
    ROBERT H. MONTGOMERY v. THE UNITED STATES
    [No. D-790.
    Decided June 6, 1927]
    
      On the Proofs
    
    
      Income-tax deductions; necessary expenses; contribution to endow*ment fund; benefits available to public. — Payment made by a firm of accountants into an endowment fund created for the purpose of maintaining a library and statistical department in an institution of which it is a member, available to the general public and to all members of the institution whether contributing to the fund or not, is not a necessary expense within the meaning of the income-tax laws enumerating allowable deductions.
    
      Same; contributions to scientific or educational organisations. — A corporation, which might otherwise be one operated exclusively for scientific or educational1 purposes, gifts to which are deductible allowances in income-tax returns, is not so operated when it has standing committees whose duty it is to safeguard the interests of its members by efforts to influence legislation.
    
      The Reporter's statement of the case :
    
      Mr. Thomas G. Haight for the plaintiff. Mr. J. Marvin Haynes was on the brief.
    
      Mr. Fred K. I)yar, with whom was Mr. Assistant Attorney General Harman J. Galloway, for the defendant.
    The court made special findings of fact, as follows:
    I. The plaintiff, Robert H. Monlgomery, during the year 1911 was a member of the partnership known as Lybrand, Ross Bros. & Montgomery, which firm, during the said year, was engaged in the practice of accounting and auditing in the city of New York and elsewhere throughout the United States.
    II. On or about March 27, 1918, the said partnership of Lybrand, Ross Bros. & Montgomery filed its partnership income return for the fiscal year ended December 31, 1917, showing a partnership net income of $260,128.02. The proportion of the plaintiff as a partner in said firm in said net income was $53,335.32, as shown by said return.
    
      III. On or about May 23, 1916, the Institute of Accountants in the United States of America was incorporated under the laws of the District of Columbia. On or about January 22, 1917, its name was changed to the American Institute of Accountants. The corporation was a successor to a body known as the American Association of Public Accountants, established in the year 1887.
    The certificate of incorporation of the American Institute of Accountants provides as its object that it was organized for the purpose of uniting the accountancy profession, to safeguard the interests of public accountants, and to encourage congenial intercourse among accountants.
    IV. In the year 1917 the American Institute of Accountants created an endowment fund for the purpose of maintaining a library and statistical department. There was subscribed for this purpose the sum of $200,000.
    Said endowment fund has been used for the establishment and maintenance of a library and statistical department and a bureau of information, which conducts research work, and for the publication of technical books for the use of the accounting profession.
    The said library and statistical department so established by the said endowment fund was open to all members of the American Institute of Accountants (whether contributing to said fund or not) and to the general public as well.
    Only 200 out of the approximate 1,200 members of the American Institute of Accountants contributed to said endowment fund.
    V. During the year 1917 the said partnership of Lybrand, Ross Bros. & Montgomery made a contribution of $5,000 to the aforesaid endowment fund of the American Institute of Accountants, to which organization each of the members of said firm belonged.
    VI. The American Institute of Accountants had standing committees on Federal legislation and State legislation, whose duty it was to safeguard the interests of public accountants by endeavoring to defeat legislation believed by the organization to lower the standards of the profession, and also to encourage legislation believed to be beneficial to same.
    
      VII. At the time required by law plaintiff made his Federal income and excess-profits tax return for the taxable year 1917 and duly paid the tax shown on said return to be due.
    VIII. On or about March 8, 1923, the Commissioner of Internal Eevenue assessed an additional tax against plaintiff for the said year 1917, amounting to the sum of $253.96. Thereafter the plaintiff, on March 27, 1923, filed with the collector of internal revenue for the second district of New York a claim for abatement of said additional tax. On February 9, 1924, the said claim was allowed in the sum of $63.74 and rejected for $190.22, which sum constituted the amount claimed by plaintiff as the tax on his share of the $5,000 contributed to said endowment fund, and which with interest amounts to $199.73.
    IX. On or about April 7, 1924, plaintiff filed with said collector of internal revenue, in accordance with the provisions of law in that regard and the regulations of the Treasury in pursuance thereof, a claim for refund of the jsum of $199.73 so paid, or such greater amount as might be legally refundable, with interest thereon from April 4, 1924. On October 7, 1924, the date of the filing of the petition in this cause, six months had elapsed since the filing of the said claim for refund and no decision had been rendered thereon by said Commissioner of Internal Eevenue. Since the institution of this suit said commissioner did, on December 11, 1924, formally reject in full the said claim for refund.
    The court decided that plaintiff was not entitled to recover.
   Moss, Judge,

delivered the opinion of the court:

The plaintiff, Eobert H. Montgomery, was in 1917 and prior thereto a member of a partnership engaged in the business of accounting and auditing in the city of New York and elsewhere throughout the United States. During that year the partnership paid $5,000 into an endowment fund of the American Institute of Accountants.. In its income-tax return the partnership claimed as a proper deduction from gross income the amount so paid, which claim was disallowed by the Commissioner of Internal Eevenue. Plaintiff likewise claimed in his individual return as a proper deduction from gross income his share in the $5,00Q the tax on which amounted with interest to $199.13, which wa,s also disallowed by the commissioner, and this action is for the recovery of that amount.

The question involved herein is governed by the revenue act of 1916 (39 Stat. 756), the applicable provisions of which are as follows:

“ Sec. 5. That in computing net income in the case of a citizen or resident of the United States (a) for the purpose of the tax there shall be allowed as deductions—
“First. The necessary expenses actually paid in carrying on any business or trade, * * *
‡ ‡ ‡ $
“ Ninth (as added by sec. 1201 (2) of the revenue act of 1917). Contributions or gifts actually made within the year to corporations or associations organized and operated exclusively for religious, charitable, ¡scientific, or educational purposes, * * * no part of the net income of which inures to the benefit of any private stockholder or individual to an amount not in excess of 15 per centum of the taxpayer’s taxable net income as computed without the benefit of this paragraph. Such contributions or gifts shall be allowable as deductions .only if verified under rules and regulation^ prescribed by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury.”

Considering first the question as to whether or not the contribution to the endowment fund was a necessary expense, it should be noted that there were approximately 1,200 members of the institute, only 200 of whom subscribed to the fund, and that the benefits and advantages derived from said endowment accrued to all member^, contributors and noncontributors alike, as well ag to the general public. The library, which was purchased with the income from said fund, wTas open to the public, free of charge, and the books which were published for research work were sold to the public as well as to the members of the institute. As a matter of right, plaintiff’s firm could have availed itself of all the services of the institute without subscribing to the fund. It can not, therefore, be held that plaintiff’s subscription was a necessary expense in carrying on the business of plaintiff’s firm.

On the second point the question for determination is. whether or not the American Institute of Accountants was a corporation or association organized and operated exchiswely for scientific and educational purposes. One of the purposes set forth in its article of incorporation was “ * * * to safeguard the interest of public accountants * * In furtherance of this purpose Article IY of the constitution provided for the appointment of certain committees, one of which was for Federal legislation, and another was for State legislation. The evidence shows that whenever and where-ever efforts were made to enact legislation which, in the belief of the American Institute of Accountants, would result in lowering the standard of qualification for admittance to membership in the institute every reasonable effort was made by these committees to defeat such legislation. It was also a part of the duty of said committees to procure legislation believed to be suitable for the purposes of the institute where no such legislation already existed. Conceding that this service might be regarded as entirely meritorious it is, nevertheless, a scope of activity which is clearly incompatible with the spirit and purpose of the exempting statute.

It is the opinion of the court that plaintiff is not entitled to recover.

It is therefore adjudged that the petition herein be, and the same is, dismissed.

Hat, Judge; Booth, Judge; and Campbell, Chief Justice,. concur.

GRAmam, Judge, took no part in the decision of this case.  