1981 Decision: IRS Properly Revoked John Marshall Law School's Exempt Status

No. 28-78

U.S. Court of Claims, Trial Division

6/24/81

John E. Simpson, Alvin M. Hitt, Jr., Miller, Simpson & Tatum, for plaintiff. John F. Murray, Acting Assistant Attorney General, Donald P. Lan, Theodore D. Peyser, Donald H. Olson, Department of Justice, Washington, D. C. 20530, for defendant.

OPINION /*/

[1] MILLER, TRIAL JUDGE: Plaintiffs, John Marshall Law School (JMLS) and John Marshall University (JMU) petition for a declaratory judgment under section 7428(a)(1)(A) of the Internal Revenue Code of 1954 ¹ seeking to overturn a determination by the Internal Revenue Service that for the years 1967-73 plaintiffs were not entitled to tax-exempt status.

[2] Plaintiffs claim that they qualify for exemption under I.R.C. section 501(c)(3), as "Corporations * * * organized and operated exclusively for * * * educational purposes, * * * no part of the net earnings of which inures to the benefit of any private shareholder or individual," but defendant contends that plaintiffs should be denied exempt status because a part of their net earnings inured to the benefit of private shareholders or individuals.

[3] JMLS first received notice of tax-exempt status in 1947, and JMU received similar notice in 1965. However, on November 18, 1977, plaintiffs received notice of a "Final Adverse Determination" retroactively revoking their notices of tax-exempt status, effective as of September 1, 1966, on the ground that a portion of their net earnings had inured to the benefit of Theo. Fenster, Martin Fenster, and their respective families.

[4] In its determination letter, the IRS stated that it had considered numerous items pertaining to the fiscal years ended August 31, 1967 to August 31, 1973, ² including, but not limited to, payments by JMLS for Fenster family: automobiles, education, and travel expenses, insurance policies, basketball and hockey tickets, membership in a private eating establishment, membership in a health spa, interest-free loans, home repairs, personal household furnishings and appliances, and golfing equipment.

[5] The term "net earnings" in the inurement-of-benefit clause of section 501(c)(3) has been construed to permit an organization to incur ordinary and necessary expenses in the course of its operations without losing its tax-exempt status. Founding Church of Scientology v. United States, 188 Ct. Cl. 490, 496 * * *, 412 F.2d 1197, 1200 (1969), cert. denied, 397 U.S. 1009 (1970); Saint Germain Foundation v. Commissioner * * * 26 T.C. 648, 658-59 (1956). The issue, therefore, is whether or not the expenditures JMLS paid to or on behalf of the Fenster family were ordinary and necessary to JMLS operations.

[6] The burden of proof was on plaintiff to establish that the grounds set forth in the determination letter and the resulting revocation of notice of exemption were erroneous. Prince Edward School Foundation v. Commissioner * * * 478 F. Supp. 107, 110-11 (D. D. C. 1979); and see discussion of legislative history and committee reports on I.R.C. section 7428 in Animal Protection Institute Inc. v. United States * * * 42 AFTR 2d 78-5850 (Ct. Cl. Tr. J. Order, Sept. 19, 1978).

[7] JMLS was established by S. B. Fenster in 1933 as a Georgia non-profit corporation. Located in Atlanta, Georgia, it offers the degrees of Bachelor of Laws, Doctor of Jurisprudence, and Master of Laws, but it has not been accredited by the American Bar Association or any other law school accrediting body. For the 1972-73 academic year, it had approximately 490 students. An extension division in Savannah, Georgia, was established in 1970 and offers evening classes in law.

[8] JMU, established in 1941 as a Georgia non-profit corporation, was an unaccredited two-year junior college with curricula in liberal arts, business administration, and legal secretarial science. Classes were discontinued in the early seventies. JMLS and JMU occupy the same building in Atlanta. JMU has never maintained separate books of account, and all fiscal matters for both have been handled by JMLS. During the years 1967-73, diplomas to graduates of both institutions were issued in the name of JMU.

[9] In 1958 Theo. Fenster, a son of S. B. Fenster, became dean of JMLS. He held this position at all times relevant to this case. In addition, he served as president of JMU for the years at issue. His brother, Martin Fenster, served as secretary of both institutions from at least 1966 until his death in 1972. After Martin Fenster's death, Theo. Fenster's wife, Catherine, assumed his positions. JMLS and JMU had no other officers during the 1967-73 period.

[10] In addition to being officers at both schools, Theo. and Martin Fenster were instructors at JMLS. JMLS and JMU employed few other full-time faculty members. There were three or four from 1966 to 1968 and only two others from 1969 to 1973.

[11] Both institutions were run by a single board of trustees which was controlled by members of the Fenster family throughout the 1967 to 1973 period, ³ including Theo. Fenster, Martin Fenster, Lee Fenster (their mother), Catherine Fenster, and T. David Fenster, Jr. (Theo's son). Under the by-laws, the board was required to fix Theo. Fenster's salary, and he in turn established all employee salaries, including that of his brother, Martin. Theo. Fenster also wrote all or a majority of the checks for JMLS during the 1967 to 1973 period.

[12] As noted the applicable statute provides that for an educational institution to be tax exempt no part of its net earnings may inure to the benefit of any private shareholder or individual. Treasury Regulation section 1.501(a)-1 (1958) provides --

          (c) "PRIVATE SHAREHOLDER OR INDIVIDUAL" DEFINED. The words

1. INTEREST-FREE LOANS.

[14] Theo. Fenster received a number of interest-free, unsecured loans from JMLS during the fiscal years 1967 to 1973.

[15] During 1968 JMLS advanced at least $4,453 to or for the benefit of Theo. Fenster. The advances were unsecured, interest-free, and without any fixed repayment schedule. The loan was reduced to $787 by August 31, 1970, and no further payments were made until at least August 31, 1972.

[16] In April 1973 Theo. Fenster purchased a condominium townhouse in DeKalb County, Georgia, for $58,560. He financed $29,108 by a 7-1/4, percent mortgage loan from a savings and loan institution amortizable over 240 months. On April 25, 1973 he obtained an additional $33,000 from JMLS merely on the evidence of a note which failed to provide for any interest, any security or any fixed schedule of repayments. Three thousand five hundred dollars of this loan was excessive and was returned to the school on May 11, 1973, leaving a balance of $29,500.

[17] In June 1973 Theo. Fenster received from JMLS the school's 1972 Lincoln Mark IV, having a fair market value of $6,335 in exchange for a 1971 Pontiac, having a fair market value of $3,374. After the close of the 1973 fiscal year the $2,961 difference in the values of these automobiles was treated on the books as an additional loan from JMLS to Theo. Fenster. This loan also was unsecured, interest-free, and had no fixed repayment schedule.

[18] Although the JMLS books show a $9,127 reduction in these loans in 1975 and 1976, $23,333 of such advances remained outstanding from July 6, 1976 to at least April 23, 1980.

[19] These interest-free loans to Theo. Fenster contrast with a contemporaneous (June 1973) $10,000 loan from JMLS to one Fritz Ellman to purchase David's Enco, an automobile service station at which the Fensters traded, at 7 percent interest and repayable in equal monthly installments. The Fenster loans provided no financial benefit to the plaintiffs. To the contrary, because they were unsecured they subjected the plaintiffs to uncompensated risks for no business purpose. Clearly Theo. Fenster could not have received such interest-free unsecured loans from banks or other lending institutions. In substance they amounted to a distribution of the interest income which plaintiffs would otherwise have received on the funds.

[20] In Founding Church of Scientology, supra, 188 Ct. Cl. at 499, 412 F.2d at 1202, the court stated: "[T]he very existence of a private source of loan credit from an organization's earnings may itself amount to inurement of benefit." And this is all the more true where the loans are without interest (or even at rates more favorable than market) and without dates for repayment. Lowry Hospital Association v. Commissioner * * *, 66 T.C. 850, 858 (1976); Best Lock Corp. v. Commissioner * * *, 31 T.C. 1217, 1236 (1959); Unitary Mission Church v. Commissioner * * *, 74 T.C. 507, 515 (1980), aff'd in unpublished opin. (2d Cir. Jan. 19, 1981); Birmingham Business College, Inc. v. Commissioner * * *, 276 F.2d 476, 479-80 (5th Cir. 1960).

[21] Plaintiffs offer no justification for the two smaller loans, and none is apparent from the record.

[22] Plaintiffs contend that the loan enabling their dean to purchase a home is an ordinary and necessary expense of the school because some other schools provide living quarters for their presidents and deans. But the comparison is not meaningful, because when a school provides housing it does not provide free financing for the dean to purchase it for himself. It is generally on or close to the campus, and he merely has the use of it for his term of office. In the present case the loan enabled the Fensters to buy a townhouse 9 miles away from the school in their own name. Thus, any benefits accruing from such ownership necessarily inured primarily to the Fensters and not to JMLS.

[23] Plaintiffs argue that the interest-free loan to purchase a home is comparable to the parsonage allowances in I.R.C. section 107. That section provides for an exclusion from the gross income of a minister of the gospel of the rental value of a home or housing allowance furnished by a church. But the extension of that treatment to the academic profession is a matter for Congress rather than the courts. ⁴ Moreover, I.R.C. section 107 deals only with the taxability of housing benefits to the recipient, and not with the status of the organization which provides such benefits.

[24] Plaintiffs cite Georgia law authorizing interest-free loans by a corporation to its employees, officers, and directors. The fact that such a loan does not violate state corporate law does not, however, affect the federal tax consequences of such a loan.

[25] The Fensters were dissatisfied with the safety of their previous home because of the murder of Martin Fenster therein. Thus, plaintiffs argue, it was in their best interests to provide their dean and his family with a secure home in which to live and entertain. But the safety of an individual's home is a personal concern, and the payment of part of the cost of an individual's home cannot thereby be converted into a business expense of the organization. Plaintiffs claim that the townhouse was needed for business entertainment. But even if it were reasonable for JMLS to pay for some or all of the Fenster's entertainment, it is difficult to see how entertainment in pursuance of the non-profit law school's business could be so extensive that the school's financing a major portion of the purchase price of the Fenster home would involve no inurement of any portion of the school's earnings to Theo. Fenster.

2. HOME FURNISHINGS.

[26] During the 1972 and 1973 fiscal years, JMLS paid for a number of household items and furnishings used in the home of Theo. Fenster. As noted in connection with the interest-free loans, in April 1973 Theo. Fenster purchased a townhouse as a residence for himself and his family, approximately 9 miles from the school. The house had two stories, with 3 bedrooms and 2 bathrooms on the upper level, and a study/den, living room/dining room, eat-in kitchen, utility room, and 2 bathrooms on the lower level. There was also a large enclosed patio.

[27] Between March and May 1973 JMLS paid $2,026 for electrical fixtures for installation in virtually every room, including the bathrooms, closets, and utility room. In March 1973 JMLS purchased $409 in bathroom fixtures, and, in April and May 1973, $2,457 in draperies for installation throughout the townhouse.

[28] While plaintiffs claim that it was reasonable for JMLS to bear such expenses because the Fensters used their home for school- related entertaining, the fact is that the Fenster family received the permanent benefit and enjoyment of such bathroom and lighting fixtures and draperies, and they would have required them even if they did no entertaining whatsoever. Moreover, since the Fensters retained title to the home, they would receive their value upon resale. Payment of these personal household expenses constitutes inurement of net earnings. Unitary Mission Church, supra at 511.

[29] In June 1972 JMLS paid $655 for a television set for installation and use at the Fenster residence. Plaintiffs contend that the set was used to record educational programs after school hours, but nowhere have they explained what programs were recorded, how they fitted into the JMLS or JMU curriculum, the frequency of such taping, or even the ability of the set in question to record such programs. Moreover, JMLS had purchased a color television set for its own use the previous month for $200, and it purchased another set in May 1973 for $494. Plaintiffs having presented no reasonable evidence as to how the payment for the Fenster's television set was a business expense of the school, it must be concluded that the expenditure was for the personal benefit of the Fensters.

[30] In October 1972 JMLS paid $447 for a washing machine and dryer for installation in the Fenster residence. There is no contention they were to be used for school laundry, and plaintiffs concede that the machines were used by the Fensters primarily for personal purposes. Plaintiffs contend that in paying for the equipment JMLS was merely repaying the Fensters for damage done to their personal washer from doing school-related washing in prior years, i.e., drapes, curtains and team uniforms, causing the washer to break down due to the heavy use. However, Catherine Fenster was only able to recall one occasion over the years where her washer broke down as a result of doing school wash. Moreover, the last JMU intercollegiate athletic team (requiring uniforms) was disbanded in 1967.

3. SCHOLARSHIPS.

[31] On January 28, 1972 the trustees of JMLS resolved to provide for a John Marshall Faculty Scholarship Fund (Fund) to furnish college scholarships to "deserving" children of full-time faculty members. No actual separate fund was set aside for this purpose. Theo. and Martin Fenster comprised the committee responsible for selecting the recipients of scholarship awards.

[32] On July 7, 1972 Theo. Fenster's son, Jeffrey, and Martin Fenster's son, Kenneth, each received a $4,000 scholarship award from JMLS to attend Emory and Western Kentucky Universities respectively. Jeffrey Fenster received an additional $2,500 award on July 6, 1973 to attend the University of Alabama. No one else has ever received a scholarship award from JMLS.

[33] Plaintiffs claim that scholarships were available to children of all full-time faculty members, but the record indicates that this was purely a screen. From 1972 until the date of trial, other than Theo. and Martin Fenster, there were no full-time faculty members with children old enough or otherwise eligible to receive scholarships. Indeed, during the 1972-73 period, there were only two other full-time faculty members besides Theo. and Martin Fenster. And plaintiffs produced no evidence that for the proximate future others would become eligible to receive such funds. Moreover, Theo. and Martin Fenster were the entire selection committee, and the complete absence of selection standards meant that they had total discretion as to awards.

[34] The payment by JMLS of $10,500 in college expenses for the Fenster children provided direct and substantial benefits to Theo. and Martin Fenster. It helped to defray the costs of their children's education, a cost which they otherwise would have had to satisfy from other resources. This constitutes prohibited inurement of JMLS earnings to them. Human Engineering Institute v. Commissioner * * *, 37 TCM 619, 625 (1978), aff'd * * *, 629 F.2d 1160 (6th Cir. 1980); Rueckwald Foundation, Inc. v. Commissioner * * *, 33 TCM 1383, 1386 (1974).

[35] Plaintiffs next argue that Kenneth Fenster's scholarship was equivalent to JMLS giving his mother a $5,000 employee's death benefit authorized by I.R.C. section 101(b) as a result of Martin Fenster's death 3 months earlier. But this does not help plaintiffs. Section 101(b) deals with the exclusion from gross income of amounts received by the beneficiaries or estate of an employee as a result of the employee's death, not with the inurement of earnings of the organization to an individual and the exemption of the donor.

4. TRAVEL EXPENSES.

[36] Between 1967 and 1973, JMLS paid the air fare for a number of trips taken by Theo. Fenster, Martin Fenster, and members of their families.

[37] In 1971 Theo. Fenster, accompanied by his wife and two of his children, went to Europe for 2 weeks. In London, England, he attended an American Bar Association convention lasting 4 days. The Fensters then visited Paris, France, and Copenhagen, Denmark, before returning home. No JMLS business was conducted in either Paris or Copenhagen. JMLS paid the air fares for the entire family.

[38] During the 1971-72 fiscal years, Theo. and Catherine Fenster took two trips to Toronto, Canada. Two of their children accompanied them on their second trip. Theo. Fenster testified that the primary purpose of these trips was to visit courts, law libraries, and universities. He also stated that approximately half the time was spent visiting the above institutions, while the rest was spent on personal business. JMLS paid the air fare for both trips, totaling $257 for the first (of which Catherine's was $110), and $614 for the second (of which $404 was for Catherine and the two children).

[39] During the 1973 fiscal year, Theo. and Catherine Fenster flew to San Francisco and Los Angeles. Theo. Fenster testified that this trip was taken primarily to visit unapproved law schools and talk to their deans about the problem of ABA accreditation. While in Los Angeles, the Fensters claim to have visited courts and law libraries. JMLS paid the air fare of $769 (of which Catherine's was $349).

[40] Plaintiffs rely entirely on the testimony of Theo. Fenster to substantiate the purpose of the above activities. No correspondence with personnel at any of the institutions visited was introduced. No prior appointments were made to meet with any school or library personnel. No notes of any meetings or observations were offered. Other than one university in Toronto and one in Montreal, Theo. Fenster could not recall the names of any other Canadian universities visited. He could not recall the names of any unapproved law schools visited in San Francisco, and only one in Los Angeles. Theo. Fenster also testified that he and his wife sometimes spent only a few minutes at any one law school or library. Plaintiffs have not shown how such trips to libraries in Canada and England were useful or necessary to JMLS. Even assuming some benefit to the school from Theo. Fenster's trips, plaintiffs have failed to carry their burden of proof that the presence of Catherine ⁵ and the two children served any bona fide purpose of JMLS. Without additional substantiation, it must be concluded that the foregoing trips were made for personal reasons unrelated to JMLS business, and, therefore, payments of the air fares were not ordinary and necessary expenses of JMLS and resulted in inurement of JMLS earnings to the Fensters. Bubbling Well Church of Universal Love, Inc. v. Commissioner * * *, 74 T.C. 531, 535-36 (1980); Best Lock Corp., supra, 31 T.C. at 1237; Unitary Mission Church, supra, 74 T.C. at 515.

[41] During the 1973 fiscal year Theo. Fenster and his son, Jeffrey, flew to Tuscaloosa, Alabama. JMLS paid $101 in air fare for both tickets, of which $45 was for Jeffrey. Theo. Fenster testified that the primary purpose of the trip was to visit the library at the University of Alabama Law School, but he made no prior appointments for that purpose, nor did he arrange to confer with any school personnel. He did not corroborate the claimed purpose by any correspondence or by any memorandum of what he found, nor did he testify as to how JMLS was benefited by the trip. He stated that his son accompanied him as a guide, but there was no testimony as to why such guidance was necessary or that the son was even acquainted with the law library. In light of the fact that Jeffrey Fenster was attending graduate school at the University of Alabama, it is concluded that the trip to Tuscaloosa was personal in nature, and payment of the air fare by JMLS for both must be deemed further inurement of income to them.

[42] In 1972 Theo. Fenster, his wife, and two of their children, took a trip to New York City, for which JMLS paid $366 in air fares. Plaintiffs claim that this trip was for interviewing prospective JMLS students from the northeastern section of the United States, and was held annually. The sessions normally lasted 3 days. Approximately 10-15 percent of JMLS's student body of almost 500 came from the northeast. Defendant challenges the presence of Catherine Fenster and the Fenster children on this trip as being unrelated to JMLS business but does not otherwise challenge the facts of the trip. Given the paperwork and the number of interviews involved, Catherine Fenster could reasonably have served a bona fide business purpose of JMLS in going on thee trips, and prohibited inurement of income will not be inferred from her attendance. However, the presence of the Fenster children served no purpose of JMLS and their presence was purely for reasons personal to Theo. Fenster. This results in inurement to the extent of the cost of the tickets for the children.

[43] The final air fares are $473 for a European trip in August 1970 by Martin Fenster, and $86 for a ticket to an unknown destination in December 1971 for either Kenneth or Jeffrey Fenster. JMLS paid for both of these tickets. Plaintiffs presented no explanation whatsoever for these trips in either the administrative proceedings or at trial. Therefore, it must be concluded that the trips were personal in nature and that the prohibited inurement of income in these sums occurred. Founding Church of Scientology, supra, 188 Ct. Cl. at 498-99, 412 F.2d at 1201.

5. AUTOMOBILE EXPENSES.

[44] During the 1967 to 1973 fiscal years, JMLS paid for gas, oil, repairs and maintenance of the personal automobiles of the Fenster family.

[45] During each year from 1966-73, Theo. Fenster and his family and Martin Fenster and his family each owned two or more automobiles. Theo. Fenster used his automobiles to commute to and from JMLS daily and sometimes twice a day. Catherine Fenster drove whichever family car was available for personal purposes and sometimes drove her husband to and from JMLS. Other family members drove such cars for other personal purposes.

[46] JMLS maintained open charge accounts at at least three filling stations, of which at least one was located near the law school and two others close to the Fenster residence or on a direct route between thenm. Theo. Fenster, his wife, and his children were authorized to use such charge accounts. For the years 1967-73 they charged an aggregate of $24,583 to JMLS for gas, oil and other automobile products. At trial Theo. and Catherine Fenster explained that they and other family members used their personal automobiles to run local errands for JMLS, such as trips to the post office, bank, office supply stores, bookstores and to lawyers' and judges' offices, because JMLS did not own an automobile until September 8, 1972. However, no records of any kind were maintained as to the number of miles or extent to which the personal vehicles were driven on school business during any of the years.

[47] Theo. Fenster testified that he believed that 50 percent of the use of his cars was for law school business and, therefore, on alternate occasions, he and other members of his family purchased out of their own funds gas, oil and other automotive products used in their automobiles equivalent in value to that paid for by the school. But there is nothing in either the administrative record or the trial record to substantiate such testimony other than the statement of Catherine that she sometimes paid cash at the filling stations. Had there been any effort to correlate costs and benefits, Theo. Fenster would have kept some record of his expenditures, and plaintiffs could have produced some receipts or other records of such personal payments by charge accounts, canceled checks, receipts, or at least the statement of one or more of the owners or attendants at the various filling stations at which they regularly made their purchases. ⁶

[48] The only documentary evidence on the subject is inconsistent with Theo. Fenster's testimony and tends to indicate that his story is of recent vintage. On Theo. and Catherine's joint income tax returns for 1968-71 and 1973, they itemized their deductions. The 1973 return was prepared for them by a certified public accountant. For each of such years they were entitled to deduct estimated state and local gasoline taxes paid, pursuant to a table based on the mileage driven and the state of residence. Although for each year they deducted estimated sales taxes derived from an analogous table, as well as other items for as little as $2 and $5, in not one of the returns did they take any deduction on the line designated for state and local gasoline taxes.

[49] In addition to gasoline and oil expenses, between 1967 and 1973 JMLS paid $2,589 for repairs and maintenance of the Fenster family automobiles. Once again, plaintiffs contend that Fenster alternated in charging them to himself and to the law school, with the net effect being that 50 percent of the total was charged to each. But here likewise plaintiffs produced no invoices, canceled checks or witnesses corroborating that the Fensters paid any such offsetting expenses. The expenditures on these automobiles were for such items as yearly tune-ups, work on the transmission, brakes, steering mechanism, carburetor, starter, heater, shock absorbers, and body-work and also tires and state inspection fees. It is significant that included in the above was $171 for repair expenses on Fenster family automobiles during 1973 -- a time when JMLS owned its own automobile.

[50] The payment of personal automobile expenses for private individuals was held to be prohibited inurement of earnings in Founding Church of Scientology, supra, 188 Ct. Cl. at 497, 412 F.2d at 1201; Kenner v. Commissioner * * *, 318 F.2d 632, 634 (7th Cir. 1963); and Labrenz Foundation, Inc. v. Commissioner * * *, 33 TCM 1374, 1379 (1974).

6. INSURANCE AND HEALTH BENEFITS.

[51] During the fiscal years 1967 to 1973 JMLS paid premiums on life and health insurance policies for Theo. and Martin Fenster. In 1964 JMLS purchased $25,000 split-dollar life insurance policies on the lives of Theo. and Martin Fenster and continued to pay premiums thereon during the years at issue. Similar policies were not made available to other employees of JMLS. Under the policy on Theo. Fenster's life, JMLS paid $845 while he paid only $141 of the annual premium of $986. The policy on Martin Fenster's life required annual premiums of $737, of which JMLS paid $596 while he paid only $141.

[52] Upon the death of the insured, JMLS was entitled to receive only the net cash value (cash surrender value) of these policies while the decedent's wife, if surviving, and otherwise his estate, was entitled to the remainder. In addition, policy dividends were applied to purchase additional 1-year term insurance solely for Theo. Fenster's benefit. When Martin Fenster died in 1972, JMLS received $4,414 from the policy, while at least $20,586 went to Martin Fenster's widow.

[53] Under split-dollar insurance policies, the value of insurance protection provided over the amount of the premiums the employee pays is a taxable benefit to the employee. Rev. Rul. 55-747, 1955-2 C.B. 228. The aggregate benefit received by Theo. and Martin Fenster from the plaintiffs' payment of the premiums for 1967 through 1973 was $1,544 for Theo. and $507 for Martin, although neither reported it in his income.

[54] Furthermore, JMLS purchased and paid the premiums for major medical health insurance policies for Theo. and Martin Fenster in addition to their Blue Cross-Blue Shield health insurance premiums for the same years. For the years 1967 to 1973 JMLS paid major medical insurance premiums totaling at least $1,341 for Theo. Presumably Martin's benefits from the payment of such premiums were comparable. No other JMLS employees were entitled to or provided with such coverage.

[55] JMLS also purchased accident and health insurance for Martin Fenster and paid premiums of $968 for the 1967 to 1971 period for this purpose.

[56] Plaintiffs argue that the split-dollar life insurance policies were key-man insurance to protect JMLS in case of the death of one of its two key employees. However, this rationale does not fit the type of policies chosen. At least in the early years, under split-dollar insurance, the bulk of the insurance proceeds go to the employee's beneficiaries instead of to the employer. Upon the death of Theo. or Martin Fenster, all JMLS could expect to recover from these policies was the amount it had paid in as premiums -- the cash surrender value. Plaintiffs have offered no explanation as to how this protected JMLS, or why dividends earned by JMLS' premiums were reinvested in additional term insurance with the proceeds going to Theo. Fenster's beneficiaries instead of to JMLS. And no justification was advanced for the health insurance policies purchased for Theo. and Martin Fenster.

[57] Since these policies provided little or no financial benefit to JMLS or JMU, and were available only to Theo. and Martin Fenster, it must be concluded that payments of the premiums on the policies provided personal benefits for these individuals. The payment of insurance premiums for the benefit of individuals by an organization claiming tax-exempt status was held to be form of prohibited inurement of earnings in Bubbling Well Church of Universal Love, Inc. v. Commissioner * * *, 74 T.C. 531, 535-36 (1980); Human Engineering Institute v. Commissioner * * *, 37 TCM 619, 631 (1978), aff'd, * * * 629 F.2d 1160 (6th Cir. 1980); Labrenz Foundation Inc., supra at 1377; Rueckwald Foundation, Inc. v. Commissioner * * *, 33 TCM 1383, 1385 (1974).

[58] Plaintiffs argue that the premium payments should be regarded as de minimis. The amounts paid and received, however, are not so small as to be inconsequential, especially when viewed over the number of years involved.

[59] In August 1973 plaintiffs paid for Theo. Fenster's membership in a European Health Spa at a cost of $975. Theo. Fenster testified that he felt justified in charging the membership to the school because in late 1970 he injured his back when he sneezed violently while getting out of his car on the JMLS parking lot and at some unspecified later date reinjured it by lifting books in his office. He claimed that his enrollment in the health club was on his physician's advice. However, he made no claim on his health insurance for the $975 as a medical expense, and neither the administrative record nor the trial record contains any statement by his physician corroborating the need for a club membership as a specific remedy for the injury. And, in any event, plaintiffs have failed to produce evidence of a sufficient basis for responsibility by the school for the injury as to warrant treatment of the disbursement as a legitimate school expense. Since payment of an individual's medical expenses by an exempt organization is a prohibited form of inurement of income (Bubbling Well Church of Universal Love, supra at 535-36; Labrenz Foundation, supra at 1379; Rueckwald Foundation, Inc., supra at 1386), payment of health club dues clearly warrants similar treatment.

7. HOCKEY AND BASKETBALL TICKETS.

[60] In July and September 1972 JMLS purchased two season tickets to the Atlanta Flames professional hockey team games and two season tickets to the Atlanta Hawks professional basketball team games for the 1972-73 seasons, at a cost of $995. It subsequently discontinued the basketball tickets, and in April 1973 JMLS bought two additional season hockey tickets for $585.

[61] Plaintiffs contend that the tickets were an ordinary and necessary expense of JMLS because they provided "a vehicle for the entertainment of parents of students, student faculty members and other persons with whom the school had a business interest." Theo. Fenster also testified that such entertainment enabled him to discuss school affairs informally with other faculty members.

[62] It is difficult to comprehend how expenditures for the entertainment of guests at professional hockey and basketball games could serve the legitimate educational purposes of a non-profit law school. Certainly there are few places and occasions less conducive to the conduct or discussion of law-school business than the spectator stands of a hockey or basketball arena during the din and tumult accompanying a close contest. ⁷ Plaintiffs produced no witnesses to corroborate Theo. Fenster's testimony that such games were occasions for the discussion of law school business. Without more, it is fair to conclude that the tickets were personal expenses of the Fensters for the entertainment of themselves and their guests, and that plaintiffs' disbursement of $1,580 for such purposes represented prohibited inurement of plaintiffs' net earnings for the benefit of Theo. Fenster.

PLAINTIFFS' OVERALL CONTENTIONS.

[63] Plaintiffs urge that none of the evidence of inurement of items of income for years prior to 1972 should be considered. The parties have stipulated that the statutory period within which defendant could legally assess income taxes against the law school and the university has expired for the years ended 1967 through 1971. Accordingly, plaintiffs do not contest the commissioner's determination revoking plaintiffs' exemptions for those years and hope thereby to restrict the scope of the evidence.

[64] However, this is not a tax-refund suit but a suit for declaratory judgment in which the sole issue is the correctness of the commissioner's determination revoking his original notice of exemption for all years from 1967 through 1973; and this is what the petition requested. Thus, notwithstanding plaintiff's concession for some of the years, the facts underlying the entire determination are relevant since it has effect as a notice for future as well as past years. Also, even if collection of income taxes from the "exempt" organization for some of the years is now barred, the facts as they existed in those years remain pertinent if they indicate a pattern of conduct continuing into the years admittedly open for assessment. See Fed. Rules Evid. 406. Furthermore, the evidence with respect to 1972 and 1973 alone is sufficient to bar exemption. The extent of the prohibited inurement of income in those years is not de minimis, and as the court stated in Founding Church of Scientology, supra, 188 Ct. Cl. at 500, 412 F.2d at 1202 --

     It is our opinion, from an examination of the statute and the

[66] The argument has two major flaws. First, the expenditures at issue were not in fact paid as additional salary to Theo. Fenster. The JMLS by-laws provide that (Art. III, sec. 3): "The salary of the Dean shall be fixed by resolution of the board of trustees. The salaries of all other officers and employees shall be fixed by the Dean." Theo. Fenster testified that although his meetings with the trustees were informal, his salary was approved by them. The JMLS funds paid out by Theo. Fenster for the various personal purposes discussed herein were paid out in Theo. Fenster's sole discretion and they were not in fact paid out as additional compensation to him. They were not treated as additional compensation on the schools' books and information tax returns, and they were not treated as additional compensation in Theo. Fenster's own tax returns.

[67] The unavoidable conclusion is that Theo. Fenster was free to make personal use of such corporate funds for himself and his family when, if, and as he chose to do so.

[68] In Founding Church of Scientology, id., the same argument was made by the plaintiff therein. The court responded:

          With respect to Mr. Hubbard, plaintiff seeks to bring

[70] For the foregoing reasons it is decided that the Commissioner of Internal Revenue's revocation of plaintiffs' notices of exemption for the years 1966 through 1973 was correct.

¹ All I.R.C. references are to the Internal Revenue Code of 1954 unless otherwise specified.

² All year references are to fiscal years ending August 31 unless otherwise specified.

³ Board action required a simple majority vote, and Fenster family members comprised three out of five members in 1966 and 1967, three out of four members in 1968 through 1972, and four out of six members in 1973. Members of the board were not paid in that capacity.

⁴ This serves to distinguish A. A. Allen Revivals, Inc. v. Commissioner * * * (1963, which involved a religious organization.

⁵ Theo. Fenster testified that the school's payment for Catherine's trips was justified because she acted as secretary to her husband and took notes as he went through the various schools and libraries. Again assuming a school business purpose for Theo.'s trips, there is not a scrap of paper to corroborate Catherine's role, no evidence of the substance of the alleged notes, no evidence as to what she did with these notes, and no evidence that any use was made of them by the school.

⁶ Although the trial was held in Washington, D.C., such location was pursuant to an agreement by the parties. Had there been any suggestion by plaintiffs that they wished to offer oral testimony of disinterested witnesses residing in Atlanta, there was no reason why all or part of the trial could not have been held there.

⁷ * * * Howard v. Commissioner * * *, holding theater tickets nondeductible from income as a business expense because of the failure to overcome the presumption of substantial distraction from the active conduct of business affairs during the performances.

⁸ This argument presumably applies also to Martin Fenster's salary.

⁹ This showed:

                Median Salaries