Full opinion text
SWAIM, Circuit Judge. These are appeals by the defendant, the former Collector of Internal Revenue for the First District of Illinois, and the inter-venor, the United States of America, from judgments of the District Court in numbers 9902, 9903 and 9904 on appeal, and an appeal by the plaintiff, Universal Oil Products Company, from a portion of the judgment in number 9905 on appeal. The plaintiff brought three actions to recover a total of $1,576,808.42 of income and excess profits taxes, which it had paid on the income it reported for the years 1944 to 1946, inclusive, on the ground that it had been a tax exempt corporation under § 101(6) of the Internal Revenue Code, 26 U.S.C.A. § 101(6), from and after November 29, 1944. The intervenor, United States of America, in these three actions sought to recover from the plaintiff a total of $1,582,886.29 on alleged tax deficiencies for the three years. The three cases were consolidated for trial in the Court below and, by order of this Court, were consolidated here for the purpose of briefing and argument. In these appeals the parties have presented six principal questions for our consideration : 1. Whether the plaintiff is exempt from income and excess profits taxes as a scientific and educational corporation under § 101(6) of the Internal Revenue Code from and after November 29, 1944, on which date all of its capital stock and notes were acquired by a trust which was admittedly exempt from taxes on its income under said section ? 2. Did the plaintiff, which used the accrual basis for its accounting and .for reporting income and deductions, earn income in the year 1945 in the amount of $1,035,205.50 under its agreement with the Tide Water Associated Oil Company, or did it earn only one-fourth of that amount in each of the years 1945 and 1946? 3. Was the plaintiff entitled under § 23 (a) of the Internal Revenue Code, 26 U.S. C.A. § 23(a) to deduct in the years of 1942-1946, inclusive, certain expenditures made by it in connection with the .prosecution of an action by Universal Oil Products Company of South Dakota against the Skelly Oil Company? 4. Did the plaintiff realize income of $75,000 in 1942 by the receipt from a debtor, on the Kanotex settlement, of one of its notes having a face value of $75,000 when the note at that time had a market value of only $60,000? 5. Was the plaintiff in the 1944 tax case entitled under § 23(a) of the Internal Revenue Code to a deduction of $356,867.47 .for unpaid royalties owed by Root Refining •Company which the plaintiff released in July, 1944? 6. Should overpayments of taxes which were credited under § 3806 of the Internal Revenue 'Code, 26 U.S.C.A. § 3806, in part payment of claims of the United .States against plaintiff growing out of re-negotiations of excess profits under plaintiff’s war contracts for the years 1944 and 1945 be taken into- account in computing any refunds allowable to the plaintiff or tax dev ficiencies collectible from the plaintiff for these two tax years ? We shall consider these questions in the above order. Exemption under Section 101(6). The principal question presented by these appeals is the question of whether the plaintiff taxpayer from arid after November 29, 1944, was, as the District Court held, exempt under the provisions of § 101(6). The basic facts concerning this question are not in dispute. The plaintiff taxpayer was organized in 1932 as a Delaware business corporation with its principal place of business in Chicago, Illinois. Upon its organization the plaintiff succeeded to the bulk of the business and took over most of the assets and liabilities of a South Dakota Corporation of the same name, hereinafter referred to as “South Dakota”. In 1931 South Dakota was a party to, or was defending on behalf of its licensees, many suits for infringement and was engaged in more than one hundred pending patent interference, and opposition proceedings. As a part of the settlement of all this ■litigation the stock of South Dakota was indirectly acquired-by several of the-major oil companies through a series of reorganizations which resulted in the organization o-f the plaintiff and in the acquisition of its stock and other securities by these major oil companies, The plaintiff’s charter, like that of South Dakota, authorized it to engage in research work in chemistry, engineering, and other scientific -fields; to acquire, own and license patented processes; to render engineering and other services; and to design chemical plants. The plaintiff at all times here in question was, and now is, engaged in the business of conducting research in the field of chemistry and physio-chemistry, particularly in the -crude oil field; of devising processes, particularly those having to do with the crude oil fifeld; of reducing such processes to commercial uses; of obtaining patents f or such processes; of designing refineries and parts thereof to refine crude oil;' and of licensing its patents and processes to others engaged in the refining of crude oil. The main objective of the plaintiff is to -develop and acquire processes on units that can be used by the refining industry. It attempts to obtain patents covering such processes so that it can have a monopoly on the processes in connection with its business as an architect engineer for petroleum refineries. The plaintiff also manufactures and sells certain chemicals called catalysts and inhibitors to refineries. Plaintiff’s revenue producing customers are principally small and independent refiners who do not have adequate research and engineering facilities to keep abreast of the major oil companies. The capitalization of the plaintiff, since .1934, has consisted of 250,000 shares of non-voting A stock, 100 shares of voting C stock -and 100 shares of voting S stock, all classes of the par value of $1 per share. As of October,. 1944, all of the above was issued and outstanding with the exception of 130,000 shares of A stock. Plaintiff also had outstanding in 1944 C and D income "Notes” in the aggregate principal amount of $8,500,000; -and prior to November, 1949 also had outstanding A “Notes” payable only from net income. No dividends have ever been paid on any of this stock since the recapitalization of the company in December, 1934, but prior thereto it -paid dividends of a little more than $1,000,000 per year on its stock. Prior to October 26, 1944, all of the outstanding shares of common stock and the. •outstanding income notes of the taxpayer were owned by the following oil companies: Shell Oil Company, Inc. Standard Oil 'Company of California Standard Oil -Company (Indiana) ■Standard Oil Company (New Jersey) The Texas -Company Phillips Petroleum Company, hereinafter referred to as “'Phillips” N. V. deBataa-fsche Petroleum Maat-scha-ppij. On October 26, 1944, all of the owners of the stock and notes of the plaintiff, except Phillips, entered into a trust agreement creating'the Petroleum Research Fund, and transferring to the Guaranty Trust Company of New York as trustee all of their stock and notes o-f the plaintiff -as the corpus of said trust fund. This agreement provided that said trust should -continue in perpetuity and that the recipient of -funds distributed by the trustee should use such funds “exclusively” for advanced scientific education and fundamental research in the “petroleum field”, which might include any field of pure science which in the judgment of the recipient might afford a basis for subsequent research directly connected with the “petroleum field”. The agreement also provided that comprehensive reports of the -research carried on by the recipient should be made available at least once each year to the public at large; that copies of such reports should be made available by the recipient to the donors o-f the trust; and that ■all publications of the results of such research should give credit to the donors of the trust. The trust agreement then provided that the recipient or beneficiary of the trust fund should >be the American Chemical Society, or a qualified successor. The trust agreement stated that the plaintiff was a corporation engaged in the business of research and development work in the petroleum field, the ownership and licensing of processes, patents, and patent rights relating to the petroleum field; that the donors believed that the carrying on of such business was in the public welfare; and that, unless and until it should be authorized by a court of competent jurisdiction, the trustees should not sell or otherwise dispose of any of the securities of the plaintiff, nor should they “cause or permit the plaintiff to discontinue research and development work in the petroleum field, and the ownership and licensing of processes, patents and patent rights relating to the petroleum field." (Emphasis supplied.) The trust agreement also provided that the donors, by the execution and delivery of the agreement, completely surrendered all interest in, and rights of supervision of any kind whatsoever over, the trust fund and should not be deemed to have any rights by way of reverter or otherwise. Thereafter, Phillips transferred all of its stock and notes in the plaintiff corporation to the American Chemical Society which in turn transferred said securities on November 29, 1944, to Guaranty Trust Company of New York as Trustee for the Petroleum Research Fund subject to the provisions of the trust agreement, which the other owners of plaintiff had executed October 26, 1944. The operations of plaintiff are carried on in its engineering office in Chicago and in its laboratories near Riverside, Illinois. An important part of its work at the Riverside laboratories is in research and development. It employs about 275 persons at this plant, of which approximately 70 are engaged in research and development work. In each of the years 1944 through 1946, inclusive, the plaintiff owned more than 2,OCO patents, had 600 to 1,000 patent applications pending and was granted during the three years 382 United States patents and 142 foreign patents. During the years here in question the taxpayer expended the following amounts in the operation of its Riverside plant and of its patent departments: 1944, $1,111,410.27; 1945, $1,175,-636.70; 1946, $1,369,763.97, a larger amount each year, and a total of $3,656,810.84 for the three years. Through contracts entered into during the period from 1931 to and including 1939 the above named major oil companies, which had owned all the stock and notes of plaintiff, and their subsidiaries had acquired the right to use, without payment of royalties, all of the patents of the plaintiff based on inventions made by the plaintiff prior to July 1, 1947, and, as to Phillips, on inventions made prior to August 14, 1956. Some of these contracts expressly gave the transferees a license for the use of the patents while others guaranteed immunity from action for infringement of the patents. This resulted in the fact that during the years here in question'these companies and their subsidiaries, constituting approximately 65% of the oil refining capacity of the United States, had the right to use, and did use, royalty free the inventions under the patents owned by the taxpayer in those years; and they would continue to have the right to such free use on inventions made by the plaintiff prior to July 1, 1947, and, in the case of Phillips, made prior to August 14, 1956. Such right to the free use of such patents ordinarily extends for the life of the patents. The amounts which the smaller independent oil companies were paying for licenses for the use of such of these patents as they' were using are shown by the following table: Gross Royalties , Income Income . . Year of Plaintiff of Plaintiff, 1944 ........ $7,167,281.41 $4,553,495.71 1945 ........ 6,070,432.51 4,125,922.92 1946 ........ 4,582,783.88 3,351,029.49 Total ...$18,820,497.80 $12,030,448.12 The net income of the plaintiff as shown by its tax returns for the years 1944, 1945 and 1946 was as follows: Year Net Income 1944 ...................... $3,710,727.74 1945 ....•................. 2,727,326.27 1946 ...................... 901,529.60 A total for the three years of $7,339,583.61 Of this net income the plaintiff paid nothing to the trustee during the year 1944 or the year 1945. In 1946 it paid to the trustee as interest on plaintiff’s C and D notes a total of $258,962.49. Of this amount the trustee paid to itself as fees for its services $100,000, and ¡other expenses totaling $11,638.45, leaving as a total ¡for the American ¡Chemical Society, the .recipient, the sum of $147,325.04 for its share of the earnings of the taxpayer for the years here in question. There was testimony to the effect that in the judgment of the .board of directors o'f plaintiff it was necessary to set up a reserve because of certain pending law suits and because of the need for enlarging and modernizing its laboratory and research facilities; that some of the larger oil -companies 'had been spending large amounts of money 'for new laboratories and equipment; and that it was necessary to the welfare of the taxpayer to set up reserves for such purpose because it could not procure first class scientists without proper laboratory ■facilities. At the time the stock and notes of the plaintiff taxpayer were transferred to Guaranty Trust Company of New York as trustee, the certificate of incorporation of the taxpayer in Article 8 (6) (a) provided that the majority of the board o'f directors was expressly authorized and empowered without the assent or vote of the stockholders to make, alter, amend and repeal the by-laws of this corporation in any manner not inconsistent with the provisions of the certificate of incorporation. Under paragraph (d) of the same Article and Section they were authorized to determine and direct the use and disposition of the annual net profits-Of 'this corporation or of its net assets in excess of its capital, and in particular to determine whether any, and if any, what part of the profits or excess assets should be declared in -dividends and paid to the stockholders. By Section 9 of Article 8 the directors were empowered and authorized by a resolution of the ¡board, and without any •action by the stockholders, to authorize the -corporation at any time to issue and sell any shares of its capital stock out of the unissued shares authorized. A year after the creation of the trust its certificate of incorporation was amended by adding a Tenth Article thereto, which was as follows-: “Tenth: This corporation is organized and shall be operated exclusively 'for charitable, scientific or educational purposes. No person shall -hold or own any stock or securities representing any proprietary interest in this corporation and no person shall have -any right in or claim to any share of the earnings or profits of this corporation except a corporation, trust, -fund, foundation or ¡community chest organized and operated exclusively for charitable, scientific or educational purposes. No -part of the net earnings of this corporation shall inure to the benefit of any private shareholder or individual. Distribution of net earnings shall inure only to such -corporation, trust, fund, foundation or community chest organized and operated exclusively for such -charitable, educational or scientific purposes. No substantial part of the activities of this corporation shall be carrying on propaganda, or -otherwise attempting to- influence legislation. Nothing herein contained shall be deemed to prevent this corporation, subject to the qualifications aforesaid, from continuing to be operated as a stock and business corporation for profit" (Emphasis supplied.) It is significant to note that when this amendment was made the provisions as to the powers of the corporation and as to the powers of the directors were left in the certificate of incorporation as they had originally been written. Prior to the amendment of the certificate o-f incorporation, the taxpayer’s by-laws, which had -been the usual by-laws 'for a business corporation for profit, were amended to provide that each director, other than one who was at the time a salaried officer of the corporation, should receive a fee of $500 for attendance at each meeting of the board of directors, not exceeding a total of $5,000 in any one calendar year, and should also be paid all expenses incurred by ■his attendance at such meetings. It is admitted by the Government that the Petroleum Research Fund and the American Chemical Society are both tax exempt. There was undisputed evidence to the effect that since November, 1944, none of the directors of taxpayer elected by the trustee has had any -connection with any of the oil company donors; that none of the directors, officers or employees of the taxpayer has any legal or equitable interest in the stock or securities of the taxpayer; and that the management of Universal since 1944 has been entirely separate and distinct ■from its management prior to November 30, 1944. The plaintiff insists that under the above facts it is a tax exempt corporation under § 101 (6) of the Internal Revenue Act, 26 U.S.C.A. § 101 (6), which exempts corporations which are: “ * * * organized and operated exclusively for * * * scientific * * * or educational purposes * * * no part of the net earnings of which inures to thé benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation”. This section provides four requirements which a corporation must meet to qualify for exemption: First, it must be organized exclusively for scientific or educational purposes. Second, it must be operated exclusively for scientific or educational purposes. Third, no part of its net earnings shall inure to the benefit of any private shareholder or individual. Fourth, no substantial part of its activities shall consist of carrying on propaganda or otherwise attempting to influence legislation. The plaintiff insists that since all of its stock and notes were transferred to the Guaranty Trust Company, trustee, to become the corpus of the Petroleum Research Fund, admittedly a tax exempt fund; and since all net earnings which were paid to the trustee were to be distributed, after the payment of the expenses of the trust, to the American Chemical Society, also admittedly tax exempt; the taxpayer thereby also became a tax exempt organization under § 101 (6). After carefully considering the record and the evidence in this case we are convinced that the plaintiff failed to bring itself within the exemption provided by § 101 (6). It is true that ordinarily in the construction of a statute levying a tax, doubts should be resplved against the Government, but in construing an exemption provision of such a statute a strict construction in favor of the Government should be made. Equitable tax statutes should tax equally. An exemption is in derogation of the common right. When the law provides an exemption the courts should not construe the provisions beyond the exact and express requirements of the language used. Yazoo & Mississippi Valley Railroad Company v. Thomas, 132 U.S. 174, 10 S.Ct. 68, 33 L.Ed. 302; A. Schrader’s Son, Inc., v. United States, 2 Cir., 51 F.2d 1038; see, Sun-Herald Corporation v. Duggan, 2 Cir., 73 F.2d 298, 300. Some of the decisions have stated that exemption provisions in favor of charitable, educational and scientific organizations should be liberally construed on the theory that the exemption of the income of such organizations is for the public good and their exemption is according to public policy dictated by Congress. For a corporation to qualify for the benefit .of such policy of liberal construction, however, it must first bring itself within the reasons for the policy by proving that it is an organization of the type to which the reasons apply, i. e., as to § 101 (6), that it was “organized and operated exclusively” for one or more of the exempt purposes. Certainly it was not the intent of Congress to grant an exemption to any corporation which was not of the exempted type. To bring itself within the exemption the plaintiff relies -on a line of cases stemming from a statement of Mr. Justice Van De-vanter in Trinidad v. Sagrada Orden, 263 U.S. 578, 44 S.Ct. 204, 205, 68 L.Ed. 458. The Supreme Court in holding that the taxpayer there was exempt from taxation as a corporation “organized and operated exclusively for religious, charitable, scientific or educational purposes * * * ”, made the statement, 263 U.S. at page 581, 44 S.Ct. at page 205, that: “Two matters apparent on the face of the clause go far toward settling its meaning. First, it recognizes that a corporation may be organized and operated exclusively for religious, charitable, scientific or- educational. purposes, and yet have a net income. Next, it says nothing about- the source of the income, but makes .the, destination the ultimate test of exemption.” The corporation there was the legal representative of an aricient religious order; the members took the vow of poverty; it had'no stockholders; and all of its income was applied to religious, charitable and educational purposes. The bulk' of its income consisted of rents, dividends and interest. Less than three per cent of its total income consisted of profits on the sale of wine, chocolate and other articles which it purchased and sold to, and' for use in, its churches, missions, parsonages, schbols' and other subordinate agencies. The Government conceded that the taxpayer was organized and operated for religious, charitable and educational purposes and that no* part of its net income inured to the benefit of any stockholder or individual, but insisted that the taxpayer’s commercial activities, i. e., its small trade in wine, chocolate and other articles, constituted an'operation for business and commercial purposes which prevented it. from-being operat'-' ed exclusively for religious and charitable purposes. The Court, however, said, 263-U.S. at page 582, 44 S.Ct. at page 206: “As respects the transactions in wine, chocolate and other articles, we think they do not amount to engaging in trade in any proper* sense of -the term. It is not claimed that there is any selling to the public or in competition with others. The articles' are merely bought and supplied. for use .within the plaintiff’s own organization and agencies — some of them for strictly religious use, and the others for uses which are purely incidental to the work which the plaintiff is carrying on. That the transactions yield some profit is in the circumstances a negligible factor. Financial gain is not the end to which they are directed.!’ The cases cited by plaintiff stress the single statement of the Court in the Trinidad case that the destination of the income and not its source was the ultimate test of exemption. We must bear in mind, however, that there the Court was only considering whether an inconsequential portion of the income of the taxpayer derived from sales to its own members and agencies prevented it from being operated exclusively for charitable and ■ educational purposes. The primary purpose of the organization and operation of the taxpayer was not in question. The Trinidad case was decided in 1924. In 1926 the United States Board of Tax Appeals in Unity School of Christianity, 4 B.T.A. 61, decided that the Unity School of Christianity was exempt from taxation under a similar provision of the applicable Internal Revenue Act. The taxpayer there was incorporated for the purpose of establishing and maintaining a school for instruction in the promotion of Christianity and related subjects. Again, there was no question but that the' taxpayer was organized for exempt purposes; and on the basis of the Trinidad decision the Board held that its publication and sale of books and the operation of a cafeteria, library and unity center were all operations for religious, charitable and educational purposes. The Tax Board significantly said in discussing the Trinidad case, 4 B.T.A. -at page 67: “It is apparent that the Court regarded the general purpose and the primary functions and activities of - the organization as the principal matters to be considered. That is to say, a corporation fáiling in the primary attribute of being a religious, charitable, scientific or 'educational organization requires no further consideration, for it is in ' no event within the exempting provision. If it be not one of this class, it is unnecessary to consider the remaining qualifications prescribed by the statute, since they are only restrictions upon corporations of the principal character exempted.” In Sand Springs Home v. Commissioner, 6 B.T.A. 198, the Board of Tax Appeals determined that the taxpayer, a corporation organized under the laws, of the state of Oklahoma “for the purpose of forming a benevolent, eleemosynary corporation under the laws of the state of Oklahoma was exempt from taxation.” There again it was admitted that the purpose of the organization of the taxpayer was charitable. The Board on the authority of the Trinidad and Unity School of Christianity decisions held that the activities of the taxpayer were all in furtherance of its charitable purposes and that it was, therefore, also operated exclusively for charitable purposes and was exempt. Hanover Improvement Society v. Gagne, 1 Cir., 92 F.2d 888, cited by plaintiff, decided that the taxpayer, organized under the laws of New Hampshire with articles of association which stated that its sole purpose was the improvement and betterment of the Village and its facilities and services for the common benefit of all the people, was an exempt corporation under § 101 (8) of the Internal Revenue Code. The Court found that the taxpayer was an organization not organized for profit and operated exclusively for the promotion of social welfare, even though as a part of its activities it operated a motion picture theatre in Hanover which constituted the association’s principal source of income which was used for carrying out its purposes. Here again the Court was considering only the operation of a taxpayer admittedly organized for an exempt purpose. The case on which plaintiff most strongly relies is Roche’s Beach, Inc., v. Commissioner, 2 Cir., 96 F.2d 776. The Court stated that the corporate taxpayer there, “ * * * was organized by Edward Roche shortly before his death for the purpose of being the medium through which a charitable foundation created by his will could operate his property and collect the income therefrom after his death.” The taxpayer was formed as a business corporation under the laws of New York. Upon its formation Roche conveyed to it real estate along the Atlantic Ocean, his bathing beach, including buildings and equipment, which he was then operating, and a claim against the City of New York for property taken by condemnation. On the same day he executed a will in which he bequeathed to his testamentary trustees all of the stock of the corporation for the purpose of establishing a relief foundation, an admittedly charitable foundation within the meaning of § 103(6) of the Revenue Act of 1928, 26 U.S.C.A. § 101(6). Roche then continued to personally operate the property for approximately four months until he died. After his death the property and business was operated by the trustees through the medium of the corporation. The Court there stated that the statute did not mean that to come within the exemption a corporation may not conduct business activities for profit; and that the destination of the income is more significant than its source, citing the Trinidad, Sand Springs Home and Unity School of Christianity decisions. The Board of Tax Appeals had denied exemption on the theory that “the stated purposes for which a corporation is organized must be found in its charter.” The Court said, “We think this is too narrow a view,” and cited the Unity School of Christianity decision as. being in point. While it is true that the Unity School of Christianity was actually incorporated under the business corporation law of Missouri, its stated purposes, as well as extrinsic evidence, showed that the actual purpose of organizing the corporation was religious and educational. In the Roche’s Beach case the Court stated that it had intimated an opposite view in Sun-Herald Corporation v. Duggan, 2 Cir., 73 F.2d 298, where it had said that “organized” meant “incorporated”. But, the Court continued, 96 F.2d at page 778: “The decision in the Duggan case (first Sun-Herald case) was correct, for the real issue was whether a subsequently formed purpose to hold the property of a business corporation for an exempt institution to which all its stock had been given entitled it to exemption under § 103(14); but the dicta on the meaning of the word ‘organized’ are broader than we car^e to adhere to.” (Emphasis supplied.) This language plainly indicates that the Court in the Roche’s Beach case was still of the opinion that at the time of the organization of a corporation it must have been the intention of the organizers or incorporators to organize it for exclusively charitable or other exempt purposes; and that no one could organize a business corporation for the purpose of profit and later make it exempt under § 101 (6) by the simple expedient of transferring its ownership to an exempt organization. In Sun-Herald Corporation v. Duggan, supra, referred to as being a correct decision, the Sun-Herald Corporation was organized as a business corporation for profit under New York law, to conduct a general newspaper publishing business which was later sold to the New York Tribune, Inc. for notes in the principal sum of $3,150,000. Thereafter, the Sun-Herald Corporation, all its stock having been transferred to an exempt.corporation, had as its sole business the holding of said notes, the collection of interest thereon and the payment of the interest to the exempt parent organization. The Court held that it was not á tax exempt corporation under § 103(14) of-the 1928 Revenue Act, even 'after all of its stock had been transferred to an admittedly exempt corporation. ¡ ,In a second Sun-Herald case, Sun-Herald Corporation v. Duggan, 2 Cir., 160, F.2d 475, the same Court explained its decision in the Roche’s Beach case by, saying, 160 F.2d at page 476, that the modification. in Roche’s Beach of what they' had said in the earlier Sun-Herald case “wag no more than to hold that the certificate of, incorporation was not the only test of. whether a.ycorporatio'n was ‘organized’ ” for an exempt purpose. In Commissioner v. Battle Creek, Inc., 5, Cir., 126 F.2d 405, the taxpayer was organized under the general corporation laws of Florida but the charter provided that the general nature of the business was to teach the theory and practice of biologic living as developed and exemplified at the Battle Creek Sanitarium under the. direction of Dr. John Harvey Kellogg, to care for and treat the sick and to so train and educate the sick, and the well, as to prevent disease and disability and 'promote efficiency and longevity. Under this charter the Sanitarium maintained a regular schedule of rates which were charged to patients who were able to pay while others who were unable to pay full rates paid nothing or a fraction of the regular charge. The Court held that the fact that the charter of the taxpayer actually authorized it to engage in other lawful business, under which authority the taxpayer had never operated, did not prevent its being exempt under § 101(6) of the Revenue Act of 1934, citing Unity School of Christianity and Roche’s Beach. Bohemian Gymnastic Association Sokol of City of New York v. Higgins, 2 Cir., 147 F.2d 774, and Debs Memorial Radio Fund v. Commissioner of Internal Revenue, 2 Cir., 148 F.2d 948 were both cases cited by plaintiff where taxpayers, organized for admittedly exempt purposes were found to still be exempt although they conducted certain activities which produced a net income used in carrying out the purposes of their organization. In Commissioner of Internal Revenue v. Orton, 6 Cir., 173 F.2d 483, 486, the Court held that upon the stipulated facts in that case there was a rational basis for the conclusion of the Tax Court that the foundation there in question was organized and operated for the predominant purpose of producing industrial, scientific and social betterments without any personal or private gain to any one. The foundation was established by the will of Orton who had long been interested in and had been a manufacturer of pyrometric cones for use in the ceramic industry. The foundation was without members or stockholders, and its activities were directed by trustees who received only nominal compensation for their services. Orton’s will stated that it was his intention to provide an organization not for profit but “whose real or ultimate objects are altruistic and [wholly] devoted to producing industrial, scientific and social betterments without -any personal or private gain [to any one], * * *” He considered the business which he bequeathed to the foundation as the source of income for the promotion of research and studies in that field. The Court there pointed out that business does not operate without being related to some objective; that with the ordinary business man it is run for profit and the profits serve his needs; that the foundation there in question produced profits to be “plowed back into the furtherance of research and study in that field”; and that the foundation could therefore be considered as having been operated for educational or scientific purposes. The Court leaned heavily on the Trinidad and the Roche’s Beach cases. There the taxpayer was not a business corporation organized and operated for profit and then later turned over to an exempt parent organization. We do not consider that case as authority for the questions confronting us. When these cases, on which plaintiff depends, are carefully read and considered in connection with the factual situation involved in each, we find that none of them supports the plaintiff in its claim for exemption as a corporation organized exclusively for scientific or educational purposes. In our opinion the plaintiff taxpayer was not organized exclusively for scientific or educational purposes within the meaning of § 101(6). Its original incorporation in 1932 under the laws of Delaware was as an ordinary business corporation for profit. It was incorporated to carry on the same type of business activities in which South Dakota had been engaged. Its organization was one of the steps which was taken to aid in bringing to an end the vexatious and expensive litigation in which some of the major oil companies were then engaged. The only science which its incorporators then had in mind was the scientific research for the sake of better business and more profits for the major oil companies which were responsible for its organization. Within the period from the date of its organization to November 29, 1944, plaintiff paid from its profits to the owners of its stock and notes a total of $14,291,-471.29. As to its original organization in 1932, there can be no doubt that plaintiff was organized for the purpose of business for profit. But, plaintiff contends, when all of its stock and notes were, on November 29, 1944, transferred to Guaranty Trust Company as trustee for the Petroleum Research Fund “it was irrevocably dedicated to scientific and educational purposes. Its entire character taxwise changed. From that date, all its net earnings were dedicated and destined exclusively to exempt uses.” With this reasoning we cannot agree. To reach this conclusion one must say that if the net earnings of any business corporation organized for profit are dedicated to an exempt purpose we may then say that the corporation was organized exclusively for that purpose. None of the cases cited by plaintiff goes that far. To so hold we must ignore the clear language of the Act. Such a holding would be carrying too far the Trinidad statement as to the importance of the destination of the income and would seem to be in conflict with the intent of Congress as expressed in 26 U.S.C.A. § 23 (q) of the Internal Revenue Code, which limits the allowable deductions by corporations for such donations to 5 per cent of net' income. If we assume, arguendo, that the dedication of the net earnings of a business corporation to an exempt purpose constitutes operation of the corporation for that purpose, it still does not follow that the corporation was organized for that purpose. Rules of construction require, us, if possible, to give some meaning to the word “organized” in, addition to the- meaning of the word “operated”. As said by Judge Hand in Sun-Herald Corporation v. Dug-gan, supra, 2 Cir., 73 F.2d 298, in discussing the meaning of the word “organized” as used in another paragraph, (14), of the same section of the Act, page 300: “We think it clear that ‘organized’ means incorporated and not ‘operated.’ * * * The use of the word ‘operated’ in addition to the word ‘organized’ * * * indicates that ‘organized’ was not * * * to have the meaning of ‘operated’ but further to interpret the exemption.” Here as in the second Sun-Herald Case, 2 Cir., 160 F.2d 475, 476, we may say: “In the case at bar, no matter how broadly one views the evidence, these plaintiffs were not ‘organized’ for' the purpose of aiding any educational .purpose.” The Court there added, “True, by 1930 they had ceased to have any other activity than to hold property for a municipal art museum; but that will not serve.” ' ‘ Plaintiff cites no case which holds that “organized” as used in § 101(6) may be interpreted as having the same meaning as “operated”. Actually, the transfer 'of the stock and securities of the plaintiff to the trustee did not change the type, character or purpose of the organization of the plaintiff. -It was still a business corporation organized for profit. The only change was in the ownership of its stock and notes and the consequent change in the recipient of such part of its net earnings .as the directors might see fit to distribute: If we were to follow-plaintiff’s reasoning and agree that plaintiff under the facts of this case became exempt November 30, 1944, there would be one other interesting result of this transfer. For the period in which plaintiff was paying to the Trustee for the Petroleum Research Fund the total sum of $258,962.49 it would secure the refund of inconae taxes-it had paid for the same period in the total sum of $1,573,079.31. After this transfer the plaintiff’s board of directors, under the provisions of its certificate of incorporation and its by-laws, still had the power to saywhat, if any, part of its earnings would be distributed, and what part would be plowed back into its business of research, development and acquisition of patents. The board also had the power, under the certificate of incorporation, and without any -action by the stockholders, t-o issue and sell the authorized, but still unissued, 130,000 shares of its Class A capital stock. On November 15, 1945, a year after the date from which it claims exemption, the plaintiff amended its certificate of incorporation by adding a new Article Tenth. This new Article used the language of § 101 (6) to describe the purpose of its organization and its operation,, and to meet the other requirements of - the section. It also included a provision that no person should own any. stock, or securities representing a proprietary interest in plaintiff. Mr. Harris, the president of plaintiff, in the exemption affidavit filed in 1946, explained that the purpose of this amendment was “by way of adding additional legal sanction to the fact that Universal has, since November 29, 1944, been organized and operated exclusively for charitable, scientific and educational purposes * * *.” However, none of the other articles of incorporation was changed and this Article Tenth 'concluded with this significant sentence: “Nothing herein contained shall be deemed to prevent this corporation, subject to the qualifications aforesaid, from continuing to be operated as a stock and business corporation for profit.” It seems to us that this amendment of its certificate of incorporation can only be considered as a belated attempt by plaintiff to bring itself within the form for exemption under § 101(6) while still -retaining its original corporate power and purpose to operate in the same manner as it had since its original organization, that is, as a business corporation for profit. In the Roche’s Beach case the Court was clearly of the opinion that “A subsequently formed purpose to hold the property of a business corporation for an exempt institution to which all its stock had been given” did not entitle it to exemption under § 101 (14) as a corporation “organized for the exclusive purpose of holding title to prop-, erty” for, and turning over the net income of such property to, an exempt corporation. The Roche’s Beach case indicated, and both of the Sun-Herald cases held, that a business corporation organized for profit cannot claim exemption as a corporation organized exclusively for an exempt purpose by merely transferring its stock to an exempt organization pursuant to a purpose formed subsequent to its original organization. The only disagreement in these cases was as to the necessity of considering the original articles of incorporation as the only evidence of the purpose of organization. To the same effect see Bear Gulch Water Co. v. Commissioner, 9 Cir., 116 F.2d 975. There the Regents of the University of California became the owner of all of the stock of the taxpayer which was organized as a business corporation for profit. The Court held, however, that the corporation did not become an exempt corporation under § 101(6) merely because its stock had been acquired by an exempt organization. Neither can we find any reasonable basis in the evidence of this case for the finding and conclusion of the Court below that the plaintiff after November 29, 1944, was operated exclusively for scientific or educational purposes within the meaning of § 101(6). Immediately after its organization the plaintiff continued to operate its business just as it had, operated prior to that date. It continued its vast research and development work and the activities of its patent department, expending in the Riverside plant and its patent department in the years 1944 through 1946 the total sum of $3,656,-810.94. It ■ still continued to attempt to develop and discover new processes, to obtain paients thereon, to sell licenses to use these patented processes to the smaller independent oil companies; and to permit such use, royalty free, by the major oil companies who held irrevocable licenses or immunity agreements. During the three years, 1944-1946; plaintiff secured 382 United States patents and 142 foreign patents which these oil company donors could use royalty free during the life of the patents. The value of the use of all of plaintiff’s patents by the major oil companies is shown by the fact that during those three years fhe small, independent oil companies paid for their licenses the total sum of $12,030,447.12. That the donors recognized the value of the research, development and patent work of the plaintiff is shown by the Fourth Article of the trust agreement which provides that regardless of the other Articles of the trust agreement the trustee shall not “cause or permit Universal to discontinue research and development work in the petroleum field and the ownership and licensing of processes, patents and patent rights relating to the petroleum field.” The donors thus provided that the plaintiff should continue to carry on the research, development and patent work in the petroleum field, work which was to be financed primarily by the smaller independent oil companies, work the results of which for years to come, could be used royalty free by the donors and their subsidiaries. In this Fifth Article of the trust agreement it was stated that the donors considered this activity by the plaintiff to be for the public good but it seems perfectly clear that here, as in Underwriter’s Laboratories, Inc., v. Commissioner, 7 Cir., 135 F.2d 371, the interest of the public was only secondary and that the primary and major interest was for the financial and business advantage of these major oil company donors. In the Underwriter’s 'Laboratories case this Court was considering the claim for exemption of Underwriter’s Laboratories, Inc., which was incorporated as a non-profit corporation and had never declared a dividend or attempted to divide its profits with its members. It was organized by fire insurance companies to make investigations and carry on research work as to insurance hazards and risks. It conducted tests, experiments and investigations into the causes of losses ¿gainst which insurance companies -insure. It furnished this information free to its members, most of whom were insurance companies, and this in-information was also made available to a wider group of the general public through publications, movies and the radio, all of which agencies extolled the work and services of the taxpayer. The taxpayer there also had a testing service which it offered only to manufacturers to determine the resistance of the manu facturer’s product to fire hazards and the part they might play in casualties usually insured against by insurance companies. If the manufactured product met the taxpayer’s standards the fact was publicized and the taxpayer’s label was placed upon the product to indicate that the product had met the test. If the product did not meet the test nothing was said or done about it. For these tests the taxpayer charged the manufacturers fees, the amount of which did not depend on whether the product passed the test. The taxpayer there in two different years made large refunds to the manufacturers who used its label service, such refunds being made from the excess which the taxpayer had charged the manufacturers above its costs. After considering the facts of that case this Court, in an opinion by Judge (now Mr. Justice) Minton said, 135 F.2d at page 373: “This does not sound like charity to us. If it is charity, it began at home. It was not the public interest that prompted the establishment of the petitioner. It was financial gain and business advantage. The primary concern of the petitioner was that of its membership, made up almost entirely of insurance companies, and the manufacturers who paid its ample fees. Whatever benefit inured to the public was only incidental to the primary concern. An institution that operates- primarily for the benefit of private parties and only incidentally for the public is not -a charitable institution in fact or within, the meaning of the statute under consideration. Whatever benefit the public received was not as ‘a gift for public use’ Kain v. Gibboney, 101 U.S. 362, 365, 25 L.Ed. 813, but was to enable someone to sell something to- the public by giving to the public something better than it otherwise would have received. That may be good business, but it is not charity. “Neither is the petitioner a scientific institution within the meaning of the statute. It did not operate on the basis of science for the sake of science. It was science for the sake of business. The fact that scientific methods were used by the petitioner does not -alter the case. Most business today uses some kind of scientific processes or methods.” The language used in the Underwriter's case seems particularly applicable to the factual situation with which we are now confronted. Here, as there, the entire business of plaintiff was for the business betterment of those engaged in the petroleum industry and especially of the major oil companies who were to receive without cost the benefits .of all of the plaintiff’s discoveries or inventions. Various facts in connection with the operation of the plaintiff bear out this conclusion. Prior to the transfer of plaintiff’s stock and securities to the trustee the plaintiff had paid annually large portions of its earnings to its stock and security holders. After the transfer it was thought necessary by the directors, who were being paid $500 and expenses for each meeting they attended, that the plaintiff should have large reserves to protect it against certain pending claims and to provide funds from which it could improve and modernize its research plant and equipment. This feeling on the part of the directors, however, did not cause a reduction in the expenses of the operation of its Riverside plant or of its patent department. It only resulted in a saving on the amounts paid to the Trustee on its stock and notes. During the three years, 1944 through 1946, it paid to the trustee a grand total of $258,-963.49 as compared -to $3,656,810.94 which it spent on the Riverside plant and the patent department. This payment to the trustee was out of total net earnings of $7,339,583.61 and out of $17,820,497.80 of gross income. In view of the manner in which plaintiff was actually operating, it is understandable that in amending the charter by the addition of a Tenth Article, consisting of recitals calculated to give -the appearance of an exempt organization, a last sentence was included which reserved the right to continue to operate “as a stock and business corporation for profit,” subject only to the qualifications therein contained. In Better Business Bureau v. United States, 326 U.S. 279, at page 283, 66 S.Ct. 112, at page 114, 90 L.Ed. 67, the Supreme Court in considering the proper interpretation of “organized and operated exclusively for * * * scientific * * * or educational purposes,” stated: “In this instance, in order to fall within the claimed exemption,'an organization must be devoted to educational purposes exclusively. This plainly means that the presence of a single non-educational purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly educational purposes.” In the instant case the scientific or educational purpose of plaintiff’s operation instead of being exclusive was only incidental to the primary purpose of research, development and securing patents in the petroleum field for the benefit of the petroleum , industry and particularly for the major oil companies, in order to improve their business, increase their sales and thereby secure to them greater profits. Resulting benefits to the public were only incidental. As said in Better Business Bureau v. United States, supra, 326 U.S. at page 283, 66 S.Ct. at page 114: “Even the most liberal of constructions does not mean that statutory words and phrases are to be given unusual or tortured meanings unjustified by legislative intent or that express limitations on such an exemption are to be ignored.” To grant plaintiff’s claim to exemption in this case it would be necessary to ignore the plain intent of Congress as expressed by the language used in § 101(6). After consideration of the entire record we must find and hold that plaintiff was neither organized nor operated exclusively for any of the exempt purposes mentioned in said section. Since plaintiff does not meet the requirements of being organized and operated for any of the exempt purposes it is not the type of organization described in § 101(6) and we do not need to consider the claims of the Government that it failed to meet the other two requirements. Unity School of Christianity, 4 B.T.A. 61, 67, 68. Tide Water Accrual. Under this heading we have the issue of whether plaintiff, which used the accrual method of accounting in reporting its income and deductions, should have included in the income it reported for 1945 royalties of $1,035,205 which it received from Tide Water Associated Oil Company in four annual installments beginning in 1945, and which plaintiff reported annually as received. In 1942 the plaintiff and five other oil companies, pursuant to recommendations of the Petroleum Co-ordinator for War, entered into an agreement, known as Recommendation 41 Agreement, for the purpose of making available to all refineries, particularly those producing aviation gasoline for the war effort, processes for catalytic refining on which the six companies held patents. This agreement designated plaintiff as one of the licensing agents to grant licenses for the use of such processes. This agreement prescribed the form of license agreement which should be used in granting such licenses and provided that plaintiff should collect royalties payable on all licenses granted by it and should then account for and pay over such royalties to the parties to the agreement in such shares as the parties should determine. The specified form of license agreement provided that the licensee might pay running royalties based on the amount of production or might convert such running royalties to a paid-up basis and thereby acquire a fully paid-up license. The Recommendation 41 Agreement also provided for cross licensing of patent rights among the parties to the agreement and further provided that on all licenses granted, the licensing agreement should provide for the exchange, between the parties to the agreement and the licensee, of information on all developments or improvements on the processes acquired by any of the parties during the period of the war and for six months thereafter. In 1943 Tide Water employed the plaintiff for engineering services necessary to the construction of a Fluid Catalytic Cracking Unit at Avon, California. As a part of this service the plaintiff furnished Tide Water the necessary plans, specifications and information to construct the plant so as to utilize the process on which the parties to the Recommendation 41 Agreement held patents. From the time plaintiff was so employed it was understood by Tide Water and by the plaintiff that they would enter into a written licensing agreement granting Tide Water a license to use the patented process embraced in said unit. The actual execution of such licensing agreement, however, was delayed until April, 1945, at which time the unit had been completed and had been in operation for about four months. The licensing agreement as finally executed actually consisted of three documents, all of which were executed and delivered at the same time, and all dated as of July 23, 1943. The three documents were a License Agreement, a Basic Agreement, and a Guarantee Agreement. The License Agreement granted Tide Water the right to use the process on which plaintiff and its associates owned patent rights. It provided that plaintiff and its associated oil companies were to furnish Tide Water through plaintiff, full information and knowledge of all improvements, developments and néw' techniques relating to the operation of the licensed process made and acquired by any of the licensor companies prior to six months after the termination' of the war, and that Tide Water should likewise make available to the licensor oil companies all such improvements, developments and operating techniques which it made or acquired during said period. These provisions for the exchange of information were pursuant to the Recommendátion 41 Agreement. The License Agreement also provided for the payment of royalties by licensee either on a running or a paid iip basis, for the protection of licensee against claims of patent infringement and for all of the other terms and conditions of the license except as such terms and conditions were modified by the other two agreements. : The Basic Agreement modified the provisions of the License Agreement as to paid-up license by providing that Tide Water might pay royalties in the total amount of $1,808,219 ($1,035,205 of which would belong to plaintiff) payable in four annual installments," the first 'installment payable on the effective date of the license. By this agreement Tide Water reserved the right to anticipate all or any part of such payments and. agreed to pay interest at’ the rate of 2% per annum from the effective date of the paid-up license on any unpaid balance of such total’ ¿mount.' The Basic Agreement also expressly provided that neither the filing, ^ pendency, nor determination of any infringement suit should excuse Tide Wátér from paying any installments on account of'paid-up'royalties, except that any sum that might" become payable under a finál- judgment and which was not paid by plaintiff should be off-set against any unpaid installments of paid-up royalties. Section 1 of the Guarantee Agreement provided that Tide Water should receive from plaintiff without charge all information and services customarily furnished by Universal .to its licensees for operation of the Fluid Catalytic Cracking Process. It was agreed between the parties that such services consisted of four types, namely, (1) periodical safety inspections, (2) furnishing a crew of plaintiff’s employees to start up the plant and to train licensee’s operators, (3) furnishing a group of consulting engineers who upon call by the licensee would go to licensee’s plant and try to discover- the cause of any trouble, and (4) checking runs and method of op-. erations of licensee’s unit occasionally to determine how the plant might be changed to improve its yield. Section 2 of the Guarantee Agreement provided that the payment by Tide Water of principal and- interest for a paid-up license should be subject to the provisions of thfe Guarantee Agreement which followed section 2, particularly those relating to Tide Water’s right to withhold royalty payments in the event plaintiff should fail to meet its guarantees of performance as thereinafter .stated. The agreement then proceeded to guarantee certain-standards of performance and production by the Tide Water Unit and provided for test runs to demonstrate that such performance guarantees had been met. It was also provided that the last three installments on the paid-up license should be paid on the specified dates if certain test runs had been successfully completed or had been waived by Tide Water. It was provided that if the Unit failed to meet any of the required tests, the plaintiff at its expense should promptly make'such changes as were necessary in order for the plant to meet the guaranteed standards of performance and production. The agreement also provided that in -the event of an unsuccessful test on either type of catalyst, installments of paid-up royalties might :be withheld until a successful test had been completed unless Tide Water had waived guarantees in respect thereof; and that no interest should be payable on any royalties so withheld. Proposed drafts of these contracts had been submitted and discussed by the parties in 1944. On December 29, 1944, Tide Water wrote a letter to the plaintiff stating that it thereby elected to pay royalties on a paid-up basis and that it reserved the right to pay same in a lump sum or in installments as provided in the Basic Agreement. On February 21, 1945, Tide Water advised plaintiff by telegram that it was satisfied with the results on the test runs on both types of catalysts and that upon receipt of fully executed agreements, and the approval by the Petroleum Administration for War it would give formal written notice to plaintiff that plaintiff’s performance guarantees had been fully met and that plaintiff’s obligations thereunder were fully discharged. In this telegram Tide Water also requested plaintiff to immediately discontinue the work of plaintiff’s operators “except as any further specific arrangements may be made” and also urged that agreements c