Appealed from: U.S. Claims Court.
Baldwin, Smith, and Nies, Circuit Judges. Nies, Circuit Judge, concurring.
In this federal income tax case, appellant American College of Physicians (College) appeals from a judgment of the United States Claims Court*fn1 holding the College is not entitled to the refund of taxes paid on income earned from sales of advertising space in the College's journal, Annals of Internal Medicine (Annals). We reverse.
The sole question presented in this appeal is one of first impression for this court: whether the revenues derived by the College from advertising in Annals constitute "unrelated business taxable income" derived from a trade or business the conduct of which is not substantially related to the exercise or performance by the College of its tax-exempt purposes or functions. This appeal involves the College's tax liability for the 1975 tax year.
The College is an organization exempt from federal income taxation under 26 U.S.C. §§ 501(a) and 501(c)(3). Among its tax-exempt purposes are*fn2 "(1) to uphold and to maintain high standards in medical education, medical practice [and medical research]; (2) to encourage research, especially in clinical medicine, and (3) to foster measures for the prevention of disease and for the improvement of public health." Membership in the College is limited to members of the medical profession engaged in practice, teaching, research, or other pursuits in the field of internal medicine or in allied or related specialties.
Annals, a highly regarded medical journal in the field of internal medicine, is published by the College in furtherance of its tax-exempt purposes. Annals contains scholarly articles relevant to the practice of internal medicine, advertisements relating only to medical products, supplies, and equipment useful in the practice of internal medicine, and notices of positions, desired or available, in connection with the practice of internal medicine. Annals is available to members of the College as a benefit of membership and to nonmembers at a per issue price or by subscription. Circulation in 1975 was roughly 73,000.
Advertisements in Annals are "stacked" in two sections -- at the front of, and behind, the editorial content -- of each issue. Advertisements in medical journals published by commercial organizations are generally also grouped in stacks, rather than dispersed throughout an issue. The trial judge found that many of the ads appearing in Annals were identical to those appearing in medical journals published by nonexempt organizations. He also found that the advertising business of Annals was operated in material respects like the advertising business of any other publication.
Advertisements appearing in Annals were prepared by the advertisers and not by the College. The trial court found that the College did not use the advertising in Annals to provide its readers a comprehensive or systematic presentation of the goods or services publicized. Advertising space was made available in Annals at rates competitive with those charged by commercial organizations for advertising space in their medical journals.
The College has a long-standing policy of accepting only those advertisements relating to medical products (primarily drugs), supplies, and equipment useful in the practice of internal medicine and those classified advertisements of positions in connection with the practice of internal medicine. Proffered advertisements are screened for accuracy and relevance to internal medicine.
1975 Advertising Revenues.
In 1975, gross advertising income attributable to Annals was $1,376,322. Direct advertising costs were $833,050. Circulation income and readership costs attributable to Annals in 1975 were $1,057,754 and $1,351,167, respectively. Another publication of the College, the Bulletin, produced an overall loss of $96,471. The College timely reported taxable income of $153,388 and paid federal income taxes of $55,965 on that income for the 1975 tax year.
On or about June 12, 1979, the College filed with the Internal Revenue Service a timely claim for refund of these taxes. Failing to receive notice of disallowance of this claim, receipt of which was not waived, the College, on or about August 17, 1982, filed in the United States Claims Court suit for refund of the taxes. The trial court found that the advertising published in Annals is not substantially related to the College's exempt purposes nor is it published primarily for the convenience of the College's members. Accordingly, the revenues derived from advertising in Annals were held to be taxable. The College appeals.
The trial court's findings of fact are not to be set aside unless they are clearly erroneous. The legal conclusions of the trial court will not be set aside unless they are incorrect as a matter of law.*fn3
Unrelated Business Taxable Income
The Internal Revenue Code provided at the relevant time, with certain exceptions not applicable here, that the income derived from the unrelated business of an organization which is exempt from taxation under 26 U.S.C. § 501(a) (1976) is taxable:*fn4
There is hereby imposed for each taxable year on the unrelated business taxable income (as defined in section 512) of every organization described in paragraph (2) a normal tax and a surtax computed as provided in section 11. In making such computation for purposes of this section, the term "taxable income" as used in section 11 shall be read as "unrelated business taxable income".
The College is an organization described in paragraph (2) -- an organization exempt from taxation under 26 U.S.C. § 501(a) not eligible for certain exceptions. Section 512(a)(1) of title 26 of the United States Code provides:
The term "unrelated business taxable income" means the gross income derived by any organization from any unrelated trade or business (as defined in section 513) regularly carried on by it, less the deductions allowed by this chapter which are directly ...