OUP USA's tax-exemption: lawyers' brief (original) (raw)
OXFORD UNIVERSlTY PRESS, INC. RELEVANT PRINCIPLES AND CASES
I present this paper without comment and exactly as it was presented to me. My own instinct is that an 'interpretation of law' approach along the lines of the Indian Judgment (return to Introduction for explanation and links) has a greater chance of success, even allowing for differences between US and Indian charity law, than the potential quagmire of a 'Fair Trading' approach. Obviously though, it is worth mugging up on all the US case law cited below. Confucius, he say, many ways cat skin. - A. M.
1. A corporation organized and operated to turn over its profits to a charitable organization is not tax-exempt. Eastman Corporation v. Commissioner of Internal Revenue, 16 T.C. 1502 (1951); Elisian Guild Inc. v. U.S., 412 D.2d 121, 124 FN5 (lst Cir. 1969).
2. Publishers whose operations are indistinguishable from ordinary commercial publishing practices are not tax-exempt. Fides Publishers Ass'n v. U.S., 263 F.Supp. 924 (N.D.Ind. 1967); American Institute for Economic Research v. U.S., 302 F.2d 934 (1962); Scripture Press Foundation v. United States, 285 F.2d 800 (U.S. Court of Claims 1961); Incorporated Trustees of the Gospel Worker Society v. U.S., Dept. Of Treasury, 510 F.Supp. 374 (D.O.C. 1981).
REGULATIONS
Internal Revenue Service Regulation paragraph 1.502-1: "If an organization is operated for the primary purpose of business for profit, tax exemption is not allowed under paragraph 501(c) just because the organization gives all of the profits to another organization which is exempt under paragraph 501(c)".
REVENUE RULINGS
Rev. Rul. 77-4, 1977-1 C.B. 141 citing Rev. Rul. 67-4, 1967-1 C.B. 121: Nonprofit organization was not tax exempt because the publishing company was operated in a manner "indistinguishable from ordinary commercial publishing practices."
GENERAL COUNSEL MEMORANDUM
General Counsel Memorandum 34340, August 28, 1970 sets forth factors to be considered in determining if purpose of publishing company is commercial gain.
ANALYSIS
A. Is the "sale of books whose profits are used to further academic excellence" a legitimate exempt purpose under sec. 501(c) of the Internal Revenue Code?
Any organization that satisfies the requirements of paragraph 501(c)(3) of the Internal Revenue Code is exempt from income taxes. Corporations organized and operated excluslvely for religious, charitable, scientific, testing for public safety, literary, or educational purposes are exempt from Federal income taxes. I.R.C. paragraph 501(c)(l)-(3).
Likewise, according to the Internal Revenue Service regulations, an organization may be considered tax exempt if it satisfies a three part test: (1) the organization must be organized and operated exclusively for exempt purposes; (2) no part of its net earnings may inure to the benefit of any private shareholder or other individual; and (3) no substantial part of its activities may be political or lobbying activities. I.R.S. Reg. paragraph 501(c)(3)-1(c)(1). Exempt purposes include: (a) religious, (b) charitable, (c) scientific, (d) testing for public safety, (e) literary, (f) educational, or (g) prevention of cruelty to children or animals." I.R.S. Reg. paragraph 1.501(c)(3)-1(d).
For Oxford University Press to be exempt from taxation, it must satisfy the three part test of the I.R.S. regulation. If the organization fails the three part test, it does not qualify as tax exempt. In determining if the "operational test" is satisfied, the organization must prove that it primarily engages in activities which accomplish its exempt purpose. If "more than an insubstantial part of its activities is not in furtherance of an exempt purpose," the organization will not be exempt. Reg. paragraph 501(c)(3)-1(c)(1). Thus, if a disqualifying nonexempt activity is "substantial in nature", the organization is not exempt. P.L.L. Scholarship Fund v. Commissioner of Internal Revenue, 82 T.C. 196, 199 (1984) citing Better Business Bureau v. U.S., 326 U.S. 279, 283 (1945). In P.L.L. Scholarship Fund, the corporation operated for the purpose of raising money to provide college scholarships. Id. at 197. The corporation raised money by operating bingo games and other fund raising activities. Id. The court held that operating bingo games benefited the corporation's private interests and thus the corporation was denied its tax exempt status. Id. at 200. Moreover, "a corporation organized and operated to turn over its profits to a charitable organization is not exempt." Eastman Corporation v. Commissioner of Internal Revenue, 16 T.C. 1502 (1951).
Even if it is determined that the corporation's primary purpose is the carrying on of a trade or business, it may still be determined that the trade or business is operated for exempt purposes. Fides Publishers Ass'n v. U.S., 263 F.Supp. 924 (N.D.Ind. 1967). In Fides, the publishing company was incorporated with the following purpose: "printing, publishing, distributing, wholesale and retail books and pamphlets and other publications to promote Christian culture and doing all things necessary thereto to the extent that an individual would be able to do, also to promote without profit arts, crafts and trade." Id.at 927. The Internal Revenue Commissioner initially granted Fides Publishers tax exempt status because it was organized for religious and educational purposes exclusively. As Fides grew, it became an organization that ran a huge business. The court had to determine if the business was organized and operated exclusively for charitable purposes. Since Fides was publishing and selling literature at a profit, the publishing company was being operated for some non-exempt purpose that was substantial in nature. Id. at 935. The court held that although Fides was selling religious literature, it was being sold for a profit. "It could not be otherwise. If it were, every publishing house would be entitled to an exemption on the ground that it furthers the education of the public." Id.
The Internal Revenue Service has stated that an organization engaged in publishing may qualify for exemption under paragraph 501(c) if (1) the content of the publication is educational, (2) the preparation of the material follows methods generally accepted as educational in character, (3) the distribution of the materials is necessary or valuable in achieving the organization's exempt purposes, and (4) the manner in which the distribution is accomplished is distinguishable from ordinary commercial publishing practices. Rev. Rul. 77-4, 1977-1 C.B. 141 citing Rev. Rul. 67-4, 1967-1 C.B. 121. Revenue Ruling 77-4 held that the nonprofit organization whose only activities were preparing and publishing a newspaper and selling subscriptions to it was not operated exclusively for charitable or educational purposes and thus was not tax exempt because the publishing company was not operated in a manner "indistinguishable from ordinary commercial publishing practices." Id.
To determine if an organization's publishing activities are distinguishable from ordinary commercial publishing practices and thus are tax exempt, the Internal Revenue Service and courts have listed some factors for guidance. The following factors must be considered when determining if the purpose of a publishing company is commercial gain: (1) making its literature available to the general public; actively soliciting the purchase of its materials through such means as commercial mailing lists and radio and newspaper advertising; pricing its materials 'competitively' or to return a 'profit' or conducting the enterprise in a manner in which all participants expect to receive a monetary return; publishing its materials almost exclusively for sale, with only a de minimis amount of material donated to 'charity'; engaging in the publication and distribution of literature as its sole activity; and accumulating amounts resulting from its sales activities which are greatly in excess of the amounts expended for educational programs. General Counsel Memorandum 34340, Aug. 28, 1970. Therefore, even if Oxford University Press is serving an educational purpose, based on the previously listed factors, the organization's publishing activities are clearly not sufficiently distinguishable from commercial practices.
Moreover, if an organization is admittedly run as a business, it is not exempt just because it contributes all its profits to an exempt organization. Elisian Guild. Inc. v. U.S., 412 D.2d 121, 124 FN5 (1st Cir. 1969). Internal Revenue Service Regulation paragraph 1.502-1 states that if an organization is operated for the primary purpose of business for profit, tax exemption is not allowed under paragraph 501(c) just because the organization gives all of the profits to another organization which is exempt under paragraph 501(c). Therefore, assuming Oxford University Press is not exempt under paragraph 501(c), it would not be considered exempt just because it donates all of its profits to an exempt organization. On the other hand, if it were determined that Oxford University Press is exempt because its purpose is educational, it would not lose its tax exempt status because it donates its profits to another exempt organization. Courts may not even reach the issue of whether an organization is a "feeder" organization. In P.L.L. Scholarship Fund, 82 T.C. 196, since the organization did not qualify as an exempt organization under paragraph 501(c)(3), the court did not see a need to determine whether the organization was a "feeder".
Based on the statutes, regulations, revenue rulings, and case law, it is unlikely that Oxford University Press would be determined to be tax exempt under paragraph 501(c)(3). The corporation states that its purpose is, "the sale of books whose profits are used to further academic excellence at Oxford University (a U.K. not for profit entity)." Form 990, Part III, 1997. Even if Oxford University Press were able to prove that it operated for educational purposes, it seems as if it would be denied its exempt status because its operation of the publishing company is commercial in nature.
PUBLISHING COMPANY CASES
1. American Institute for Economic Research v. U.S., 302 F.2d 934 (1962).
Facts: American Institute was organized as a charitable corporation under Massachusetts law. The Institute's purpose was "to conduct scientific research in the general economic field and to disseminate the results of such research in order to educate individual students and the general public..." Id. at 935. The American Institute publishes two periodicals which give investment advice. Although it distributes these periodicals and books free to libraries, the Institute has many subscribers who pay for the periodicals. The Institute receives hundreds of thousands of dollars a year from these publications.
Test: Since Congress has never clearly defined education for tax purposes, the court assumes that the Institute has an educational purpose. Then the test is whether the commercial purpose of the corporation is primary or incidental to the exempt purpose.
Hold: The business purpose is the primary purpose. Since there is a substantial nonexempt purpose, the corporation is nonexempt.
Rationale: Plaintiff is in competition with other publishers distributing investment advice. "It is obvious that the service offered by plaintiff is one commonly associated with a commercial enterprise." Id. at 938.
2. Fides Publishers Ass'n v. U.S., 263 F.Supp. 924 (N.D.Ind. 1967).
Facts: The publishing company was incorporated with the following purpose: "printing, publishing, distributing, wholesale and retail books and pamphlets and other publications to promote Christian culture and doing all things necessary thereto to the extent that an individual would be able to do, also to promote without profit arts, crafts and trade." Id. at 927. The Internal Revenue Commissioner initially granted Fides Publishers tax exempt status because it was organized for religious and educational purposes exclusively. As Fides grew, it became an organization that ran a huge business. The court had to determine if the business was organized and operated exclusively for charitable purposes.
Hold: Nonprofit corporation was revoked of nonprofit status.
Rationale: Since Fides was publishing and selling literature at a profit, the publishing company was being operated for some non-exempt purpose that was substantial in nature. Id. at 935. The court held that although Fides was selling religious iiterature, it was being sold for a profit. "It could not be otherwise. If it were, every publishing house would be entitled to an exemption on the ground that it furthers the education of the public." Id.
3. Elisian Guild. Inc, v, U.S., 412 F.2d 121 (Ist Cir. 1969).
Facts: The Elisian Guild corporation was incorporated in Massachusetts in 1961 with the following purpose: "to collect and edit, and to publish, disseminate and distribute to the public for educational and religious purposes essays, articles, books pamphlets and works of art, and dramatic works, dealing with, commenting upon or expounding some aspect of the Christian religion, Christian teaching..." Id. at 122. In 1962, the corporation showed a profit.
The court looked at whether the Guild's exempt purpose transcends the profit motive rather than the other way around. Id. at 124.
Hold: The corporation shall remain tax exempt.
Rationale: In 1962, the Guild only sold 313 books for 615.70,whichwastypicalfortheGuild.Itdoesn′tseemasiftheexemptpurposeis"swallowedupinthefactofathrivingbusinessoperation."But,theGuilddidhaveaninventoryworth615.70, which was typical for the Guild. It doesn't seem as if the exempt purpose is "swallowed up in the fact of a thriving business operation." But, the Guild did have an inventory worth 615.70,whichwastypicalfortheGuild.Itdoesn′tseemasiftheexemptpurposeis"swallowedupinthefactofathrivingbusinessoperation."But,theGuilddidhaveaninventoryworth10,000 by 1967. The court believes that "an over-optimistic inventory is far less suspect than burgeoning profits." Id. at 125. Moreover, the small operation indicates that profits were not the goal of the corporation.
4. Pulpit Resource v. Commissioner of Internal Revenue, 70 T.C. 594 (U.S. 1978).
Facts: Pulpit Resource was incorporated as a nonprofit corporation in California. The corporation's purpose was, "to advance religious preaching through publication of sermons and other resources for ministers, priests, and rabbis, and to apply proceeds to purchase of preaching materials for libraries of selected schools of theology." Id. at 596
Hold: Pulpit Resource was organized and operated exclusively for religious, educational, and charitable purposes under paragraph 501(a) and (c)(3). The publishing activities clearly further the corporation's purpose of improving preaching skills and sermons of clergy of many faiths.
Rationale: Although the corporation has a dual purpose, improving preaching skills and selling religious literature to the clergy, the court determines that the commercial or business agenda of the corporation does not negate that Pulpit was operated exclusively for charitable purposes. "If the sale of religious literature was an integral part of and incidental to petitioner's avowed religious purpose, that activity may be considered a part of the religious purpose or objective." Id. at 611 citing Elisian Guild Inc. v. U.S., 412 F.2d 121 (1st Cir. 1969).
5. Incorporated Trustees of the Gospel Worker Society v. U.S., Dep't. of Treasury, 510 F.Supp. 374 (D.O.C. 1981).
Facts: The Gospel Worker Society was incorporated in 1906 as a religious organization. The members distributed literature, conducted services, held street meetings. Beginning in the 1930s, the members printed the literature they distributed on their own press and in 1937 the IRS declared the Society exempt as an organization carrying on charitable, educational, religious, and missionary activities. In 1953 the exemption was upheld. Currently, the Society is not affiliated with a church and the only activity the Society does is publish religious literature. There have been increased profits since the 1960s.
Test: Does the organization satisfy the organizational test set out in the statute, that an organization is not exempt if more than "an insubstantial part of its activities is not in furtherance of an exempt purpose." Id. at 377 citing 26 C.F.R. s 1.501(c)(3)-1(c)(1).
Two types of factual patterns: This court states that the case law has divided cases into two different factual patterns.
1. An organization conducting religious activity which also carries on a trade or business for profit. Then the test would be whether the business is incident to and in furtherance of the religious activity.
2. An organization whose only activity is income producing. Then the test would be whether the primary purpose for the income producing activity is an exempt purpose. The Gospel Workers Society falls into this category. This is a factual question.
Hold: The court holds that Gospel Workers Society is no longer a tax exempt organization and that it must pay taxes for all of the years since it has not been operating for an exempt purpose. The court looked at the following factors when considering what the purpose of the commercial activity was: accumulated profits, increase in the salaries of personnel of the press, that Gospel Press is in "direct competition with a number of commercial publishers." Id. at 379. These facts taken together present a picture of a publishing enterprise the primary purpose of which is profits, not salvation." Id. at 380.
6. Presbyterian and Reformed Publishing Co. v. Commissioner of Internal Revenue, 743 F.2d 148 (3rd Cir. 1984).
Facts: Presbyterian and Reformed Publishing Co. was incorporated in 1931 to, "state, defend and disseminate (through every proper means connected with or incidental to the printing and publishing business) the system of belief and practice taught in the Bible, as that system is now set forth in the Confession of Faith and Catechisms of the Presbyterian Church in the United States..." Id. at 150. The publishing company was tax-exempt for 52 years until the tax court declared that the publisher became profitable and thus lost its tax-exempt status. This court reverses the tax court and reinstates the publishing company's tax-exempt status.
Test: What is the purpose of the organization claiming tax-exempt status and to whose benefit does its activity inure?
Hold: The activity does not personally benefit any individual and the purpose was as defined in its articles of incorporation; thus, the corporation is tax-exempt. "...the presence of profit making activities is not per se a bar to qualification of an organization as exempt if the activities further or accomplish an exempt purpose." Id. at 156 citing Aid to Artisans. Inc. v. Commissioner, 71 T.C. 202, 211 (1978). This court holds that unexplained accumulations of cash beyond the reasonable needs of the business may be considered evidence of a commercial purpose. Further, this court distinguishes Reformed Publishing from Fides by stating that in Fides the publisher did not explain the reason for the increased profits. Reformed Publishing needed to raise profits so it could increase its physical capacity.
7. The Nationalist Movement v. Commissioner of Internal Revenue, 102 T.C. 558 (U.S. 1994).
Facts: The Nationalist Movement was incorporated as "a non-profit charitable, educational and fraternal organization dedicated to advancing American freedom, American democracy and American nationalism." Id. at 560. The organization publishes and distributes a monthly newsletter, produces a cable television program, provides telephone counseling, and participates in rallies, speeches and parades.
Hold: The Nationalist Movement does not operate its "legal activities" for charitable purposes and the publishing and distribution of the newsletter is not an educational purpose. The court is not convinced that the publication and distribution of the newsletter is an insubstantial activity; there is a wide distribution of the newsletter and it brings in money to the organization.
8. Scripture Press Foundation v. United States, 285 F.2d 800 (U.S. Court of Claims 1961).
Facts: Plaintiff was organized as a nonprofit corporation operated exclusively for religious purposes. Plaintiff prepares and sells religious literature. The issue is whether plaintiff is exempt under IRC paragraph 101(6) (of 1939), currently paragraph 501(c).
Hold: The court holds that plaintiff's activities are not tax exempt. The court looked at whether the sale of the religious literature was incidental to the religious purposes, or whether the religious objectives were incidental to the sale of religious literature. The court held that the sales were the organization's primary activity. Moreovcr, the organization did not qualify as having an educational purpose either because it engaged in a non-educational purpose that was substantial in nature: selling literature.
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