Before HASTINGS, Chief Judge, and KNOCH and KILEY, Circuit Judges.
These three proceedings are before us on petitions by taxpayers for review of a decision of the Tax Court of the United States. It sustained the Commissioner's determination that there were deficiencies in each petitioners'*fn1 federal income tax for the taxable year 1953.*fn2 The tax court's opinion is reported at 38 T.C. 15 (1962). The three cases were consolidated for review in this court as they were for trial in the tax court.
The deficiency assessments arose from the Commissioner's disallowance of capital gain treatment of sums received by Grace M. Scharf, Arthur H. Hauber and Urban V. Comes in return for the sale of their individual memberships in Belmont Community Hospital Association (Belmont), an Illinois not for profit corporation.
Belmont was organized June 18, 1938 and took over the business and assets of Belmont Hospital, Inc., an Illinois business corporation which had operated Belmont Hospital since 1927.
Belmont's charter provided that it was to own and operate a general hospital "not for pecuniary profit, but exclusively for charitable purposes * * *." Belmont Hospital was to be maintained "as a charitable institution and not for pecuniary profit with a view toward conferring upon the public as much benefit as is consistent with the proper operation, management and control of said institution." Because of its exclusively charitable nature, Belmont was exempted from federal income tax, and a donation to it was deductible in computing the donor's income tax.
Belmont's by-laws provided that its memberships should be limited to five. These memberships were transferable but the prospective transferee was subject to the approval of Belmont's board of trustees. Upon a member's death, his membership passed to his personal representative, heirs or legatees but without any rights except that of transferring the membership to an approved applicant. The affairs of the corporation were managed by a board of trustees consisting of three regular members of Belmont.
Petitioners Hauber and Comes, both doctors, acquired their memberships at the time of Belmont's organization. Grace M. Scharf, whose estate has been substituted for her in the instant proceeding, acquired her membership in 1943 by transfer from Charles E. Scharf, her husband, shortly before his death. Charles E. Scharf was a doctor and one of the original members of Belmont. Mrs. Scharf was certified a regular member of Belmont in 1944.
From the time of its organization, petitioners Hauber and Comes served on Belmont's board of trustees and were in active control of its affairs until they transferred their memberships. For their services, they received compensation comparable to that of doctors in administrative capacities in other hospitals. During this period, Hauber and Comes continued their practice of medicine, enjoying the benefits of a hospital affiliation deemed to be important to a doctor's practice. Emergency patients who came to Belmont Hospital without a doctor were attended by Hauber and Comes along with the other doctors who held memberships in Belmont.Grace M. Scharf was not a doctor, was not elected to Belmont's board of trustees and never rendered any services for Belmont.
Sometime in the late 1940's Hauber and Comes considered retiring from their practice. A broker approached them and informed them he might be able to secure a purchaser for their memberships in Belmont. The broker handled the ensuing financial negotiations. Several proposals, including an offer of $300,000 which was rejected, were conveyed to all five of Belmont's members whose consent to sell was required by the prospective purchasers.
An agreement satisfactory to all five members was reached in 1953. An organization called Stewards Foundation agreed to purchase the five memberships for a gross sum of $710,000. All five members then entered into agreements with a lawyer under which he was empowered to sell each member's membership. As nominee for the five selling members, he entered into a final agreement of sale with Stewards Foundation on October 30, 1953.
The tax court found that in consummating the sale the attorney was nominee of all five members in the sale to Stewards and rejected the contention of the Commissioner and Grace M. Scharf that Mrs. Scharf had sold her membership to him as agent for Hauber and Comes.
On the date of sale, October 30, 1953, the old members met and effectively vested control of Belmont in Stewards Foundation by electing five new members. Also on this date the membership certificates and resignations of all the old members were delivered to Stewards Foundation.
As a result of the sale, Stanley F. Price and Robert R. Stibgen, the two members who are not parties to this proceeding, received $30,000 and $20,000, respectively. For the sale of her membership, Mrs. Scharf received $75,000, $25,000 of which came from the interest of Hauber and ...