Lorain Ave. Clinic v. Commissioner , 31 T.C. 141 ( 1958 )

The Lorain Avenue Clinic, Petitioner, v. Commissioner of Internal Revenue, Respondent

Lorain Ave. Clinic v. Commissioner

Docket No. 55754

United States Tax Court

31 T.C. 141; 1958 U.S. Tax Ct. LEXIS 56;

October 23, 1958, Filed

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Decision will be entered under Rule 50.

Held, petitioner was not organized and operated exclusively for charitable purposes and, therefore, it is not exempt from income taxes for the years 1945-1953, inclusive. Sec. 101 (6), I. R. C. 1939.

Wallace B. Heiser, Esq., for the petitioner.

James F. Shea, Esq., for the respondent.

Harron, Judge.

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HARRON

The Commissioner determined deficiencies in income tax for the years 1945-1953, inclusive, in the amounts set forth below. He determined, also, that for the year 1945 there are deficiencies in declared value excess-profits tax and excess profits tax in the respective amounts of $ 2,212.54 and $ 200.96, respectively, and that for 1952 an addition to tax is due under section 291 (a), 1939 Code, in the amount of $ 3,522.53. The deficiencies in income tax are as follows:

Year	Deficiencies
1945	$ 3,764.81
1946	5,245.67
1947	5,845.28
1948	6,550.84
1949	6,949.42
1950	9,434.11
1951	15,453.23
1952	14,090.12
1953	6,354.31

The parties have entered into stipulations which dispose of several issues raised by the pleadings. Petitioner has conceded or abandoned some issues. There is no issue remaining about the imposition of an addition to the tax for 1952 under section 291 (a). Effect will be given to all of the stipulations and concessions under a Rule 50 computation.

The remaining issues are as follows: The first question is whether petitioner was a corporation organized and operated exclusively for charitable purposes, none of whose net earnings inured to the benefit of any private shareholder or individual, so as to be exempt from tax under section 101 (6), 1939 Code, during each of the years 1945-1953, inclusive. This issue arises from the Commissioner's revocation in 1953 of a ruling which he made in 1941 that petitioner was a tax-exempt corporation. If it is held that petitioner did not qualify for exemption from tax during the years at issue, the second question is whether the Commissioner exceeded his discretionary power under section 3791 (b) in making retroactive to 1945 his revocation of the 1941 ruling, thereby determining that petitioner is liable for tax for 1945 and each succeeding year.

FINDINGS OF FACT.

On November 4, 1935, petitioner was organized under the laws of Ohio as a nonprofit corporation. It operated under the charter of a nonprofit corporation thereafter until July 1, 1954, its charter never having been revoked. On July 1, 1954, petitioner ceased operations, and those who were then active in petitioner's enterprise formed a partnership.

At all times during its existence, petitioner operated a clinic at 11420 Lorain Avenue, Cleveland, Ohio, where licensed doctors rendered medical services to individuals who came to the clinic.

The petitioner, which is sometimes referred to hereinafter as the Clinic, was organized by three doctors, licensed to practice medicine in Ohio, Dwight S. Spreng, Robert J. Dial, and Donald E. Dial.

Emory Dial, the father of Robert and Donald Dial and Elizabeth Dial Spreng (the wife of Dwight S. Spreng), constructed the building located at 11420 Lorain Avenue. The building was designed for doctors' offices. Emory Dial operated a clinic in the building for several years, but the operations were not profitable. When his sons and Dwight S. Spreng decided to organize petitioner, they were able to establish petitioner's operations in the same building which had been used by Emory Dial. Emory Dial was a physician.

Since petitioner was organized as a "corporation, not for profit," no stock was issued. Petitioner has been governed at all times by a board of trustees.

Petitioner's articles of incorporation set forth the purposes for which it was organized. Its bylaws, which are brief, set forth provisions for holding regular and special meetings of the trustees. It has a "Code of Regulations" which, as amended, constitute the effective bylaws and rules for organization and operations. The Code of Regulations provides that there shall be not less than three trustees; that the officers of the corporation shall be a president, vice president, secretary, treasurer, and at the discretion of the board of trustees, a chairman of the board of trustees and a general manager. The president and the chairman of the board of trustees shall be chosen from among the trustees. The general manager, if there is one, shall have general charge and control of the business and property of the corporation, and shall be subject to the direction and control of the board of trustees. Compensation of officers shall be fixed by the trustees. The officers shall be elected, and vacancies in offices filled, by the trustees. The Code of Regulations provides, with respect to the trustees, that every trustee shall be a "member" of the corporation; that the trustees shall be elected by the members; and that the board of trustees "shall have all powers, in the conduct, control, and management of the business and property of the corporation, which shall be consistent with law, the Articles, and these regulations."

With respect to "members," the Code of Regulations provides that "[any] physician licensed to practice medicine in the State of Ohio may be elected a member of this corporation by a majority vote of the Board of Trustees of the Corporation"; that "membership of any member may be terminated at any time by his voluntary withdrawal, his death, or by unanimous vote of other members, with or without cause assigned"; and that "[the] Board of Trustees may contract with themselves or any other members or non-members of the Corporation to act as physicians to care for patients referred by the corporation."

The Code of Regulations provided that the treasurer of petitioner should keep complete and accurate accounts of all of petitioner's funds.

Nowhere in the bylaws and Code of Regulations is there any provision relating to a fund for the conduct of operations, or relating to trust funds, or relating to donations and gifts, or relating to rendering services on the basis of charity or free of charge. The articles of incorporation designate petitioner as "a corporation, not for profit," and they authorize the solicitation, receipt, and expenditure of donations, bequests, or legacies.

Petitioner never received any bequests or legacies of money, and except for instances where earnings of petitioner were left in petitioner's treasury by its trustees and designated "donations" on petitioner's books, petitioner has never received any substantial donations from persons not associated with it as a member, as is more fully explained hereinafter.

In its articles of incorporation, the purposes for which petitioner was formed were stated to be the following:

(a) To own, manage, and/or conduct hospitals, dispensaries, or clinics for the reception and care of patients and for their medical and hygienic treatment;

(b) To buy, sell, compound, manufacture, trade in and/or give away medicines, drugs, bandages, splints, dressings, medical, and/or surgical supplies;

(c) To engage in research in any branch of medicine and/or in any other science;

(d) To educate and/or train physicians, nurses, and/or technicians;

(e) To own, buy, rent, lease, and/or manage real estate convenient or necessary to carry out any of the aforesaid purposes;

(f) To solicit, receive, and/or expend donations, bequests and/or legacies for any purpose aforementioned or related to the purposes hereinbefore mentioned;

(g) And to do any other thing convenient or necessary to carry out any of the aforementioned purposes.

The original trustees of petitioner were Dwight S. Spreng, Robert J. Dial, and Donald E. Dial. Spreng and Robert Dial served continuously as trustees through 1953 and until the petitioner corporation ended its operation of the Lorain Avenue Clinic as of July 1, 1954. Donald Dial ceased being a trustee at the end of 1938, when he moved to New York. He was succeeded by Spreng's wife, Elizabeth Dial Spreng, who was a trustee continuously until July 1, 1954. Elizabeth Dial Spreng was a sister of Robert and Donald Dial, and, also, she was a physician.

At all times Dwight Spreng has been petitioner's president, and Robert Dial has been its vice president and treasurer. The office of secretary has always been held by an employee who was not a member of petitioner.

Dwight Spreng and Robert Dial have at all times possessed and exercised full control over petitioner's operations.

Petitioner never has owned or operated a hospital; it has not engaged in research in any branch of medicine or science, and it has not engaged in the education or training of physicians, nurses, or technicians.

Petitioner has occupied, at all times material, a 3-story brick building, 120 feet by 90 feet, located at 11420 Lorain Avenue in Cleveland. Title to the building is in the name of the petitioner. The record does not disclose how it acquired title. The title to all of the furniture and fixtures in the building also is in the name of petitioner.

The equipment owned by petitioner included a 200-milliampere X-ray machine, a fully equipped laboratory, an operating room adequate for everything except the more important major operations, 2 beds, an electrocardiograph, basal metabolism equipment, and fluoroscopes. Petitioner's facilities included doctors' offices and examining rooms, and offices for dentists. Doctors associated with petitioner sometimes treated as many as 150 patients a day.

Petitioner at all times has had a number of employees, not including the doctors, consisting of nurses, nurses aids, laboratory technicians, X-ray technicians, assistant technicians, secretaries, bookkeepers, receptionists, a custodian, and cleaning women.

Dwight S. Spreng, as president, was at all times the manager of petitioner's operations. Such duties required one-third to one-half of his time. He was paid a salary for his services as manager. The amount each year was computed on the basis of 10 per cent of the sum set aside for the payment of salaries to the physicians who were associated with petitioner under arrangements described hereinafter. Dwight Spreng is the only person connected with petitioner who served as manager, or who received any compensation for rendering managerial services. The doctors who were associated with petitioner received compensation for their services under arrangements described hereinafter. During the 9 years, 1945-1953, inclusive, Spreng was paid the total amount of $ 69,700.55 for his managerial services. The following schedule shows the amount petitioner paid him in each of the years involved for such services:

Year	Amount
1945	$ 5,580.91
1946	6,172.75
1947	5,255.96
1948	5,888.61
1949	6,211.20
1950	8,154.88
1951	9,967.17
1952	12,765.90
1953	9,703.17
Total	69,700.55

As stated above, petitioner's Code of Regulations provided that the trustees could enter into contracts with themselves, as physicians, and with other physicians, who were members or nonmembers, under which a physician would agree to serve as a physician at the Clinic. Such agreements between petitioner, the Lorain Avenue Clinic, and doctors and dentists were entered into from time to time, and the doctors who so contracted with petitioner were the doctors and dentists who rendered services to the people who came to the Clinic. The contracts were executed for the Clinic usually by Dwight S. Spreng. Among other things the agreement stated the method of paying the doctor for his services. This method was changed in 1945. During the years 1945-1953, inclusive, the three trustees rendered medical services to patients and they served under the above-mentioned contracts. At any one time, usually there were three other doctors under contract who rendered services on a full-time basis. During the period 1945-1953, inclusive, there were altogether 12 doctors who entered into contracts with petitioner, exclusive of Dwight Spreng, Elizabeth Spreng, Robert Dial, and Donald Dial. All of the 12 doctors were not associated with petitioner at the same time, as is indicated above. Contracts with dentists differed from those with doctors in that they were essentially percentage rental agreements under which the Clinic collected the dentists' fees and retained a percentage thereof for rental of the space used by the dentists. The terms of the contracts with physicians are set forth hereinafter.

At all times, from its organization through 1953, petitioner was operated as a clinic where the doctors with whom petitioner had entered into contracts, including Dwight and Elizabeth Spreng, and Robert and Donald Dial, rendered general medical services, and dentists practiced dentistry. Those who came to the Clinic paid fees, on the whole. The individual doctors charged fees and the Clinic collected them. Each doctor, under his contract, assigned his fees to the Clinic. The doctors associated with petitioner agreed, in their contracts, "to care for patients needing medical attention regardless of their ability to pay therefor." However, no record was kept of the number of persons who received medical attention free of charge, or for nominal charges, each year. An estimate was made by Dwight Spreng at the trial of this case of the percentage of persons who received free treatment, and his estimate was 2 to 5 per cent. The record does not show the number or percentage of patients who paid nominal fees or less than the usual fees fixed by the doctors.

On June 20, 1941, Dwight S. Spreng filed an application for petitioner with the Commissioner for exemption from taxation under the Internal Revenue Code and the Social Security Act. He attached his affidavit to the application, together with a copy, each, of the articles of incorporation, bylaws, and a financial statement as of December 31, 1941. Up to this time, petitioner had not filed Federal income tax returns for any year.

The affidavit of Dwight Spreng stated, inter alia, as follows:

The Lorain Avenue Clinic is a corporation chartered under the laws of Ohio as a corporation not for profit; that the purposes of the said corporation are as stated in the attached Articles of Incorporation; that the said corporation does not engage in propaganda or otherwise make any effort to influence legislation; that the actual activities of the corporation consist of making agreements with physicians and dentists licensed to practice in the state of Ohio under which such physicians and dentists agree to care for any and all patients presenting themselves for care, without regard to the financial ability of said patients to pay for their medical or dental care; that the physicians and dentists further agree to devote their full time and energy to caring for such patients. If the physician or dentist caring for the patient believes that the patient can pay something for his medical care, a charge is made by the said physician or dentist and such charge is assigned, by written instrument, to The Lorain Avenue Clinic for collection if such collection can be made without undue hardship to the patient. The physician in exchange for the above agreements is paid a monthly stipend in dollars for his own use and in addition is furnished all necessary medical supplies and technical assistants, which supplies and assistants are paid for by the corporation. The corporation retains no direction nor control over the professional performance of the associated physicians and dentists. The only relationship is the financial one. Of patients cared for, approximately 9% are taken care of without charges of any kind. The remaining patients are charged various sums ranging from minimum amounts to full compensation, according to the scale of charges by private practitioners in the community. No definite figures have been kept as to what full charges would amount to, but it is estimated that less than 20% of the total charges would represent full payment, the other 80% representing various percentages of full payment. In most cases additional services rendered included many services ordinarily rendered in hospitals for which the average physician in the community is in no position to furnish, or can furnish only at much higher costs. In other words the patients are getting a high grade of medical service in the community, the additional expense thereof being borne by the clinic. During the last five years of the income of the clinic $ 232,443.61 has been received from patients and $ 42,490.28 has been donations of various sums from various individuals for the general work of the clinic. The income received has been almost entirely spent for the operation of the clinic, in fact, operation of the clinic has been hampered by inadequate income. No income at any time has been credited to surplus nor has any income, nor may it in the future, inure to the benefit of any individual. No individual has a personal or private interest in the activities of the corporation nor can any individual profit from the activities of the corporation. The stipend paid to physicians who are associated with the clinic is not in excess of the net income which such physicians could earn in independent private practice and no profits are divided in the form of salaries or compensation to the associated physicians.

The reference to donations of $ 42,490.28, in the affidavit, was somewhat ambiguous, if not misleading, as is shown hereafter, because most of the above-stated sum represented receipts left in the treasury of petitioner by Dwight Spreng, R. J. Dial, and D. E. Dial, and only about $ 91.75 had been given to petitioner by unnamed outsiders.

Under a letter dated July 21, 1941, the Commissioner advised petitioner, in material part, as follows:

It is the opinion of this office, based upon the evidence presented, that you are exempt from Federal income tax under the provisions of section 101 (6) of the Internal Revenue Code and corresponding provisions of prior revenue acts.

Accordingly, you will not be required to file returns of income unless you change the character of your organization, the purposes for which you were organized, or your method of operation. Any such changes should be reported immediately to the collector of internal revenue for your district in order that their effect upon your exempt status may be determined.

* * * *

Furthermore, under substantially identical authority contained in sections 1426 and 1607 of the Code and/or corresponding provisions of the Social Security Act, the employment taxes imposed by said statutes are not applicable to remuneration for services performed in your employ so long as you meet the conditions prescribed above for retention of an exempt status for income tax purposes.

Contributions made to you are deductible by the donors in arriving at their taxable net income in the manner and to the extent provided by section 23 (o) and (q) of the Internal Revenue Code and corresponding provisions of prior revenue acts.

Bequests, legacies, devises or transfers, to or for your use are deductible in arriving at the value of the net estate of a decedent for estate tax purposes in the manner and to the extent provided by sections 812 (d) and 861 (a) (3) of the Code and/or corresponding provisions of prior revenue acts. Gifts of property to you are deductible in computing net gifts for gift tax purposes in the manner and to the extent provided in section 1004 (a) (2) (B) and 1004 (b) (2) and (3) of the Code and/or corresponding provisions of prior revenue acts.

The collector of internal revenue for your district is being advised of this action.

After receiving the above ruling, petitioner did not file tax returns, but it filed the required information returns, Form 990. They were filed with the collector for the eighteenth district of Ohio at Cleveland.

After petitioner was organized in 1935, the form of contract with doctors which was entered into by petitioner provided, in general, as follows: That the physician agreed to devote his entire time to the practice of medicine, presumably at the Clinic; that the Clinic would furnish to the contracting doctor offices, necessary supplies and equipment for the practice of medicine, and all professional expenses except that the doctor would furnish and maintain at his own expense an automobile for his own use. In case of any disagreement as to what constituted a professional expense, the principle to be followed would be that a disputed item would be considered a professional expense if "in the opinion of the Income Tax Division of the United States Treasury Department, it is deductible from income as a professional expense"; that the doctor agreed to assign to the Clinic all accounts for services rendered and to assist the Clinic in collecting such accounts. The agreement also provided for the payment to the contracting doctor of such sum per month or per year as would be mutually agreed upon, but that until there was further agreement the annual compensation was stated to be a certain amount per year. For example, in the contract between the Clinic and Dwight S. Spreng dated November 16, 1935, it was provided that his annual compensation would be $ 10,000 per year. The first contracts which were made by the petitioner with physicians specified an annual salary, or compensation, for the physicians in a stated amount.

In 1945, petitioner adopted a different and new system for paying compensation to all of the doctors who rendered medical services at the Clinic, including the trustees. This method of payment is described as a point system. With the change in the arrangements for paying compensation to the doctors for their services, a new form of agreement was used by the petitioner. The new form took the place of any existing agreement between petitioner and one of the trustees. The agreements used in and after 1945 provided, in general, as follows: The contracting doctor agreed to devote his entire time to the practice of medicine (presumably at the Clinic) and to engage in no other business enterprises of any kind without the consent of the Clinic; the Clinic agreed to furnish the doctor offices, supplies, equipment, and professional expenses, and the doctor agreed to maintain and operate an automobile at his own expense for his own use; the doctor agreed to assign to the Clinic all his charges for professional services rendered and to assist the Clinic in collecting accounts; the Clinic agreed to set up a retirement income program for the benefit of the contracting doctor, members, and employees of the Clinic; the agreement could be terminated by either party upon giving 60 days' notice; and, for the first time, the agreement form provided that the contracting doctor agreed to care for patients needing medical attention regardless of their ability to pay therefor. The new contracts provided that petitioner would pay a salary to the contracting doctor on the following basis:

A. The Clinic agrees that it will at the beginning of each calendar quarter set aside a sum of money as total salary for all of the physicians associated with The Clinic to be divided among them as salary in ratio accordance with their point score on the following plan. To the extent that the income of The Clinic is represented by an increase in accounts receivable from patients, part of the sum set aside for distribution may be in the form of interest bearing debentures of The Clinic.

B. There will be assigned a total of 300 points to be divided among the doctors in proportion to the charges made by him for professional services and assigned to The Clinic during the previous calendar quarter.

C. A further 300 points will be divided among the doctors in proportion to the number of visits to or by patients made by or to the physician during the previous calendar quarter.

D. A further 250 points will be divided among the doctors as a credit for new patients seen during the fifth preceding calendar quarter in proportion to the charges made against such new patients during the first year after their registration; for this purpose, the total charges are to be credited to the first doctor seeing the new patient; new patients being those who have not previously been registered by The Clinic either as individuals or as members of a family group, some individuals of which are registered with The Clinic.

E. A further 100 points will be divided among those physicians not limiting their practice to surgery or some of its branches in proportion to the sum total of the previous 850 points.

F. A further 50 points will be set aside for a bonus fund to be distributed by the President of The Clinic to the physician or physicians who, in his opinion and at his sole discretion, have contributed the most in proportion to their income from The Clinic to build up the welfare of The Clinic, but no portion of said bonus fund shall be paid to or on behalf of the President of The Clinic himself.

G. Any disputes or uncertainties of the computation of points shall be settled by the Trustees of The Lorain Avenue Clinic and their decision shall be final.

H. The salary to be paid to each physician for the current quarter shall be computed as so many dollars per point of the point score credited to him computed as above.

The point system was revised from time to time, but the above-quoted provisions were in substance followed during the years 1945-1953, inclusive. The amount set aside to pay doctors' salaries was computed by the trustees quarterly, and it was customary to set aside a very large proportion of net receipts after all expenses other than salaries. Division of the sum set aside was made in accordance with the point system described above, and under this system none of the doctors received the same annual compensation for his services.

On March 31, 1947, the above-described arrangements for compensating the contracting doctors for their services was modified by agreement which provided, in part, as follows:

5. The Clinic agrees that it will from time to time set aside and appropriate certain sums for the payment of salaries to the Physicians associated with The Clinic. Such sums so set aside and appropriated shall be divided among the physicians associated with The Clinic in such ratio as the Physicians may agree among themselves; however, should the Physicians be unable to reach an agreement among themselves, then the Trustees of The Clinic will divide such sums in such manner as seems to the said Trustees equitable.

Since each of the trustees entered into a contract with petitioner to render medical services to persons who came to the Clinic, they received compensation for their services under the so-called point system. The amounts paid to Dwight S. Spreng for his managerial services were in addition to his annual compensation for professional services.

The employment contract which was adopted in 1945, referred to above, was amended on January 3, 1947, by the addition of a termination benefit clause providing benefits of $ 500 per month based upon the years of service with the petitioner. That is to say, the contract with each of the doctors was modified to provide that if the employment contract was terminated for any reason other than death or permanent disability or retirement because of age, there would be paid to the physician a termination salary of $ 500 per month for the number of months set forth in a schedule in the supplemental agreements. Such payments would be made monthly or could be paid in a lump sum with a discount computed at the rate of 3 per cent per annum. The agreements of January 3, 1947, constituted the retirement system which was referred to in the new employment contracts which were adopted in 1945.

From the time of its incorporation through the years involved, petitioner's principal source of income was the charges made by the associated physicians and dentists, who assigned their charges to petitioner. The petitioner did not establish the rates of charges but, rather, the charges were actually made by the physicians and dentists for their services, and petitioner had no control over the physicians and dentists in either the matter of the charges which they made, or in their practice of their professions. Petitioner established a rigorous collection program to collect fees assigned to it by the doctors and dentists.

During the years 1945-1953, inclusive, petitioner received rent from a piece of property which it purchased in 1935 from Elizabeth Spreng. During the same years petitioner's gross receipts from doctors' fees ranged from close to $ 140,000 to about $ 284,750. During the same years petitioner retained out of its net receipts from $ 1,300 to $ 10,600, but, otherwise, credited to its doctors the major part of its net receipts after all expenses. It appears that the doctors did not draw out in each year the entire amounts which were credited to them, but, nevertheless, they received credits for the major part of net receipts after all expenses under the so-called point system. The following schedule sets forth for the years 1945-1953, inclusive, petitioner's gross receipts, expenses before doctors' compensation, net receipts after all expenses except doctors' compensation, the total amounts credited to the doctors, and the net profit or loss:

				Total exp.,
Year	Professional	Other income	Total gross	depr. exclusive
	income		income	of
				doctors' salaries
1945	$ 139,973.89	$ 9,704.00	$ 149,677.89	$ 110,098.92
1946	149,054.05	8,017.43	157,071.48	113,869.63
1947	145,880.10	6,812.07	152,692.17	116,990.59
1948	155,373.96	6,823.52	162,197.48	122,048.81
1949	160,547.06	6,937.79	167,484.85	124,243.07
1950	196,133.72	6,832.46	202,966.18	142,802.20
1951	215,838.94	9,329.75	225,168.69	148,015.10
1952	268,747.27	8,133.95	276,881.22	175,173.78
1953	284,751.41	6,557.35	291,308.76	217,157.21

	Net receipts after
Year	expenses except	Total credits	Net profit
	doctors' compensation	to doctors 1	(or loss)
1945	$ 39,578.97	$ 37,381.25	$ 2,197.72
1946	43,201.85	40,770.00	2,431.85
1947	35,701.58	33,202.59	2,498.99
1948	40,148.67	35,946.46	4,202.21
1949	43,241.78	41,900.00	1,341.78
1950	60,163.98	55,750.00	4,413,98
1951	77,153.59	66,510.59	10,643.00
1952	101,707.45	92,115.82	9,591.63
1953	74,151.55	82,998.37	(8,846.82)

The petitioner was required to file information returns each year reporting salaries which it paid (as other corporations are required to do) on Form 1099. On these forms petitioner reported the amounts of compensation which were withdrawn by each doctor during each year from the account to which his compensation, under the point system, was credited. The following schedule shows the amounts of salary which were withdrawn each year by the various physicians who were under contract in each year, according to the Forms 1099 filed by petitioner:

Doctors' Salaries Withdrawn 1
Reported on Form 1099
Doctor's name	1945	1946	1947	1948	1949
D. S. Spreng	$ 10,453.71	$ 7,173.62	$ 11,081.80	$ 14,880.02	$ 11,607.09
Eliz. Spreng	156.25			1,163.68	2,885.71
Robert Dial	4,387.11	2,823.40	3,861.60	6,713.57	8,890.16
Ann Wollack
J. L. Burke			6,680.03	11,934.63	16,746.35
N. S. Manica					2,631.69
M. J. Barker			6,341.24	8,484.78	9,786.34
Thos. McLin
A. J. Lelbach
P. W. Edgecombe
E. W. Gessler	6,605.43	6,690.93	2,845.37
W. S. Skaryd	75.00	5,350.16
J. M. Strong		4,178.34
A. E. Shaw	5,100.00	5,682.32
R. V. Beltz	1,750.00
Total	28,527.50	31,898.77	30,810.04	43,176.68	52,547.34

Doctor's name	1950	1951	1952	1953
D. S. Spreng	$ 16,149.34	$ 17,495.25	$ 19,651.76	$ 18,173.85
Eliz. Spreng	1,702.25	2,887.70	3,648.04	2,905.28
Robert Dial	13,661.79	10,789.07	11,563.81	10,884.75
Ann Wollack		1,000.00	10,100.26	13,674.82
J. L. Burke	17,988.56	20,223.10	23,639.60	18,407.64
N. S. Manica	9,704.93	18,011.77	25,237.63	18,809.60
M. J. Barker	10,401.35	5,095.99
Thos. McLin				6,250.09
A. J. Lelbach				1,395.00
P. W. Edgecombe				3,513.75
E. W. Gessler
W. S. Skaryd
J. M. Strong
A. E. Shaw
R. V. Beltz
Total	69,608.22	75,502.88	93,841.10	94,059.78

The amount of the sum which was set aside by petitioner each year to be available for the compensation of petitioner's trustees and associated physicians depended upon the amounts of the fees charged and collected as well as the extent of the expenses of operating the Clinic.

On April 1, 1954, all of the trustees and doctors then associated with petitioner, to wit, 8, including the 3 trustees -- Dwight S. Spreng, Robert J. Dial, and Elizabeth D. Spreng -- entered into an agreement which modified to some extent the point system which was first inaugurated on September 22, 1945. The modification constituted, in one instance, an upgrading of the points to be set aside for various categories. In general, the "points score" was stated to be as follows: The sum set aside by the Clinic was to be divided as salary between the doctors (including the 3 trustees) on the point basis under which a total of 450 points was to be divided among the doctors in proportion to the charges made by them for professional services and assigned to the Clinic during the previous quarter (no change from the 1945 arrangement except that 450 points was an increase and took the place of 300 points); a further 250 points (instead of 300 points) was to be divided among the doctors in proportion to the number of visits to or by patients made by or to the physician during the previous calendar quarter; a further 200 points (instead of 250 points) was to be divided among the doctors as credits for new patients seen during the calendar quarter in proportion to the charges made against new patients during the first year after their registration, and for this purpose, the total charges are to be credited to the first doctor seeing the new patient, new patients being those who have not been previously registered by the Clinic either as individuals or as members of a family group, some individuals of which had been registered with the Clinic; a further 100 points (same as in 1945) were to be divided among the physicians in proportion to the number of calendar quarters during each of which they had been associated with the Clinic and in each of which quarters they had made charges aggregating not less than $ 200, and in each of which they had assigned to the Clinic accounts aggregating not less than $ 200. If the point score of any one or more but not all of the physicians devoting their full time to the services of the Clinic provided him with a salary of less than $ 650 per month (if he had been provided a living suite) or less than $ 700 per month (if he had had to provide his own living quarters) then the salaries were to be arbitrarily fixed at a minimum of $ 650 or $ 700 per month. Dwight Spreng was designated as senior physician.

In 1945 Dwight Spreng and Robert Dial had an accumulation of credits in their salary accounts which had been accumulated over a period of years. They advanced some of such funds to petitioner, and the petitioner used the funds to pay off a mortgage held by Prudential Life Insurance Company. The funds so advanced to petitioner were carried as accounts payable by the petitioner on its books. In 1945 these accounts payable, in the amount of $ 120,000, were converted to bonded indebtedness of petitioner who issued its own bonds to Dwight Spreng and Robert Dial, so that they became secured creditors. Bonds were issued to them in units of $ 1,000 each. Spreng received 65 bonds in the face amount of $ 65,000, and Robert Dial received 55 bonds in the face amount of $ 55,000. The term of the bonds was 24 years, to 1969. The bonds further provided for annual payments of 7 1/2 per cent of the face amount, 7 per cent to be applied as interest and 1/2 of 1 per cent to be applied to principal. Dwight Spreng assigned 21 bonds to his children and 1 bond to a grandchild. The records of petitioner show that interest payments were made on the bonds by petitioner in the amounts set forth below, totaling $ 74,444.94, and that the interest was paid to Spreng and Dial, or to their respective assignees:

Year	Amount
1945	$ 7,493.56
1946	8,759.32
1947	8,354.72
1948	8,248.46
1949	8,196.11
1950	8,136.99
1951	8,166.08
1952	8,006.63
1953	9,083.07
Total	74,444.94

In 1935 when Dwight Spreng agreed to organize the Clinic, he caused to be transferred to it a property held in the name of his wife, Elizabeth D. Spreng, located at 10120 Lorain Avenue. This was an improved property containing 2 stores and 2 doctors' suites. Spreng practiced at this location until he moved to the Clinic. In 1946 when it was decided to remodel the building in which petitioner carried on its activities, located at 11420 Lorain Avenue, petitioner needed money for the work. Petitioner obtained $ 22,000 for its remodeling work by conveying the property at 10120 Lorain Avenue to Spreng's wife, Elizabeth D. Spreng, and the wife of Robert Dial for a purchase price of $ 22,000, which was the value at which the property was carried on petitioner's books. Mrs. Spreng and Mrs. Dial immediately thereafter were able to borrow $ 20,000 for which they gave a mortgage on the 10120 Lorain Avenue property. They paid the $ 20,000 so obtained to petitioner.

Reference has been made above to the retirement plan instituted by petitioner in 1945 for the physicians and dentists under contracts with petitioner. Petitioner paid 90 or 95 per cent of the cost of the plan. During the years 1945-1953, inclusive, $ 164,424.49 was paid into the retirement fund under the plan. The amounts paid into the fund each year were as follows:

Year	Amount
1945	$ 12,874.30
1946	19,608.32
1947	18,225.94
1948	18,898.80
1949	18,659.04
1950	19,229.91
1951	18,574.18
1952	19,177.00
1953	19,177.00
Total	164,424.49

In the earlier years of the Clinic's business, if income was insufficient to meet salaries and expenses, advances were made to petitioner by Dwight Spreng, Robert Dial, and Donald Dial out of credits to their salary accounts. In some instances money was made available to petitioner by their not withdrawing accrued salary. Amounts advanced to petitioner by Dwight Spreng and Robert and Donald Dial were usually in the same amount, and in certain instances were entered on the books of petitioner as "donations." According to petitioner's books, they made such "donations" to petitioner in 1936, 1937, 1940, and 1946 in the total amount of $ 43,418.53, as follows:

Year	Trustees	Amounts
1936	D. S. Spreng	$ 5,000.00
1936	R. J. Dial	5,000.00
1936	D. E. Dial	5,000.00
1937	D. S. Spreng	5,000.00
1937	R. J. Dial	5,000.00
1937	D. E. Dial	5,000.00
1940	D. S. Spreng	4,139.51
1940	R. J. Dial	4,139.51
1940	D. E. Dial	4,139.51
1946	D. S. Spreng	500.00
1946	R. J. Dial	500.00
		43,418.53

Petitioner did not at any time solicit gifts from the community or any group, and it did not receive any bequests or legacies, as far as the record before us shows. On its books, petitioner carried an account called "Donations" in which a few very small gifts were entered, and from the time of petitioner's organization through 1953, these aggregated only $ 305.62. During the years here involved, 1945 through 1953, such small gifts totaled $ 183.78. The following schedule shows the amounts of gifts from persons who were not connected with petitioner's organization during the entire period 1935 through 1953:

Dates	Donors	Amounts
Aug. 12, 1938	Unknown	$ 10.00
Aug. 16, 1938	Unknown	25.00
Oct. 18, 1938	Unknown	36.75
Apr. 9, 1941	Unknown	20.00
Dec. 31, 1941	Lang Furniture Co	30.00
Feb. 13, 1948	D. Denton	50.00
Apr. 6, 1950	Unknown	5.00
Apr. 13, 1950	For sales tax stamps	43.94
May 5, 1950	For sales tax stamps	41.13
Dec. 6, 1951	Unknown	7.81
Apr. 4, 1952	M. Wade	8.65
Aug. 4, 1953	P. Ventresco	.13
Aug. 6, 1953	For sales tax stamps	27.21
		305.62

Beginning sometime in 1949, respondent's agents began an examination of the books and records of petitioner. Under letter dated January 22, 1953, respondent informed the Clinic that its ruling of 1941 was revoked. The letter is set forth below:

Jan. 22, 1953

The Lorain Avenue Clinic

11420 Lorain Avenue

Cleveland 11, Ohio

Gentlemen:

Reference is made to Bureau ruling of July 21, 1941, in which it was held that you are entitled to exemption from Federal income tax under the provisions of section 101 (6) of the Internal Revenue Code and corresponding provisions of prior revenue acts.

An examination of your books and records for the years 1946 to 1950 discloses that you are and have been operated for the benefit of and personal advantage to private individuals and you are not therefore organized and operated exclusively for any one or more of the purposes specified in section 101 (6) of the Code.

Accordingly, Bureau ruling of July 21, 1941, is hereby revoked and you are required to file Federal income tax returns on Form 1120 for all the years of your existence.

The Internal Revenue Agent in Charge and the Collector of Internal Revenue for your district are being advised of this action.

Very truly yours,

Norman A. Sugarman,

Assistant Commissioner

By (signed) R. S. Gaylor

Head, Special Technical Services Division

Although respondent advised petitioner, in his letter of January 22, 1953, that petitioner was required to file income tax returns for all the years of its existence, he did not determine deficiencies for all of such years, but, rather, he determined deficiencies for the year 1953, and for the 8 preceding years back to and including 1945. Respondent mailed petitioner a deficiency notice on October 7, 1954, in which he determined the deficiencies for the 9 years, 1945-1953. He based his determinations on reports of his examining agents dated May 23, 1952, May 13, 1953, and May 21, 1954.

After petitioner received respondent's letter of January 22, 1953, petitioner filed protests on April 2, 1953, and July 15, 1953. Conferences were held in 1953 and 1954 with petitioner to consider the protests, but respondent adhered to his determination that petitioner was not exempt from tax during the years 1945-1953. Petitioner filed a blank corporation income tax return, Form 1120, for 1953 under protest. Petitioner did not file Form 1120 returns for any of the other years, 1945-1952, inclusive.

As of July 1, 1954, petitioner ended its operations. Thereupon, Dwight S. Spreng, Robert Dial, Elizabeth Dial Spreng, and the other physicians and dentists who had been associated with petitioner, formed a partnership and petitioner leased its buildings and equipment to the partners.

Although petitioner was organized under the Ohio statutes as a "corporation not for profit," its purposes, as stated in its articles of incorporation, did not dedicate petitioner to exclusively charitable operations. The stated purposes for which petitioner was organized, as set forth in its articles of incorporation, did not include receiving and caring for charity patients, or giving medical treatment to people on a basis of charity, or free of charge, or for charges fixed on the basis of exclusively charitable operations. Although petitioner, under its articles of incorporation, could solicit donations, legacies, or bequests, petitioner did not make such solicitation; and, also, petitioner did not give away drugs, medicines, or medical supplies. Petitioner did not fix the charges to be made to patients but left the matter of determining the amounts of charges to be collected to the associated physicians. Petitioner's president, Dwight S. Spreng, did not know upon what basis the individual physicians fixed their charges. Petitioner did not maintain contacts with any charitable organization or association.

Petitioner was not operated exclusively for charitable purposes, or for any of the other purposes set forth in section 101 (6) during any of the years 1945-1953, inclusive, and during each of those years petitioner was operated for the benefit and advantage of private individuals, and during each of those years part of petitioner's earnings inured to the benefit of private individuals.

The parties are agreed that petitioner is entitled to net operating loss deductions of $ 33,036.74 for 1952, and $ 19,600.34 for 1953.

The stipulated facts which have not been set forth herein are found as stipulated.

OPINION.

Whether or not petitioner is a corporation the income of which is taxable for each of the years 1945-1953, inclusive, depends on (1) whether petitioner qualified for exemption from tax during that 9-year period under the provisions of section 101(6), 1939 Code, ¹ and (2) whether respondent abused his discretion under section 3791 (b) ² in retroactively holding petitioner taxable for the 9-year period upon his revocation on January 22, 1953, of his ruling of July 21, 1941, under which he held that petitioner was entitled to exemption from tax under section 101 (6).

In order to qualify for exemption from tax during the years involved, petitioner has the burden of proving that it was (a) both organized and operated exclusively for charitable purposes (or for any of the other purposes) specified in section 101 (6), and (b) that no part of its net earnings for each of the taxable years inured to the benefit of any private individual.

Petitioner claims to have been organized exclusively for charitable purposes and it denies that any of its net earnings served to benefit any individual. Petitioner contends, further, that the dissolution of petitioner will not result in gain to any individual. It argues that the provisions of section 101 (6) should be construed broadly and liberally in its favor.

It is well established that "[a] statute creating an exemption must be strictly construed and any doubt must be resolved in favor of the taxing power." Associated Industries of Cleveland, 7 T.C. 1449">7 T. C. 1449, 1464; American Automobile Association, 19 T. C. 1146, 1160. Petitioner errs in its argument to the contrary.

In applying the provisions of section 101 (6), one question which must be considered is what is meant by charitable purposes. The statute does not define "charitable purposes." The Commissioner, in Regulations 111, section 29.101 (6), states that corporations organized and operated exclusively for charitable purposes are organizations for the relief of the poor and indigent. This agrees with the meaning in law of charity which is, generally, a trust for the relief of poverty and for other purposes beneficial to the community. Special Commissioners v. Pemsel, [1891] A. C. 531, 3 Great Britain Tax Cases 53, 96. ³Congress has used the term "charitable purposes" in its generally accepted legal meaning, and, also, there is in section 101 (6) a requirement that no part of the net earnings of a corporation claiming tax exemption may inure to the benefit of any private shareholder or individual. In considering the first question, the evidence has been examined thoroughly to ascertain whether petitioner was both organized and operated exclusively for charitable purposes and whether the above-stated requirement was met.

Petitioner has failed to prove that it was organized and operated exclusively for any of the other purposes specified in section 101 (6). The evidence before us makes it clear that petitioner was not operated exclusively for either scientific or educational purposes. The argument that petitioner contributed to the "education of young doctors" associated with it does not help petitioner in its effort to qualify for exemption from tax. Young doctors who are associated with more experienced doctors in the private practice of medicine enlarge their knowledge from such association, of course, as do young lawyers employed by private law firms. Putting aside as lacking merit petitioner's claims that it was operated for some of the other purposes enumerated in section 101 (6), the question is limited to whether petitioner was a charitable corporation.

With respect to the organization of petitioner, it is noted that the fact that petitioner received its charter as a corporation not for profit, and that no stock was issued, is not controlling, and does not foreclose consideration of other factors because petitioner must establish, inter alia, that it was operated exclusively for charitable purposes. Cummins-Collins Foundation, 15 T. C. 613; Marie and Alex Manoogian Fund, 24 T. C. 412; Journal of Accountancy, Inc., 16 B. T. A. 1260, 1263; Better Business Bureau v. United States, 326 U.S. 279">326 U.S. 279, 285; United States v. Community Services, 189 F.2d 421">189 F. 2d 421, certiorari denied 342 U.S. 932">342 U.S. 932. Petitioner's articles of incorporation permitted it to solicit and receive donations and bequests and to give away medicines and medical supplies, but the articles did not restrict petitioner to carry on its operations for charitable purposes, and the evidence shows that petitioner was not operated in such a way as to carry out some of the purposes permitted by its articles. Petitioner did not solicit or receive legacies and bequests and it received from outsiders gifts that were so small as to be scarcely noticeable. We go on, therefore, to consideration of the other requirements of section 101 (6).

The crux of the question whether petitioner was a tax-exempt corporation under section 101 (6) is whether petitioner was operated exclusively for charitable purposes, and whether any part of its net earnings inured to the benefit of any private individual. Upon consideration of all of the evidence, our conclusion is that during the years 1945-1953, inclusive, part, at least, of petitioner's net earnings inured to the benefit of private individuals, and petitioner was not operated exclusively for charitable purposes. Briefly this conclusion is reached because of the following: The petitioner's receipts were derived from the services of a group of physicians and dentists who were, for all practical purposes, associated together in the practice of medicine and dentistry through the contracts which were executed with petitioner under which the physicians and dentists were free to charge such fees as they individually determined. The associated doctors and dentists contributed to all of the costs and expenses of their activities which were carried on on premises owned by petitioner by turning over all their fees to petitioner, which petitioner collected. Such occasional instances as there were (or may have been) of giving of medical services and treatment to people by the individual doctors "regardless of their ability to pay therefor" were no more than any doctor in private practice may do under the ethics of the medical profession. Furthermore, the petitioner failed to produce records of the number of patients who received medical treatment free of charge or for nominal charges during each of the taxable years, and petitioner's chief witness admitted that patients in substantial numbers were charged fees. The evidence as a whole shows that it was the usual practice of the doctors associated with petitioner to charge fees and for petitioner to collect such fees, and it was the exceptional or infrequent instance where no fee or a nominal fee was charged. No attempt was made by petitioner to show that the associated dentists gave dental treatment and care free of charge, or for nominal charges. The financial arrangements under the agreements with the doctors, the point system which was adopted in 1945, provided an incentive to the doctors to charge fees and assist petitioner in the collection of them. Petitioner maintained a retirement fund for the benefit of the associated doctors and paid into that fund, out of earnings, a large per cent of the cost of the plan. Substantially all of petitioner's net earnings during the years 1945-1953 were distributed to the associated doctors. The control of petitioner from the time of its organization through 1953 was in the hands of three individuals who were related by marriage, the so-called trustees. No person outside this family group, consisting of Dwight S. Spreng, Elizabeth Dial Spreng, and Robert Dial, was ever made a trustee, so that, in effect, the trustees of petitioner were a self-perpetuating family group. Dwight S. Spreng was paid a salary for managerial services, in addition to his share of petitioner's net earnings in each year. There was indebtedness of petitioner to Dwight S. Spreng and to Robert Dial on which petitioner paid interest totaling $ 74,444.94 during the period 1945-1953. In the light of all of these facts and factors, petitioner was not operated exclusively for charitable purposes, and most of its net earnings inured to the benefit of private individuals.

Upon the entire record, it must be concluded that during the years 1945-1953, inclusive, petitioner was operated for profit by a small family group; that operations for profit were petitioner's predominant activity, and that such charitable services as were rendered by the associated physicians were occasional and of too minor volume to qualify petitioner for exemption from tax under section 101(6). Fort Scott Clinic & Hospital Corp. v. Brodrick, 99 F. Supp. 515">99 F. Supp. 515; Medical Diagnostic Association, 42 B. T. A. 610; General Contractors' Ass'n v. United States, 202 F. 2d 633; Better Business Bureau v. United States, supra.

Consideration has been given to cases relied on by petitioner, including Commissioner v. Battle Creek, 126 F. 2d 405. That case, on its facts, is distinguishable, as are others which are cited under this issue.

More specifically, the reasons for the above conclusions are as follows: Petitioner has failed to establish that it was operated exclusively for charitable purposes in any year from the time of its organization. Petitioner's only witness was Dwight S. Spreng. His testimony about the number of patients who were charity cases in each of the years 1945 through 1953 was vague and represents only estimates and conjecture. He did not produce any records to show the total number of patients who received treatments each year, the number who were treated free of charge, and the amounts or the rates of the fees charged. He evaded the proof of such facts by referring to some unexplained standard of "normal charges," and by stating, in general, that 70 to 80 per cent of the patients paid "part" of a normal charge, only 20 per cent paid the full amount of so-called "normal" charges, and that he estimated that from 2 to 5 per cent paid nothing. His testimony on this point amounts to an admission that not more than 5 per cent of the patients paid nothing, and that about 95 per cent paid for services and treatments.

Petitioner was located in an area where the residents did not have large income. Perhaps the rate of fees charged by the doctors who were associated with petitioner was lower than doctors charge patients whose income is fairly substantial. But the requirements of section 101(6) are that a corporation must be operated exclusively for charity in order to be exempt from income tax, and those requirements are not met by charging moderate, compared to high, fees, or by giving free services to only a small per cent of all persons receiving treatment. See Fort Scott Clinic & Hospital Corp. v. Brodrick, supra.

The evidence as a whole shows that during the period 1945-1953, inclusive, petitioner operated a clinic where doctors are associated together in the practice of medicine for profit. Beginning in 1945, a system was adopted for sharing net receipts after expenses which provided the individual doctors with salaries based upon the ratio of each doctor's charges to total charges, the ratio of each doctor's visits with patients to total visits, and the ratio of the new patients treated by an individual doctor to all new patients. Since petitioner's trustees did not establish any schedule fixing the charges which could be made, each doctor was free to fix the amount of his fees as he saw fit. Spreng, in his testimony, admitted that the individual doctors fixed the amounts of their fees. The so-called point system for fixing the salaries of the individual doctors constituted a competitive system with incentives for increasing the extent of the services rendered by the doctors and the income to be derived from such services. The adoption of the above-described system in 1945 for fixing the respective salaries of the individual doctors effectively ruled out a charity clinic and made petitioner's operations the conduct of professional work for profit. It is recognized, of course, that where a corporation is operated exclusively for charitable purposes, employees may receive reasonable compensation for their services, if they do not contribute their services free of charge. But where, as here, the method for fixing compensation for services is predominantly one which compensates the individual on the basis of the ratio of his fees and activity to the whole, so that each is in competition with the other, the operation is one for profit and the exemption from tax which section 101 (6) contemplates cannot be allowed. Section 101 (6) prescribes that if a corporation is to be exempted from tax, no part of its net earnings can inure to the benefit of any private individual. Petitioner's method of fixing the compensation of the individual doctors and its practice of distributing substantially all of its net receipts among its associated doctors disqualified petitioner in each of the years involved for the tax exemption allowed by section 101 (6).

The petitioner has failed to show clearly how Spreng and Dial accumulated credits which, by 1945, amounted to $ 120,000 for which each received bonds of petitioner in that total amount, on which interest in the amount of $ 74,444.94 was paid during the period 1945-1953, inclusive. Petitioner has not shown that under this arrangement Spreng and Dial did not benefit as private individuals from petitioner's earnings.

The case of Klamath Medical Service Bureau, 29 T.C. 339">29 T. C. 339, affords an appropriate comparison with petitioner's method of distributing its net receipts among its associated doctors. In that case, although the petitioner did not claim to be an exempt corporation under section 101 (6), it contended that its profits were not distributed to its stockholders under the guise of salaries. We held that the method of compensating employees achieved distribution of profits in addition to compensation for services. It is significant in this case that petitioner's system for arriving at the respective amounts of the annual compensation of each of its doctors was similar to the method which was used by the Klamath Medical Service Bureau in making distributions of its net receipts.

Petitioner has not shown that no part of its earnings inured to the benefit of any private individual. On this point, it is noted, further, that Spreng and Dial could receive the maximum benefits under petitioner's retirement pension plan, compared to the benefits available to the associated doctors who worked under individual contracts. As "trustees" and "members," the association of Spreng and Dial with petitioner could not be, or was not likely to be, severed, whereas the duration of the employment of the associated doctors was controlled by Spreng, Dial, and Elizabeth Spreng, the trustees.

It is concluded, upon the entire record, that petitioner did not qualify for exemption from tax under section 101 (6) in any of the years 1945-1953, inclusive. It is concluded, also, that petitioner has failed to establish that it was operated exclusively for charitable purposes from the time of its organization in 1935 through 1944.

Petitioner's application of June 20, 1941, together with Spreng's affidavit and other supporting documents, under which it obtained the Commissioner's ruling of July 21, 1941, that it was exempt from Federal income tax, was misleading. Spreng's statement that petitioner has received donations and gifts totaling $ 42,490.28 was a gross exaggeration, and petitioner's failure to attach to its application an example of its written contracts with the doctors associated with petitioner constituted an omission which kept from the Commissioner information which was needed to fully apprise him of the nature of petitioner's operations. Petitioner was required by the Commissioner's ruling of July 21, 1941, to report immediately to him any changes in its method of operations. When petitioner changed its method of computing the amounts of its associated doctors' compensation in 1945, it failed to report such change in its operations to the Commissioner. Furthermore, the Form 990 which petitioner filed for each year did not give the Commissioner information about the new method of distributing net earnings among the doctors, and, therefore, these forms did not provide the Commissioner with facts upon which he could reappraise from time to time petitioner's right to exemption from tax under section 101 (6). When the Commissioner's agents undertook an investigation of petitioner's operations in 1949, they then ascertained facts which showed that under his ruling of July 21, 1941, the Commissioner had made a mistake of law. The Commissioner was not equitably estopped by his 1941 ruling from retroactively applying his 1953 ruling, which revoked the 1941 ruling. The petitioner does not dispute this point. It cannot do so in the light of Automobile Club of Michigan v. Commissioner, 353 U.S. 180">353 U.S. 180.

In the alternative, petitioner contends that "the retroactive assessment * * * is an abuse of discretion and should be revoked [by this Court]." Petitioner argues that the respondent has "abused" the discretion conferred upon him by section 3791 (b) in determining that petitioner is liable for taxes for the years 1945 through 1953. It is claimed that the respondent, in effect, has repudiated his ruling of July 21, 1941, retroactively, and that the large amount of the total deficiencies resulting therefrom causes petitioner irreparable hardships from which this Court should grant relief. Petitioner refers to Lesavoy Foundation v. Commissioner, 238 F. 2d 589, reversing 25 T.C. 924">25 T. C. 924.

Petitioner's alternative contention appears to be chiefly a claim for equitable relief. But this Court does not have the powers of a court of equity, Emilie Furnish Funk, 29 T. C. 279, 297; it has only the powers which have been expressly conferred by the Congress. See also Peerless Woolen Mills, 13 B. T. A. 1119; Roslyn Fuel Co., 16 B. T. A. 285, 294; and National Refining Co. of Ohio, 1 B. T. A. 236. To the extent that petitioner makes claim here for equitable relief, we are without authority to consider the matter. Otherwise, whether or not this Court has jurisdiction to review the respondent's exercise of his discretion under section 3791 (b), we do not here decide. Neither party, on brief, has considered such question; no authorities are cited which deal with the question.

However, there is substantial authority that the Commissioner had the power under section 3791 (b) to issue the ruling dated January 22, 1953, requiring petitioner to file returns for prior years. In Automobile Club of Michigan v. Commissioner, 230 F. 2d 585, affd. 353 U.S. 180">353 U.S. 180, the court made the following observation:

This provision [section 3791 (b)] clearly vests the Secretary or the Commissioner acting with approval of the Secretary, with the discretionary power to prescribe the extent, "if any," to which the ruling of the Commissioner shall or shall not be retroactive.

The Supreme Court in the same case, supra, recognized that the Commissioner has a statutory power to retroactively revoke a ruling. This Court, in James Couzens, 11 B. T. A. 1040, 1154et seq., recognized that where there is no statute of limitations which prevents his doing so, the Commissioner has the right to correct an error or change his earlier conclusions and apply his revised ruling to earlier years. See also Southern Maryland Agricultural Fair Association, 40 B. T. A. 549. The record in this case shows that the Commissioner's ruling of July 21, 1941, holding that petitioner was an exempt corporation, was erroneous. The error appears to have been due to petitioner's failure to give the Commissioner all of the facts as they then existed. Later, in 1945, petitioner adopted a different and new system for paying its associated doctors for their services. During the years 1945 through 1953, at least, petitioner was, as a matter of law, not a tax-exempt corporation. In 1953, the respondent discovered that his 1941 ruling was in error and involved a mistake of law. Assuming, arguendo, but not deciding the question, that we have jurisdiction to review the Commissioner's exercise, or lack of exercise, of his statutory discretion under section 3791 (b), we are unable to hold, on the record here, that the respondent erred in determining that petitioner is liable for taxes for the years 1945 through 1953. Petitioner's alternative contention is rejected.

A Rule 50 computation is required because of various stipulations of the parties.

Decision will be entered under Rule 50.

---

Footnotes

• 1. The totals in this column represent the total salaries credited to each doctor's drawing account. The total amounts of salaries reported on Form 1099 for each year represented only total salaries withdrawn by each doctor.↩

• 1. Blank spaces indicate that the doctor was not associated with petitioner during the year.↩

• 1. SEC. 101. EXEMPTIONS FROM TAX ON CORPORATIONS.

  (6) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the 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. For loss of exemption under certain circumstances, see sections 3813 and 3814;↩

• 2. SEC. 3791. RULES AND REGULATIONS.

  (b) Retroactivity of Regulations or Rulings. -- The Secretary, or the Commissioner with the approval of the Secretary, may prescribe the extent, if any, to which any ruling, regulation, or Treasury Decision, relating to the internal revenue laws, shall be applied without retroactive effect.↩

• 3. See: H. T. Reiling, "What Is a Charitable Organization," 44 A. B. A. J. 525↩ (1958).