American Institute for Economic Research v. The United States , 302 F.2d 934 ( 1962 )

JONES, Chief Judge.

Plaintiff American Institute for Economic Research, organized under Massachusetts law as a charitable corporation, sues to recover income taxes paid for the calendar years 1957 and 1958 in the amounts of $231 and $510, respectively, with interest as provided by law.

Prior to 1957, plaintiff had invested in the common stock of Tri-Continental Corporation, an investment trust. During 1957 and 1958, Tri-Continental paid, on plaintiff's account, income taxes on undistributed capital gains allocated to plaintiff’s stock holdings in the amounts of $231 for 1957, and $510 for 1958. Properly exhausting its administrative remedies, plaintiff here asserts exemption from these assessments under section 501(e) (3) of the Internal Revenue Code of 1954. 26 U.S.C. (I.R.C.1954) § 501(c) (3) (1958 Ed.).

Generally, section 501(c) (3) allows exemption to corporations “organized and operated exclusively” for charitable, scientific, or educational purposes where no part of the earnings inures to the benefit of any private shareholder or individual.

Plaintiff was organized in 1935 as a trust, and Edward C. Harwood, who was instrumental in the trust’s creation, was appointed trustee. Plaintiff’s stated aim was:

“teaching and disseminating economic knowledge with a view to advancing the welfare of the American people, and the doing of everything necessary, suitable and proper for the accomplishment of said purposes.” [Finding 2.]

The Commissioner of Internal Revenue ruled in 1938 that the trust was an exempt organization under section 101(6) of the Revenue Act of 1988, 52 Stat. 447, 481, which is in terms similar to section 501(c) (3) of the 1954 Code.

In 1939, pursuant to applicable Massachusetts law, plaintiff reorganized as a charitable corporation. Mr. Harwood was named its director and cotrustee. In the latter capacity he was to be entitled to life tenure with plaintiff. During the years involved in this suit, Mr. Harwood’s compensation totaled about $18,000 annually.

Plaintiff’s charter indicated its organizational purposes were:

“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, so that there may be more widespread understanding of the fundamental economic relationships affecting the citizens of the United States, both as individuals and as members of a complex economic society, with the ultimate object of advancing the welfare of the American people.” [Finding 4.]

The pertinent bylaws are set out in finding 4. Of present interest is Part I, numbers 11 and 20, which provide as follows :

“11. From time to time the Institute shall publish the results of the scientific research in progress. Such publications may be in form of books, booklets, pamphlets, periodic reports, bulletins, and like material; provided that the Institute may not engage in a general publishing business, and the only publications issued shall be those presenting the results of research undertaken by members of the Institute Staff or Associate Members; provided further, that no manuscripts from outside sources shall be solicited.

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“20. The results of the Institute’s scientific research, as embodied in the Research Reports published by the Institute, shall be available to the general public and no subscribers and other supporters of the Institute shall be required to keep such material confidential. All such material shall be freely available to students and research organizations in the field, and may be quoted in full or in part with or without credit by such individuals and organizations.”

Plaintiff was required to file a claim for exemption under section 501(c) (3) in 1955. This claim and subsequent revisions were denied by the Service.

Having outlined plaintiff’s organizational aspects, which are more completely delineated in our findings of fact to which reference is made, we now turn to the facts necessary for an understanding of plaintiff’s actual operations.

During the period involved in this suit, and almost from its inception, plaintiff has published two periodicals, the Investment Bulletin and the Research Reports. According to plaintiff,

“ * * * The bulletins are issued twice monthly and include brief analyses of industries and individual securities on our approved lists. In addition, the general economic situation and special factors that have an influence on security values are discussed clearly and concisely. Please note that the Institute does not give advice on margin trading and does not attempt to forecast the short swings or so-called technical, movements of the stock market. Our bulletins are intended to aid those who wish to follow a sane and sensible program.” [Finding 10.]

In at least one instance, the Investment Bulletin has contained plaintiff’s suggestion as to the proper vote by subscribers holding stock in particular companies which had announced plans to merge. Subscribers to this bulletin are entitled to receive a Quarterly List of Recommended Securities. This publication contains recommendations regarding efiicacious purchase or sale of selected fixed income securities, investment trust shares, and common stocks. Such recommendations vary as plaintiff deems advisable .to achieve the objectives of any of three types of investment programs, viz., “Investment Plan,” “Speculative-Investment Plan,” and “Speculative Plan.”

Charging one-quarter of one percent of the annual capital involved, plaintiff provides, for about 300 clients, a “Continuous Supervising Service” whereby the client is given specific recommendations for sales and purchases of securities in his portfolio. Further, plaintiff will prepare, for a $1 fee, an analysis of any specified security with a conclusion as to its investment merit.

On the basis of information furnished by any individual, plaintiff offers, without cost, to ascertain

“Whether or not the probable savings or other reasons would justify a complete report on your insurance or retirement program, and the cost of such a report.

“Your need for special assistance in planning your estate so that income taxes and the estate and inheritance taxes payable at your death will be a minimum.

“Whether an appraisal of your investment portfolio with recommendations as to which securities should be sold, retained, or added, would be advisable, and the fees involved.

“Whether the Institute’s other services such as the continuous supervision of investments would be helpful to you, and the cost of such services.” [Finding 10.]

Plaintiff describes the weekly Research Reports as follows:

“ * * * Current economic events are analyzed, and important economic factors such as trade and industrial activity, prices, and money-credit trends, which have a bearing on the future, are portrayed in an unusual series of charts. Included are the statistical indicators of business-cycle changes first developed by the National Bureau of Economic Research. Moreover, the Harwood index of inflation, published monthly in the Research Reports in graphic and tabular form, indicates clearly the present stage of the inflation menace and follows its progress. Probably no single indicator will be of greater importance during the years ahead than this index.” [Finding 10.]

Supplemental thereto, plaintiff publishes at various times more detailed studies of specific economic problems.

The faculty and staff of plaintiff conduct the research necessary for the preparation of all publications. In addition to those discussed above, such research also provides source material for many books published in pamphlet form which deal with economic and financial problems.

Plaintiff is able to accomplish about one-half its printing requirements on its own premises; an independent printing establishment prints the remainder.

A fellowship program, consisting of a two-year course of training in research and advanced economics at the postgraduate level, was initiated by plaintiff in 1946. From three to eight Fellows participated at various times between the program’s inception and its discontinuance, because of the Korean War, in 1955.

Plaintiff was also instrumental in the formation in 1955 of The Interfoundation Committee for Economic Scholarships. This program, in which plaintiff was joined by three private foundations, was an attempt to interest qualified high school students in the field of economic research. It was believed this program would help to supply the future talent for plaintiff’s then inactive fellowship program. Agreeing to bear the program’s administrative expense and to provide any scholarships which the foundations were unable to provide at a given time, plaintiff received $43,535.46 from the three foundations during 1957 and 1958. Sometime during the years 1955 through 1960, plaintiff itself contributed from $12,000 to $14,000 to the scholarship program. For 1957 and 1958, scholarships were made available in the total amount of $32,625, averaging about $80 per student.

The subscription cost for the semimonthly Investment Bulletin is $10 per year; the weekly Research Reports costs $25 per year. Some subscribers, nominated “Annual Sustaining Members,” pay $35 annually, for which they receive the Investment Bulletin, Research Reports, and all book publications (including annual revisions) currently available. In the years 1957 and 1958, plaintiff received $96,540.17 and $117,300.78, respectively, from these individuals. From those who subscribe to the Investment Bulletin alone or one of the investment services, plaintiff received $132,226.59 and $157,544.31. The Research Reports and many of the books dealing with various economic problems are distributed free to approximately 2,000 libraries, the Investment Bulletin is not so distributed.

Plaintiff’s burden is to show that the facts discussed above place it within the language of section 501(c) (3) which requires exclusive devotion to an exempted purpose. “This plainly means that the presence of a single [nonexempt] * * * purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly [exempted] * * * purposes.” Better Business Bureau v. United States, 326 U.S. 279, 283, 66 S.Ct. 112, 90 L.Ed. 67 (1945).¹

A major argument of defendant proceeds, paraphrased, as follows: Many of plaintiff’s publications, specifically the semi-monthly Investment Bulletin and the Quarterly List of Recommended Securities, merely provide advice for a fee to individual subscribers toward achieving a sound investment program. Plaintiff’s “Continuous Supervising Service” (which gives recommendations for sales and purchases of securities in the individual’s portfolio) and its analysis for a fee of specific securities are of a similar nature. The totality of these activities is indicative of a business, and plaintiff’s purpose is thus a commercial purpose and nonexempt.

Since the presence of a single substantial nonexempt purpose will defeat its claim, plaintiff must necessarily answer defendant’s preliminary argument even though this argument is directed toward these selected activities, rather than plaintiff’s operations as a whole. This is so because, as shown by plaintiff’s current receipts found in finding 13, these particular activities clearly demonstrate a substantial purpose of plaintiff. As its answer, plaintiff contends that dissemination of information of this nature, gained by scholarly research which would go for naught without dissemination, is primarily educational.

“Education” is an extremely broad concept, and Congress has not specifically defined its meaning in a tax sense. We note that the judiciary will liberally construe, and rightfully so, provisions giving exemptions for charitable, religious, and educational purposes. See e. g., Harrison v. Barker Annuity Funds, 90 F.2d 286 (7th Cir. 1937).

Of constructional pertinence is our decision in Scripture Press Foundation v. United States, Ct.Cl., 285 F.2d 800, cert. den., 368 U.S. 985, 82 S.Ct. 597, 7 L.Ed.2d 523. There the problem was “whether a religious publishing house, lacking denominational ties, merits tax exempt status.” In denying exemption, we found the dispositive test to be “whether the business activities of the taxpayer are incidental to its charitable [or educational] objectives, or whether, in fact, the converse is true.”

Our approach, then, is to first assume a&guendo an educational purpose without giving definitive meaning to that concept, and next ascertain whether or not the taxpayer has an additional commercial purpose. Should the answer to the latter inquiry be affirmative, we must decide whether the commercial purpose is primary or incidental to the exempt purpose. That on the facts before us the answer to the first question is affirmative requires no extensive discussion. The difficult question is whether the commercial purpose is primary.

Plaintiff admits the amounts received for the publications giving investment advice are above their actual cost of production. (And see finding 13, which shows an operating profit in this sense of approximately 9.2 percent and 4.5 percent in 1957 and 1958, respectively.) In Scripture Press, we indicated that profits are, although not conclusive, at least some evidence that the business purpose is primary.

It is obvious that the service offered by plaintiff is one commonly associated with a commercial enterprise. Plaintiff contends, however, that there is a difference; i. e., that it is not concerned with making a profit in a business sense. Plaintiff argues that the subscriptions of “Annual Sustaining Members” are charitable gifts, and that this method of obtaining funds was chosen so as to preclude any obligation to large contributors. But it is impossible to ignore the fact that these “Members” and those individuals who solely subscribe to the Investment Bulletin are paying for and receiving a desired service, investment advice, and that they subscribe, for the most part, to the publications for that purpose. Since the subscribers receive full value in exchange for their money, it is difficult, if not impossible, to regard these payments as charitable contributions.

In order for plaintiff to obtain its “contributions,” it must proffer something valuable in return. This necessity or purpose to provide such information and service as would be desired by the public places plaintiff in competition with other commercial organizations providing similar services. Plaintiff has chosen to compete in this manner and, as a consequence, plaintiff’s activities acquire a commercial hue.

It is thus readily apparent that those operations emphasized by defendant are more analogous to commerce than to education. And, of course, the operational test of section 501(c) (3) is as decisive as the organizational test. Exclusivity is required by both. By the sale of these publications and services, plaintiff has entered, unwittingly or not, a business. We conclude that this business purpose is primary and not incidental to any educational purpose which may be present. It is not the fact of profits alone which compels this conclusion, for plaintiff is also hampered, as we have discussed above, by the methods it has selected to disseminate this type of subject matter.

All we have said regarding the comparative stress of business as opposed to educational purpose applies as well to any contention that plaintiff is a charitable or scientific corporation. If there be a substantial nonexempt purpose, the corporation is nonexempt. Plaintiff’s investment service in all its ramifications may be educational, but its purpose is primarily a business one.

As to plaintiff’s argument that, since any profits gained from the sale of its publications are used for nonexempt purposes, it is therefore entitled to exemption, we need only refer to the adoption by the majority of this court of our Commissioner’s opinion in The SICO Foundation v. United States, Ct.Cl., 295 F.2d 924.

Plaintiff’s petition will be dismissed.

It is so ordered.

1 . This case involved section 811(b) (8) of the Social Security Act, 49 Stat. 620, 639, 42 U.S.O.A. § 1011(b) (8), 26 U.S.O.A. (I.R.C.1954) §§ 3121, 7701(a) (1), which is in terms substantially the same as section 501 (c) (3) of the Internal Revenue Code. See Scripture Press Foundation v. United States, Ct.Cl., 285 F.2d 800, cert. den. 368 U.S. 985, 82 S.Ct. 597, 7 L.Ed.2d 523, in which we cited the case as relevant authority for the construction of section 501(c) (3).