Before SWAN, CHASE, and FRANK, Circuit Judges.
Section 727 of the Internal Revenue Code, 26 U.S.C.A. Int. Rev. § 727, exempts from the excess profits tax corporations exempt under section 101 from the income tax imposed by chapter 1. Debs Memorial Radio Fund, Inc., is a corporation organized in 1928 under the Stock Corporation Law of the state of New York, Consol. Laws N.Y. c. 59, "to engage in the business of broadcasting"; it operates radio station WEVD. It succeeded an unincorporated association organized in 1927 by the name of Debs Memorial Radio Fund to conduct a free public radio forum for the dissemination of liberal and progressive social views. The petitioner claims exemption from federal taxation by virtue of subdivision (8) of section 101, exempting "(8) Civic leagues or organizations not organized for profit but operated exclusively for * * * social welfare, * * *." The Commissioner denied the claimed exemption and assessed an excess profits tax for the year 1940. His determination was sustained by the Tax Court, with two judges dissenting, 3 T.C. 949, and its decision has been brought to this court for review.
The facts are not in dispute. They are set forth in detail in the Tax Court's opinion and will be repeated here only in summary. In 1927 friends of the late Eugene V. Debs organized as a memorial to him an unincorporated membership association by the name of Debs Memorial Radio Fund. The purpose of the association was to conduct a free public radio forum for the dissemination of liberal and progressive social views. A small part-time radio station was acquired and permission was obtained from the Federal Radio Commission to use the call letters WEVD.In the beginning there were no commercial broadcasts, but as expected donations sufficient for operation and rehabilitation of the station failed to materialize, commercial broadcasts sponsored by advertisers were soon begun and were gradually increased. In 1928 the association caused the petitioner Debs Memorial Fund, Inc. to be incorporated under the New York Stock Corporation Law in order to limit the personal liability of the individuals responsible for the operation of station WEVD and to provide a better form of management and control. The corporation's purposes were stated in its certificate of incorporation as broadly as those of any corporation created under the laws of New York to engage in the business of broadcasting; and its by-laws, as originally adopted, authorized the declaration of dividends from surplus profits of the company. Its 100 shares of authorized capital stock, without par value, were issued in exchange for station WEVD and all other assets of the association, subject to its liabilities up to $10,000. The stock certificate was issued to Norman Thomas, chairman of the Debs Memorial Radio Fund for and on behalf of the trustees of that Fund. Mr. Thomas personally paid nothing for the shares.
From its organization in 1928 to the end of 1931 the petitioner's gross income from broadcasting increased from some $4,000 in 1928 to some $22,000 in 1931. It also continued to receive donations, its total gross income in 1931 being $31,727. It was, however, in a condition of financial distress and there was danger that the Federal Communications Commission might cancel the WEVD license. The Forward Association, a New York corporation which the respondent has ruled to be entitled to exemption from federal taxation under section 101(8), came to the petitioner's assistance. Forward agreed to make advances up to the amount of $250,000 upon certain conditions, one of which was that the petitioner's stock should be issued to nominees of Forward to be held as security for repayment of the advances, but only out of surplus after station WEVD "is able to pay all necessary running expenses and earn a surplus." In January 1932, pursuant to this agreement, Forward advanced the sum of $70,000, Norman Thomas surrendered his certificate, and the petitioner issued in its place 24 certificates for four shares each to individuals nominated by Forward. The certificates were assigned in blank and thereafter when any of such individuals died or resigned, new certificates have been issued to other persons nominated by Forward and elected by the shareholders of the petitioner. In February 1932 the by-law providing for the declaration of dividends was repealed, and new provisions were added to Article VIII as follows:
"2. None of the profits or surplus of the corporation shall be used for distribution as dividends. All profits or surplus shall be used for the improvement of the services of radio stations owned by the corporation or for civic, educational and cultural purposes.
"3. None of the holders of the stock of the corporation shall have the right to assign, transfer or sell the same without the consent of a majority of the rest of the stockholders. He shall be the holder and owner of the stock with the right to vote on it during his life and upon his death the majority of the stockholders shall have the right to designate a successor."
As so amended the by-laws have been in effect ever since. Subsequently Forward advanced additional amounts to the petitioner which were entered on its books in an account payable. As of December 31, 1938 and 1939, the amount owing to Forward in such account was $295,000 and as of December 31, 1940, it was $325,000. The petitioner has always paid interest at six per cent. to Forward on the amounts shown in this account except for the first year or two when interest was forgiven. The interest paid to Forward in 1940 was $17,875.
In addition to the advances already mentioned Forward "pledged" to the petitioner the amount of $250,000, and paid $100,000 thereof in 1941 and the remaining $150,000 in 1942. To the Federal Communications Commission the "pledge" of Forward was reported as a gift or donation and as an asset of the petitioner in order to obtain permission to build a new transmitter.
From 1932 to 1942 the petitioner's gross income, aside from a few small items, has been derived from commercial broadcasting over station WEVD. In each of these years, except 1936 and 1937, down to 1939 its federal income tax returns showed no net income but a deficit. The following table gives the figures for 1939 to 1942 inclusive:
Year broadcasting paid ...