1979 U.S. Tax Ct. LEXIS 181">*181
Petitioner was organized pursuant to the Nonprofit Corporation Act of Texas. Its articles of incorporation indicate that the purposes for its organization were religious, charitable, and educational in nature. Petitioner's primary activity was the publication and sale of books written by its founder which were religiously inspired and oriented but were sold commercially at a profit.
71 T.C. 661">*661 OPINION
Respondent determined that petitioner does not qualify for exemption for Federal income tax under
This case was submitted for decision on the stipulated administrative record under
1979 U.S. Tax Ct. LEXIS 181">*184 Christian Manner International, Inc. (hereinafter referred to as petitioner), was incorporated on January 13, 1976, pursuant to the Nonprofit Corporation Act of Texas, by Willie D. Smith (hereinafter referred to as Smith), Lois T. Smith, and Gary L. Hill. Smith, a registered chemical engineer by profession, was president of petitioner and its sole employee at the time the petition herein was filed. Its articles of incorporation state that the purposes for its organization are to teach and promulgate the gospel of Jesus Christ, to develop and maintain a Christian seminar center and international headquarters, to make direct application of the corporation's funds in the aid and assistance of those considered to be in need or infirm, to contribute to institutions which seek to evangelize and disciple, to provide scholarships or other assistance for worthy and indigent students, to share by media presentation the claims of the gospel of Jesus Christ, and for such other charitable, religious, and educational purposes as petitioner's directors may from time to time determine.
Petitioner filed an application for recognition of exemption under
A. Charitable contributions have been received * * * to publish a Christian book. The funds for this book and others will be used for various Christian activities and employee support.
B. As more funds come in through Charitable contributions and gifts, a radio and possibly Tv ministry will be established.
D. A Christian Communications Center will be formed with the purpose of several organizations coming together to share office space, ideas and ministry functions.
E. All media will be used to educate in areas of Christian knowledge and growth, with films, material, etc.
Petitioner's income is derived from contributions and from the sale of Smith's books. Smith, under the pen name Elijah Two, wrote "The End of Time -- The Messiah Comes." Evidently this book was written by Smith during 1974 and 1975. After some 71 T.C. 661">*663 unsuccessful attempts to have the book printed and published on a commission basis, 3 Smith contracted with Crescendo Publications, Inc., and Kingsport Press to publish and print the book. The unit1979 U.S. Tax Ct. LEXIS 181">*186 cost was $ 0.45 per copy for 20,000 copies and $ 0.40 for additional copies.
Because the books were not received from the printer until December 21, 1975, little, if any, distribution occurred during that year. The books were distributed by advertisement, Christian book store contracts, Christian racks, and word of mouth. The distribution area for the book was primarily the State of Texas. Outlets through distributors with commercial racks were the primary means of distribution. All outlets sold the book for the standard price and commissions allowed to the bookstores and racks were determined according to standard commercial market procedures. The books were sold by petitioner for $ 2.95. Crescendo Publications, Inc., and Kingsport Press received 20 percent of the selling price and the bookstores and1979 U.S. Tax Ct. LEXIS 181">*187 distributors received 40 to 60 percent. The remaining percentage was retained by petitioner. In return for a contribution of $ 3.50 a gift of the book was made. The minimum donation was increased to $ 5.
In 1974 and 1975, prior to petitioner's incorporation, $ 10,113 was received in contributions. Smith also provided $ 1,947.65 of his own funds. Apparently these funds were expended toward the publication of Smith's book. During the period January through September 1976, petitioner received $ 3,787.21 from book sales and $ 4,984.50 from contributions. 41979 U.S. Tax Ct. LEXIS 181">*188 Petitioner's paid expenses during the same period totaled $ 8,147.39. The net profit amounted to $ 624.32. 5 Smith received a salary from petitioner during this period of $ 1,083.63. 6 Petitioner's financial reports show that all funds were used to meet expenses related to the publication, distribution, and sale of books and to repay Smith's 71 T.C. 661">*664 loan, and that no funds were used to carry out any of the other specific purposes stated in petitioner's articles of incorporation.
Although petitioner stated in its application for recognition of exemption that its prospective activities included public speaking, seminars, a Christian communications center, and the use of all media, as of April 23, 1976, no seminars had yet been held nor had any speaking engagements occurred. During the first quarter of 1976, Smith wrote a second book, "The Gift." 7 Consequently, very little activity took place as far as soliciting funds or selling books. From August 1976 to the end of 1976, Smith conducted a "ministry" to bookstore owners. Ministry through other media has not been accomplished.
1979 U.S. Tax Ct. LEXIS 181">*189 On June 8, 1976, petitioner's initial application for recognition of exemption was withdrawn from active consideration. The application was resubmitted by petitioner on September 2, 1976. On January 4, 1977, an adverse letter ruling was issued by the District Director denying the exemption in part on the ground that petitioner is not operated exclusively for exempt purposes because it is engaged in the publication and sale of religious books at a profit. Petitioner appealed this determination, but it was upheld by the Assistant Regional Commissioner on March 10, 1977. This decision was appealed by petitioner to the national office on March 15, 1977. On April 25, 1977, the decision of the District Director was upheld and a final adverse letter ruling was issued on July 7, 1977. The grounds for denial of the exemption are that:
in publishing and selling religious and educational books you were not operated exclusively for one or more exempt purposes as required by
Section 7428(a) permits this Court under certain circumstances to declare the correctness of a final determination by respondent that a corporation is not an organization described in
1979 U.S. Tax Ct. LEXIS 181">*191
1979 U.S. Tax Ct. LEXIS 181">*192 The principal focus of respondent's arguments on brief is that petitioner's sole activity is the promotion, distribution, and sale of Smith's books at a profit. This activity, he argues, was conducted by petitioner for a commercial purpose which is substantial in nature. Therefore, he argues, it is not necessary for the Court to weigh this nonexempt purpose against the exempt purposes, if any, to determine whether petitioner is operated exclusively for charitable purposes. While we agree that a weighing of the importance of the exempt purpose against the substantial nonexempt purpose is not the test, we 71 T.C. 661">*666 believe consideration must be given to whether the nonexempt purpose is independent of, or merely incidental to, the exempt purposes.
Petitioner complains at length that during the course of the administrative procedures at the district and regional levels of the Internal Revenue Service, respondent's agents did not specifically deny that petitioner was organized and operated exclusively for charitable, religious, or educational purposes but instead relied primarily on petitioner's failure to comply with the guidelines set forth in his own
Petitioner is correct in its argument that revenue rulings are not the law but are merely the official interpretations of the law made by the Internal Revenue Service for the information and guidance of taxpayers, Internal Revenue officials, and others concerned.
Although conceding that the sale of Smith's books at a profit is an activity in which petitioner engages, petitioner argues that this was by no means its sole activity. In support of this contention petitioner points to the ministries purportedly conducted by it apart from the distribution and sale of the books. These activities are styled by petitioner as the ministries of reconciliation, preaching, teaching, faith, radio, television, encouragement, prayer, writing, solicitation, youth, and Christian leaders. Respondent would have us infer that these 71 T.C. 661">*667 activities, to the extent any were conducted, are adjuncts to the sale of Smith's books and the promotion of their ideas. Certainly there is little in the record to dispel this inference. In fact, Smith testified that all of his time was spent writing his books and that he does not actively attempt to conduct his ministry in other mediums. Rather, he waits to be approached by others, presumably because they have read his books. Moreover, petitioner's explanations of the purposes1979 U.S. Tax Ct. LEXIS 181">*195 of each of these ministries are vague and unclearly stated -- and there is no explanation of why each ministry should be considered distinct from the others. We believe it apparent from the record that these other ministries are intended to further the successful dissemination of Smith's books. In other words, and without disparaging the sincerity of Smith's convictions, these other ministries have no life independent of Smith's books.
A finding that petitioner's primary, if not sole, activity is the distribution, promotion, and sale of Smith's books does not end our inquiry with regard to petitioner's status. The question of whether petitioner engaged in this activity exclusively for exempt purposes poses difficult legal and factual issues. Therefore, a review of the regulations and decisions which have grappled with the "operated exclusively" standard of
In
in order to fall within the claimed exemption, an organization must be devoted to educational purposes exclusively. This plainly means that the presence of a single non-educational purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truely educational purposes. * * * [
This philosophy, in somewhat modified form, has been carried into the regulations relating to
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 such exempt purposes specified in
71 T.C. 661">*668 The quotation from
Having decided that petitioner's primary activity was the distribution, promotion, and sale of Smith's books, we must next determine whether that activity was in furtherance of an exempt or a nonexempt purpose, or 1979 U.S. Tax Ct. LEXIS 181">*198 both. If the activity was engaged in to further a nonexempt purpose only, the exemption must be denied. If it was engaged in to further an exempt purpose only, petitioner would qualify as an exempt organization under
Several decisions have dealt with the tax-exempt status of organizations which publish and sell religious literature and, as might be expected, have reached conflicting results. However, a review of the pertinent cases highlights the tests used to resolve this issue. Our opinion in
albeit an exempt purpose furthering Christian fundraising efforts, has a nonexempt purpose of offering advice to individuals on tax matters that reduces an individual's personal and estate tax liabilities. Based on those private benefits offered, we find the nonexempt purpose to be greater than the exempt purpose. [
Looking to the purposes served by the primary activity of petitioner in this case, the publication of Smith's books, we find the principal purpose served was commercial1979 U.S. Tax Ct. LEXIS 181">*200 in nature and for the private benefit of Smith. While petitioner's avowed purposes may ultimately be of an exempt nature, we find nothing in the administrative record that convinces us that the activities engaged in by petitioner were directly related to the accomplishment of those purposes. We are convinced that the actual purpose for the organization of petitioner was to publish Smith's books and provide him with an outlet for the exposition of his theories on "the end of time."
Smith's first book, "The End of Time -- The Messiah Comes," relies on his interpretation of various passages from the holy scriptures to develop a timetable prophesying that the Messiah will come in 1980 and that that will be the end of time. While Smith's prophesy may be based on passages from the scriptures, that does not necessarily make the publication of the book religious in purpose.
Respondent determined in his final ruling letter that the content of petitioner's publications is not educational and the manner of distribution is not valuable in achieving educational purposes. "Education" is1979 U.S. Tax Ct. LEXIS 181">*201 defined in
71 T.C. 661">*670
Petitioner has failed to convince us that respondent erred in determining that the activity of publishing Smith's books was not accomplishing an educational purpose.
But even if we assume that the publication of Smith's books was in part in furtherance of religious or educational purposes, petitioner would still not qualify for exemption under
It is also clear that the projected activities to advance the gospel have not been implemented. Although there is some validity to petitioner's argument that profits are necessary before petitioner's projected activities can be effectively begun, it is also true that no serious or meaningful preparation has been made by petitioner with regard to those activities. And, quite frankly, the rambling and obscure positions taken by petitioner in the various documents submitted to the Internal Revenue Service with regard to its proposed activities leave us with the feeling that petitioner's future plans are not firmed up. Moreover, as respondent points out, the publication and sale of Smith's books are directly competitive with other businesses which market religiously oriented literature.
We find that this case more closely resembles such cases as
We conclude that petitioner was not operated exclusively for a purpose exempt under
1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise stated.↩
2. Petitioner refused to stipulate the administrative record filed by respondent pursuant to
3. At least one publisher refused to publish the book on the grounds that it was too controversial. The book predicts the end of the world as it is known today and refers to Henry Kissinger as the "anti-Christ."↩
4. There is no numerical indication in the administrative record regarding the extent to which the contributions were made in return for Smith's book.↩
5. Petitioner's financials indicate that it owed Crescendo Publications, Inc., $ 1,272.75, and Kingsport Press, $ 7,349, for publishing and printing Smith's second book, "The Gifts", see
6. Smith was paid $ 168.92 in the second quarter of 1976 and $ 914.71 in the third quarter of 1976. The financials do not reveal the basis upon which Smith is paid or the projected maximum salary he will receive.↩
7. In his oral argument Smith indicated that he had written 10 books up to the time of trial.↩
8. Sec. 7428(a) provides in pertinent part:
(a) Creation of Remedy. -- In a case of actual controversy involving -- (1) a determination by the Secretary -- (A) with respect to the initial qualification * * * of an organization as an organization described in * * * * upon the filing of an appropriate pleading, the United States Tax Court * * * may make a declaration with respect to such initial qualification * * *. Any such declaration shall have the force and effect of a decision of the Tax Court * * * and shall be reviewable as such.↩
9.
(a) Exemption From Taxation. -- An organization described in subsection (c) * * * shall be exempt from taxation under this subtitle unless such exemption is denied under section 502 or 503.
* * * *
(c) List of Exempt Organizations. -- The following organizations are referred to in subsection (a):
* * * * (3) Corporations * * * organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, * * * no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation, (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of any candidate for public office.↩