J____, our legacy planner, wrote to me just before 2 this afternoon.

I have a few minutes before we take off. Would you like to arrange an initial conference call with C____ [the high-powered attorney J____ knows in Denver who specializes in 501(c)(3) issues] to talk about the nonprofit issues and the application process?

Let me know if you would like to do so and I’ll get that arranged when I get back to the office tomorrow.

By the way, when it comes to nonprofit accounting experts [the firm you contacted] is the best. I have known [the founder] for years. They do our corporate and my personal taxes.

“I’d be delighted to speak with C____,” I replied, “if the strategy really can work. Sarita and I would like to move forward.”

This evening, then, after he got home, he wrote, “Your conversation with C____ will be exceedingly worthwhile on all this.”

Then, not quite an hour later:

In the flight magazine on the plane it tells about a AAA minor league baseball team that operates as a nonprofit organization (in Memphis). The baseball team fulfills part of the nonprofit’s mission.

I think your “business” has an even more legitimate mission and purpose that the baseball team. Getting you to be a nonprofit will take time and experience, but it can certainly be done.

While he has been traveling, however, I have done further research. And based on what I have found, I don’t think I can accept his comments without reply. So I just wrote him:

I am glad you feel so confident about the possibility of our company becoming a 501(c)(3) organization. The further I get into things, the less confident I am.

Reasons: in sum: because . . .

• According to the IRS’ online publication about Section 501(c)(3) Organizations, Section 501(c)(3) specifies clearly what organizations are qualified as exempt from federal taxation because of their Educational nature. Our firm doesn’t come close.
• In like manner, qualifying charitable organizations must be exclusively engaged in their declared charitable purposes. Based on court precedent (some of which is outlined below), I see no way that our company could possibly come up with a definite charitable purpose that would encompass its current activities.

Some reasons for coming to the immediately preceding conclusion:

• We do not want–at least not at this time–to engage in large-scale donations to “those in need.” (We engage already, and would have no difficulty in continuing to engage in some form of de minimis donations; but not large-scale donations of materials–say, on the order of more than half the corporation’s net income.) –An interesting precedent cited in the literature references Fides Publishers Ass’n v. U.S., 263 F.Supp. 924 (N.D.Ind. 1967).
• The primary source of income for the company would be from sales of materials the organization publishes–generally regarded by the courts as proof of business rather than any appropriate exempt purpose. (As the IRS’ online publication about Section 501(c)(3) Organizations states, “The articles of organization must limit the organization’s purposes to one or more of those described at the beginning of this chapter and must not expressly empower it to engage, other than as an insubstantial part of its activities, in activities that do not further one or more of those purposes. These conditions for exemption are referred to as the organizational test.”
• The federal tax courts have held that “tax exemption is not allowed [to a business] just because the organization gives all of [its] profits to another organization which is exempt under paragraph 501(c)” (Internal Revenue Service Regulation paragraph 1.502-1). –Precedent cited in the literature for this point includes Eastman Corporation v. Commissioner of Internal Revenue, 16 T.C. 1502 (1951) and Elisian Guild. Inc. v. U.S., 412 D.2d 121, 124 FN5 (1st Cir. 1969).

******

If you’d like to see additional grounds for my concerns . . . let me call your attention to three documents I found online (and the only three I have perused to this point beyond the IRS document I referenced above).

I found the following documents by doing a search on scripture press 501c3 in Google. This, of course, was based on what ______ wrote last night.

The first document on which I clicked–the second in the search engine–was http://bulk.resource.org/courts.gov/c/F2/625/625.F2d.804.79-1883.html. It turns out the document is not about Scripture Press, but about an organization called Federation Pharmacy Services. The document is a judgment by the U.S. Court of Appeals concerning a decision that had gone against FPS’ request for tax-exempt status. Scripture Press is referenced in the decision by way of supporting precedent.

I have quoted much of the Court’s decision, below, having highlighted (in bold and/or in deep red) the most pertinent portions:

Metropolitan Senior Federation (Metropolitan), a nonprofit Minnesota corporation whose purpose is to enhance the well-being of Minneapolis-St. Paul senior citizens, organized the Federation. Prior to Federation’s formation, Script Shoppes, Inc., (Script), a commercial pharmacy, had agreed with Metropolitan to provide senior citizens with prescription drugs at 10 percent off the lowest retail price in the Minneapolis-St. Paul area and to make free or low-cost delivery of those drugs to certain senior citizens. But Script incurred substantial losses and consequently was forced to discontinue its operation in December 1976. In order to preserve the services that Script had rendered to the elderly, Metropolitan acquired its remaining assets and transferred them to Federation.

According to its articles of incorporation, Federation was organized for the purposes of operating a nonprofit pharmaceutical service for the general public, with special discount rates for senior citizens and handicapped citizens in the Minneapolis-St. Paul metropolitan area.

In its application for recognition of exemption under § 501(c)(3) of the Internal Revenue Code of 1954, the Federation proposed to sell prescription drugs to its members at a price of 5 percent below the lowest price charged for such items at local for-profit pharmacies, as established by a price survey. Nonmembers would be obliged to pay the established survey price for their drug purchases. . . .

In its application for tax-exempt status Federation stated that all customers, whether members or not, would be required to pay for their drug purchases. Federation gave no commitment that it would reduce prices in any instance below cost, and the organization was not obligated to provide free drugs to any indigent persons.

In order to meet its operating costs Federation expected to rely on the assistance of volunteers to perform certain duties and financial contributions. However, it was admitted that the primary source of income would be derived from its prescription drug sales and that Federation had not formulated a program for soliciting contributions. Federation planned to promote its products through advertising, principally directed at senior citizens and the handicapped. . . . The majority of the Court held that Federation must be denied tax-exempt status because “it is operated for a substantial commercial purpose.” . . .

Federation contends that its activities accomplish two exempt purposes the promotion of health and the relief of financial distress of the aged and the handicapped. The burden of proving entitlement to an exemption lies with the party claiming it. In the instant case, the Tax Court held that Federation failed to carry that burden and that it operated for a substantial commercial purpose rather than for an exclusively charitable purpose. . . .

The income of all persons, natural or corporate, is subject to tax unless it comes within a specific statutory exception. . . . One of the exceptions . . . is . . . [o]rganizations exempt under Code § 501(c)(3) [which] include “Corporations . . . organized and operated exclusively for . . . charitable . . . purposes . . .” . . .

In order to operate “exclusively” for a charitable purpose, an organization must engage “primarily in activities which accomplish” such a purpose and its exempt status will be lost “if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.” . . .

The test of “exclusivity” has been defined by Treasury Regulations and case law to mean that a substantial nonexempt purpose or activity will disqualify the organization’s exempt status, but insubstantial nonexempt activities do not destroy the exemption. . . .

An organization which does not extend some of its benefits to individuals financially unable to make the required payments reflects a commercial activity rather than a charitable one. In Sonora Community Hospital v. Commissioner, supra, the Tax Court denied tax-exempt status to a hospital which provided only a de minimis amount of free care. The Court said (46 T.C., p. 526) “a ‘charitable’ hospital may impose charges or fees for services rendered, and indeed its charity record may be comparatively low depending upon all the facts . . . but a serious question is raised where its charitable operation is virtually inconsequential.” . . .

[I]n Hassett v. Associated Hospital Service Corp., . . . an organization instituted a “nonprofit hospital service plan” to provide health care to its subscribers at a set fee. Any surplus proceeds were used to reduce future subscription rates or increase services and the corporate officers performed their duties without compensation. But the corporation solicited no charitable contributions and its subscribers were required to pay the fee charged in order to receive its benefits. The Court held that such an arrangement was commercial in nature, and although the rates were “as low as possible,” the corporation was not organized and operated exclusively for a charitable purpose.

Again, in B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), a corporation whose purpose was to furnish consulting services to exempt and other not-for-profit organizations sought to be classified as a § 501(c)(3) organization. As in Hassett, its officers received no compensation. But the corporation here, too, solicited no contributions and, therefore, while giving some consideration to the client’s ability to pay, planned to charge a sufficient fee which would enable it to recover its costs plus a small profit. The Tax Court pointed out that the corporation was engaged in a business normally pursued by commercial enterprises and appeared to be in competition with them, which is “strong evidence of the predominance of nonexempt commercial purposes.” B.S.W. Group, Inc. v. Commissioner, supra, 70 T.C., p. 358. The Court, moreover, was not impressed by the corporation’s statement that it would charge a lesser fee than that imposed by other firms.

In the recent case of Christian Manner International, Inc. v. Commissioner, 71 T.C. 661, 670 (1979), the Court held that a corporation which sold books of a religious nature at a profit was pursuing principally a commercial purpose and was thus ineligible for tax-exempt status. As one factor indicating such a purpose, the court cited that the corporation there was in direct competition with other businesses that sold religious literature.

Federation has admitted that it has no program for raising charitable contributions and intends to rely financially on the “patrons of the pharmacy.” As pointed out in B.S.W. Group, Inc., and Harding Hospital, Inc., supra, Lorain Avenue Clinic v. Commissioner, 31 T.C. 141 (1958), and Hassett, supra, the absence of contributions or of a plan to solicit contributions, which are characteristic of a charitable institution, militated against the finding of tax-exempt status for those respective organizations.

Federation also requires that all its customers pay for their prescription drug purchases. Although its members are allowed a 5 percent discount, there is no evidence that Federation has ever offered or is committed to offer its products to any customer below cost. Further, it should be noted that the use of volunteers by Federation to defray its costs does not negate the existence of a commercial purpose. . . . It is immaterial that Federation’s objectives may be laudable. In the case of Est of Hawaii v. Commissioner, (71 T.C. 1067, p. 1082) (1979), the Tax Court stated:

We do not question the sincerity or dedication of petitioner’s members. But it is petitioner’s activities and not its members’ devotion to their work that determines whether it is entitled to exemption from taxation. . . .

[I]n order for an organization to qualify for exemption under § 501(c) (3) the organization must “establish” that it is neither organized nor operated for the “benefit of private interests.” Only Federation’s card-holding members are eligible to purchase drugs at a discount. There is no showing one needs financial assistance or is indigent to receive a card.

To summarize, we find Federation relies financially on the sale of prescription drugs to the public with no accommodation made for those unable to pay. As a consequence, it is engaged in competition with for-profit pharmacies in the area. Nor does the administrative record indicate any other activity on Federation’s part which establishes the requisite charitable purpose.

Accordingly, we find that the Tax Court’s decision that Federation operates for a substantial commercial purpose and does not qualify as a charitable organization exempt from tax under § 501(c)(3)

Having read that decision, I then moved up a spot in Google to read the actual decision with regard to Scripture Press. Again, I found it highly instructive. But let me quote, simply, the summary at the end:

In summary, we are compelled to reach a conclusion that plaintiff’s activities are of a nonexempt character. We find that the crucial factor, in the light of the evidence, is that the sales aspect of plaintiff’s work looms so large as to overshadow all else.

Look up above in the decision, and it appears that what the Court is referring to is “the enormity of the contrast between what plaintiff has accumulated from sales each year and what it has expended for its educational programs” . . . which “reveals that the sale of religious literature is its primary activity and that its instructional phase is incidental thereto.” –And when the Court refers to “enormity of contrast,” they mean that the ratio between expenditures for religious education programs generally averaged about 4% compared to accumulation of capital (or, in other words, “profit”–even though the profit inured to no individuals’ benefit).

And now . . . the coup de grace.

I “couldn’t believe it.” I “just happened,” next, to click on the seventh link listed on the first page of my Google search–a “lawyer’s brief” to Oxford University Press concerning the possibility of being declared tax-exempt. The first point in the document states,

A corporation organized and operated to turn over its profits to a charitable organization is not tax-exempt. Eastman Corporation v. Commissioner of Internal Revenue, 16 T.C. 1502 (1951); Elisian Guild Inc. v. U.S., 412 D.2d 121, 124 FN5 (lst Cir. 1969).

And the third paragraph, titled “Regulations,” clarifies:

Internal Revenue Service Regulation paragraph 1.502-1: “If an organization is operated for the primary purpose of business for profit, tax exemption is not allowed under paragraph 501(c) just because the organization gives all of the profits to another organization which is exempt under paragraph 501(c)”.

–Kinda punches a hole in the idea that, just because Sarita and I are “all about” giving money to charity and want to turn our company into an organization dedicated to generating profits that can be turned over to charity, the company should be worthy of tax-exempt status.

I’m going to stop here.

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