527 F2d 231 Miller v. United States

527 F.2d 231

76-1 USTC P 9153

Clyde C. MILLER et al., Appellants,
UNITED STATES of America, Appellee.

No. 75--1329.

United States Court of Appeals,
Eighth Circuit.

Submitted Dec. 8, 1975.
Decided Dec. 30, 1975.

William D. Crampton, St. Louis, Mo., for appellants.

Arthur L. Bailey, Tax Div., Dept. of Justice, Washington, D.C., for appellee.

Before MATTHES, Senior Circuit Judge, and STEPHENSON and WEBSTER, Circuit Judges.


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In this appeal, the trustees of the Parsons Blewett Memorial Fund contend that the District Court erred in denying a refund of income taxes paid by that trust for taxable years ended June 30, 1962, through June 30, 1968.


The Fund was formed in 1916 by Ben Blewett, then Superintendent of Public Instruction of the City of Saint Louis, Missouri, for the purpose of creating endowments to assist the teachers of the Saint Louis public school system. The trustees of the Fund are composed of: (1) the Superintendent of Public Instruction of Saint Louis; (2) the Secretary-Treasurer of the Board of Education; (3) the City Comptroller; (4) a member of the teaching corps of the Saint Louis public schools, elected by that corps for a term of two years; and (5) a citizen appointed by a judge of the Saint Louis Probate Court for a term of four years.


Dividends and interest from various securities and cash contributed to the trust by Blewett, his estate, and his two sisters are the sole sources of its income. From June 30, 1951, through June 30, 1968, the Fund had total receipts from such dividends and interest totalling $2,700,301.00. During this period, the Fund expended $777,811.00 for the relief and assistance of retired teachers, $680,832.00 in scholarship funds, and $160,619.00 for administrative costs. The Fund had thus accumulated $1,081,039.00 in undistributed income during this period, which, together with prior accumulations, produced a total income accumulation of $1,554,357.00 as of June 30, 1968.


On March 7, 1961, the Internal Revenue Service issued a ruling letter holding the Fund to be an educational and charitable organization described in Section 501(c)(3) of the Internal Revenue Code of 1954, and therefore exempt from federal income taxation pursuant to Section 501(a). On September 5, 1968, the District Director of Internal Revenue, Saint Louis, Missouri, retroactively revoked the Fund's exemption letter effective June 30, 1962, on the sole ground that the Fund had unreasonably accumulated income in violation of Section 504(a)(1).1 A notice of deficiency of income taxes for the taxable years ended June 30, 1962, through June 30, 1968, was issued, pursuant to which the Fund paid taxes and interest totalling $1,017,779.53. After disallowance of a timely claim for refund, the Fund initiated this action. See 28 U.S.C. § 1346(a)(1).


The District Court,2 ruling on cross-motions for summary judgment, held that the Fund, viewed separate from the public school system, could not claim exemption from Section 504(a)(1) as an 'educational organization' within the meaning of Section 503(b)(2) because it had not demonstrated, as required by the latter section, that it maintained a regular faculty and curriculum and normally had an enrolled body of pupils or students in attendance at the place where its educational activities were regularly carried on. The District Court further held that the activities of the Fund, however laudable, were not derived from the exercise of an essential governmental function and did not accrue to a governmental organization, and thus could not qualify for exclusion from gross income under Section 115(a). The undisputed evidence on the record before this Court amply supports the findings of the District Court. We affirm upon the basis of Judge Nangle's well-reasoned opinion. Miller v. United States, 393 F.Supp. 831 (E.D.Mo.1975).


Section 504 of the Internal Revenue Code of 1954, which was repealed by Section 101(j)(15) of the Tax Reform Act of 1969, Pub.L.91--172, 83 Stat. 487, imposed a penalty of the loss of tax exemption for any Section 501(c)(3) organization which 'unreasonably accumulated' its income. Section 504 explicitly applied only to organizations exempt under Section 501(c)(3) and to which Section 503, repealed by Section 101(j)(14) of the Tax Reform Act of 1969, applied. Section 503(b)(2) specifically excepted the application of Section 503 from 'an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on * * *.'


The Honorable John F. Nangle, United States District Judge for the Eastern District of Missouri