Commercial publishing and private benefits defeat section 501(c)(3) exemption

Plain-English summary

An organization formed to spread the teachings of a spiritual author merged with a for-profit publisher and continued selling, licensing, and subscribing readers to the author's books and other materials. The author's estate owned the works and granted the organization exclusive publishing rights in exchange for royalties based on net revenue. The organization also planned to pay for restoration of transcripts and make other gifts that benefited the author's estate, while expecting only a small share of income from charitable contributions. The IRS found that the publishing operation resembled an ordinary commercial business because it used market pricing, advertising, distributors, and subscriptions. It also found that royalty payments and restoration work served the private interests of the author's estate. Those substantial commercial and private purposes prevented the organization from operating exclusively for exempt purposes, so the IRS denied section 501(c)(3) status.

Ruling snapshot

• Question: Did the organization's publishing and preservation of a spiritual author's works qualify it for exemption under IRC § 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(a)(1), (c)(1), (c)(2), and (d)(1)(ii)

Full text (IRS public release)

Department of the Treasury Internal Revenue Service       Date:
Tax Exempt and Government Entities                            07/24/2023
P.O. Box 2508                                                 Employer ID number:
Cincinnati, OH 45201
                                                              Form you must file:
                                                              1120
                                                              Tax years:
Release Number: 202342018                                     All
Release Date: 10/20/2023                                      Person to contact:
UIL Code: 501.32-01,
          501.33-00, 501.36-03

Dear               :

This letter is our final determination that you don't qualify for exemption from federal income tax under Internal
Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3). Recently, we sent
you a proposed adverse determination in response to your application. The proposed adverse determination
explained the facts, law, and basis for our conclusion, and it gave you 30 days to file a protest. Because we
didn't receive a protest within the required 30 days, the proposed determination is now final.

Because you don't qualify as a tax-exempt organization under IRC Section 501(c)(3), donors generally can't
deduct contributions to you under IRC Section 170.

We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c), by
sending them a copy of this final letter along with the proposed determination letter.

You must file the federal income tax forms for the tax years shown above within 30 days from the date of this
letter unless you request an extension of time to file. For further instructions, forms, and information, visit
www.irs.gov.

We'll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection after deleting certain identifying information, as required by IRC Section 6110. Read the
enclosed Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our
proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how
to notify us. If you agree with our deletions, you don't need to take any further action.

If you have questions about this letter, you can call the contact person shown above. If you have questions
about your federal income tax status and responsibilities, call our customer service number at 800-829-1040
(TTY 800-829-4933 for deaf or hard of hearing) or customer service for businesses at 800-829-4933.

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Letter 437

Redacted Letter 4034
Redacted Letter 4038

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S

Department of the Treasury
Internal Revenue Service
PO Box 2508
Cincinnati, OH 45201
Date: 05/22/2023

Employer ID number:

Person to contact:

Name:
ID number:
Telephone:
Fax:
Legend: UIL:
T = Movement 501.32-01
V = Date of Formation 501.33-00
W = State of Formation 501.36-03
X = Date of Merger
Y = Author

Z = Related Entity
b = Percent of Royalties Paid
c = Percent of Contributions Paid

Dear               :

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 501(a). We determined that you don’t qualify for exemption under IRC Section 501(c)(3).

This letter explains the reasons for our conclusion. Please keep it for your records.

Issues
Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below.

Facts

You were incorporated on V in W. Your Articles of Incorporation, in addition to containing the standard
exempt purpose clause, provides that your specific purpose is to spread the message of Y, a spiritual author and
teacher, founder of the T. You merged with a for-profit publishing company on X and you are the surviving
corporation. The for-profit publishing company engaged in publishing and preserving Y’s works on behalf of
the estate of Y prior to the merger. You indicate that the assets you received from the merger exceeded the
value of any remaining liabilities.

You continue to use the website of the for-profit publishing company for your activities. You sell books and
other written materials to those interested in Y’s message, and make Y’s works available to other domestic and
foreign publishing companies for resale. You also offer a book subscription service for this material, you
provide free study materials on your website to the public and e to other study groups and nonprofit groups such
as Z. You supply nonprofit groups with materials for their websites, you review the works of Y’s for errors and

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

quality control, and you renovate transcripts of Y’s works as a gift to Z. Z is a non-exempt organization inspired
by Y.

The estate of Y owns the works of Y and has granted you exclusive publishing rights via numerous licenses to
publish and distribute his works. You will pay the estate royalties equaling b percent of the net revenues based
of an accounting of previous activity of net revenue received from sales. Per the consent agreement, the estate

of Y agreed to the assignment of the publishing and royalty agreement to you as the surviving entity. The
payment of royalties to the estate shall continue for the duration of the copyright for each individual book or
derivative work.

Projected income derives from the sale of books through various publishing companies and subscriptions.
Prices charged are equivalent to fair market value. Projected expenses include royalty, publishing, shipping,
advertising, marketing, catalogs, cost of goods/print on demand, storage, website, and charitable contributions.
Charitable contributions are expected to be less than c percent of your total projected income. You will pay a
professional to perform renovations, of archival transcripts owned by the estate of Z. This will also be your gift
to the estate.

Law

IRC Section 501(c)(3) provides, in part, for the exemption from federal income tax of organizations organized
and operated exclusively for charitable, religious, or educational purposes, no part of the nets earnings of which
inures to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that, to be exempt as an organization described in IRC
Section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the
purposes specified in such section. If an organization fails to meet either the organizational or operational test, it
is not exempt.

Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides that 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 IRC 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.

Treas. Reg. Section 1.501(c)(3)-1(c)(2) provides an organization is not operated exclusively for one or more
exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals.

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized and operated
exclusively for exempt purposes unless it serves a public rather a private interest. It must not be operated for the
benefit of designated individuals or the persons who created it.

Rev. Rul. 60-351, 1960-2 C.B. 169, describes an organization that published a foreign language magazine
alleged to be of literary, scientific and educational character. The corporate charter affirms this in its articles of
incorporation. The organization’s income was derived mainly from subscriptions to the magazine and sales of
individual copies. It was found that while the magazine was printed in a foreign language and may provide
material unlike those in other magazines, its primary activity was devoted to publishing a magazine and selling

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

it to the general public in accordance with ordinary commercial business practices. There was no showing that
the organization fulfilled a corporate role that serves an exclusive exempt purpose, and thus did not qualify for
exemption under IRC Section 501(c)(3).

Rev. Rul. 77-4, 1977-1 C.B. 141, describes an organization’s only activities were preparing and publishing a
weekly newspaper that presented local, national and world news, solicited advertising and sold subscriptions.
The pages of the newspaper are equally divided between community interest items of significance to the
members of a certain ethnic group, national and international news articles of special interest to that group and
regular commercial advertising. Income is derived from the sale of advertising and the sale of subscription
services. Although the organization had been in existence for many years, it had yet to realize a profit from its
operations. The Service held that the organization’s activities were indistinguishable from commercial
publishing, and as such, did not qualify for exemption under IRC Section 501(c)(3).

In Better Business Bureau of Washington, D.C., Inc v. United States, 326 U.S. 279 (1945), the Supreme Court
concluded that the presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption
under IRC Section 501(c)(3), regardless of the number and importance of true exempt purposes.

In Harding Hospital, Inc. v United States, 283 F. Supp. 2d 1068 (6th Cir. 1974), the court held that an
organization seeking a ruling as to recognition of its tax-exempt status has the burden of proving that it satisfies
the requirements of the exemption statute.

In Living Faith, Inc. v. Commissioner, 950 F.2d 365 (7th Cir. 1991) the court wrote that the activities were
conducted as a business and the organization was in direct competition with other restaurants and health food
stores; thus, it did not qualify for exemption under IRC Section 501(c)(3). The appellate court stated the factors
that the court relied on to find commerciality and thus offered the best contemporary explanation of the
commerciality doctrine. These factors include:

1) The organization sold goods and services to the public.

2) The organization was in direct competition with for profit businesses.

3) The prices set by the organization were based on pricing formulas common to retail food businesses.
4) The organization utilized promotional materials and "commercial catch phrases" to enhance sales.
5) The organization advertised its services and food.

6) The organization did not receive any charitable contributions.

Application of law
You are not organized or operated exclusively for one or more exempt purposes under IRC Section 501(c)(3) as
described in Treas. Reg. Section 1.501(c)(3)-1(a)(1). You fail the operational test as further explained below.

You are not operating exclusively for an exempt purpose described in IRC Section 501(c)(3). Publishing as a
substantial activity is acceptable only if it furthers a qualifying exempt purpose. You are operating in a manner
consistent with similar for-profit businesses. You are primarily formed to restore, promote, distribute, and make
available for free and sale Y’s works which are owned by Y’s estate. You have not established that your
activities an exclusively charitable, educational, or religious purpose. Therefore, you have not met the
requirements of exemption under IRC Section 501(c)(3). See Treas. Reg. Section 1.501(c)(3)-1(c)(1).

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

By engaging in the publishing, marketing and distributing the works of Y and providing a percentage of any
income received to the estate of Y, you are serving a private rather than a public interest. You stated you will
make payments in percentage of sales of the Y’s works as well as additional gifts to the estate of Y. You will
also use any income received by you to provide for the restoration of Y’s transcripts. This will provide
additional benefit to Y’s estate in the long-term. The estate of Y is a private entity, and therefore this activity
furthers a private interest. Thus, you are not operating for exclusively exempt purposes as described in IRC
Section 501(c)(3): See Treas. Reg. Section 1.501(c)(3)-1(c)(2) and Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii).

You are like the organizations denied exemption in Rev. Rul. 60-351 and Rev. Rul. 77-4 because more than an
insubstantial amount of your activities is devoted to publishing activities which are indistinguishable from
commercial activities; you make Y’s works available for sale under contracts through book distributors and
subscriptions priced at market value. While your activity may provide some benefit to those who read the
writings of Y, you have not established that the overall scope of your activities are distinguishable from a
normal commercial enterprise, and thus serve an exclusively exempt purpose. The fact that this activity has not
sustained a profit over the years is not an indicator that you meet the requirements of this section. Therefore,
you do not meet the requirements under IRC Section 501(c)(3).

You are similar to the organization described in In Living Faith, Inc. You are operating a publishing company
non-distinguishable from a for-profit entity conducting similar activities. While you do provide some works for
free, you primarily produce, market and advertise these items are marketed to the general public for a fee in a
similar fashion to the for-profit entity you assumed operations from. The price of the items you sell are set a fair
market value; there is no donative element to this activity. You have represented that you will receive only a
small amount of income from charitable contributions; the majority of your income will come from
subscriptions and the outright sale of Y’s works. These factors indicate that you are operated for a substantial
non-exempt commercial purpose and thus do not qualify for exemption under IRC Section 501(c)(3).

You are like the organization described in Better Business Bureau of Washington D.C., Inc. While we
acknowledge the works you produce may have an educational and religious element, as indicated in this case,
the presence of your nonexempt commercial and private purposes disqualifies you from exemption under IRC
Section 501(c)(3). You are also like the organization described in Harding Hospital, Inc. The information you
provided for the administrative record does not demonstrate that you operate exclusively in furtherance of an
exempt purpose.

Conclusion
Based on the information submitted, you are not operating exclusively for one or more purposes described in

IRC Section 501(c)(3). Even though your publishing activity may provide some benefit to the those read these
works, you are substantially operating in a similar fashion to an entity that conducts similar activities to a
regular trade or business and serve a private interest to the estate of Y by making periodic royalty payments and
gifts to it. Therefore, you do not qualify for exemption under IRC Section 501(c)(3). Donations to you are not

deductible.

If you agree
If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from
you within 30 days, we’ll issue a final adverse determination letter. That letter will provide information on

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

your income tax filing requirements.

If you don't agree
You have a right to protest if you don’t agree with our proposed adverse determination. To do so, send us a
protest within 30 days of the date of this letter. You must include:

• Your name, address, employer identification number (EIN), and a daytime phone number
• A statement of the facts, law, and arguments supporting your position
• A statement indicating whether you are requesting an Appeals Office conference

• The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization or your authorized representative

• The following declaration:
For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I have examined this request, or this modification to the
request, including accompanying documents, and to the best of my knowledge and belief, the request
or the modification contains all relevant facts relating to the request, and such facts are true, correct,
and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven’t
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We'll review your protest statement and decide if you gave us a basis to reconsider our determination. If so,
we’ll continue to process your case considering the information you provided. If you haven’t given us a basis
for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information
in Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status.

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court later because the
law requires that you use the IRC administrative process first (IRC Section 7428(b)(2)).

Where to send your protest
Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address:

U.S. mail: Street address for delivery service:
Internal Revenue Service Internal Revenue Service

EO Determinations Quality Assurance EO Determinations Quality Assurance
Mail Stop 6403 550 Main Street, Mail Stop 6403

PO Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

fax your statement, please contact the person listed at the top of this letter to confirm that they received it.

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-
pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at
the top of this letter.

Contacting the Taxpayer Advocate Service

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your
taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you’ve tried but haven’t
been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS
will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

We sent a copy of this letter to your representative as indicated in your power of attorney.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K