United States v. Amer. Coll. Of Physicians, 475 U.S. 834 (1986)

United States v. American College of Physicians

No. 84-1737

Argued January 21, 1986
Decided April 22, 1986
475 U.S. 834

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR

THE FEDERAL CIRCUIT

Syllabus

Section 511(a)(1) of the Internal Revenue Code imposes a tax on the "unrelated business taxable income" of tax-exempt organizations. Section 512(a)(1) defines "unrelated business taxable income" as the gross income derived by such an organization from any "unrelated trade or business . . . regularly carried on by it," and § 513(a) defines "unrelated trade or business" as "any trade or business the conduct of which is not substantially related" to the organization’s tax-exempt purposes. Respondent tax-exempt organization, in furtherance of its exempt purposes of maintaining high standards in medical education and practice, encouraging research, and fostering measures for preventing disease and improving public health, publishes a monthly medical journal containing articles relevant to the practice of internal medicine. Each issue of the journal contains paid advertisements for pharmaceuticals, and medical supplies and equipment useful in the practice of internal medicine. After respondent had paid taxes on its net income from such advertisements in 1975, it filed a claim for a refund, and when the Government demurred, ultimately filed suit in the United States Claims Court, which held that the advertisements were not substantially related to respondent’s tax-exempt purposes, and that therefore the advertising proceeds were taxable. The Court of Appeals reversed. Taking the view that the Claims Court had focused too much on the commercial character of the advertising business and not enough on the advertisements’ contribution to the education of the medical journal’s readers, the Court of Appeals held that respondent had established the requisite substantial relation and its entitlement to exemption from taxation.

Held: Respondent must pay a tax on the profits it earns from the advertisements. Pp. 837-850.

(a) It is undisputed that respondent’s publication of paid advertising is a "trade or business," and that the business is "regularly carried on." Pp. 839-841.

(b) There is no merit to the Government’s argument that Congress and the Treasury intended to establish a blanket rule requiring the taxation of income from all commercial advertising by tax-exempt professional journals without a specific analysis of the circumstances. There is no support for such a rule in the regulations or in the legislative history of the Internal Revenue Code. Pp. 841-847.

(c) In this case, however, based on the Claims Court’s finding of facts that are adequately supported by the record, and considering those facts in light of the applicable legal standard, it must be concluded that the advertisements in question were not "substantially related," or, in the words of the implementing regulation, did not "contribute importantly," to the medical journal’s educational purposes. The Claims Court properly directed its attention to respondent’s conduct of its advertising business, whereas the Court of Appeals erroneously focused exclusively upon the information conveyed by commercial advertising, and consequently failed to give effect to the governing statute and regulations. Pp. 847-850.

743 F.2d 1570, reversed.

MARSHALL, J., delivered the opinion for a unanimous Court. BURGER, C.J., filed a concurring opinion, in which POWELL, J., joined, post, p. 850.