1992 Tax Ct. Memo LEXIS 387 | Tax Ct. | 1992
1992 Tax Ct. Memo LEXIS 387">*387 Decision will be entered for petitioner.
MEMORANDUM OPINION
JACOBS,
All section references are to the Internal Revenue Code as in effect at the time the petition was filed, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The parties submitted this case based on the stipulated administrative record. For purposes of this proceeding, we accept the facts contained in the administrative record as true and incorporate them herein by this reference. Rule 217(b)(1).
Petitioner is a nonprofit Ohio corporation whose principal place of business was in Ohio on the date the petition was filed. All of its members are public and academic libraries that are exempt from Federal income1992 Tax Ct. Memo LEXIS 387">*388 tax. Petitioner is controlled by its board of trustees, the members of which are elected from and by the member libraries.
Petitioner is an outgrowth of Ohionet, another nonprofit corporation which qualified for tax exemption under section 501(c). Formerly, Ohionet performed four principal functions: (1) Providing its members with access to a regional library computer network which assisted them in the exchange of educational and scientific information; (2) conducting certain research activities on bibliographic and information technologies and publishing the results thereof; (3) offering a bibliographic computer program (TLM) to its members which it had developed pursuant to a cooperative research and development program conducted with its members; and (4) making computer equipment available to its members for use with TLM at a cost substantially below fair market value. Petitioner has assumed the latter three functions which Ohionet previously performed.
Ohionet asked its members who used TLM to form a new organization whereby those members could assume primary and direct control of the TLM program. Accordingly, petitioner was formed, and on or about January 20, 1989, it acquired1992 Tax Ct. Memo LEXIS 387">*389 TLM from Ohionet. In addition, on or about the same date, petitioner hired as its executive director the Ohionet employee principally responsible for conducting Ohionet's research activities. Each of petitioner's four current employees was previously employed by Ohionet.
TLM is an on-site computerized library system. TLM uses a computer that is owned and operated by petitioner's members. TLM is a transaction system which a library and its patrons may use for circulation and cataloging. Users of TLM include terminal operators who charge or discharge books at circulation desks, technical processing staff members who label materials and create inventory records, acquisition staff members who prepare orders, and patrons or reference librarians who conduct on-line searches.
Petitioner intends to continue providing TLM to its current and future members, to conduct research activities in much the same fashion as Ohionet formerly did, and to provide its members with access to computer equipment at costs substantially below fair market value, but at least equal to petitioner's costs. Petitioner receives volume discounts for its computer purchases and thus is charged lower prices for1992 Tax Ct. Memo LEXIS 387">*390 purchasing such equipment than the individual members would be charged.
Petitioner will also assist its members: (1) In publishing, testing, and installing the system; (2) in developing training materials and programs for the system; (3) in researching and developing new uses and technologies for the system; and (4) in facilitating the sharing of information among its members to help its members learn and adapt computer and semiotic technologies. By undertaking such activities through petitioner, rather than on an individual basis, members can share their knowledge and better perform their educational purposes.
Petitioner's sources of financial support, in order of size from greatest to least, are fees assessed for the use of petitioner's services, investment income, and membership fees. Petitioner's members are assessed for petitioner's operating costs based upon the size of their library system. Petitioner retains a portion of the volume discount for equipment purchased through it, which amounts are used to reduce petitioner's future operating costs or to reduce members' future assessments. Petitioner's members pay an annual membership fee of $ 200.
According to financial1992 Tax Ct. Memo LEXIS 387">*391 projections which petitioner submitted to respondent, petitioner expects to realize a profit of $ 4,000 for its fiscal year ended June 30, 1989, $ 15,000 for its fiscal year ended June 30, 1990, and $ 37,000 for its fiscal year ended June 30, 1991.
Upon liquidation, petitioner's assets will be distributed for one or more tax exempt purposes or will be distributed to the Federal government or a State or local government for a public purpose.
On August 9, 1990, respondent issued a final adverse ruling that petitioner did not qualify for tax exemption. In said ruling, respondent stated that:
You are not operated exclusively for one or more exempt purposes as required by section 501(c)(3) of the Code. You are operated to provide your member local libraries with a proprietary electronic catalogue system, software support and technological assistance, and joint purchasing activities, for which dues and assessments are charged. By providing these services, you are operated for a substantial, non-exempt commercial purpose.
A timely petition made under section 7428(a) confers jurisdiction on this Court to declare whether petitioner qualifies under section 501(c)(3) 1992 Tax Ct. Memo LEXIS 387">*392 as an exempt section 501(a) entity. In making our declaration, we do not engage in a de novo review of the administrative record.
Section 501 provides in part:
(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 Exempt1992 Tax Ct. Memo LEXIS 387">*393 Organizations. -- The following organizations are referred to in subsection (a):
* * * *
(3) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes * * *
To qualify as a tax exempt organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in that section.
An organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of1992 Tax Ct. Memo LEXIS 387">*394 the exempt purposes specified in section 501(c)(3).
Respondent argues that petitioner is operated for a substantial, nonexempt commercial purpose. We disagree. Several cases support our conclusion.
In
The Government argued that the cooperative in
The
In the instant case, respondent argues that petitioner is not entitled to an exemption because:
petitioner's primary activity is not to perform functions that advance education within the meaning of section 501(c)(3). Petitioner does not primarily operate a computer network by which information, such as educational or research data, or bibliographic information is exchanged, shared, or disseminated among members as well as the general public. The TLM system * * * is designed to be nothing more than a local library administrative system used by local libraries to catalog1992 Tax Ct. Memo LEXIS 387">*397 information, perform research, control circulation of materials, track overdue materials, compute the amount of fines due on the overdue materials, and bill for these amounts.
In our opinion, petitioner's activities, like those of the cooperative in
In
The District Court held that the cooperative was exempt under section 501(c)(3). Citing
1992 Tax Ct. Memo LEXIS 387">*399 The activities of petitioner closely parallel those of the cooperative in
Respondent distinguishes these cases by arguing that petitioner does not perform the exempt functions that are vital to its members' exempt purpose. As an example, respondent notes that petitioner is not operating the information systems or card catalogues.
We do not find respondent's distinction persuasive. First, we note that respondent1992 Tax Ct. Memo LEXIS 387">*400 has not attempted to reconcile this distinction with the holding in
Second, respondent's distinction assumes that
Respondent argues that the following three factors indicate that petitioner has a substantial nonexempt purpose: (1) The manner in which petitioner's activities are conducted; (2) the commercial hue of those activities; and (3) the existence and amount of annual or accumulated profits.
The facts in
These factual distinctions are critical to the resolution of the instant case. 3 Our holding follows those cases which hold that where a group of tax exempt organizations form a cooperative to provide services exclusively to those tax exempt organizations, and the services provided are necessary and indispensable to the operations of the tax exempt organizations, the cooperative1992 Tax Ct. Memo LEXIS 387">*402 is a tax exempt organization. E.g.,
Respondent places great emphasis on the fact that petitioner projected a profit for its fiscal years ending June 30, 1989, June 30, 1990, and June 30, 1991. As we said in
We do not believe that petitioner realizes a "profit" as that word is traditionally used. Any funds which petitioner receives in excess of its costs will reduce petitioner's future costs or reduce members' future assessments. Whether petitioner's prices for its services and products are set at cost so that petitioner does not realize a profit or petitioner's prices are calculated to ensure that petitioner realizes a profit, all financial benefits ultimately accrue to its members. 4 Although petitioner's proposed budget indicates that it anticipated making a profit during the next three fiscal years, such merely represents the bookkeeping arrangements between petitioner and its members; these bookkeeping arrangements do not have any substantive effect on the parties. See
1992 Tax Ct. Memo LEXIS 387">*404 Finally, during the administrative process, respondent raised two reasons for concluding that petitioner failed to qualify as an exempt organization which were either not addressed or only superficially addressed in respondent's briefs. For completeness' sake, we will quickly dispose of those arguments.
First, respondent notes that petitioner is not supported by outside donors, and thus argues that petitioner lacks "donative intent". Outside donors are not required for an organization to qualify under section 501(c)(3), and courts have found organizations supported exclusively by fees and assessments to be exempt from taxation.
Second, 1992 Tax Ct. Memo LEXIS 387">*405 respondent argues that TLM is used for administrative rather than educational functions. Without addressing the accuracy of this contention, we note that respondent does not cite any statutes or case law which provide that the performance of administrative services precludes qualification under section 501(c)(3). 5
To summarize, we hold that petitioner has satisfied its burden of proving that it is operated exclusively for one or more exempt purposes.
Footnotes
1. Sec. 501(e), which was enacted after
, 158 F. Supp. 560">158 F. Supp. 560 (1958), was decided, is now the exclusive provision whereby cooperatives formed by hospitals may qualify for tax exemption under sec. 501.Hospital Bureau of Standards & Supplies, Inc. v. United States , 141 Ct. Cl. 91">141 Ct. Cl. 91HCSC - .Laundry v. United States , 450 U.S. 1">450 U.S. 1↩ (1981)2. E.g.,
, 591 F.2d 620">591 F.2d 620 (1979);Northern California Central Services, Inc. v. United States , 219 Ct. Cl. 60">219 Ct. Cl. 60HCSC - (E.D. Pa. 1979), revd. on another issueLaundry v. United States , 473 F. Supp. 250">473 F. Supp. 250624 F.2d 428">624 F.2d 428 (3d Cir. 1980), affd.450 U.S. 1">450 U.S. 1 (1981); , revd. on another issueMetropolitan Detroit Area Hospital Services, Inc. v. United States , 445 F. Supp. 857">445 F. Supp. 857 (E.D. Mich. 1978)634 F.2d 330">634 F.2d 330 (6th Cir. 1980); . The Supreme Court has ruled that cooperative hospital organizations can qualify for exemption only under section 501(e).United Hospital Services, Inc. v. United States , 384 F. Supp. 776">384 F. Supp. 776 (S.D. Ind. 1974)HCSC - (1981). However, the Supreme Court ruling only pertains to hospital cooperatives and not cooperatives formed by libraries.Laundry v. United States , 450 U.S. 1">450 U.S. 1↩3. Respondent also cites numerous revenue rulings in support of the Government's position.
Rev. Rul. 81-29, 1 C.B. 329">1981-1 C.B. 329 ;Rev. Rul. 74-614, 2 C.B. 164">1974-2 C.B. 164 ;Rev. Rul. 72-369, 2 C.B. 245">1972-2 C.B. 245 ;Rev. Rul. 71-529, 2 C.B. 234">1971-2 C.B. 234 ;Rev. Rul. 69-528, 2 C.B. 127">1969-2 C.B. 127↩ . These revenue rulings are distinguishable from the instant case.4. We note that petitioner's articles of incorporation state that upon petitioner's dissolution, petitioner's assets will be distributed for one or more tax exempt purposes. Thus, it is possible that petitioner's board of trustees, which is elected from petitioner's members, would decide to distribute petitioner's assets to nonmember tax exempt organizations.↩
5. Respondent cites
Rev. Rul. 81-29, 1 C.B. 329">1981-1 C.B. 329 , andRev. Rul. 74-614, 2 C.B. 164">1974-2 C.B. 164 . Revenue rulings are statements of respondent's position. , 64 T.C. 404">407 (1975), affd. in part and revd. in partEstate of Lang v. Commissioner , 64 T.C. 404">64 T.C. 404613 F.2d 770">613 F.2d 770↩ (9th Cir. 1980). Furthermore, these revenue rulings do not state that the performance of administrative services precludes qualification under sec. 501(c)(3).