OPINION.
Goodeioh :
Bespondent determined deficiencies in income tax for fiscal years as follows:
August 31, 1919_ $203. 63
August 31, 1920_ 737.46
August 31, 1921_ 2,304.39
August 31, 1922_ 346. 81
August 31, 1923_ 650. 77
August 31, 1924_ $353.87
August 31, 1925_ 651. 67
August 31, 1926_ 747.41
August 31, 1927_ 197. 90
August 31, 1928_ 110.42
Petitioner assails these determinations on two grounds; first, that respondent is bound by the prior ruling of a former Commissioner of Internal Bevenue holding petitioner to be exempt from tax; and, second, that it is exempt from tax under the provisions of section 103 (6) or (14), Bevenue Act of 1928, and corresponding provisions of prior acts. We hold against petitioner on both contentions.
Petitioner is a cooperative association under the laws of California, organized for the purpose of carrying on " a general mercantile business, for the accommodation of the students and faculty of Leland Stanford Junior University." Membership in the association is confined to persons connected with the university and may be canceled by the directors, who, in turn, are elected by the members. The membership fee is $1, which represents the entire pecuniary interest of a member in the assets of the association and which is returned upon termination of membership. No dividends are paid on the membership fees. The directors are in charge of the business, which is run by a manager employed by them upon salary. Its sales, however, are not limited to members.
Petitioner has two stores, both located on university property, more than a mile from the nearest town. One building it owns and on it pays the university a nominal annual ground rental; the other building it rents from the university for $75 a month. It sells textbooks, stationery, engineering, laboratory and art supplies and equipment, notebooks, pens, typewriters (and rents them also), desk lamps, and other miscellaneous articles used by students, and fills special orders for personal stationery, dance programs, emblems, and books. Textbooks are stocked after inquiry amongst the faculty members as to the expected requirements of the university classes. The bulk of its business is done with students and faculty of the university; sales to outsiders, tourists and visiting parents being a small part of the total. Petitioner sells its stock at list or current retail prices, and with each sale issues a cash receipt which may be signed and turned in by the purchaser. Periodically, these receipts are totaled and rebates made to the purchasers from the profits of the association. In the period before us 10 percent of the total sales was thus rebated, except in 1918, when no rebate was paid, and 1920, when 5 percent was paid. In 1926 (the only year as to which we have detailed evidence) the average net profit of its three departments- — textbook, miscellaneous, and stationery — were 26.5 percent of its total sales. So far as this record discloses, no part of the earnings of the association was paid to- the university, or to any other exempt organization.
The bylaws of the association provide that the profits " shall be added to the common property of the Bookstore " and that upon dissolution of the business " the net assets may, by the vote of two-thirds of the members, be transferred to an organization with purposes similar to those of the Bookstore, or applied to any educational, charitable or benevolent institution or purpose."
Petitioner's contention that respondent may not now lay a tax on its earnings because his predecessor in office was of opinion that it was exempt from taxation, we may dispose of without discussion, since that point has been previously decided adversely. James Couzens, 11 B.T.A. 1040; Arthur H. Lamborn, 13 B.T.A. 171; Frances P. McIlhenny et al., Executors, 13 B.T.A. 288.
Petitioner's contention that it is an exempt corporation offers only little more difficulty. Clearly, it falls without the provisions of paragraph (14), for it is not merely holding property, but is actively engaged in business; moreover, it does not turn over its earnings, less expenses, to an exempt organization. The opposite view it does not press. However, it argues that it falls within paragraph (6) because, (a) it is organized and operated exclusively for educational purposes, (b) it is an integral part of the university, which is an exempt organization, and (c) any surplus which it accumulates will be distributed to some organization of similar purpose or applied to a charitable or educational institution or purpose.
We see no merit in that argument. This petitioner is neither organized nor operated as an educational institution as that term is commonly used and understood. It arranges no lectures, holds no classes, offers no courses. It sells books and supplies to persons in attendance, whether as faculty members or students, at an educational institution, and to anyone else who may come along to buy. Nor is it an integral part of the university; it is a separate legal entity; controlled by its own directors and officers. True, its directors and officers, and members as well, are members of the university faculty, but it is not shown that a part of the duties of those individuals under their employment by the university is to manage the affairs of this association. True, also, a report of petitioner's condition is made annually to the registrar of the university, but there is nothing in the record before us to show that the university, as such, takes any action respecting the report, or exercises any control over petitioner's affairs. As to the provision of the bylaws providing for the ultimate distribution of petitioner's accumulated surplus to an exempt corporation, suffice it to point out that bylaws may be changed, and that up to the present no part of petitioner's earnings has ever been paid to any educational or charitable institution. Cf. Riverdale Cooperative Creamery Assn., 18 B.T.A. 1159; affd., 48 Fed. (2d) 711.
Moreover — and this is controlling of the case without regard to the other considerations urged — the fact remains that a part of the net earnings of the association does inure to private individuals. Dividends or rebates (on its own records petitioner uses both terms) are regularly paid to such customers as turn in their purchase receipts. Though the majority of them may be students or faculty members of the university, still such customers are private individuals so far as this statutory provision is concerned (being an exemption it must be strictly construed) and it cannot be disputed that they receive such part of the association's net earnings as its directors see fit to distribute.
Reviewed by the Board.
Judgment will Toe entered for the respondent.
(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.
(14) Corporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt from the tax imposed by this title.