DocketNumber: Docket No. 29901-82X.
Citation Numbers: 50 T.C.M. 1457, 1985 Tax Ct. Memo LEXIS 60, 1985 T.C. Memo. 570
Filed Date: 11/21/1985
Status: Non-Precedential
Modified Date: 11/21/2020
MEMORANDUM FINDINGS OF FACT AND OPINION
GERBER,
FINDINGS OF FACT
This case was submitted for decision on the stipulated administrative record under Rules 217 and 122. 2 The facts and representations contained1985 Tax Ct. Memo LEXIS 60">*62 in the administrative record, which are assumed to be true for purposes of this proceeding, are incorporated herein by this reference.
Petitioner is a corporation incorporated on July 20, 1981, under the law of the Washington Non-Profit Corporation Act. At the time of the filing of the petition in this case, petitioner's principal place of business was in Seattle, Washington. Petitioner applied for recognition as a tax-exempt organization under
During December 1981, when petitioner first applied for recognition of exempt status, it had essentially not engaged in any operations. Petitioner was also not operational nor had it performed any of its licensing function by the date of its final submission into the administrative record, as enlarged by the Court's Order of September 19, 1983. Thus, our findings are based mainly on proposed operations and on actual operations, to the very limited extent that they have occurred.
Petitioner's Articles of Incorporation include the statement that the purpose of the organization is to operate exclusively for the benefit of educational or scientific research institutions located within Washington State which are exempt from income taxation under
In petitioner's application for tax-exempt status, the Foundation's three main goals were: (1) To financially support scientific research at colleges, universities, and research institutions; (2) to increase the rate of technology transfer from research1985 Tax Ct. Memo LEXIS 60">*64 departments of universities and nonprofit research institutions to industry, particularly industry in the State of Washington; and (3) to strengthen and diversify the economy of Washington State.
Petitioner proposed to assist technology transfer by obtaining patent, copyright, trade secrets, and other rights from researchers for the purpose of licensing them to third parties. Petitioner explained that it intended to do this because academic institutions and individual researchers usually do not have the resources or ability to develop a patentable product.
Petitioner also planned on sponsoring seminars for researchers and members of industry to provide a technology network between the academic world and industry. Specifically, petitioner planned on presenting seminars to inform interested persons of the technological opportunities that exist and to discover what new technology is needed. Petitioner proposed to publish information for the general public regarding discoveries on which it had obtained patents. Furthermore, peritioner would publish a science newsletter once a staff was hired. All of these services would be available to industry, researchers, and the public at no1985 Tax Ct. Memo LEXIS 60">*65 charge.
Petitioner's original funding was a $1 million loan from Seattle-First National Bank based on the loan guarantees which the Foundation's Board of Directors had solicited. Petitioner's Board of Directors canvassed the business community in Washington to obtain financial support in the form of guarantees for the $1 million proposed loan. None of the approximately 30 guarantors are directly affiliated with petitioner. Petitioner proposed to use the loan proceeds to equip an office, to pay full-time professional help, to hire a secretary and to pay administrative expenses.
Petitioner expected that its activities would eventually generate revenue, principally in the form of royalties on inventions acquired from research institutions. Petitioner planned to make agreements with research institutions under which the research institution would transfer the patentable products to petitioner, who would license them to third parties. In granting the patent licenses, petitioner would not give any preferances to any company, but priority consideration would be given to companies located in Washington State. Petitioner planned that researchers and tax-exempt organizations would1985 Tax Ct. Memo LEXIS 60">*66 not be required to pay for petitioner's assistance in developing patentable products. Petitioner also planned not to charge for its seminars, publications, and other information it intended to make available to the interested public. Only third-party licensees would be required to pay for patents and other rights licensed to them by petitioner. If the revenues exceeded the cost of operation, petitioner proposed that the excess would be contributed to universities, colleges, and research institutions exempt from taxation under
On June 7, 1982, petitioner entered into a Memorandum of Understanding with the University of Washington (University) whereby the University agreed to make its technology available to petitioner.Once the technological information was received petitioner would use its best efforts to introduce the technology into public use and to secure royalties or other compensation. After notification by petitioner, the University would assign all rights to petitioner in such technology and agree to execute any other instruments to place1985 Tax Ct. Memo LEXIS 60">*67 the ownership, right, title, and interest in petitioner. Petitioner would thereafter undertake the commercialization of the technology. The basic concept of the agreement is that the major portion of the revenues received from the licensing activities would flow directly to the University after petitioner had covered its out-of-pocket expenses. The monies flowing to the University would be used for further research and to meet its obligation to the inventors. Any monies that petitioner received in excess of that required to cover expenses would be returned to the University in the form of grants for further research. For example, 62.5 percent of gross royalties from patents assigned by the University would be paid directly to that institution. Remaining royalties would be applied to petitioner's expenses, and, should any royalties remain, those funds would be donated to
The Service denied the Foundation's exempt status in their final adverse ruling, stating: "You are not operated exclusively for exempt purposes within the meaning of
OPINION
The parties raise the issue of whether petitioner is operated exclusively for exempt purposes. Resolution of this issue depends solely upon whether petitioner satisfies the operational test of
Under the operational test, an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of the exempt purposes specified in
Petitioner contends that it is entitled to exempt status because it is organized and operated exclusively for the purpose of promoting scientific research. Respondent, however, argues that petitioner does not satisfy the1985 Tax Ct. Memo LEXIS 60">*70 operational test because it furthers a substantial nonexempt commercial purpose of its own.
Whether an entity is operated "exclusively" for exempt purposes is primarily a question of fact and must be determined on an ad hoc basis.
In determining whether an organization is operated "exclusively" for exempt purposes, we must first examine the organization's activities. In applying the operational test, the proper focus is on the purpose or purposes furthered by an organization's activities, rather than on the nature of those activities.
Determining whether petitioner is operated for a substantial commercial purpose is primarily a question of fact to be resolved on the basis of all the evidence presented by the administrative record. See
Because petitioner proposes to engage in various activities, we must determine whether each substantial activity carried on is directed towards the accomplishment of one or more exempt purposes.
Petitioner contends that it is operated exclusively for scientific, educational and charitable purposes. Respondent does not agree that petitioner was operated exclusively for any of the three stated purposes. The statute (
We do not find petitioner's reasoning to necesarily follow. The Foundation's existence will not necessarily provide any more funds for scientific research than might have been received by a university if it had individually sought patents or formed its own organization to do so. Additionally, petitioner's "return" to academic institutions may not be used by those institutions for research or scientific purposes. The major activity of petitioner seems to be geared toward two major aspects: (1) Providing patenting1985 Tax Ct. Memo LEXIS 60">*75 and licensing services and (2) providing a more effective link between academic technical resources and the needs of the marketplace. The second aspect may, in theory, be viewed as benefiting the academic research institutions and the public indirectly through the availability of better goods and products produced by the licensees in the business community. Assuming that petitioner's proposed purposes materialize, there may be some public benefit, but we have difficulty following the contention that petitioner's activities are "scientific." We point out, however, that research is not the only activity that can be "scientific."
Second, respondent argues that petitioner's1985 Tax Ct. Memo LEXIS 60">*76 activity of bringing researchers and industry members together is not the type of activity that advances education. We disagree. It is petitioner's intent to provide a clearinghouse of information to cause the exchange of available and needed technology. Petitioner proposed to publish a science newsletter, sponsor seminars, and publish information for the general public at no cost. Petitioner has already cosponsored a seminar and workshop to educate researchers on the practical applications of their research and to discover new areas to research. It is clear that informational programs may qualify as educational under
Third, respondent argues that petitioner's activities are not charitable because any benefit the community at large receives is, at best, indirect. Although respondent's point1985 Tax Ct. Memo LEXIS 60">*78 is well taken, petitioner's intent to promote scientific research and to remit any receits over its cost to universities is somewhat underrated by respondent. Petitioner may encourage researchers to work in areas where a dublic need exists. Respondent argues that the immediate benefit of these activities redounds to private industry and the research institutions because petitioner's activity of patenting new products on a restrictive basis to selected manufacturers is directed toward benefiting those particular manufacturers. Thus, any benefit to the State of Washington must be considered indirect. In this regard we agree with respondent. It would appear that petitioner's activities will provide revenue to "501(c)(3) organizations," but, more likely be a clearinghouse for academic technology for the direct benefit of Washington State businesses.
We now consider whether petitioner is operated for a substantial commercial purpose. Respondent concludes that petitioner is operated in furtherance of a substantial commercial purpose. In view of the record, as a whole, we conclude that the very nature of petitioner's major activities are commercial.
Petitioner states it will attempt1985 Tax Ct. Memo LEXIS 60">*79 to license the patent to the user or users who will most effectively disseminate the discovery to the public rather than attempting to maximize profits as a commercial operation would do. This statement is not in harmony with petitioner's stated intent to maximize royalties so as to provide universities with additional funds for research. Although petitioner's plan of operation is not to limit work only to areas of research or inventions which are the most economically efficient or have the most immediate market attractiveness, its overall goal is to provide the universities with the maximum return on patents, i.e., 62.5 percent. Petitioner also plans to educate researchers and the public and encourage development of research that might never be made available to the public. There is an incongruity in petitioner's position and the record, as a whole, does not support petitioner's claim that it will not operate with the same objectives as a commercial enterprise.
With respect to the existence and amount of annual or accumulated profits, both parties agree that the mere presence, or possible presence, of profits is not determinative. See
With respect to competition with commercial firms, there is no evidence in the administrative record that petitioner would not compete with commercial firms. Petitioner contends that its clients, such as the University of Washington, will not deal with commercial firms. Respondent argues that the University of Washington is not barred from dealing with commercial firms. The administrative record, however, contains no direct evidence that the University1985 Tax Ct. Memo LEXIS 60">*81 of Washington will not deal with or is prohibited from dealing with commercial firms. 5
With respect to voluntary contributions, the record is sparse. Petitioner has not received any voluntary contributions other than the purportedly gratuitous guarantees for the $1 million loan. Petitioner intends to use the original loan to set up the Foundation and once recognized as exempt, fund-raising activities are to occur. It appears that the revenues from royalties are to be petitioner's principal source of funds.
Petitioner only proposes to accept patent assignments from organizations that are exempt from taxation under
For the foregoing reasons, we conclude that petitioner is not a tax-exempt organization under
Because we have found that petitioner is not organized for exempt purposes, there is no need to consider respondent's argument that petitioner is a feeder organization within the meaning of section 502. To reflect the foregoing,
1. All section references are to the Internal Revenue Code of 1954, as amended and in effect for the taxable years at issue unless otherwise indicated.↩
2. All rule references are to the Tax Court Rules of Practice and Procedure.↩
3. For purposes of
4. See generally
5. The University of Washington advised a representative of the petitioner that it was not interested in dealing with commercial firms, but there is no indication that it is prohibited from doing so. The overall significance of this fact is questionable because the University of Washington is but one of the institutions that petitioner proposes to service.↩