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THE ERIE ENDOWMENT v. UNITED STATES

December 21, 1961

The ERIE ENDOWMENT, Plaintiff,
v.
UNITED STATES of America, Defendant



The opinion of the court was delivered by: WILLSON

The Erie Endowment is a Pennsylvania non-profit corporation, incorporated June 1, 1949, for the purpose of carrying out the intents and purposes of an inter-vivos trust established by E. H. Mack dated December 10, 1935.

 The purposes of the inter-vivos trust was to use 'the net amount of income of which is to be used for the advancement of the Christian religion, for the promotion of science and arts, and the education, welfare and social development and betterment, both materially and spiritually of the people, more especially of, but not restricted to, the City and County of Erie, Pennsylvania, regardless of race, sex, color or creed'.

 The inter-vivos trust also provides that the Trustees shall accumulate the net amount of income resources and profits as follows:

 'Ninety (90%) per cent of the said amount shall be retained during the first five (5) years; Eighty (80%) per cent of said net amount shall be retained the second five (5) years; Seventy (70%) per cent of said net amount shall be retained during the succeeding ten (10) years; and Fifty (50%) per cent of said net amount shall be retained the succeeding ten (10) years; not less than Ten (10%) per cent of said amount shall be retained thereafter by the said Trustees and added to the corpus of this trust estate until the total aggregate of such additions with the corpus of the trust shall be as much as Ten Million Dollars.'

 On or about July 14, 1953, the Erie Endowment filed its application for exemption from taxation under the provisions of Section 101(6) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 101(6). Through delay, postponements (not here important), the request was not clearly answered until some years later. In the meantime, plaintiff filed a dual request with the Treasury Department asking that the Erie Endowment be granted exemption as either a charitable organization under Section 501(c)(3) I.R.C., 26 U.S.C.A. § 501(c)(3) or as a social welfare organization under Section 501(c)(4). The resulting ruling held that the plaintiff was not such as described in Section 501(c)(4) and that it was such as described in Section 501(c)(3), but denying exemption for violation of the accumulation provision of Section 504, 26 U.S.C.A. § 504.

 The Erie Endowment filed its income tax return for the year 1958 and paid its tax, in the total amount of $ 2,992.93, and filed a claim for refund which was denied December 5, 1960. This suit was then filed.

 QUESTIONS PRESENTED

 The defendant, in its brief, presents two questions for decision. They are:

 '1. Is the taxpayer's program for an accumulation of income pursuant to the provisions of its charter in the amount of 90 per cent for the first five years of the program, 80 per cent the second five years, 70 per (cent) for the next ten years and 50 per cent for the succeeding ten years and not less than 10 per cent thereafter until the total aggregate of additions and corpus shall be equal to $ 10,000,000, an unreasonable accumulation within the meaning of Section 504 of the Internal Revenue Code of 1953 (1954), where there are no specific projects or objectives for which the income is accumulated?

 '2. If the answer to the foregoing question is that the accumulation was unreasonable, then the question presented is whether the taxpayer can avoid the prohibition against unreasonable accumulation, applicable to nonprofit organizations organized and operated for charitable, etc. purposes, by the assertion that it is a civic organization operated exclusively for the promotion of social welfare within the meaning of Section 501(c)(4) of the Internal Revenue Code of 1954.'

 The plaintiff, in its statement of the questions involved contends that the Erie Endowment should be held to be exempt under the provisions of Section 501(c)(4). It says also that the court should hold that the plaintiff is organized and operated exclusively for charitable purposes as described in Section 501(c)(3). It finally contends that the accumulation out of the income during the year 1958 or any prior taxable year and not actually paid out by the end of the year are not unreasonable in amount and duration.

 DISCUSSION

 It is to be noticed that the trust was originally established by an indenture dated December 10, 1935, between E. H. Mack as donor and William E. Hirt, Enoch C. Filer and E. H. Mack as Trustees. The trust purposes are general in nature and character but certainly may be designated as charitable. As stated in the indenture, 'Broad powers are intended' and were given to the Trustees. Government Exhibit 3 shows income from 1936 to 1958 in the sum of $ 504,200.94; contributions made by the Trustees during the same period were $ 114,669.20; and the income accumulated during the same period was $ 389,531.64. The trust was incorporated June 1, 1949. From that date until the end of 1958 the net income was $ 314,494.98; charitable contributions of $ 93,314.20 were paid and the income accumulations amounted to $ 221,180.78. It is well to note that during the period of its existence both as a trust and as a corporation, ...


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