UNITED STATES TAX COURT



     QUALITY AUDITING COMPANY, INC., Petitioner v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 8794-99X.                      Filed June 19, 2000.


     P is a nonprofit corporation organized to audit
structural steel fabricators pursuant to a quality
certification program administered by the American Institute
of Steel Construction, Inc. (AISC). AISC is likewise a
nonprofit organization and is exempt from Federal taxation
under sec. 501(c)(6), I.R.C. As its primary activity, P
inspects the quality control procedures used in facilities
of fabricators applying to AISC for certification. P
evaluates whether such procedures are in compliance with the
standards set forth in the AISC program. The certification
program was established by AISC at the request of public and
private owners and developers who desired a reliable method
for selecting competent fabricators from among those who
submit bids for the steel work component of a construction
project.

     P seeks tax-exempt status as an organization described
in sec. 501(c)(3), I.R.C., on the grounds that P is operated
exclusively for the charitable purposes of lessening the
burdens of Government and encouraging safe construction for
the benefit of the general public.
                               - 2 -

          Held: P furthers private interests and therefore is
     not operated exclusively for exempt charitable purposes.
     Consequently, P is not entitled to exemption from income
     taxation under sec. 501(a), I.R.C., as an organization
     described in sec. 501(c)(3), I.R.C.

     James A. Nitsche, for petitioner.

     Joan Ronder Domike, for respondent.


                              OPINION

     NIMS, Judge:   Respondent determined that petitioner Quality

Auditing Company, Inc., does not qualify for exemption from

Federal income taxation under section 501(a) as an organization

meeting the requirements of section 501(c)(3).   Having exhausted

its administrative remedies, petitioner challenged respondent’s

determination by timely invoking the jurisdiction of this Court

for a declaratory judgment pursuant to section 7428(a).   The case

was submitted for decision under Rule 122 upon the stipulated

administrative record.   For purposes of this proceeding, the

facts and representations contained in the administrative record

are accepted as true, see Rule 217(b), and are incorporated

herein by this reference.   The issue for decision is whether

petitioner is operated exclusively for charitable purposes within

the meaning of section 501(c)(3).

     Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code, and all Rule references

are to the Tax Court Rules of Practice and Procedure.
                               - 3 -

                            Background

     Petitioner, a nonprofit corporation with a principal place

of business in Bristol, Virginia, at the time of filing its

petition, was formed under the laws of Virginia on April 7, 1995.

Developments and concerns within the structural steel fabrication

industry, and particularly the response thereto by the American

Institute of Steel Construction, Inc. (AISC), led to petitioner’s

genesis.   AISC is a nonprofit organization exempt from Federal

income taxation pursuant to section 501(c)(6).   Since its

founding in 1921, AISC has been engaged primarily in the creation

of standardized engineering codes and specifications for use in

the fabrication and construction of steel-framed buildings and

bridges.

     During the 1960's, a number of governmental agencies and

private industrial owners and developers approached AISC and

requested that it develop a certification program for structural

steel fabricators.   As technological advances had increased both

the predominance and the complexity of steel’s role in commercial

and residential structures, a growing concern over potential

differences in quality had arisen among entities attempting to

select contractors for this component of a building project.    Yet

few owners and developers had sufficient expertise, time, or
                                 - 4 -

funds to adequately investigate the fabricators submitting

project bids.   AISC undertook to create a program which would

afford the requested quality assurances.

     Working in collaboration with engineers, architects,

contractors, and other industry participants (including

governmental agencies), AISC developed and trademarked the AISC

Quality Certification Program.    This certification program

incorporates codes, standards, and specifications for particular

aspects of the fabricating process developed by, among others,

the American Welding Society, the Steel Structures Painting

Council, the American Society for Testing Materials, the Bolting

Council, and AISC.   The program is designed to verify that

fabricators have in place a quality control system that will

assure compliance with such construction standards, as well as

with contract requirements.    Ongoing revision and upgrading of

the program track changes and advancements within the industry.

     The certification program operates in the following manner.

Fabricators desiring certification, often because the owner or

developer of a project conditions bid awards thereon, submit an

application and appropriate fee to AISC.    The fees so charged are

determined in accordance with a schedule set by AISC and are

based upon the fabricator’s status as a member or nonmember of

AISC, the type of certification sought, and the number of

employees at the facility.    The program is open to all
                                - 5 -

fabricators, regardless of AISC membership, but the fee is less

for members also responsible for AISC dues.    The following four

types or categories of certification are available:    Conventional

steel building structures, simple steel bridges, complex steel

building structures, and major steel bridges.    A paint

endorsement is also offered.    Fees for a first-time audit range

from $3,200 to $6,900.

     AISC then contracts with and pays for an independent entity

to perform the actual audit investigation of the fabricator’s

facility.   The auditor evaluates the fabricator’s quality control

procedures to determine whether such procedures adequately test

for and ensure compliance with the industry specifications

incorporated in the AISC program.    No particular structure,

project, or product is certified; rather, the construction

process itself is examined.    Following the audit, the auditor

communicates his or her findings to the fabricator and recommends

to AISC whether certification should be awarded.    Upon receipt of

a positive recommendation from the auditor, AISC forwards to the

fabricator documentation reflecting AISC certified status.      If

the auditor does not believe certification warranted, the

fabricator may choose to be reevaluated after corrective actions

have been implemented.   The specific report pertaining to a given

audit is not disseminated to the public, but AISC publishes the

names of certified companies.
                               - 6 -

     In so administering the certification program, AISC

initially contracted with Abstect, a private, for-profit company,

to conduct the facility audits.   Problems with this arrangement

developed, however, because a profit-driven enterprise was

unwilling to reinvest a sufficient portion of the fees charged to

achieve the level of auditor training and audit consistency

necessary for a uniform, reliable certification program.   AISC

therefore provided the startup capital to establish petitioner as

an independent, nonprofit corporation.    Petitioner’s articles of

incorporation state that its purpose is “To conduct quality

certification and inspection programs which meet the requirements

of private and public standards setting bodies and governmental

agencies”.   Substantially all of petitioner’s time and resources

are dedicated to performing the quality audit function, and no

other entities presently furnish this service.

     Petitioner is governed by a board of directors consisting of

the sitting chairman of AISC; the sitting chairman of AISC’s

Committee on Fabricating Operations and Standards; petitioner’s

president and CEO; and two elected members.   Petitioner operates

by hiring and training independent contractors to inspect and

audit the facilities of fabricators applying to AISC for

certification.   These auditors are paid by petitioner $400 per

audit day plus expenses, which include airfare, lodging,

transportation, and telecommunications.   Petitioner also pays
                                - 7 -

royalties to AISC for use of its trademarked certification

program.   Petitioner’s income is derived solely from the fees

charged AISC for conducting the quality audits.    These fees are

determined annually by petitioner’s board based upon an estimate

of the costs, expenses, and overhead associated with providing

the auditing service.    Petitioner’s stated intent is to set fees

at a level which approximates actual cost.    The request for tax-

exemption submitted by petitioner to respondent estimated an

excess (loss) of revenue over expenses for the years 1995, 1996,

and 1997 of ($28,350), $25,500, and $103,300, respectively.

     The majority of steel structures in the United States are

built without imposing a certification prerequisite on

fabricators.   However, the AISC certification program has

increasingly become recognized as furthering structural integrity

and quality within the steel fabrication industry.    Numerous

private and public owners, developers, and contractors, including

the Army Corps of Engineers and 38 to 40 State highway

departments, now require AISC certification for bridges and other

metal work.    To promote such use of the program, AISC solicits

owners and developers to require certification of fabricators

submitting bids.    The following is representative of a

communication sent by AISC for this purpose:

     Congratulations on reaching the bid stage of the new
     Cleveland Stadium. We understand this is a complex
     project, requiring skilled and experienced construction
     contractors. AISC, the non-profit association
                         - 8 -

responsible for the Specification for Design and
Fabrication of Structural Steel for Buildings for over
75 years, offers a quality certification intended to
make the task of selecting qualified bidders more
reliable. The AISC Quality Certification Program is
internationally recognized as a leader in ensuring that
steel fabricators have the equipment, personnel and
procedures to handle specific types of projects. By
requiring an AISC Quality Certified fabricator, you
will join a growing list of designers and owners who
have elected to use the program, including the U.S.
Army Corps of Engineers, the Navy Facilities Command
and 40 states. Currently, more than 390 shops,
representing 327 companies in the United States,
Canada, Japan and Korea are certified--with more being
added each month.

Though some specifiers have expressed concern that
requiring a Quality Certified fabricator will raise
project costs, rest assured that this is not the case.
The Program is administered by fabricators, for
fabricators with an annual fee to a fabricator of
usually less than $5,000. This fee is much less than
comparable programs in other industries. The fee funds
the cost of administering the program and performing
audits. The Program relies on the use of prevailing
industry standards so there are no implementation costs
associated with the program and the audits often
provide a cost benefit for fabricators since they not
only review a company’s existing quality procedures,
but also help to inform a fabricator about the latest
industry issues and trends. Many program participants
have reported that their procedures and practices have
greatly improved under the impetus of Quality
Certification audits.

We therefore recommend that project specifications
require fabricators bidding on a project be certified
and that contracts be awarded to fabricators that are
certified prior to submitting their bid. The AISC
Quality Certification Program exists to provide
assurances to construction team members such as
yourself that suppliers are capable of performing
according to your specification. We hope you will let
us help you with your work by awarding the project to
currently certified fabricators.
                               - 9 -

     The Cleveland stadium is a highly complex and visible
     project. We recommend the following language be
     inserted n [sic] your structural steel specification:

           “The structural steel fabricator shall be
           certified at the time of bid in the AISC
           Quality Certification Program in the Complex
           Steel Structure Category with a Sophisticated
           Paint Endorsement. A copy of the certificate
           shall be submitted with the bid documents.”

     If you’d like more information on the Certification
     Program, please feel free to call * * *

     Petitioner’s application for exemption under section

501(c)(3), for its role in the above-described quality

certification endeavor, was received by the Internal Revenue

Service on August 2, 1995.   On February 11, 1999, respondent

issued the final adverse ruling which is the subject of this

litigation.

                             Discussion

I.   General Rules

     Section 501(a) exempts from Federal income taxation

organizations described in section 501(c).   Among the

organizations so described are those set forth in section

501(c)(3):

          Corporations * * * organized and operated
     exclusively for religious, charitable, scientific,
     testing for public safety, literary, or educational
     purposes, or to foster national or international
     amateur sports competition * * * , or for the
     prevention of cruelty to children or animals, no part
     of the net earnings of which inures to the benefit of
     any private shareholder or individual * * *
                               - 10 -

     In order to be exempt under section 501(c)(3), an

organization must be both organized exclusively for one or more

of the exempt purposes specified in the section, known as the

organizational test, and operated exclusively for such purposes,

known as the operational test.    See sec. 1.501(c)(3)-1(a)(1),

Income Tax Regs.   Failure to satisfy either test forecloses a

section 501(c)(3) exemption.    See 

of the organizational and operational tests,

“exclusively” does not mean “‘solely’” or “‘absolutely without

exception’”.    Nationalist Movement v. Commissioner, 

,

576 (1994) (quoting Church in Boston v. Commissioner, 

, 107 (1978)), affd. 

(5th Cir. 1994); see also

Copyright Clearance Ctr., Inc. v. Commissioner, 

, 803-

804 (1982).    Nonetheless, the presence of a single nonexempt

purpose, if substantial in nature, precludes exempt status,

regardless of the number or importance of truly exempt purposes.

See Better Bus. Bureau v. United States, 

, 283

(1945); Redlands Surgical Servs. v. Commissioner, 

,

71-72 (1999); Nationalist Movement v. 

at 576;

American Campaign Academy v. Commissioner, 

, 1065

(1989).

     To satisfy the exclusivity requirement as it pertains to the

organizational test, the entity’s articles of organization must

limit its purposes to those which are exempt and must not
                              - 11 -

expressly empower it to engage, except in insubstantial part, in

activities not in furtherance of exempt purposes.   See sec.

1.501(c)(3)-1(b)(1)(i)(a) and (b), Income Tax Regs.

     With respect to 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 such exempt purposes specified in section
     501(c)(3). An organization will not be so regarded if
     more than an insubstantial part of its activities is
     not in furtherance of an exempt purpose. [Sec.
     1.501(c)(3)-1(c)(1), Income Tax Regs.]

Additionally, although an organization may be engaged only in a

single activity directed toward multiple purposes, both exempt

and nonexempt, failure to satisfy the operational test will

result if any nonexempt purpose is substantial.   See Redlands

Surgical Servs. v. 

at 71; Copyright Clearance

Ctr., Inc. v. 

at 803-804.

     Exempt purposes, in turn, are those specified in section

501(c)(3), such as religious, charitable, scientific, and

educational.   See sec. 1.501(c)(3)-1(d)(1)(i), Income Tax Regs.

Charitable is further defined as follows:

     The term “charitable” is used in section 501(c)(3) in
     its generally accepted legal sense and is, therefore,
     not to be construed as limited by the separate
     enumeration in section 501(c)(3) of other tax-exempt
     purposes which may fall within the broad outlines of
     “charity” as developed by judicial decisions. Such
     terms include: Relief of the poor and distressed or of
     the underprivileged; advancement of religion;
     advancement of education or science; erection or
     maintenance of public buildings, monuments, or works;
     lessening of the burdens of Government; and promotion
                               - 12 -

      of social welfare by organizations designed to
      accomplish any of the above purposes, or (i) to lessen
      neighborhood tensions; (ii) to eliminate prejudice and
      discrimination; (iii) to defend human and civil rights
      secured by law; or (iv) to combat community
      deterioration and juvenile delinquency. * * * [Sec.
      1.501(c)(3)-1(d)(2), Income Tax Regs.]

      However, regardless of the presence of what might otherwise

be proper exempt purposes, an explicit exception to section

501(c)(3) status exists in that:

      An organization is not organized or operated
      exclusively for one or more of the purposes specified
      in * * * [section 501(c)(3)] unless it serves a public
      rather than a private interest. Thus, * * * it is
      necessary for an organization to establish that it is
      not organized or operated for the benefit of private
      interests * * * [Sec. 1.501(c)(3)-1(d)(1)(ii), Income
      Tax Regs.]

Private interests within the meaning of this rule include not

only related persons and insiders but also unrelated and

disinterested private parties.    See id.; American Campaign

Academy v. 

at 1068-1069.     In other words, if

an organization benefits private interests, it will be deemed to

further a nonexempt purpose.   See American Campaign Academy v.

at 1066.     The organization will thereby be

prevented from operating primarily for exempt purposes “absent a

showing that no more than an insubstantial part of its activities

further the private interests or any other nonexempt purposes.”

of proof rests on petitioner to demonstrate,

based on materials in the administrative record, that it is
                              - 13 -

organized and operated exclusively for exempt purposes, not

benefiting private interests more than incidentally.   See Rule

217(c)(4)(A); Redlands Surgical Servs. v. 

at

72; American Campaign Academy v. 

at 1063-

1064.

II.   Contentions of the Parties

      Petitioner contends that it satisfies the requirements of

section 501(c)(3) for exemption from Federal taxation as a

charitable organization.   Petitioner maintains that it is

organized and operated exclusively for charitable purposes, that

no part of its net earnings inures to the benefit of private

individuals, and that it serves public rather than private

interests.   According to petitioner, its purpose and activities

qualify as charitable in that quality auditing of steel

fabrication firms both lessens the burdens of Government and

encourages the safe construction of buildings and bridges for the

benefit of the general public.

      Conversely, respondent asserts that petitioner is not

entitled to exemption from taxation under sections 501(a) and

(c)(3).   Respondent concedes that petitioner is organized

exclusively for exempt purposes and that no part of its net

earnings inures to the benefit of proscribed private individuals.

However, it is respondent’s position that petitioner’s inspection

activity neither lessens the burdens of Government nor confers
                                - 14 -

upon the general public any benefit which is not merely

incidental to petitioner’s furthering of the private interests of

AISC and firms within the steel industry.

       We conclude, for the reasons explained below, that

petitioner has failed to establish that it qualifies for

exemption from tax as a charitable organization within the

meaning of section 501(c)(3).

III.    Application

       The question of whether petitioner is entitled to tax-exempt

status as a section 501(c)(3) organization turns here upon

whether petitioner is operated exclusively for exempt purposes.

Petitioner’s primary activity consists of performing audits of

steel fabricators who have applied to AISC for quality

certification.     Petitioner contends that, in so functioning, it

operates exclusively for the charitable purposes of lessening the

burdens of Government and encouraging safe construction for the

benefit of the general public.     We examine each of these

potential grounds for exemption.

       A.   Lessening the Burdens of Government

       An organization can be classified as having the charitable

purpose of lessening the burdens of government only if two

criteria are satisfied.     See Columbia Park & Recreation

Association v. Commissioner, 

, 21 & n.45 (1987), affd.

without published opinion 

(4th Cir. 1988);
                              - 15 -

University Med. Resident Servs., P.C. v. Commissioner, T.C. Memo.

1996-251; Public Indus., Inc. v. Commissioner, T.C. Memo. 1991-3.

First, the activities engaged in by the organization must be

those which a governmental unit considers to be its burden.     See

Columbia Park & Recreation Association v. 

at

21 & n.45; University Med. Resident Servs., P.C. v. 

; Public Indus., Inc. v. 

.   In other

words, it must be shown that a governmental unit accepts as its

responsibility the activities conducted by the organization and

recognizes the organization as acting on the Government’s behalf.

See Columbia Park & Recreation Association v. 

at 21.   Second, the organization’s performance of the activities

must actually lessen the burdens of Government.   See Columbia

Park & Recreation Association v. 

at 21 &

n.45; University Med. Resident Servs., P.C. v. 

; Public Indus., Inc. v. 

.   However, “The

mere fact that such activities might improve the general economic

well-being of the Nation or a State or reduce any adverse impact

from the failure of Government to carry out such activities is

not enough.”   Public Indus., Inc. v. 

.

     Applying these criteria to the case at bar, we conclude that

petitioner has failed to make the requisite showing for an

exemption on the basis of lessening Government burdens.

Petitioner’s primary activity consists of performing quality
                               - 16 -

audits of steel fabricators.   Yet there is no indication in the

record that governmental units consider it their burden to

inspect or certify the quality control procedures in place in the

facilities of private fabricators.      The quality inspection and

certification activities here are not part of a legislated

governmental program, are not the result of an express

governmental delegation of function, and do not seek to enforce

governmentally established standards or guidelines.      See Indiana

Crop Improvement Association v. Commissioner, 

(1981)

(relying on such factors to hold that a taxpayer’s testing and

certification of agricultural products lessened the burdens of

Government); see also Professional Standards Review Org. v.

Commissioner, 

(1980) (finding an entity authorized by

statute to review utilization of Government-subsidized programs

to lessen the burdens of Government).

     Rather, the record reflects only that governmental agencies

were among those who initially requested that AISC develop a

certification program and who have since made use of the program

in awarding bids.   Although such involvement shows a concern with

obtaining high-quality steel work in public projects, it falls

short of demonstrating that governmental units view a program for

auditing steel fabricators as a Government responsibility and

recognize petitioner as acting on their behalf.      The record is
                              - 17 -

likewise bereft of evidence that, in absence of the AISC program,

governmental entities would have undertaken to develop a similar

program or to conduct actual audit inspections.

     Furthermore, to the extent that the existence of the AISC

program and petitioner’s role therein facilitate the Government

in selecting qualified fabricators, an equivalent benefit is

conferred upon private owners and developers.     Private entities

joined with public in requesting the AISC program and likewise

utilize the program in awarding bids.     If, as petitioner

contends, it is operated to lessen the burdens of Government, it

would follow that it is also operated to lessen the burdens on

private parties.   While the former is a charitable purpose, the

latter is not, and the record offers no basis upon which to

determine that the latter is merely incidental to the former.     We

thus cannot conclude that petitioner is operating exclusively for

the charitable purpose of lessening the burdens of Government.

     B.   Encouraging Safe Construction

     We turn to the question of whether petitioner is operating

exclusively for the charitable purpose of encouraging safe

construction for the benefit of the general public.     We

acknowledge that furthering public safety is indeed a charitable

objective.   Moreover, we do not dispute that the AISC

certification program and petitioner’s audit activities promote

increased structural integrity and safety in steel buildings and
                                - 18 -

bridges.    Nonetheless, we find that petitioner’s activities also

further private interests to a degree that is more than

insubstantial.    See Better Bus. Bureau v. United States, 

, 283 (1945).

     Petitioner performs quality audits at the request of AISC,

which in turn acts at the request of steel fabricators applying

for certification.     Neither AISC nor the fabricators, however,

are public entities.     As an organization exempt from taxation

under section 501(c)(6), AISC is a business league or board of

trade.     Such entities are defined as follows:

          A business league is an association of persons
     having some common business interest, the purpose of
     which is to promote such common interest and not to
     engage in a regular business of a kind ordinarily
     carried on for profit. It is an organization of the
     same general class as a chamber of commerce or board of
     trade. Thus, its activities should be directed to the
     improvement of business conditions of one or more lines
     of business * * * [Sec. 1.501(c)(6)-1, Income Tax
     Regs.]

Hence, AISC is classified as an organization which seeks the

betterment of an industry, not the betterment of the general

public.     Although AISC’s actions are not profit-motivated and may

have positive results for society at large, that does not

transform AISC’s purpose, and activities undertaken in

furtherance thereof, from private to public.       As expressed by

this Court:

     It is clear, however, that not all organizations which
     incidentally enhance the public good will be classified
     as “public” organizations within the meaning of section
                              - 19 -

     501(c)(3). One need only glance at the other types of
     organizations described in section 501(c) for examples
     of “nonpublic” organizations which often do much to
     enhance the public good * * *

          We think it is significant that Congress enacted
     special exemption provisions for certain types of
     organizations which would be unable to meet the
     stricter section 501(c)(3) tests which require service
     to public interests rather than to private ones. * * *
     [American Campaign Academy v. Commissioner, 

, 1077-1078 (1989).]

     Here, the development and administration of a quality

certification program, at the request of and for the structural

steel industry, would appear to be consistent with AISC’s mission

as a section 501(c)(6) organization.   AISC, in its solicitations

to owners and developers, states that the program is “intended to

make the task of selecting qualified bidders more reliable” and

“exists to provide assurances to construction team members such

as yourself that suppliers are capable of performing according to

your specification.”   The focus thus seems to be on aiding

industry participants, with any benefit to the general public

being merely secondary.   We note that safety is never mentioned

in the solicitation, and having qualified bidders and suppliers

would address a host of concerns distinct from that of ending up

with a finished product that will not harm its users.   Increased

nonconformities, delays, project cost overruns, reduced structure

longevity, and frequent repair expenditures are among the

problems that could flow from hiring fabricators with inadequate
                              - 20 -

quality control.   Therefore, to the extent that petitioner serves

AISC’s interests in carrying out its section 501(c)(6) role of

industry betterment, petitioner benefits a private interest.

     The steel fabricators who request audits and whose

facilities petitioner inspects are likewise private entities.

Moreover, because these fabricators operate as commercial

enterprises, we are constrained to assume that they largely apply

for certification when to do so furthers their primary objective

of making a profit.   We doubt that firms would seek and pay to

obtain certified status unless they believed the investment would

prove lucrative in the future.   They likely wish to pursue

revenues from a contract requiring certification, or they see the

certification process as a vehicle to increased work through an

improved control process and reputation for quality.   Thus, in

auditing these fabricators, petitioner is once again furthering

private interests.

     Lastly, petitioner has failed to convince us that the

private interests discussed above are insubstantial in comparison

to the benefit reaped by the general public.   The majority of

steel structures built in the United States do not require

certified fabricators.   The certification process itself does not

result in petitioner’s inspecting or certifying the safety of any

finished structure or product with which the public might come in

contract.   Rather, petitioner evaluates the internal quality
                              - 21 -

control procedures of private, for-profit steel fabricators,

incident to a quality certification program administered by a

nonpublic section 501(c)(6) entity and implemented at the request

of steel industry participants.   Accordingly, we conclude that

petitioner is operated to a substantial degree for the benefit of

private interests, including those of AISC and members of the

steel industry.   As furthering private interests constitutes a

nonexempt purpose, petitioner has not established that it is

operated exclusively for exempt charitable purposes.   We hold

that petitioner is not entitled to exemption from taxation as a

charitable organization described in section 501(c)(3).

     To reflect the foregoing,



                                         Decision will be entered

                                    for respondent.