfare organization entitled to a Section 501(c)(4) exemption, but rather it must be viewed as an organization whose primary purpose has in fact become the running of a commercial resort.*fn11
Petitioner argues, however, that despite the relationship existing between its Tamiment expenditures and the amount of its revenues devoted to the promotion of social welfare, its Tamiment resort is no more than an income producing operation designed to finance its social welfare activities, and hence it is entitled to an exemption under the "destination of income" test. According to that test, first developed by this Circuit in 1938 largely on the basis of the Supreme Court's decision in Trinidad v. Sagrada Orden, etc., supra, the fact that an otherwise exempt organization conducts a commercial operation should not prevent the organization from qualifying for an exemption if the net income thereby realized is destined to be used for exempt purposes. Consumer-Farmer Milk Coop. v. Commissioner, supra; Debs Memorial Radio Fund, Inc. v. Commissioner of Internal Revenue, supra; Bohemian Gymnastic Ass'n Sokol v. Higgins, 147 F.2d 774 (2 Cir. 1945); Roche's Beach, Inc. v. Commissioner, 96 F.2d 776 (2 Cir. 1938).
While petitioner's argument is not completely unpersuasive, we think that to use the destination test to exempt this petitioner from the income tax would be an unnecessarily broad application of the test and one which would be out of keeping with the spirit and purpose of the social welfare exemption. The destination test ought not to be used to permit an entity to escape taxation where, as here, so much of its revenues are devoted to expanding its commercial facilities and increasing its surpluses, and so little of its revenues are actually spent for social welfare activities, that it ...