Document: 475 U.S. 834 106 S.Ct. 1591 89 L.Ed.2d 841 UNITED STATES, Petitionerv.AMERICAN COLLEGE OF PHYSICIANS. No. 84-1737. Argued Jan. 21, 1986. Decided April 22, Syllabus Section 511(a)(1) of the Internal Revenue Code imposes a tax on "unrelated business taxable income" tax-exempt organizations. 512(a)(1) defines as gross income derived by such an organization from any trade or . regularly carried it," and § 513(a) business" "any conduct which is not substantially related" to organization's purposes. Respondent organization, in furtherance its exempt purposes maintaining high standards medical education practice, encouraging research, fostering measures for preventing disease improving public health, publishes monthly journal containing articles relevant practice internal medicine. Each issue contains paid advertisements pharmaceuticals, supplies equipment useful After respondent had taxes net 1975, it filed claim refund, when Government demurred, ultimately suit United States Claims Court, held that were related respondent's therefore advertising proceeds taxable. The Court Appeals reversed. Taking view focused too much commercial character enough advertisements' contribution journal's readers, established requisite substantial relation entitlement exemption taxation. Held: must pay profits earns advertisements. Pp. 837-850. (a) It undisputed publication "trade "regularly on." 839-841. (b) There no merit Government's argument Congress Treasury intended establish blanket rule requiring taxation all professional journals without specific analysis circumstances. support regulations legislative history Code. 841-847. (c) In this case, however, based Court's finding facts are adequately supported record, considering those light applicable legal standard, be concluded question "substantially related," words implementing regulation did "contribute importantly," educational properly directed attention business, whereas erroneously exclusively upon information conveyed consequently failed give effect governing statute regulations. 847-850. 743 F.2d 1570 (CA Fed. 1984), MARSHALL, J., delivered opinion unanimous Court. BURGER, C.J., concurring opinion, POWELL, joined, post, p. 850. Albert G. Lauber, Jr., Washington, D.C., petitioner. John B. Huffaker, Philadelphia, Pa., respondents. Justice MARSHALL 1 A carrying has received federal before whether respondent, selling space journal. Annals Medicine. 2 * Respondent, American College Physicians, under 501(c)(3) Code.1 College, stated incorporation, maintain practice; encourage especially clinical medicine; foster prevention improvement health. App. 16a. principal stipulated at trial. purposes, Medicine (Annals), highly regarded scholarly supplies, medicine, well notices positions available field. longstanding policy accepting only about use products, screens proffered accuracy relevance clustered two groups, one front back each issue. 3 produced $1,376,322. expenses deductible losses subtracted, there remained $153,388. reported figure amount $55,965. then timely with Service refund these taxes, 4 trial Cl.Ct. 531 (1983). Rather, after various regarding nature College's correlation between purpose was incidental because "the comprehensiveness content package entirely dependent manufacturer's willingness imagination agency." Id., 535. Accordingly, court determined 5 Federal Circuit (1984). clearly erroneous court's purpose. believed actual readers. 1578. We granted petition certiorari, 473 904, 105 3524, 87 649 (1985), now reverse. II 6 objectives organizations dates Act 1950, Ch. 994, 64 Stat. 906 (1950 Act). enacted response perceived abuses laws engaged profit-making activities. Prior law required garnered used regard source profits. See Trinidad v. Sagrada Orden de Predicadores, 263 578, 581, 44 204, 205, 68 L.Ed. 458 (1924); C.F. Mueller Co. Commissioner, 190 120 (CA3 1951); Roche's Beach, Inc. 96 776 (CA2 1938). As result, able carry full-fledged enterprises competition corporations whose fully Revision 1950: Hearings House Committee Ways Means, Vol. I, 81st Cong., 2d Sess., 18-19 (1950) (hereinafter cited 1950 Hearings) (describing universities' production "automobile parts, chinaware, food operation theatres, oil wells, cotton gins"). need restrain unfair fostered laws. H.R.Rep. 2319, 36-37 (1950). 7 Nevertheless, force abandon ventures, nor levy businesses bore some Act's proponents suggested. See, e.g., Hearings, 4, 19, 165. struck balance benevolent enterprise restraining imposing 26 U.S.C. 511(a)(1). 8 "Unrelated defined unrelated it. ." 512(a)(1). exercise performance charitable, educational, other function constituting basis exemption. 513(a). Whether taxable, therefore, depends (1) business," (2) on, (3) III A. 9 Satisfaction first condition conceded be, declared unambiguously activity distinct accompanying editorial comment. 10 1967, promulgated interpreting provision Act. include complete enterprise, but also component business. Treas.Reg. 1.513-1(b), CFR 1.513-1(b) (1985) (first published 32 Fed.Reg. 17657 (1967)).2 This revolutionary approach identification significant advertising, theretofore been considered simply part unified publishing new segregated journal, commonly referred "fragmenting" into parts: 11 "[A]ctivities soliciting, selling, do lose identity even though periodical matter organization." (1985). 12 1969, responded widespread criticism regulations3 passing Tax Reform Pub.L. 91-172, 83 487 (1969 That legislation specifically endorsed Treasury's concept activities, adopted, 513(c), language separate business: 13 "Advertising, etc., activities does merely within larger complex endeavors may, may not, 513(c). 14 prong inquiry income. 15 presence second condition, here. satisfaction third "substantial relation," vigorously contested, forms crux controversy us. B 16 According Government, can never is, always contends case characteristics question. party finds position issued Department Treasury. 17 1967 regulations, addressed "fragmentation" discussed above, attempted clarify statutory standard found provided have causal (other than through generation income), distribution goods services contribute importantly accomplishment [the exempt] purposes." 1.513-1(d)(2), 1.513-1(d)(2) (emphasis added). illustration test relation, example interpretation central resolution Example 1.513-1(d)(4)(iv) involves "Z," association formed advance interests particular profession drawing membership profession. Z material derives products field interest members: "Following common among magazines publish requires comply certain general taste, fairness, accuracy; limits form, content, manner presentation messages governed basic objective advertisers promote sale advertised products. While contain information, informational controlling aim stimulating demand differs essential respect advertising. Like publishers accepts who willing rates. Although continuing members matters pertaining their exemption, designed selected ordinary kind contemplated statute; fundamentally both method. Z's purposes; constitutes business." 1.513-1(d)(4)(iv), 7. 18 creates per se adopt rule, together remainder 1969 find contentions unpersuasive. 19 Read whole, appear create type taxability urges On contrary, importance activity's issue, direct "[w]hether productive circumstances involved," interpreted being inconsistent rule. Attributing term "example" meaning, we believe best construed possible application, given circumstances, regulatory determining relation. 20 interpretative difficulty arises primarily failure distinguish statements provide hypothetical posit necessary consequences facts. Just point lengthy would end begin, pivotal statement appears: products." reading proposition law, while read fact true hypothesis "Z" Annals. 21 recognize amenable either interpretation. several considerations lead us intend set out law. First, proposed early expressed clear intention treat Technical Information Release 889, CCH Stand.Fed.Tax Rep. ¶ 6557. When final following addition 7, they included intention. (1967). Second, contradict explicit case-by-case requirement articulated reluctant attribute depart own principle absence doing so. Finally, time issued, mean customarily continue untaxed. Note, Macaroni Monopoly: Developing Concept Unrelated Business Income Exempt Organizations, 81 Harv.L.Rev. 1280, 1291 (1968). activity, traditional journals, departure prevailing view. Thus, idea revenue sufficiently controversial, so substantial, authorization tenuous, cannot intent take step form ambiguous example, appended subpart subsection subparagraph regulation. 22 still possible, course, that, regardless what actually meant creating taxation, appears embrace view, supports For cites Report, discussing organizations: 23 "Your committee believes competing taxpaying should competitive advantage operating free unless contributes function. functions, taxed." 91-413, pt. 1, 50 (1969), U.S.Code Cong. & Admin.News pp. 1645, 1695. Similar views Senate Report: 24 "Present law.—In December 25 similar treated 'unrelated income' organization. "General reasons change.—The agrees reached appropriate result specifying carries businesses, based, unclear litigation could reason, insofar apply placed laws." S.Rep. 91-552, 75 2104. 27 Based language, argues created weakness otherwise persuasive argument, quoted discussion Reports solely legislators' decision enact approving fragmentation 513(c) change removed barrier proceeds, comment conditions on" "not related"—whose prerequisite incorporate defining refer way hotly debated hearings. Reform, 1969: 91st 1st 1113, 1118, 1192, 1241 (1969). reason conclude resolved dispute whether, carriage meaning 28 Committees' reflects assumption more, automatic revenue. Alternatively, passages indicate affirmatively endorse existing substantially. truth reluctance consider generally congressional emerges excerpts Reports.4 despite Reports' seeming endorsement hesitant rely inconclusive supply Congress, see Commissioner Acker, 361 87, 93, 80 144, 148, 127 (1959); J. Mertens, Law Taxation 3.29 (Weinstein rev.1985), define prior Congress. SEC Sloan, 436 103, 121, 98 1702, 1713, 56 148 (1978); Price, 304, 313, 326, 331, 334 (1960). Cf. TVA Hill, 437 153, 193, 2279, 2301, 57 117 (1978). agree, tacit rejection circumstances.5 IV 29 remains or, regulation, "contributes importantly"—to enjoys maintained throughout performs supplemental content. 7a. Testimony witnesses tended show drug valuable doctors disseminating recent developments manufacture use. 27a, 38a, 43a. addition, contended role played Food Drug Administration, regulating prescription-drug advertisements, enhances make readers' education. All factors, argues, approaches perspective subscribers; points benefit glean concludes satisfy took same approach. performed "essential" functions physicians, F.2d, 1576, medically group. 30 hand, looks itself, inquiring evinces contributing value Also approaching vantage emphasized lack comprehensive contained commented "hit-or-miss advertising," Cl.Ct., 543, n. 3, observed "differences ads plainly reflected advertiser's marketing strategy rather probable reader." 534. "[A]ny advertising] served raising revenue." 31 correct concentrate scrutiny quality if modicum informative important achieve rare advertisement indeed fail meet test. Yet scheme, against antagonistic Moreover, provides will imposed added), directing our focus operates implication confirmed emphasize "manner" designing selecting pertinent facts: "The evidence plaintiff readers systematic aspect publicized. Those companies got it; others not. drugs devices repeated month another, undermining suggestion principally alert [citing, examples, Valium, Insulin Maalox]. Some concerned conceivable relationship 534 (footnotes omitted). 33 These adequate record. 29a-30a, 59a. Considering them bound say control reflect functions. By coordinating reflecting pharmaceutical market, perhaps stringent erected invariably Its judgment, accordingly, 34 Reversed. 35 Chief whom POWELL joins, concurring. 36 Most comparable newspapers profit. Their assemble disseminate bearing patient care. enormous expansion knowledge makes difficult practitioner—or specialist—to keep current latest aids. sense physicians—a "correspondence course" sponsored profit 37 widest circulation data, surely tends reduce cost hence subscriber, thereby enhancing prospect wider circulation. Plainly recognizing realities appropriate. Such Executive Branch courts. I join permissible present Title exempts entities "organized operated religious, scientific, testing safety, literary, purposes," restrictions including prohibition political activity. (1967), amended since promulgation, references herein version. Moore, Current Problems L.Rev. 469, 476 (1969); Middleditch Webster, Regs: mean; how cope them, J.Tax. 174, 178 (1968); New proposals definition income, 42, 43 (1967); Weithorn Liles, Tax: Changes Affecting Journal Advertising Revenues, 45 Taxes 791, 798 1129, 1184, 1223 Numerous bills introduced 90th Session, unsuccessful attempt overturn became final. H.R. 8765; 8766; 9103; 9468; 9661; 9763; 10150; 10997; 10998; 11491; 11492. And years later, courts down exceeding pre-1969 authority, Physicians States, 209 Ct.Cl. 23, 29, 530 930, 933 (1976); Massachusetts Medical Society 514 154 (CA1 1975). Indeed, different suggest construe explanation Report states subject section 511 2, 1906 conclusion consistent analogous problems. Rev.Rul. 82-139, 1982-2 Cum.Bull. 108 (advertisements county bar journal; rule); 72-431, 1972-2 281 (exempt mailing lists advertisers; rule). Our renders unnecessary address alternative associations organized 501(c)(6)

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