Source: https://www.chanrobles.com/usa/us_supremecourt/475/834/case.php
Timestamp: 2020-08-09 05:39:29
Document Index: 723422852

Matched Legal Cases: ['§ 513', '§ 1', '§ 1', '§ 1', '§ 1', '§ 513', '§ 513', '§ 513', '§ 3']

(b) There is no merit to the Government's argument that Congress and the Treasury intended to establish a blanket rule requiring the taxation of income from all commercial advertising by tax-exempt professional journals without a specific analysis of the circumstances. chanrobles.com-red
A tax-exempt organization must pay tax on income that it earns by carrying on a business not "substantially related" to the purposes for which the organization has received its exemption from federal taxation. The question before this Court is whether respondent, a tax-exempt organization, chanrobles.com-red
In 1975, Annals produced gross advertising income of $1,376,322. After expenses and deductible losses were subtracted, there remained a net income of $163,388. Respondent reported this figure as taxable income and paid taxes on it in the amount of $55,965. Respondent then filed a timely claim with the Internal Revenue Service for refund of these chanrobles.com-red
The taxation of business income not "substantially related" to the objectives of exempt organizations dates from the Revenue Act of 1950, Ch. 994, 64 Stat. 906 (1950 Act). The statute was enacted in response to perceived abuses of the tax laws by tax-exempt organizations that engaged in profit-making activities. Prior law had required only that the profits garnered by exempt organizations be used in furtherance of tax-exempt purposes, without regard to the source of chanrobles.com-red
§ 513(a). Whether respondent's advertising income is taxable, therefore, depends upon (1) whether the publication of paid advertising is a "trade or business," (2) whether it chanrobles.com-red
26 CFR § 1.513-1(b) (1985). chanrobles.com-red
The presence of the second condition, that the business be regularly carried on, is also undisputed here. The satisfaction of the third condition, however, that of "substantial relation," chanrobles.com-red
Treas.Reg. § 1.513-1(d)(2), 26 CFR § 1.513-1(d)(2) (1985) (emphasis added). In illustration of its new test for substantial relation, the Treasury provided an example whose interpretation is central to the resolution of the issue before us. Example 7 of Treas.Reg. § 1.513-1(d)(4)(iv) involves "Z," an exempt association formed to advance the interests of a particular profession and drawing its membership from that profession. Z publishes a monthly journal containing articles and other editorial material that contribute importantly to the tax-exempt purpose. Z derives income from advertising products within the field of professional interest of the members: chanrobles.com-red
Read as a whole, the regulations do not appear to create the type of blanket rule of taxability that the Government urges upon us. On the contrary, the regulations specifically condition tax exemption of business income upon the importance chanrobles.com-red
We recognize that the language of the Example is amenable to either interpretation. Nevertheless, several considerations lead us to believe that the Treasury did not intend to set out a per se statement of law. First, when the regulations were proposed in early 1967, the Treasury expressed a clear intention to treat all commercial advertising as an unrelated business. See Technical Information Release No. 889, CCH 1967 Stand.Fed.Tax Rep. ¦ 6557. When the regulations were issued in final form, however, following much criticism and the addition of Example 7, they included no such statement of intention. 32 Fed.Reg. 17657 (1967). Second, chanrobles.com-red
Based on this language, the Government argues that the 1969 Act created a per se rule of taxation for advertising income. The weakness of this otherwise persuasive argument, however, is that the quoted discussion appears in the Reports solely in support of the legislators' decision to enact § 513(c), the provision approving the fragmentation of "trade or business." Although § 513(c) was a significant change in the tax law that removed one barrier to the taxation of advertising proceeds, it cannot be construed as a comment upon the two other distinct conditions -- "regularly carried on" and "not substantially related" -- whose satisfaction is prerequisite chanrobles.com-red
It is possible that the Committees' discussion of advertising reflects merely an erroneous assumption that the "fragmentation" provision of § 513(c), without more, would establish the automatic taxation of journal advertising revenue. Alternatively, the quoted passages could be read to indicate the Committees' intention affirmatively to endorse what they believed to be existing practice, or even to change the law substantially. The truth is that, other than a general reluctance to consider commercial advertisements generally as substantially related to the purposes of tax-exempt journals, no congressional view of the issue emerges from the quoted excerpts of the Reports. [Footnote 4] Thus, despite the Reports' seeming endorsement of a per se rule, we are hesitant to rely on that inconclusive legislative history either to supply a provision not enacted by Congress, see 361 U. S. 93 (1959); 1 J. Mertens, Law of Federal Income Taxation § 3.29 (Weinstein rev.1985), or to define a statutory term enacted by a prior Congress. See SEC v. Sloan, 436 U. S. 103, 436 U. S. 121 (1978); United States v. Price, 361 U. S. 304, 361 U. S. 313 (1960). Cf. TVA v. Hill, 437 U. S. 153, 437 U. S. 193 (1978). We agree, therefore, with both the Claims Court and the Court of Appeals in their tacit rejection of the Government's argument that the Treasury and Congress intended to establish a per [email protected] rule requiring the taxation of income from all commercial advertisements of all tax-exempt journals without a specific analysis of the circumstances. [Footnote 5]
It remains to be determined whether, in this case, the business of selling advertising space is "substantially related" -- or, in the words of the regulation, "contributes importantly" -- to the purposes for which respondent enjoys an exemption from federal taxation. Respondent has maintained throughout this litigation that the advertising in Annals performs an educational function supplemental to that of the journal's editorial content. App. 7a. Testimony of respondent's witnesses at trial tended to show that drug advertising performs a valuable function for doctors by disseminating information on recent developments in drug manufacture and use. Id. at 27a, 38a, 43a. In addition, respondent has contended that the role played by the Food and Drug Administration, in regulating much of the form and content of prescription drug advertisements, enhances the contribution that such advertisements make to the readers' education. All of these chanrobles.com-red
factors, respondent argues, distinguish the advertising in Annals from standard commercial advertising. Respondent approaches the question of substantial relation from the perspective of the journal's subscribers; it points to the benefit that they may glean from reading the advertisements, and concludes that that benefit is substantial enough to satisfy the statutory test for tax exemption. The Court of Appeals took the same approach. It concluded that the advertisements performed various "essential" functions for physicians, 743 F.2d 1576, and found a substantial relation based entirely upon the medically related content of the advertisements as a group.
We believe that the Claims Court was correct to concentrate its scrutiny upon the conduct of the College, rather than upon the educational quality of the advertisements. For all advertisements contain some information, and if a modicum of informative content were enough to supply the important contribution necessary to achieve tax exemption for commercial advertising, it would be the rare advertisement indeed that would fail to meet the test. Yet the statutory and regulatory scheme, even if not creating a per se rule against tax chanrobles.com-red
These facts find adequate support in the record. See, e.g., App. 29a-30a, 59a. Considering them in light of the applicable legal standard, we are bound to conclude that the advertising in Annals does not contribute importantly to the journal's educational purposes. This is not to say that the College could not control its publication of advertisements in such a way as to reflect an intention to contribute importantly to its educational functions. By coordinating the content of the advertisements with the editorial content of the issue, or by publishing only advertisements reflecting chanrobles.com-red