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The presence of profit-making activities is not per se a bar to qualification of an organization as exempt if the activities further or accomplish an exempt purpose.
After a religious publishing house began accumulating operational surpluses, the Commissioner of Internal Revenue revoked the 26 U.S.C.S. § 501(c)(3) tax-exempt status conferred on the publishing house decades earlier. The Tax Court affirmed the revocation. The religious publishing house sought review of the decision.
Was it proper to revoke the tax-exempt status of the religious publishing house on the basis of its increased economic activity?
Using plenary review under Fed. R. Civ. P. 52(a), rather than the clearly erroneous standard, the court on appeal ruled that increased economic activity was an improper basis for determining whether to revoke the publishing house's tax-exempt status under 26 U.S.C.S. § 501(c)(3). The publishing house was not to be penalized for its success. Rather, revocation depended on two determinations: (1) the purpose of the organization claiming tax-exempt status, and (2) the entity to whose benefit its activity inured. As to the first criterion, neither the publishing house's lack of affiliation with a particular church, its accumulation of profits, nor all the evidence taken together indicated the presence of a non-exempt purpose. As for the second criterion, other than relatively modest salaries, none of the publishing house's net earnings inured to the benefit of any person having a personal and private interest in its activities.