Hulman Foundation, Inc. v. United States (217 F. Supp. 423, 1962)

HOLDER, District Judge.

This case was submitted to the Court for trial on the issues set forth in the plaintiff’s complaint filed September 13, 1961, and supplemental complaints filed January 25, 1962, and June 12, 1962, as joined by the defendant’s answer filed November 10, 1961, as amended in pretrial conference on January 5, 1962, and by defendant’s declaration of issues filed January 19, 1962. The trial was commenced on January 25th and continued through January 26th, 1962, and adjourned to February 6, 1962, when the evidence was concluded and the matter was continued for post-trial briefing and final argument.

The Court having considered the evidence, the credibility of the witnesses, and the briefs of the parties (final argument having been waived on June 14, 1962) does now file its

FINDINGS OF FACTS

1. The parties stipulated that the Court has jurisdiction of the parties and of the subject matter.

2. The plaintiff at all times in question was a duly qualified Indiana corporation organized on December 10, 1940 under “The Indiana General Not-For-Profit Corporation Act’’ with its principal office and place of business in the City of Terre Haute, Vigo County, Indiana.

The purpose or purposes for which it is formed are as follows:

“a. To promote educational, literary, scientific, religious and charitable purposes.

“b. To receive by gift, devise, bequest or otherwise, any money or other property absolutely or in trust to be used either as to principal or income therefrom, or both, for the furtherance of any of the above mentioned purposes as designated in these articles, and in accordance with the purposes declared in the instrument of gift, devise, bequest, or other assignment, conveyance or transfer, to change the form of investment, except as prohibited by the terms of any instrument of gift, devise, bequest or other transfer, and for that or other purposes of the corporation to dispose of any securities or real estate or other purposes of the corporation to dispose of any securities or real estate or other property held by such corporation.

“c. In general, to do any and all things necessary and proper to carry out the objects for which the corporation is formed and to have and exercise all the rights, powers and privileges which are now, and may hereafter be conferred by the laws of the State of Indiana upon similar corporation; to execute from time to time general or special powers of attorney, to persons, firms or corporations, and to revoke the same, subject to the will of the Board of Directors, and to do all things heretofore set forth in the same manner as natural persons might or could do.

“d. The foregoing clauses shall be construed both as objects and powers, and unless otherwise expressly provided, the objects or powers therein specified shall in no wise be limited or restricted by reference to or inference from the terms of any other clause or clauses in these articles and the enumeration of specific powers therein shall not be held to limit or restrict in any manner the powers of this corporation, but the same will in furtherance of, and in addition to, and not in limitation of the general powers of this corporation.

“e. All of the above and foregoing purposes, not being exclusive but consistent with the limitations and privileges as set forth in ‘Indiana General Not For Profit Corporation Act’, can be used when necessary, convenient and expedient, to accomplish the purposes for which this corporation is formed.”

The incorporators and at all times in question the directors were as follows:

Joseph R. Cloutier

Anton Hulmán, Jr.

Ralph Horton

3. Prior to December 30, 1941, the plaintiff filed with the United States Treasury Department an application for exemption from Federal income taxes under Section 101(6) of the Internal Revenue Code of 1939. On December 30, 1941, the United States Treasury Department ruled that plaintiff was exempt, which ruling is quoted as follows:

“Hulmán Foundation, Inc.

Wabash Ave., and Ninth Street, Terre, Haute, Indiana.

“Sirs:

“It is the opinion of this office, based upon the evidence presented, that you are exempt from Federal income tax under the provisions of section 101(6) of the Internal Revenue Code and corresponding provisions of prior revenue acts.

“Accordingly, you will not be required to file returns of income unless you change the character of your organization, the purposes for which you are organized, or your method of operation. Any such changes should be reported immediately to the collector of internal revenue for your district in order that their effect upon your exempt status may be determined.

“Since any organization that is exempt from Federal income tax under the provisions of section 101 of the Internal Revenue Code also is exempt from the capital stock tax pursuant to the express provisions of section 1201(a) (1) of the Internal Revenue Code, you will not be required to file capital stock tax returns for future years so long as the exemption from income tax is effective. Furthermore, under substantially identical authority contained in sections 1426 and 1607 of the Code and/or corresponding provisions of the Social Security Act, the employment taxes imposed by such statutes are not applicable to remuneration for services performed in your employ so long as you meet the conditions prescribed above for retention of an exempt status for income tax purposes.

“Contributions made to you are deductible by the donors in arriving at their taxable net income in the manner and to the extent provided by section 23(o) and (q) of the Internal Revenue Code and corresponding provisions of prior revenue acts. Bequests, legacies, devises or transfers to or for your use are deductible in arriving at the value of the net estate of a decedent for estate tax purposes in the manner and! to the extent provided by sections 812(d) and 861(a) (3) of the Code and/or corresponding provisions of prior revenue acts. Gifts of property to you are deductible in computing net gifts for gift tax purposes in the manner and to the extent provided in section 1004(a) (2) (B) and 1004(b) (2) and (3) of the Code and/or corresponding provisions of prior revenue acts.

“The collector of internal revenue for your district is being advised of this action.

“By direction of the Commissioner.

“Respectfully,

Deputy Commissioner”

4. On January 12, 1956, the defendant revoked its ruling of December 30,. 1941 for each of the years 1951, 1952, 1953 and 1954, and subsequent years. The revoking letter of defendant is quoted as follows:

“Hulmán Foundation, Inc.

Wabash Avenue and Ninth Street Terre Haute, Indiana

“Gentlemen:

“This refers to your protest and to the conference held in this office with your representatives concerning the recommendation of the District Director of Internal Revenue at Indianapolis, Indiana that your exempt status under section 101(6) of the 1939 Internal Revenue Code (corresponding to section 501(c) (3) of the 1954 Code), to which you were held to be entitled in our ruling of December 30, 1941, be revoked for years 1951, 1952 and 1953 for unreasonable accumulation of income within the meaning of section 3814 of the 1939 Code (corresponding to section 504 of the 1954 Code).

“The information before us shows that you were incorporated December 13, 1940, under the laws of the State of Indiana, to promote educational, literary, scientific, religious and charitable purposes. To effectuate such purposes, you have made donations from time to time to other organizations and entities organized and operated in furtherance thereof.

“The information before us regarding your operations shows that for the first ten years thereof, that is, from 1940 through 1950, your total receipts amounted to $6,570,-334.29. Of this amount, $2,150,-398.90 represented gifts of cash and securities; $1,606,417.62, dividends; $56,957.99, interest; $5,235.95, profit on sale of securities; and $3,-351,323.83, advances or loans from the Hulmán Company, of which your officers and directors are principal stockholders and officers. During the same period donations of $477,253.05 were made by you in furtherance of the purposes stated above and the amount of $84.46 was distributed for expenses, resulting in an excess of receipts of $6,092,-996.78. Exclusive of the gains on the sale of securities, your income receipts for the ten year period amounted to $1,063,375.61. The percentage of donations to income during such period was approximately 44.88 percent.

“For the years 1951 through 1953, your total receipts amounted to $1,-197,043.27, divided as follows: contributions, $356,539.93; dividends, $579,612.77; interest, $64,100.50; and profit on sales on securities, $196,790.07. Disbursements for the three year period which totaled $1,-859,521.75, included $1,786,403.55 for repayment of advances made to you by the Hulmán Company, $69,-800.00 for donations, and $3,318.20 for expenses. Exclusive of profit on gains of sale of securities, your income receipts for the three year period amounted to $643,713.27. The proportion of donations to income for such period was approximately 10.84 percent.

“The information return, Form 990A, filed by you for the year 1954 reflects gross receipts of $255,-262.46, which include the following: interest, $7,758.60; dividends, $235,820.27; and gains on sales on securities, $11,683.59. Disbursements for such year were $1,174.30 for expenses and $40,394.62 for donations. Exclusive of the gain on sale of securities, income not distributed for exempt purposes during such year amounted to $202,-009.95.

“Though gains on sales of securities have not been considered in computing the amount of income accumulated, a conclusion should not be drawn therefrom that all or any part thereof are properly excludible for tax purposes.

“It is shown that from an amount of $81,905.00 at the close of your first year of operation, your net worth had increased, at December 31, 1953, to the amount of $3,865,-598.02, representing the excess of your assets (cash, securities and notes receivable) over advances owing and payable to the Hulmán Company.

“With respect to the advances obtained from the Hulmán Company, you state that such indebtedness was incurred to improve your financial position and earning power. These advances were noninterest bearing and were carried as open book accounts by the Hulmán Company, with no written evidence of indebtedness being executed by you for the repayment thereof. The first sums borrowed were in the year 1945, with substantial amounts being borrowed in the years 1949 and 1950. However, no payments were made in such years, the first repayment being made in the year 1951. It is also indicated that additional amounts were borrowed by you from the Hulmán Company in 1954.

“A recapitulation of your operations for the years 1951 through 1954 reflects income receipts, exclusive of gains on sale of securities, totaling $887,292.14 as compared with donations of $110,194.62 for charitable purposes.

“Subsequent to the conference held in this office with your representatives, you submitted a proposal to the effect that should your exempt status for the years 1951 through 1954 not be disturbed, all indebtedness presently owing by you, approximately $1,800,000.00 would be discharged prior to the end of the year 1955, to be accomplished through the sale of some of your income-producing securities. You propose to distribute your income for the year 1955 to the extent of 95 percent or more thereof for the charitable purposes for which you were organized, such distribution to be accomplished within the calendar year, or not later than January 31, 1956.

“In addition, further correspondence has been received by us setting forth a proposed plan to underwrite the construction costs of a field house for the use of the public schools in Terre Haute, the estimated cost of which is $1,250,000.00.-You state that to accomplish this within a reasonable period, it will be necessary to use part of your principal, as well as your earnings, during construction.

“Section 501(e) (3) provides for the exemption of corporations organized and operated exclusively for the purposes provided for in such section of the law.

“Section 504 of the Code states, in part, as follows:

“ ‘In the case of any organization described in section 501(c) (3) to which section 503 is applicable, exemption under section-501 shall be denied for the taxable year if the amounts accumulated out of income during the taxable year or any prior taxable year and not actually paid out by the end of the taxable year—

“ ‘(1) are unreasonable in amount or duration in order to carry out the charitable, educational, or other purpose or function constituting the basis for exemption under section 501(a) of an organization described in section 501(c) (3); * * *’

“An organization claiming exemption under section 501(c) (3) of the Code, which is not excepted from the provisions of section 504, and which uses income to retire indebtedness incurred in the acquisition of property is considered to be accumulating income within the meaning of section 504. (See Rev.Rul. 54-420, C.B. 1954-2, 128).

“A review of the foregoing shows that notwithstanding that substantial gifts of cash and securities have been received by you from your creators, you borrowed sums in excess of three and one half million dollars, with no evidenced purpose therefor other than as stated above, or, to increase your financial position and income earning capacity. During the years that you have been operating not only have you made substantial accumulations of income, but by incurring the indebtedness referred to herein you became obligated to use additional income for the repayment thereof. It is further shown that though you had income available in prior years to reduce the indebtedness incurred in those years, no payments were made thereon until the years presently under consideration.

“It is the opinion of this office that the amounts accumulated out of income during the years 1951 through 1954 are unreasonable within the intent of section 504 of the 1954 Code. The fact that during these years income was used to partially liquidate the indebtedness theretofore incurred does not change your position so far as the accumulation is concerned, in view of the position of the Service that the use of income in such manner is considered to be an accumulation. Further, the borrowing of funds merely for the puipose of increasing the earning power of an organization so that in future years it may have a larger operating fund is not a sufficient basis to justify the accumulation of income for the repayment thereof, or to establish that the accumulations were necessary to carry out the exempt purposes of the organization.

“It is our further opinion that your proposal to eliminate your indebtedness during the year 1955 by selling a part of your principal assets cannot have any retroactive effect with respect to the years during which your income is considered to have been unreasonably accumulated. Accordingly, we have concluded that you are not entitled to exemption from Federal income tax for the years 1951, 1952, 1953 and 1954 and your exempt status for such years is hereby revoked. Our ruling of December 30, 1941 is hereby modified in accordance therewith.

“You are required, therefore, to file Federal income tax returns for such years on Form 1120.

“With respect to your status for the year 1955 and subsequent years if the indebtedness to which you are presently subject is liquidated as proposed and you distribute your income for the year 1955 as indicated, consideration would be given to reinstating your exemption for such year and subsequent years. However, this is not to be considered as a definite commitment or a ruling for the year 1955 or subsequent years since only upon submission of the proper evidence to this office may a definite ruling be issued. Such evidence would include complete information as to the assets sold, to whom, the selling price, the terms of sale, financial statements, and any other agreements pertaining thereto which will evidence to the satisfaction of the Service that the circumstances causing the loss of your exemption have been eliminated.

“Your plan for supplying funds for the construction of the field house referred to above, and the reservation of income earned in future years to be used for such purpose, appears to be within the intent of the exemption statute. However, in order for us to issue a definite ruling as to whether the accumulation of income therefor is proper, it will be necessary that you advise, in addition to the information presently before us, the amount of funds you expect to supply, the amount of principal you expect to use, the approximate amount of income to be used or set aside therefor, and the period such accumulation is expected to continue.

“The District Director of Internal Revenue at Indianapolis, Indiana, is being advised of the action taken herein.

“Very truly yours,

tt y cwari7 -n• \ „ rr. -p,-

5. By its written instrument dated January 20, 1956, the plaintiff created the “Hulmán Public Building Trust” for the purpose of building and providing a civic building hereinafter referred to in these Findings in furtherance of the plaintiff’s planning during and prior to the years 1951 through 1955. This instrument was amended on June 17, 1958, and again on April 16, 1960. This instrument and the two amendments are identified as Exhibit A, attached hereto and made a part hereof. This trust has been ruled tax exempt by the defendant,

The defendant restored plaintiff’s exempt status for all years subsequent to the year 1954 and refunded to plaintiff taxes, penalties and interest for the years 1955 and 1956, all in accordance with defendant’s letter of July 18, 1960 identified as Exhibit B, attached hereto and made a part hereof.

6. Pursuant to an audit of plaintiff and resulting determination by defendant that plaintiff owed income taxes for the years 1951 through 1954, the plaintiff on November 20, 1956, in compliance with this ruling, did execute and file with the Director of Internal Revenue for the District of Indiana, a “Waiver of Restrictions on Assessment and Collection of Deficiency in Tax”, Form 870, waiving and consenting to the assessment and collection of deficiencies in income tax for the years 1951 through 1954 in the respective amounts of $62,523.91, $11,022.-78, $13,490.86 and $10,947.50, reserving, however, the right to file a claim for refund of such deficiency for said years, At the same time, plaintiff paid said District Director the amount of each such deficiency for the years 1951 through 1954, and on December 26, 1956, plaintiff to defendant paid interest on each deficiency in the respective amounts of $17,557.96, $2,434.05, $2,169.60 and $1,-103.73. Said payments amounted in to-^3.1 to $121,250.39.

7. On November 10, 1958, within the time limitations prescribed by law in effeet at the time and in compliance with Section 7422 of Title 26 of the United States Code, plaintiff filed with said District Director of Internal Revenue for the District of Indiana at Indianapolis, Indiana, properly executed on Form 843 with attachments, separate claims for the refund of taxes together with interest for the years 1951, 1952, 1953 and 1954 jn the amount of $80,081.87, $13,456.83, $15,660.46 and $12,051.23, respectively, in each of said claims, plaintiff demanded repayment of said above mentioned amounts paid by it to defendant, for the reasons that plaintiff, during each of said years, was exempt from income taxes and did not unreasonably accumulate its income,

8. By notice of disallowance dated September 15, 1959, mailed to plaintiff by registered letter, the said Director of Internal Revenue for the District of Indiana disallowed plaintiff’s claim for refund of Federal income taxes and interest paid for the years 1951 through 1954 *n amounts of $80,081.87, $13,456,83, $15,660.46 and $12,051.23, respectively, together with interest thereon as prov^ed by law. Subsequent to such dis-allowance, and^ within the time allowed ^y law, plaintiff filed this suit for refund °f said amounts paid by it to defendant, with interest thereon as provide(^ ky *aw‘

9. Mr. Anton Hulmán, Jr. was the dominant organizer of and at all times in question controlled the plaintiff. Mr. Hulmán and his ancestors for many years prior to plaintiff’s incorporation and since have been closely associated with the business, cultural, civic, social, and charitable activities of the community of-Vigo County, Indiana. The assets of the plaintiff referred to in these Findings were all acquired directly or indirectly from members of the Hulmán family, except a donation of $15,000 to plaintiff by Princeton Mining Company referred to in Finding of Fact No. 12.

10. During World War Two, Mr. Hulmán was in charge of the war bond sales promotion. In this capacity it was necessary for him to provide meeting places for members of the public to fulfill his mission in Vigo County, Indiana. Then and at all times in question there was and is no adequate indoor meeting place to fulfill the cultural, civic, social, athletic and charitable needs of the public. Mr. Hulmán, prior to 1950 and continuously since, individually and as a director jointly with the other directors of plaintiff, concluded to construct a coliseum or auditorium type structure and to maintain such thereafter for the community needs. The plaintiff during the times in question through its directors progressively studied the needs of the community, surveyed the community for a location and availability of real estate for a site, made a general study of approximate costs and maintenance costs in the future years, and explored for ways and means of increasing the capital funds and income of plaintiff to construct and maintain such structure and continue its other charitable purposes. The directors differed as to the estimated costs of construction and maintenance and with the passage of time were all aware that the costs were increasing. All directors agreed that the increase of the plaintiff’s funds was a first requisite to the success of the project before prematurely engaging in the expense of concluding building plans. The plaintiff during the times in. question as set forth elsewhere in these Findings did materially increase the. funds of the plaintiff for the project.

11. The proposed civic building was. at all times in question within the pur