Petition for Writ of Certiorari — United States v. American College of Physicians

Supreme Court brief1986

Ask Donna

What actually matters in this document.

Text

g4-1737%! | errers™

, WAY 3 1985

No. ALEXANDER L. STEVAS,

Iu the Supreme Court of the United States

OCTOBER TERM, 1984

UNITED STATES OF AMERICA, PETITIONER

Vv.

AMERICAN COLLEGE OF PHYSICIANS

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

REx E. LEE

Solicitor General

GLENN L. ARCHER, JR.

Assistant Attorney General

ALBERT G. LAUBER, JR.

Assistant to the Solicitor General

ROBERT A. BERNSTEIN

ROBERT S. POMERANCE

Attorneys

Department of Justice

Washington, D.C. 20530

(202) 633-2217

(oO

QUESTION PRESENTED

Whether income derived by a tax-exempt medical

association from the sale of commercial advertising

space in its monthly journal is “unrelated business

income” subject to tax under Sections 511 through

513 of the Internal Revenue Code.

(1)

TABLE OF CONTENTS

Page

Opinions below ............ SEES Ro 1

Jurisdiction ............ i scesinsnenions 1

i snetiinmennnin 2

a cnanees la 2

Reasons for granting the petition —...........2...0-.e.e.. x

i neeasstonnnconsess 26

EE I la

Appendix B .... ........ NASER Oa 22a

Ca reenstanntionnnnncesnns . 28a

re AALS oO 24a

a _._._ssssipespniniennouneneseenenentesen 34a

EE EES 35a

EE EE 55a

ELE seisasaiads 65a

LEE SEES TT . Fla

TABLE OF AUTHORITIES

Cases:

American College of Physicians v. United States,

EET .. 17,21

C.F. Mueller Co. v. Commissioner, 190 F.2d 120...... 9

Massachusetts Medical Soc’y v. United States, 514

ELE eR 17

National Muffler Dealers Ass’n v. United States,

EE ates 22

Roche’s Beach, Inc. v. Commissioner, 96 F.2d 776.. 9

United States v. Cartwright, 411 U.S. 546 .............. 22

(III)

Statutes, regulations and rule: Page

Internal Revenue Code of 1954 (26 U.S.C.) :

B GOL ............----0-0----ceenneeneevnesnneccnnnennnees ent 2, 35a

§ 501 (c) (3) -...-.-------n----cecenee ceeneeeeseesereteeneneeeenenene 2

$ 602 (a) .......-....-. vatatinataidinndiinaiinanies Urea 9

— EEE ES SEO Te 2, 37a

S§ 511-513 .........--------------ceeneeeeneneneeceeseeeneeeeeees ce 4

§§ 511-515 ................-- inal aie aseal cele 9

|) } Seenererernennnnnn re penn Ee 2,17, 40a

S 513 (a) ......--.----c--ccenceeneeneeesssncennesenenenses oe 4,10

§ 513 (a) (2) ......------------c--ceeeeneneeneeeeeeeseeneee tenet 6

§ 513(c) .....--. a ial __..4, 7, 8, 14, 15, 16, 17, 19

Revenue Act of 1950, ch. 994, 64 Stat. 906 ef seq..... 9

Tax Reform Act of 1969, Pub. L. No. 91-172, 83

Stat. 487 et S€Q. .........--------------eeeeeeesesseneneseeeneenntnneess 14

Treas. Reg.:

By SERA Se eo ce et 2

§ 1.512 (a)-1(f) --.-.--...-.------------- as

§ 1.512(a)-1(f) (1) -.......-------. Ree ee nnneRCHee Ss 4,17

§ 1.512 (a)-1(f) (2)-(7) .....----------------- eee 17

SVB 18 nnn. n.nnnnsecnncnnennenceeenceseecenenseneeeeseennensenees 2

8 0) tS) eeeneennnnnrnrnnnnnn neers 44a

§ 1.518-1 (b) .................--------------- eee

§ 1.518-1(d) (2) .....------------------ec-eeeeeeeeteeee Reber 4, 20

§ 1.513-1(d) (4) (iv) -.........- _...6, 12, 18, 18, 19, 20, 21

GT 2) 7 ae ale 25

Red. BR. Civ. P. 41 (8) .......-----.--0-------2-e-sercecesoeesseseennnensss 26

Miscellaneous:

Folio: 00/1982 ...........----------cce--eeeceneeeeeeeernseeerensneneeneees 23

Pelé: £00 / 1984 ........2--00--20.2200200--00000000002 indichiiaiaciiaaaiaan 23

32 Fed. Reg. (1967) :

DP. BOOS ...........-------c-ecenseneeneseenssenseensnnnenenssnnsnnnseees 11

D. 17GBT .........-..-------c0ne-ncenerencenennernsnsenetsnssneenoennnsnes 11, 15

D. 17G5Q ...........----n--0--nene-erenceeeenseesesnnsenennenesnnenesees 12

40 Fed. Reg. 58637 (1975) .........-----------------eee0----00000-" 17

H.R. Rep. 2319, 81st Cong., 2d Sess. (1950) .......... ‘a 10

Miscellaneous—Continued :

H.R. Rep. 91-413, 91st Cong., 1st Sess. Pt. 1

REED, PPR oe a OLE Cees

Lehrfeld, The Unfairness Doctrine: Commercial

Advertising Profits as Unrelated Business In-

come, 23 Tax Law. 349 (1970)... 10,

Middleditch & Webster, The new unrelated busi-

ness income Regs: what they mean; how to

cope with them, 28 J. Tax. 174 (Mar. 1968)...

Moore, Current Problems of Exempt Organiza-

tions, 24 Tax. L. Rev. 469 (1969)...

Rev. Rul. 76-93, 1976-1 C.B. 170...

S. Rep. 2375, 81st Cong., 2d Sess. (1950)...

S. Rep. 91-552, 91st Cong., Ist Sess. (1969) 16,

Staff of Joint Comm. on Internal Revenue Tax-

ation, 91st Cong., 1st Sess., Summary of Prob-

lems Included in Tax Reform Hearings Dealing

with Tax-Exempt Organizations (Comm. Print

1969) ..... Se vere Sen eso NE Se

Staff of Senate Comm. on Finance, 91st Cong.,

Ist Sess., Tax Reform Act of 1969 H.R. 13270:

Technical Memorandum of Treasury Position

Tax Reform Act of 1969: Hearings on H.R. 13270

Before the Senate Comm. on Finance, 91st Cong.,

I 13,

Tax Reform 1969: Hearings Before the House

Comm. on Ways and Means, 91st Cong., 1st Sess.

UNIT rbinnessinnminccnsieiaiitininidiadlataiiating tale ena 13,

U.S. Postal Service, Revenue, Pieces and Weight

SPITE) Wiacidianicndeadanabnicdlimancntlat ett SE Mai tee tien iets

Webster, Unrelated Business Income, 23 Tax. Law.

lg, SSRI DR aes ese nan EO

Weithorn & Liles, Unrelated Business Income Tax:

Changes Affecting Journal Advertising Reve-

nues, 45 Taxes 791 (1967)... 11, 138,

Page

13, 18

17, 18

14, 15

14, 24

18, 23

$u the Supreme Court of the United States

OCTOBER TERM, 1984

No.

UNITED STATES OF AMERICA, PETITIONER

Vv.

AMERICAN COLLEGE OF PHYSICIANS

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

The Solicitor General, on behalf of the United

States, petitions for a writ of certiorari to review the

judgment of the United States Court of Appeals for

the Federal Circuit in this case.

OPINIONS BELOW

The opinion of the court of appeals (App., infra,

la-2la) is reported at 743 F.2d 1570. The opinion

of the Claims Court (App., infra, 24a-33a) is re

ported at 3 Cl. Ct. 531.

JURISDICTION

The judgment of the court of appeals (App., infra,

22a) was entered on September 17, 1984. A timely

petition for rehearing was denied on December 5,

1984 (App., infra, 23a). On February 26, 1985, the

Chief Justice extended the time within which to pe-

tition for a writ of certiorari to and including May

4, 1985. The jurisdiction of this Court is invoked

under 28 U.S.C. 1254(1).

(1)

STATUTES INVOLVED

The relevant portions of Sections 501, 511, 512,

and 513 of the Internal Revenue Code of 1954 (26

U.S.C.), and of Sections 1.512 and 1.513 of the

Treasury Regulations on Income Tax (26 C.F.R.),

are set out in a statutory appendix (App., infra,

35a-54a).

STATEMENT

1. The basic facts were stipulated below (C.A.

App. 18A-22A). The American College of Physicians

is an association exempt from tax under Section 501

poses are to uphold high standards of medical educa-

tion and practice and to encourage medical research

(App., infra, 24a-25a). Membership in the College

is open only to those engaged in practice, teaching,

research, or other professional activities in the field

of internal medicine (id. at 2a). Respondent had ap-

proximately 32,000 members in 1975 (C.A. App.

19A).

In furtherance of its tax-exempt educational pur-

poses, respondent publishes a monthly journal entitled

Annals of Internal Medicine. The journal contains

scholarly articles relevant to the practice of internal

medicine and is highly regarded in its field (App.,

infra, 2a). The journal is provided to respondent’s

dues-paying members without charge and to nonmem-

bers on a per-issue basis or by subscription (id. at

25a). Its circulation in 1975 was roughly 73,000 (id.

at 3a). Each issue contains commercial advertise-

ments (including classified ads) relating to medical

services and products, primarily drugs (id. at 25a).

1 Unless otherwise noted, all statutory references are to the

Internal Revenue Code of 1954 (26 U.S.C.), as in effect for

the tax year at issue (the Code or I.R.C.).

It is respondent’s policy to limit its advertising to

those products and services that are useful in the

practice of internal medicine (id. at 3a). Proffered

advertisements are screened as to subject matter and

as to the accuracy of their content (ibid.).

Many of the advertisements appearing in Annals

re identical with those appearing in medical journals

published by taxable commercial publishers, such as

the American Journal of Medicine, which is put out

by a division of Dun and Bradstreet (App., infra,

28a; C.A. App. 21A).? Some of the advertisements

are eye-catching, others strictly factual; some cover

a fraction of a page, others several p..zes; some are

in black and white, many in bright color (App., infra,

28a). The advertisements are not dispersed through-

out the journal but rather are grouped in discrete

“stacks” at the beginning and end of each issue; the

same format is generally followed in medical journals

published by taxable commercial publishers (id. at

3a). The advertisements are deleted when the An-

nals are permanently bound.

The advertisements appearing in Annals are pre-

pared by the advertisers and not by respondent

(App., infra, 3a). Some of the ads are for estab-

lished drugs and devices and are repeated from month

to month (id. at 28a) No effort is made to coordi-

nate the advertising with the journal’s editorial con-

tent; thus, it would be coincidental for a drug that

is discussed in an article to be featured in an adver-

tisement in the same ‘ssue (id. at 28a n.3). Advertis-

ing space is made available at rates competitive with

* Selected advertisements appearing in Annals of Internal

Medicine and in American Journal of Medicine during Janu-

ary and February 1975 are reproduced in the appendix

(App., infra, 55a-75a).

those charged for advertising space in other medical

journals, whether published by taxable or tax-exempt

entities (id. at 3a). According to a policy statement

appearing in the July 1977 issue of Annals, what

“justifies the incorporation of drug advertising in

this journal” is the need to obtain “the financial sup-

port of drug houses” (C.A. App. 71A). Thus, it is

an important source of revenue to respondent.

9 Sections 511 through 513 of the Code impose a

tax on the “unrelated business income” of otherwise

tax-exempt organizations like respondent. An “unre-

lated trade or business” is one the conduct of which “is

not substantially related * * * to” (I.R.C. § 513(a)),

i.e., does not “contribute importantly to” ( Treas.

Reg. § 1.513-1(d) (2)), the accomplishment of the or-

ganization’s charitable purposes. Section 513(c), en-

titled “Advertising, Etc., Activities,” provides that an

activity, such as advertising, which bears the ear-

marks of an unrelated trade or business “does not

lose identity as [such] merely because it is carried

on within * * * a larger complex of other endeavors,”

such as educational endeavors, that reflect an organ-

ization’s tax-exempt function. The Treasury Regu-

lations generally provide that “amounts realized by

an exempt organization from the sale of advertising

in a periodical constitute gross income from an un-

related trade or business” (Treas. Reg. § 1.512(a)-

1(f)(1)).

Respondent’s gross advertising revenue from

Annals in 1975 was $1,376,322 (App., infra, 3a).

After taking into account allowable offsets and de-

ductions, respondent reported “unrelated business

taxable income” of $153,388 on its 1975 tax return

(id. at 4a). Respondent timely filed that return and

paid unrelated business income tax of $55,965 for

thet year (tbid.).

On June 12, 1979, respondent filed an administra-

tive claim for refund of the tax thus paid (App.,

infra, 4a). When the IRS demurred, respondent, on

August 17, 1982, instituted this refund suit in the

Claims Court (ibid.). Respondent’s principal conten-

tion was that its solicitation and publication of com-

mercial advertising was “substantially related” to

the performance of its educational purposes because

“the advertising contains factual and technical data

which * * * can help physicians keep up” with re-

cent developments in medicine (id. at 27a-28a).

Following a trial, the Claims Court (Kozinski, C.J .)

entered judgment for the United States. The court

found respondent’s principal argument—that the ad-

vertising in Annals “performs an educational func-

tion, supplementing the journal’s editorial content”

—to be “unpersuasive” (App., infra, 27a-28a). To

begin with, the court noted, the “evidence is clear

that [respondent] did not use the advertising to pro-

vide its readers a comprehensive or systematic pre-

sentation of any aspect of the goods or services pub-

licized” (id. at 28a (footnote omitted) ). Rather,

“the comprehensiveness and content of the advertis-

ing package [was] entirely dependent on each manu-

facturer’s willingness to pay for space and the imagi-

nation of its advertising agency” (id. at 30a). The

advertising, moreover, was “typical commercial pub-

licity” (id. at 28a). “Many ads were identical to

those appearing in medical journals published by non-

exempt organizations,” any differences in format re-

flecting “the advertiser’s marketing strategy rather

than their probable importance to the reader” (id. at

28a-29a). Some of the advertising, the court ob-

served, was for well-known and established products

like Valium, Insulin, and Maalox, a fact that “under-

min[ed] the suggestion that the advertising was prin-

cipally designed to alert readers of recent develop-

ments” (id. at 28a & n.4).

After thus evaluating the facts, the court noted

that the Treasury Regulations provide that “advertis-

ing income of journals like Annals generally is tax-

able” (App., infra, 29a, citing Treas. Reg. § 1.512

(a)-1(f)). In holding that respondent’s advertise-

ments fall within this general rule, the court relied

particularly on an Example set forth in the Regula-

tions that “closely resembles the situation here”

(App., infra, at 29a). That Example, involving a

tax-exempt publisher of a professional journal, con-

cludes that “the publication of advertising designed

and selected in the manner of ordinary commercial

advertising is not an educational activity of the kind

contemplated by the exemption statute” (Treas. Reg.

§ 1.513-1(d) (4) (iv) (Example 7)). The court found

that respondent’s advertising package served no

“identifiable educational objective that goes substan-

tially beyond the informational content” necessarily

possessed by any advertising, that any educational

function that the advertising may have served “was

incidental to its purpose of raising revenue,” and

hence that “the advertising in Annals did not con-

tribute importantly to the College’s tax-exempt pur-

poses” (App., infra, 30a).°

’ The Claims Court also rejected (App., infra, 30a-34a)

respondent’s alternative contention that its product advertis-

ing was carried on “primarily for the convenience of its mem-

bers” and was exempt from unrelated business income tax on

that basis. See I.R.C. §513(a)(2). The Federal Circuit

upheld the Claims Court’s findings in this respect (App.,

infra, 19a) and we have no occasion to address that alterna-

tive contention here.

3. The Court of Appeals for the Federal Circuit

reversed (App., infra, la-2la). Rejecting the trial

court’s findings, it concluded that the advertising in

Annals contributes importantly to the accomplish-

ment of respondent’s educational purposes by “ap-

pris[ing] internists of developments in their field”

(id. at 19a).

The court turned first to the legislative history ac-

companying Congress’s enactment (in 1969) of Sec-

tion 513(c), which, as noted above, is entitled “Ad-

vertising, Ete., Activities.” While acknowledging

language in the committee reports suggesting that

Congress “may have believed that advertising income

should be taxed,” the court dismissed this legislative

history on the ground that it “addresses advertising

generally and does not grapple with specific factual

situations” (App., infra, 12a-13a). As the court read

the legislative history, Congress did not intend to

“adopt a blanket rule” that commercial] advertising

revenues should be taxed, but rather left to the courts

a case-by-case, ad-by-ad determination about whether

or not particular advertisements are “substantially re-

lated” to an entity’s tax-exempt function (id. at 17a-

19a & n.23).

The court of appeals agreed with the Claims Court

that the “primary purpose” of respondent’s advertis-

ing was commercial and that its “educational func-

tion * * * may well have been secondary to the pur-

pose of raising revenues” (App., infra, 19a). The

court held, however, that “[t]he commercial char-

acter of the activity is not * * * determinative” (id.

at 16a), and concluded that the trial judge, “ap-

parently distracted by the commercial character of

the advertisements,” had erroneously evaluated them

under “a more rigorous standard than is supported

by the statute” (id. at 16a, 18a). The court of ap-

peals did not discuss, or even mention, the Treasury

Regulations upon which the Claims Court had based

its decision. Rather, relying on testimony of respond-

ent’s expert witnesses that the trier of fact had found

“unpersuasive” (id. at 16a-17a, 28a), the court of

appeals concluded that “the sales of advertising in

Annals are substantially related to the exempt pur-

pose of the College to educate internists” and that

the Claims Court’s conclusion to the contrary was

“clearly erroneous” (id. at 19a).

The government’s petition for rehearing, with sug-

gestion for rehearing en banc, was denied (App.,

infra, 23a).

REASONS FOR GRANTING THE PETITION

The court of appeals has decided an important ques-

tion of federal tax law in a way that conflicts di-

rectly with Congress’s clearly-expressed intent in en-

acting Section 513(c). The decision below grants an

exempt professional organization the very competitive

edge over its taxpaying commercial counterparts that

Congress was at pains to deny when it amended the

Code specifically to bring advertising revenues within

the reach of the unrelated business income tax. The

decision below sub silentio invalidates long-standing

Treasury Regulations that Congress considered in

1969 and upon which it placed its explicit imprimatur.

The court of appeals’ open-ended construction of the

statutory phrase “substantially related” has consid-

erable administrative importance: it will pave the

way for many hundreds of trade and professional

organizations to escape tax on their advertising in-

come, and will impose tremendous burdens on limited

IRS audit resources. The Claims Court is a court of

nationwide jurisdiction—any taxpayer can have its

case heard there, with review in the Federal Circuit,

simply by filing a refund suit—and the decision be-

low is thus likely to be uncontradicted unless certi-

orari is granted. Review by this Court is therefore

appropriate at this time.

l.a. The unrelated business income tax has its

genesis in the Revenue Act of 1950, ch. 994, 64 Stat.

906 et seg. Before that law was enacted, charitable

organizations that carried on ordinary trades or bus-

inesses were able to escape tax on their profits on

the theory that the charitable “destination” of the

revenues took precedence over their commercial

“source.” Thus, a nationwide vendor of macaroni

(C.F. Mueller Co. v. Commissioner, 190 F.2d 120 (3d

Cir. 1951)), and a commercial bathing beach fa-

cility (Roche’s Beach, Inc. v. Commissioner, 96 F.2d

776 (2d Cir. 1938) ), successfully claimed tax-exempt

status simply because their business profits went to

charity.

In the Revenue Act of 1950, Congress responded

to this problem in two ways. First, it enacted the

so-called “anti-feeder” provision (I.R.C. § 502(a)),

under which organizations “operated for the primary

purpose of carrying on a trade or business for profit”

cannot claim tax exemption solely on the ground that

their profits go to charity. Second, Congress enacted

the “unrelated business income tax,” now codified in

Sections 511 through 515 of the Code. Those provi-

sions generally require organizations that otherwise

qualify for tax exemption to pay tax at regular cor-

porate rates on income derived from any trade or

business “the conduct of which is not substantially

related (aside from the need of such organization

for income or funds or the use it makes of the profits

derived) to the exercise or performance by such or-

ganization of its charitable, educational, or other

[tax-exempt] purpose” (I.R.C. §513(a)).

The chief impetus behind the new tax was Con-

gress’s desire to put the business operations of tax-

exempt organizations on an equal footing with those

of their taxable commercial counterparts. The House

Report stated that “[t]he problem at which the tax

on unrelated business income is directed * * * is pri-

marily that of unfair competition.” H.R. Rep. 2319,

Sist Cong., 2d Sess. 36 (1950). The tax falls on

business revenues, not on membership dues or invest-

ment income, since Congress regarded such sources

of income as a traditional and proper mainstay

for charitable institutions. S. Rep. 2375, 81st Cong.,

2d Sess. 30-31 (1950). As amended by Congress in

1950, the Code “does not deny [a tax] exemption

where the organizations are carrying on unrelated

active business enterprises, or require that they dis-

pose of such businesses, but merely imposes the same

tax on income derived therefrom as is borne by their

competitors” (H.R. Rep. 2319, supra, at 37).

b. During the ensuing years, uncertainty arose as

to whether the unrelated business income tax ex-

tended to profits derived by tax-exempt organiza-

tions from the solicitation and sale of advertising

space in their publications. See Lehrfeld, The Un-

fairness Doctrine: Commercial Advertising Profits as

Unrelated Business Income, 23 Tax Law. 349, 351-

352 (1970). The main argument against applying

the tax in these circumstances was that the journal’s

articles and editorial content furthered the sponsor-

ing organization’s tax-exempt goals. Since the com-

mercial advertisements arguably were part and par-

cel of a single trade or business (“publishing”) with

an ultimately educational end, the unrelated business

income tax was said to be inapplicable. See, e.v.,

Weithorn & Liles, Unrelated Business Income Tax:

Changes Affecting Journal Advertising Revenues, 45

Taxes 791, 798-800 (1967).

In 1967, the Treasury issued a Proposed Regula-

tion formally announcing its intention to “fragment”

tax-exempt publications into two components—com-

mercial advertising, the income from which would

be subject to unrelated business income tax, and

articles and editorial content, the income from which

would remain tax-free. Prop. Reg. §1.513-1, 32

Fed. Reg. 5993 (1967). Following receipt of public

comments, the Regulation was issued in final form

eight months later. 32 Fed. Reg. 17°57 (1967). It

has remained substantially unchanged ever since.

Articulating the “fragmentation” concept, the new

Regulation set forth the general rule that income-

producing activities “do not lose identity as [a]

trade or business merely because they are carried on

within a larger aggregate of similar activities or

within a larger complex of other endeavors which

may, or may not, be related to the exempt purposes

of wie organization.” Treas. Reg. § 1.513-1(b), 32

Fed. Reg. 17657. “Thus,” the Regulation explained,

“activities of soliciting, selling, and publishing com-

mercial advertising do not lose identity as [a] trade

or business even though the advertising is published

in an exempt organization periodical which contains

editorial matter related to [its] exempt purposes”

(ibid.).

To illustrate this principle, the Treasury set forth

a pair of examples, each involving a professional

association (“Z”) that publishes a monthly journal

containing scholarly articles and commercial advertis-

ing. Treas. Reg. § 1.513-1(d)(4)(iv) (Examples

6 & 7), 32 Fed. Reg. 17659. In Example 6, Z pub-

lishes “general consumer advertising” for products

like “soft drinks, automobiles, articles of apparel, and

home appliances.” The Treasury concluded that such

advertising revenues represented “gross income from

[an] unrelated trade or business” (Treas. Reg.

§ 1.513-1(d) (4) (iv) (Example 6)). In Example 7,

the facts are the same as in Example 6, “except that

the advertising in Z’s journal promotes only products

within the general area of professional interest of

its members.” Example 7 elaborated the hypotheti-

eal facts as follows:

Following a practice common among taxable

magazines which publish advertising, Z requires

its advertising to comply with certain general

standards of taste, fairness, and accuracy; but

within those limits the form, content, and man-

ner of presentation of the advertising messages

are governed by the basic objective of the adver-

tisers to promote the sale of the advertised prod-

ucts. While the advertisements contain certain

information, the informational function of the

advertising is incidental to the controlling aim

of stimulating demand for the advertised prod-

ucts and differs in no essential respect from the

informational function of any commercial adver-

tising. Like taxable publishers of advertising,

Z accepts advertising only from those who are

willing to pay its prescribed rates.

Acknowledging that “continuing education of its

members * * * is one of the purposes for which Z is

granted exemption,” the Treasury nevertheless con-

cluded that “the publication of advertising designed

and selected in the manner of ordinary commercial

advertising is not an educational activity of the kind

contemplated by the exemption statute.” Treas. Reg.

§ 1.513-1(d) (4) (iv) (Example 7). Thus, “Z’s pub-

lication of advertising does not contribute impor-

tantly to the accomplishment of its exempt purposes;

and the income which it derives from advertising

constitutes gross income from unrelated trade or bus-

iness” (ibid.).

ce. The new Regulation triggered a storm of pro-

test from tax-exempt publishers. During 1968, Con-

gressmen sympathetic to their interests introduced

numerous bills to block the Regulation’s implemen-

tation. See Lehrfeld, supra, at 364-365; Weithorn &

Liles, supra, at 792 n.8. These initiatives were un-

successful. Extensive hearings were then held, at-

tended by spokesmen for both the exempt and the

non-exempt press. See Jax Reform, 1969: Hear-

ings Before the House Comm. on Ways and Means,

91st Cong., 1st Sess. (1969) [hereinafter cited as

House Hearings]; Tax Reform Act of 1969: Hear-

ings on H.R. 13270 Before the Senate Comm. on

Finance, 91st Cong., 1st Sess. (1969) [hereinafter

cited as Senate Hearings]. Tax-exempt publishers

of medical journals were well represented.‘ The wit-

nesses repeatedly characterized the challenged Reg-

ulation as establishing a “presumption” or a “per se

rule” that professional journal advertising income is

subject to unrelated business income tax.’ Those op-

*See, e.g., House Hearings 1259 (American Medical

Ass’n) ; id. at 1211 (American Dental Ass’n); id. at 1117

(American Psychiatric Ass’n); id. at 1110 (American Col-

lege of Physicians, respondent here).

* See, e.g., House Hearings 928 (Regulation “indicate[s]

that advertising is unrelated per se to an exempt purpose”) ;

id. at 1113 (Regulation is “designed * * * to preclude even the

possibility” that advertising income could escape tax); id.

at 1188 (“all advertising in an organization publication is

posing the Regulation argued that the Treasury

lacked statutory authority to “fragment” publishing

activity and to treat commercial advertising as a

“trade or business” distinct from the journal’s edi-

torial content. See, e.g., House Hearings 1111,

1128-1129, 1184, 1213. And they contended that

product advertising furthered their associations’ tax-

exempt purposes, e.g., by educating doctors about new

pharmaceutical products.*° The non-exempt press, on

the other hand, defended the Regulation as a check

upon the perceived inequity and anti-competitive

effect of affording a tax subsidy to their tax-exempt

counterparts. See, e.g., House Hearings 1150-1152,

1176-1177.

d. In the Tax Reform Act of 1969, Pub. L. No.

91-172, 83 Stat. 487 et seg., Congress resolved the

controversy by endorsing the Regulation and paving

the way for its enforcement. Congress added to the

Code new Section 513(c), entitled “Advertising, Etc.,

Activities.” It provides that the term “trade or busi-

ness” includes any activity “carried on for the pro-

duction of income,” and that “an activity does not

lose identity as a trade or business merely because it

is carried on within a larger aggregate of similar

activities or within a larger complex of other en-

now taxable”) ; id. at 1192 (Regulation effects “blanket taxa-

tion of all advertising”); id. at 1268 (Regulation creates a

“presumption regarding advertising”); Senate Hearings

1670 (“all advertising is to be considered unrelated”) ; id.

at 1705 (Regulation establishes “conclusive presumption * * *

that all advertising [is] taxable”).

® See, e.g., House Hearings 1111-1112 (American College

of Physicians); id. at 1119-1120 (American Psychiatric

Ass’n); id. at 1214 (American Dental Ass’n); id. at 1261

(American Medical Ass’n).

deavors which may, or may not, be related to the

exempt purposes of the organization.” Those words,

expressly sanctioning “fragmentation” of an activity

into exempt-purpose and unrelated-business compo-

nents, were taken almost verbatim from the 1967

Treasury Regulation promulgated to deal with the

commercial advertising problem. Compare I.R.C.

§ 513(c) with Treas. Reg. § 1.513-1(b), 32 Fed. Reg.

17657 (1967).

The legislative history accompanying Section 513

the treatment of advertising income prescribed by

the 1967 Regulation. The Treasury Department

took the position before Congress that the bill “codi-

fies previously existing Treasury regulations defin-

ing activities such as advertising, which will be

treated as unrelated business.” Senate Hearings 568

(testimony of Assistant Secretary for Tax Policy

Edwin S. Cohen) ; Staff of Senate Comm. on Finance,

91st Cong., Ist Sess., Tax Reform Act of 1969 H.R.

13270: Technical Memorandum of Treasury Posi-

tion 34 (Comm. Print 1969). The House Report

recites that the 1967 Regulation had “mainly af-

fected the advertising income of publications such as

medical journals,” and stated that “ly]Jour commit-

tee wants to make clear that such regulations are

valid.” H.R. Rep. 91-413, 91st Cong., 1st Sess. Pt. 1,

at 44 (1969). The Report then explains the new

Section 513(c) as follows (id. at 50):

Because of the ensuing controversy over this

problem your committee has decided to deal with

this subject by legislation. In general, it is in

agreement with the purpose of the regulations.

Your committee believes that a business compet-

ing with taxpaying organizations should not be

granted an unfair competitive advantage by op-

erating tax free unless the business contributes

importantly to the exempt function. It has con-

cluded that by this standard, advertising in a

journal published by an exempt organization is

not related to the organization’s exempt func-

tions, and therefore it believes that this income

should be taxed.

The Senate Report is equally explicit. It notes the

controversy over the 1967 Regulation and continues

as follows (S. Rep. 91-552, 91st Cong., Ist Sess. 75

(1969) ):

The committee agrees with the House that

the regulations reached an appropriate result in

specifying that when an exempt organization

carries on an advertising business in competi-

tion with other taxpaying advertising businesses,

it should pay a tax on the advertising income.

The statutory language on which the regulations

are based, however, is sufficiently unclear so that

substantial litigation could result from these

regulations. For this reason, the committee

agrees with the House that the regulations, in-

sofar as they apply to advertising and related

activities, should be placed in the tax laws.

The Report goes on to summarize the language of

new Section 513(c), and concludes: “Under this pro-

vision, advertising income from publications (whether

or not the publications are related to the exempt pur-

pose of the organization) is to constitute unrelated

business income to the extent it exceeds the expenses

related to advertising” (S. Rep. 91-552, supra, at

75). The Treasury was directed to “prescribe regu-

lations indicating the appropriate methods for allo-

cating income and expenses” as between taxable

product advertising and tax-exempt editorial con-

tent (id. at 76).’

2. Surveying this legislative history, the court of

appeals concluded that Congress in 1969 laid down

no “blanket rule” (App., infra, 12a) about commer-

cial advertising in tax-exempt professional journals.

The court believed, rather, that Congress had left the

door ajar and consigned to the courts a case-by-case,

ad-by-ad determination as to whether some adver-

tisements in some journals are “substantially re-

* Those regulations were issued six years later. 40 Fed.

Reg. 58637 (i975). They provide generally that “[u]nder

section 513 * * * and § 1.513-1, amounts realized by an

exempt organization from the sale of advertising in a pe-

riodical constitute gross income from an unrelated trade or

business.” Treas. Reg. § 1.512(a)-1(f)(1). They then set

forth detailed allocation rules for advertising income and ex-

penses. Treas. Reg. § 1.512(a)-1(f) (2) through (7).

As both the Senate Report and the commentators predicted,

the 1967 Regulation did generate “substantial litigation” (S.

Rep. 91-552, supra, at 75) concerning its application to tax

years antedating Congress’s enactment of Section 513(c).

Indeed, two courts declared the Regulation invalid as applied

to pre-1970 tax years, reasoning that the Treasury previous!

lacked statutory authority to “fragment” publishing activity

into taxable and tax-exempt components. See Massachusetts

Medical Soc’y v. United States, 514 F.2d 153, 154 (1st Cir.

1975) ; American College of Physicians v. United States, 530

F.2d 930, 933 (Ct. Cl. 1976). In so holding, the Court of

Claims recognized that Congress in 1969 “prospectively

amended [Section 513] to validate the 1967 regulations,” and

it accordingly limited its decision to tax years before the

effective date of that enactment (530 F.2d at 930-931 n.2).

The taxpayer in the First Circuit case—like respondent, a

tax-exempt publisher of a medical journal—“acknowledge[d]

that its advertising activities [came] within the new regula-

tions’ definition of an unrelated trade or business” (514 F.2d

at 154).

lated” to the publisher’s exempt purpose and are ‘thus

immune from tax (see App., infra, 13a, 19a & n.23).

In overturning the Claims Court’s findings, more

over, the court of appeals implied that the advertis-

ing in Annals is somehow distinguishable from the

common run of advertising that does fall within the

area of Congress’s attention and concern.

The court of appeals erred in each step of its anal-

ysis. To begin with, Congress in 1969 quite plainly

did adopt a presumption or “blanket rule” that com-

mercial advertising income of professional journals

is subject to tax. The 1967 Treasury Regulation,

which Congress explicitly approved and determined

to “place[ ] in the tax laws” (S. Rep. 91-552, supra,

at 75), was uniformly interpreted, both by the wit-

nesses who testified against it* and by leading com-

mentators, as creating a presumption to that effect.’

Indeed, the Regulation unequivocally states that “the

publication of advertising designed and selected in

the manner of ordinary commercial advertising is not

an educational activity of the kind contemplated by

the exemption statute.” Treas. Reg. § 1.513-1(d)

(4) (iv) (Example 7). And Congress made clear

that, under the statutory standard it was adopting,

® See pages 13-14 note 5, supra.

*See, e.g., Lehrfeld, supra, at 355 (“per se rule”);

Weithorn & Liles, supra, at 806 (“all journal advertising

constitutes unrelated business”) (emphasis in original) ;

Moore, Current Problems of Exempt Organizations, 24

Tax L. Rev. 469, 475 (1969) (“the regulations take the

position that all advertising revenues of journals of tax-

exempt organizations constitute a separate trade or busi-

ness”); Middleditch & Webster, The new unrelated business

income Regs: what they mean; how to cope with them, 28

J. Tax. 174, 175 (Mar. 1968) (“Under the new Regulations,

all advertising in an organization publication is now tax-

able”).

“advertising in a journal published by an exempt

organization is not related to the organization’s ex-

empt functions, and therefore * * * this income

should be taxed” (H.R. Rep. 91-413 Pt. 1, supra,

at 50). Although the presumption Congress en-

acted may admit of exceptions,” Congress plainly

intended that the exceptions would be rare indeed.”

Secondly, there is no suggestion anywhere in Sec-

tion 513(c) or its legislative history that Congress

intended the courts to confer ad hoc immunity from

the unrelated business income tax depending on their

subjective, case-by-case evaluation of how “impor-

tantly” particular advertisments contribute to a tax-

exempt publisher’s goals. The Regulations do pro

vide that whether an activity is “substantially re-

lated” to an exempt purpose generally “depends in

’* The chief exception recognized by the Treasury Depart-

ment concerns advertising published in a student-run campus

newspaper, where “solicitation, sale, and publication of the

advertising are conducted by students, under the supervi-

sion and instruction of the university.” Treas. Reg. § 1.513-

1(d) (4) (iv) (Example 5). The Example concludes that,

under these circumstances, publication of the advertising con-

tributes importantly to the university’s educational goals “by

means of student instruction of other students in the * * *

advertising activities and student participation in those activi-

ties.” See also Rev. Rul. 76-93, 1976-1 C.B. 170 (recognizing

exception for advertisement which contains no commercial

message but merely lists a company’s name, along with the

names of 59 other corporate “patrons,” on a single page).

“ As one commentator put it (rather ironically, as it turns

out): “[Ijt is arguable [after the enactment of Section

513(c)] that there can still be ‘related’ advertising. How-

ever, the legislative history and intent of the Congress is so

clear that the likelihood of this argument prevailing as to any

period after December 31, 1969 is very improbable.” Webster,

Unrelated Business Income, 23 Tax Law. 471, 476 (1970).

each case upon the facts and circumstances involved”

(Treas. Reg. § 1.513-1(d) (2)). However, Congress

and the Treasury Department have definitively under-

taken this calculus with respect to professional jour-

nal advertising activities in particular, and have de-

termined, as a matter of law, that “the publication

of advertising designed and selected in the manner of

ordinary commercial advertising is not an educa-

tional activity of the kind contemplated by the ex-

emption statute” (Treas. Reg. § 1.513-1(d) (4) (iv)

(Example 7)). There is simply no room for courts

to second-guess that determination by purporting to

“find facts,” and thereby defeat the very uniform-

ity and even-handedness of tax treatment that Con-

gress sought to achieve.

Finally, the court of appeals erred in thinking that

the advertising in Annals is somehow different from

the common run of advertising that Congress clearly

intended to tax. To the contrary, the pharmaceutical

product advertising involved here was at the core

of the problem Congress addressed in 1969. Far from

being exceptional, respondent’s advertising is of the

garden-variety commercial type and it vies success-

fully in the marketplace for advertisers’ dollars. The

court of appeals did not disturb the Claims Court's

findings that “[t]he advertising * * “ was typical

commercial publicity” (App., infra, 28a) and that

“(t]he advertising business of Annals was operated

in material respects like the advertising business of

any other publication” (id. at 33a). Respondent’s

ads, like those held taxable in the Regulation Con-

gress approved, are “designed and selected in the

manner of ordinary commercial advertising” and

their “informational function * * * is incidental to

the controlling aim of stimulating demand for the

advertised products” (Treas. Reg. § 1.513-1(d) (4)

(iv) (Example 7)). Indeed, the Court of Claims

found on an earlier occasion that “Annals regularly

competes for advertising income with commercially

published medical journals which, because of their

non-exempt status, must in some instances charge

higher rates than [respondent].” American College

of Physicians vy. United States, 530 F.2d at 931.

Contrary to the court of appeals’ belief, moreover,

it makes no difference that respondent’s advertise-

ments are “screened with respect to subject matter

[and] accuracy” (App., infra, 17a) or that they

“served to apprise internists of developments in their

field” (id. at 19a). The advertisements described

in the Regulation are also screened to ensure that

they “comply with certain general standards of taste,

fairness, and accuracy,” and those advertisements

also relate exclusively to “products * * * within the

general area of professional interest of [the associa-

tion’s] members” (Treas. Reg. § 1.513-1(d) (4) (iv)

(Example 7)). Indeed, the Regulation makes clear

that “professional interest” advertising, for products

like drugs and medical devices, and “general con-

sumer advertising,” for products like soft drinks, au-

tomobiles, and appliances, are to be treated exactly

the same way for purposes of the unrelated business

income tax. Compare id. (Example 6) with id. (Ex-

ample 7). The Regulation thus recognizes the sim-

“ See also Staff of Joint Comm. on Internal Revenue Taxa-

tion, 91st Cong., 1st Sess., Summary of Problems Included in

Tax Reform Hearings Dealing with Tax-Exempt Organiza-

tions 4 (Comm. Print 1969) (“The advertising income is sub-

ject to tax under the existing regulations whether or not the

advertising is with respect to a product which itself may be

related to the exempt activity of the organization involved”).

ple reality that, to the extent the advertiser is charged

a fee as a condition of publication of the advertise-

ment, the message is that of the advertiser rather

than one to which the journal would choose to devote

its own, general resources. A long line of this Court’s

decisions confirms that interpretive rulings by the

Treasury, “if found to ‘implement the congressional

mandate in some reasonable manner,’ must be up-

held.” National Muffler Dealers Ass’n v. United

States, 440 U.S. 472, 476 (1979) (quoting United

States v. Cartwright, 411 U.S. 546, 550 (1973)).

And here the Regulation not only implements the

congressional mandate but was specifically endorsed

by Congress when it enacted the mandate in ques-

tion.

In sum, the decision below invalidates sub silentio

a Treasury Regulation that, having been explicitly

approved by Congress, the court of appeals appar-

ently did not dare invalidate in terms. In permitting

respondent to operate its commercial advertising

venture tax-free while its business rivals must pay

tax, the court of appeals has adopted a controlling

legal standard that flies in the face of Congress's

design to achieve parity of treatrrent between exempt

and non-exempt entities that publish advertisements

for profit.

3. The question presented has considerable admin-

istrative importance. The reasoning of the decision

below would apparently apply to virtually every tax-

exempt professional or trade journal in the country.

Associations of lawyers, chemists, engineers, com-

puter programmers, and water pollution experts, no

less than of doctors, can plausibly contend that their

members’ professional competency is enhanced by up-

dated information contained in advertisements for

new products and services. According to Folio:

400/192, a publishing industry compilation, there

were in 1981 some 5,730 trade journals in the coun-

try, earning about $2.8 billion in revenues, the bulk

of which came from advertising. Although it is diffi-

cult to tell how many of these journals currently are

published by tax-exempt organizations, estimates be-

fore Congress in 1969 put the number at 700, with

gross advertising revenues of about $110 million.

Weithorn & Liles, supra, at 791. Those numbers can

be expected to have grown since. According to postal

service statistics, some 150 million pounds of com-

mercial advertising were contained in exempt organ-

ization publications mailed during 1982 using special

second class postage rates. U.S. Postal Service, Reve-

nue, Pieces and Weight (1982).

The revenue impact of the decision below would

likewise be substantial. Tax-exempt publishing is a

big business. Of the 400 largest magazines in the

Nation in 1981, at least 45 were published by tax-

exempt organizations. In the medical field alone,

they include the Journal of the American Medical

Association (with 1983 advertising revenues of

$14,207,000) ; the New England Journal of Medicine

(with 1983 advertising revenues of $12,000,000) :

American Medical News (with 1983 advertising reve-

nues of $8,497,000) ; and respondent’s Annals of In-

ternal Medicine (with 1983 advertising revenues of

$4,637,000). See Folio: 400/1984, at 57, 60, 65.

Indeed, the IRS estimates (based on industry

sources) that between 20% and 25% of all commer-

cial advertising in the medical field is published in

exempt organization periodicals. The IRS advises

that there are either currently pending or closed

within the last two years some 200 examinations of

advertising in exempt organization periodicals, in

which tax deficiencies totalling $29.6 million have

been proposed. The Service estimates that almost

half its total collections from the unrelated business

income tax are attributable to revenues from com-

mercial advertising in professional and trade journals.

Aside from the revenue impact, the decision below

would impose formidable burdens on IRS audit re

sources. Under the (heretofore unquestioned) regu-

latory presumption that commercial advertising is

taxable, IRS examiners were not required to investi-

gate the “educational” function of advertisements

on a case-by-case basis; the agent’s task was simply

to identify the ad as being for a commercial product

or service. Under the decision below, by contrast,

IRS agents will apparently have to determine, on a

case-by-case, ad-by-ad basis, which commercial adver-

tisements “contribute importantly” to the publisher’s

exempt function and which do not.” As a witness

testified before Congress in 1969, “[t]o draw the

line on an individual basis * * * and to say that this

is advertising which is unrelated and that [that is]

advertising [which] is related would present to the

IRS[,] and taxpayers generally, an almost insur-

mountable audit problem.” House Hearings 1184

18 The court of appeals, for example, highlighted an adver-

tisement placed in Annals for Medical Economics ( App., infra,

60a), a magazine that offers financial and tax advice to doc-

tors, and suggested that it would not qualify as “substantially

related” to the College's exempt function. See id. at 19a &

n.23. But would the same be said about an advertisement

placed by an interior decorating firm that specializes in doc-

tors’ offices? And does a drug advertisement serve an educa-

tional purpose when the product is widely known and has been

available (say) for 15 years? The IRS advises that the

amount of time required to audit tax-exempt publishers might

increase by as much as 50° by the need to answer questions

like these.

(American Society of Association Executives). The

existing Treasury approach, by establishing a general

rule that commercial advertising is unrelated to ex-

empt purposes, produces logical tax consequences and

prevents journals from manipulating the tax outcome

simply by advising their advertisers to insert inciden-

tal “educational” boilerplate in their ads. The court

of appeals has discarded that analysis and has pro-

vided no workable standard to take its place.

Finally, the question presented is important be-

cause the unrelated business income tax has a sig-

nificant regulatory function. Congress designed the

tax, not just to raise money, but to keep the com-

mercial endeavors of exempt and non-exempt com-

petitors on a par. The decision below has flouted

that sharply-defined legislative policy.

4. The decision below is the first by a court of

appeals to consider the question presented here. The

Court of Appeals for the Federal Circuit, however, is

a court of nationwide jurisdiction. Any taxpayer, re-

gardless of where he is domiciled or does business,

can have his case heard in the Claims Court, with

review in the Federal Circuit, simply by paying the

contested tax and suing for a refund. 28 U.S.C. 1491.

In the future, therefore, any solvent, well-advised

taxpayer affected by this issue will unquestionably

opt for the same venue as did respondent."* Unless

* We are aware of three cases now pending in trial courts

outside the Federal Circuit that raise the question presented

here. There is no assurance, however, that any of these

cases will reach a court of appeals. Indeed, our trial counsel

in one of the cases (American Medical Ass’n v. United States,

Civ. No. 82-C-7213 (N.D. Ill. 1982)) has been informed that

the taxpayer plans to move for a voluntary dismissal under

Fed. R. Civ. P. 41(a), a plan obviously motivated by the

decision below. In Florida Trucking Ass’n v. Commissioner,

this Court grants certiorari, therefore, the decision

below will in all likelihood prescribe the governing

legal standard on the subject. We believe that the

court’s error is too important, both to Congress and

to the IRS, to permit that to happen.

CONCLUSION

The petition for a writ of certiorari should be

granted.

Respectfully submitted.

Rex E. LEE

Solicitor General

GLENN L. ARCHER, JR.

Assistant Attorney General

ALBERT G. LAUBER, JR.

Assistant to the Solicitor General

ROBERT A. BERNSTEIN

ROBERT S. POMERANCE

Attorneys

May 1985

No. 4884-84 (T.C. 1984), the “relatedness” issue involves only

$3,225 in tax and may well wash out at the trial level; and in

American Academy of Family Physicians v. United States,

Civ. No. 84-0170-CV-W-4 (W.D. Mo. 1984), which is currently

in settlement negotiations, the “relatedness” issue involves

only $18,000 in tax and is dwarfed by numerous other issues

in the case.

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

Appeal No. 84-715

THE AMERICAN COLLEGE OF PHYSICIANS, APPELLANT

Vv.

THE UNITED STATES, APPELLEE

Decided: September 17, 1984

Before BALDWIN, SMITH, and NIEs, Circuit Judges.

SMITH, Circuit Judge.

In this federal income tax case, appellant Ameri-

can College of Physicians (College) appeals from a

judgment of the United States Claims Court’ hold-

ing the College is not entitled to the refund of taxes

paid on income earned from sales of advertising

space in the College’s journal, Annals of Internal

Medicine (Annals). We reverse.

Issue

The sole question presented in this appeal is one of

first impression for this court: whether the reve-

' American College of Physicians v. United States. 3 Cl. Ct.

531 (1983).

(la)

nues derived by the College from advertising in An-

nals constitute “unrelated business taxable income”’

derived from a trade or business the conduct of

which is not substantially related to the exercise or

performance by the College of its tax-exempt pur-

poses or functions. This appeal involves the College’s

tax liability for the 1975 tax year.

Background

The College is an organization exempt from fed-

eral income taxation under 26 U.S.C. §§ 501(a) and

501(c)(3). Among its tax-exempt purposes are*

“(1) to uphold and to maintain high standards in

medical education, medical practice [and medical re-

search]; (2) to encourage research, especially in

clinical medicine, and (3) to foster measures for the

prevention of disease and for the improvement of

public health.” Membership in the College is limited

to members of the medical profession engaged in

practice, teaching, research, or other pursuits in the

field of internal medicine or in allied or related

specialties.

Annals, a highly regarded medical journal in the

field of internal medicine, is published by the College

in furtherance of its tax-exempt purposes. Annals

contains scholarly articles relevant to the practice of

internal medicine, advertisements relating only to

medical products, supplies, and equipment useful in

the practice of internal medicine, and notices of posi-

tions, desired or available, in connection with the

practice of internal medicine. Annals is available to

members of the College as a benefit of membership

2 These purposes, inter alia, are set forth in the College’s

Articles of Incorporation.

and to nonmembers at a per issue price or by sub-

scription. Circulation in 1975 was roughly 73,000.

Advertisements in Annals are “stacked” in two

sections—at the front of, and behind, the editorial

content—of each issue. Advertisements in medical

journals published by commercial organizations are

generally also grouped in stacks, rather than dis-

persed throughout an issue. The trial judge found

that many of the ads appearing in Annals were iden-

tical to those appearing in medical journals published

by nonexempt organizations. He also found that the

advertising business of Annals was operated in ma-

terial respects like the advertising business of any

other publication.

Advertisements appearing in Annals were pre-

pared by the advertisers and not by the College. The

trial court found that the college did not use the ad-

vertising in Annals to provide its readers a com-

prehensive or systematic presentation of the goods

or services publicized. Advertising space was made

available in Annals at rates competitive with those

charged by commercial organizations for advertis-

ing space in their medical journals.

The College has a long-standing policy of accepting

only those advertisements relating to medical prod-

ucts (primarily drugs), supplies, and equipment use-

ful in the practice of internal medicine and those

classified advertisements of positions in connection

with the practice of internal medicine. Proffered ad-

vertisements are screened for accuracy and relevance

to internal medicine.

1975 Advertising Revenues.

In 1975, gross advertising income attributable to

Annals was $1,376,322. Direct advertising costs were

$833,050. Circulation income and readership costs

attributable to Annals in 1975 were $1,057,754 and

$1,351,167, respectively. Another publication of the

College, the Bulletin, produced an overall loss of

$96,471. The College timely reported taxable income

of $153,388 and paid federal income taxes of $55,965

on that income for the 1975 tax year.

Proceedings Below.

On or about June 12, 1979, the College filed with

the Internal Revenue Service a timely claim for re-

fund of these taxes. Failing to receive notice of dis-

allowance of this claim, receipt of which was not

waived, the College, on or about August 17, 1982,

filed in the United States Claims Court suit for re

fund of the taxes. The trial court found that the

advertising published in Annals is not substantially

related to the College’s exempt purposes nor is it

published primarily for the convenience of the Col-

lege’s members. Accordingly, the revenues derived

from advertising in Annals were held to be taxable.

The College appeals.

The trial court’s findings of fact are not to be set

aside unless they are clearly erroneous. The legal

conclusions of the trial court will not be set aside

unless they are incorrect as a matter of law.’

Unrelated Business Taxable Income

The Internal Revenue Code provided at the rele-

vant time, with certain exceptions not applicable here,

that the income derived from the unrelated business

’ Fed. R. Civ. P. 52(a) ; Heisig v. United States, 719 F.2d

1153, 1158 (Fed. Cir. 1983).

of an organization which is exempt from taxation

under 26 U.S.C. § 501(a) (1976) is taxable: *

There is hereby imposed for each taxable year

on the unrelated business taxable income (as de

fined in section 512) of every organization de

scribed in paragraph (2) a normal tax and a

surtax computed as provided in section 11. In

making such computation for purposes of this

section, the term “taxable income” as used in

section 11 shall be read as “unrelated business

taxable income’”’.

The College is an organization described in paragraph

(2)—an organization exempt from taxation under

26 U.S.C. § 501(a) not eligible for certain exceptions.

Section 512(a)(1) of title 26 of the United States

Code provides:

[T]he term “unrelated business taxable income”

means the gross income derived by any organiza-

tion from any unrelated trade or business (as

defined in section 513) regularly carried on by

it, less the deductions allowed by this chapter

which are directly connected with the carrying

on of such trade or business * * *.

Section 513 provides: °

The term “unrelated trade or business” means.

in the case of any organization subject to the

tax imposed by section 511, any trade or busi-

ness the conduct of which is not substantially

related (aside from the need of such organiza-

tion for income or funds or the use it makes of

*26 U.S.C. §511(a)(1) (1976).

*26 U.S.C. §513(a) (1976).

—

the profits derived) to the exercise or perform-

ance by such organization of its charitable, edu-

cational, or other purpose or function constitut-

ing the basis for its exemption under section 501

* * * except that such term does not include any

trade or business—

(2) which is carried on, in the case of

an organization described in section 501(c)

(3) * * * by the organization primarily for

the convenience of its members * * *[.]

The definition provided in section 513 is explained

by Treas. Reg. § 1.513-1(a) (1976):

[Unless one of the specific exceptions of section

512 or 513 is applicable, gross income of an

exempt organization subject to the tax imposed

by section 511 is includible in the computation

of unrelated business taxable income if: (1) It

is income from trade or business; (2) such trade

or business is regularly carried on by the organi-

zation; and (3) the conduct of such trade or

business is not substantially related (other than

through the production of funds) to the organ-

ization’s performance of its exempt functions.

There is no dispute in this case that the advertising

income is from a trade or business that is regularly

carried on. Thus, the only remaining issues are

whether that activity is not substantially related to

an exempt purpose or function of the organization,

and, in any event, whether the advertising does not

constitute an “unrelated trade or business” because

it is covered by the exception of section 513(a) (2)

as a trade or business which is carried on by the or-

ganization primarily for the convenience of its

members.

“Substantially Related” Standard

The relevant Treasury regulations outline the anal-

ysis required under the “substantially related” ele

ment of section 513: *

The presence of this requirement necessitates an

examination of the relationship between the bus-

iness activities which generate the particular in-

come in question—the activities, that is, of pro-

ducing or distributing the goods or performing

the services involved—and the accomplishment

of the organization’s exempt purposes.

The regulations proceed to delimit the type of rela-

tionship required: *

Trade or business is “related” to exempt pur-

poses, in the relevant sense, only where the con-

duct of the business activities has causal rela-

tionship to the achievement of exempt purposes

(other than through the production of income) ;

and it is “substantially related,” for purposes of

section 513, only if the causal relationship is a

substantial one. Thus, for the conduct of trade

or business from which a particular amount of

gross income is derived to be substantially re-

lated to purposes for which exemption is granted,

the production or distribution of the goods or the

performance of the services from which the

* Treas. Reg. § 1.513-1(d) (1) (1976).

" Treas. Reg. § 1.513-1(d) (2) (1976).

gross income is derived must contribute impor-

tantly to the accomplishment of those purposes.

Where the production or distribution of the

goods or the performance of the services does

not contribute importantly to the accomplish-

ment of the exempt purposes of an organization,

the income from the sale of the goods or the per-

formance of the services does not derive from the

conduct of related trade or business. Whether

activities productive of gross income contribute

importantly to the accomplishment of any pur-

pose for which an organization is granted ex-

emption depends in each case upon the facts and

circumstances involved.

Further, the regulations provide that *

[i]n determining whether activities contribute

importantly to the accomplishment of an exempt

purpose, the size and extent of the activities in-

volved must be considered in relation to the na-

ture and extent of the exempt function which

they purport to serve. Thus, where income is

realized by an exempt organization from activi-

ties which are in part related to the performance

of its exempt functions, but which are conducted

on a larger scale than is reasonably necessary

for performance of such functions, the gross in-

come attributable to that portion of the activities

in excess of the needs of exempt functions con-

stitutes gross income from the conduct of unre-

lated trade or business. Such income is not de-

rived from the production or distribution of

goods or the performance of services which con-

* Treas. Reg. § 1.518-1(d) (3) (1976).

tribute importantly to the accomplishment of

any exempt purpose of the organization.

Development of Section 513

Prior to 1950, the test for whether income re-

ceived by a tax-exempt organization was taxable was

the destination of those funds, not their source.’ The

predecessor provisions to sections 511-513 were pro-

mulgated in response to the abuse of tax-exempt status

by certain tax-exempt organizations which were op-

erating unrelated commercial enterprises purely as

a source of revenue.”®

The evils sought to be remedied by that legislation

were specific and limited, although at the time the

problem was spiraling. The First Circuit, in Massa-

chusetts Medical Society v. United States, noted that ™

[ijn his message to Congress in 1950 President

Truman sought legislation to correct “the few

giaring abuses of the tax exemption privilege,”

“tating that it had been “misused in a few in-

stances to gain competitive advantage over pri-

vate enterprise through the conduct of business

and industrial operations entirely unrelated to

educational activities.” * * *

* Trinidad v. Sagrada Orden, 263 U.S. 578, 581 (1924).

1” See C. F. Mueller Co. v. Commissioner, 190 F.2d 120

(3d Cir. 1951).

'! Massachusetts Medical Soc’y vy. United States, 514 F.2d

153, 154 (ist Cir. 1975) (quoting Hearings on Revenue Re-

vision Before the House Committee on Ways and Means, 81st

Cong., 2d Sess. 4, 5 (1950)). See also H.R. Rep. No. 2319,

8ist Cong., 2d Sess. 36-37 (1950), S. Rep. No. 23765, 8ist

Cong., 2d Sess. 29, 107 (1950).

10a

Similarly, the Court of Claims, in addressing whether

advertising in Annals was taxable during a different

tax year, stated

[t]he 1950 Act was a fairly limited measure, de-

signed to distinguish the customary activities of

exempt organizations from the operation of in-

dependent business enterprises entirely unrelated

to the educational purpose of the organization.

The publication of advertising in tax-exempt edu-

cational journals was a well-established practice

before 1950, and Congress did not intend to treat

such advertising on a par with an independently

run advertisement placement agency.

Prior to 1967, the Commissioner took no steps to

tax the advertising income of professional journals

of tax-exempt organizations. In that year, the Treas-

ury amended its regulations to provide that commer-

cial advertising does not lose its identity as a trade

or business “even though the advertising is published

in an exempt organization periodical which contains

editorial matter related to the exempt purposes of the

organization.” Hence, Treasury adopted a frag-

mentary definition of trade or business.

The First Circuit in Massachusetts Medical So-

ciety,"* and the Court of Claims, in American College

of Physicians,” rejected the fragmentary approach,

% American College of Physicians v. United States, 530

F.2d 930, 933 (Ct. Cl. 1976) (resolved on grounds other than

substantial relation of the activity to an exempt purpose).

“% Treas. Reg. § 1.513-1(b) (1968).

% Massachusetts Medical Soc’y, 514 F.2d 153.

1% American College of Physicians, 530 F.2d 930 (following

reasoning of First Circuit in Massachusetts Medical Soc’y).

lla

however, as inconsistent with the legislative history,

with the treatment of deductions in the regulations,

and with section 512(a) of the code, in favor of

treatment of the integrated publication of a periodi-

cal as a “trade or business.” In American College

of Physicians,” the court did not reach the sole issue

before us:

Since we view as dispositive the issue of whether

plaintiff's advertising activities, as a matter of

law, constituted a “trade or business” for tax

purposes—irrespective of whether the advertise-

ments themselves are or are not substantially re-

lated to plaintiff's exempt purpose—we find it

unnecessary to resolve this essentially factual

dispute.

In the interim before the regulations were declared

invalid, however, Congress enacted the Tax Reform

Act of 1969 amending section 513.

Effect of Tax Reform Act

of 1969 on Section 513.

The Government asserts that the enactment of sec-

tion 513 pursuant to the Tax Reform Act of 1969 re

flects a congressional intent to tax advertising reve-

nues as an unrelated trade or business. Subsection

For purposes of this section, the term “trade or

business” includes any activity which is carried

on for the production of income from the sale

* American College of Physicians, 530 F 2d at 931 n.3.

26 U.S.C. §513(c) (1976).

12a

of goods or the performance of services. For

purposes of the preceding sentence, an activity

does not lose identity as a trade or business

merely because it is carried on within a larger

aggregate of similar activities or within a larger

complex of other endeavors which may, or may

not, be related to the exempt purposes of the

organization. Where an activity carried on for

profit constitutes an unrelated trade or business,

no part of such trade or business shall be ex-

cluded from such classification merely because it

does not result in profit.

The Government avers that Congress expressly vali-

dated the regulations that were held invalid in Mas-

sachusetts Medical Society and in American College

of Physicians. The Government, quite properly, rec-

ognizes that congressional action was not in response

to the above cases.“ Rather, the Government asserts

that it reflects a broader policy decision to tax or-

ganizations such as the College. We disagree.

The Government relies on statements of the House

Ways and Means Committee to the effect that it was

anticipated that advertising income from a journal

published by an exempt organization would constitute

unrelated business income.” While the committee

may have believed that advertising income should be

taxed, it did not adopt a blanket rule. Rather, it

'® The Government recognizes that the cases were decided

subsequent to amendment of the code by the Tax Reform

Act of 1969 and involved tax years prior to the effective date

of the amendment.

” H.R. Rep. No. 413, 9ist Cong., ist Sess. at 50, reprinted

in 1969 U.S. Cope Conc. & Ap. News 1645, 1695-96. See also

S. Rep. No. 552, 9ist Cong., Ist Seas. at 75-76, reprinted mm

1969 U.S. Cope Conc. & Ap. News 1645, 2104-06.

13a

expressly preserved the exemption for those trade or

business activities that contribute importantly to the

exempt function. The legislative history addresses

advertising generally and does not grapple with spe-

cific factual situations. Congress heard testimony

that medical advertising in journals such as Annals

is substantially related to the exempt purposes of

organizations such as the College, yet, Congress made

no change to the “substantial relation” or “conven-

ience” tests of section 513(a). Instead, it amended

the statute only to provide that advertising activity

shall be treated as a separate trade or business for

purposes of analysis.

The Government’s reliance on HCSC-Laundry v.

United States* is unavailing. That case held that

a cooperative hospital service organization cannot

qualify for tax-exempt status under section 501(c)

(3) but, instead, may qualify only under section 501

(e). The laundry was previously held exempt under

section 501(c)(3)*" which was unchanged by the ad-

dition of section 501(e).

Section 501(e), however, provided exact guidance

in the treatment of cooperative service organizations

and, in so doing, omitted any specific exemption for

shared laundry organizations. In HCSC-Laundry,

the specific provision, subsection (e), was held to

control over the more general, subsection (c) (3),

particularly in view of their interrelationship.

A different section of the code is involved in this

case. Section 513(c) is not a “more specific” pro-

* HCSC-Laundry v. United States, 450 U.S. 1 (1981).

21 Northern Cal. Cent. Servs., Inc. v. United States, 591 F.2d

620 (Ct. Cl. 1979) (holding that despite enactment of

§ 501 (e), a cooperative hospital laundry remained a § 501 (c)

(3) exempt organization—a position expressly rejected in

HCSC-Laundry).

l4a

vision which governs the “more general” section 513

(a). Rather, subsection (c) defines the trade or bus-

iness to be analyzed under the substantially related

test of subsection (a). Nor are we convinced of the

congressional purpose asserted by the Government.

We conclude that the Government has not established

that Congress intended to tax all advertising revenues

of all journals of exempt organizations. Even were

we to agree that Congress did so intend, it failed to

carry that alleged intent forward into the statute

with language appropriate to effect that result.

We conclude that Congress, in enacting section 513

(c), intended for advertising activity to be treated

as a separate trade or business for purposes of the

unrelated business income tax provisions. Section

513(a) expressly requires that, although considered

a separate trade or business, the conduct of that ad-

vertising must be evaluated to determine whether

it is not substantially related to an exempt purpose

or function of the organization and to determine

whether the conduct of the trade or business is not

primarily for the convenience of the organization’s

members, before that income is taxable. The trial

judge undertook that analysis and we conclude that

he erred.

The trial judge attempted first to determine whether

the conduct of the trade or business is not substan-

tially related to the performance of the College’s tax-

exempt purposes. The College maintains that the

advertising performs an educational function; a sug-

gestion the court below found unpersuasive. The

trial court focused instead on the commercial char-

acter of the advertising and on the degree of simi-

larity to advertising activity carried on by commer-

cial organizations. While it recognized the advertis-

l5a

ing had some degree of educational content, the trial

court went on to state that:

To avoid the [unrelated business income tax,]

an exempt organization would have to run its

advertising business much differently than did

plaintiff. For example, it might make a con-

certed effort to provide advertising that compre-

hensively surveys a particular field, includes all

recent developments in that field, or otherwise

makes a systematic presentation on some subject

relevant to the organization’s exempt purposes.

To qualify for exemption, the advertising pack-

age as a whole must serve an identifiable educa-

tional objective that goes substantially beyond

the informational content of the individual ad-

vertisements. This standard is not met where,

as here, the comprehensiveness and content of

the advertising package is entirely dependent on

each manufacturer’s willingness to pay for space

and the imagination of its advertising agency.

The court below found any educational function of

the activity to be incidental to the purpose of raising

revenue.

Having found the advertising in Annals not sub-

stantially related to the College’s exempt purposes,

the trial judge proceeded to determine whether it was

nevertheless carried on primarily for the convenience

of the College’s members in their capacity as mem-

bers of the College and not merely in their capacity

as physicians. He found that the advertising busi-

ness was not carried on primarily for the conven-

ience of the College’s members but, rather, for the

primary purpose of raising revenue.

The College argues that the court below fashioned

its own test—adding requirements unsupported by

l6a

statute, legislative history, or regulation. The trial

court’s test, avers the College, requires a noncom-

mercial primary purpose. The College asserts that

the trial court’s decision is contrary to authority, re-

lies on the Internal Revenue Service’s generalizations

that journal advertising is unrelated, and fails to

recognize distinguishing facts present in this case.

The Government, on the other hand, asserts that the

trial court’s decision is consistent with both the in-

tent of Congress and the applicable Treasury regu-

lations.

We agree with the College that the trial court erred

in imposing a more rigorous standard than is sup-

ported by the statute. The trial court did not, how-

ever, impose tax liability merely because the primary

purpose was found to be to raise revenue. It relied

on a variety of factors, among them the similarity

to the content and conduct of advertising in commer-

cial publications.

The commercial character of the activity is not,

however, determinative. Rather, it is the substan-

tiality of the relationship—the importance of the con-

tribution of that activity—to the performance of the

College’s exempt purposes or functions, that is de-

terminative. The trial court’s analysis places too

great an emphasis on the similarity of the activity

to commercial advertising. Sections 511-513 impose

tax liability for revenues derived from activities that

are not sufficiently related to the exempt purpose or

function of the organization; not by virtue of the

commercial character of that activity.

The exempt purpose or function urged by the Col-

lege was the medical education of internists includ-

ing, but not limited to, dissemination of medical and

pharmaceutical information. The College’s expert

17a

witnesses testified regarding the need for continuing

pharmacologic information, particularly in view of

the rapid pace of developments in internal medicine.

Testimony was also elicited regarding the essential

function performed by drug advertising to dissemi-

nate information on recent developments with respect

to new drugs, changes in dosage forms and strengths

of existing drugs, and additional indications and con-

traindications discovered based on use. Finally, the

College’s experts testified that the advertising per-

formed an essential “alerting” function to inform the

physician of recent developments by disseminating

information concerning those developments.

The trial court recognized that “all advertising is

educational or informational to some degree.” The

College introduced evidence that the advertising

carried in Annals is screened with respect to sub-

ject matter and its content controlled. Advertising

is accepted only of products and services related to

the practice of internal medicine. The accuracy of

information in the advertisements appearing in

Annals is regulated, in part by information man-

dated by the Food and Drug Administration. Fur-

ther, the College screens new advertisements for

relevance to the practice of internal medicine. Simi-

larly, classified advertising in Annals is limited to

advertisements directly relevant to the practice of

internal medicine. The advertisements are also in-

dexed by advertiser.

The trial court erred in requiring the activity to

meet a standard higher than set out in the statute.

We conclude the trial court erred in requiring that

“[t]o qualify for exemption, the advertising pack-

age as a whole must serve an identifiable educational

objective that goes substantially beyond the informa-

18a

tional content of the individual advertisements.”

The trial court was apparently distracted by the

commercial character of the advertisements and

failed to focus properly on the substantiality of the

relation of the information content of the advertise-

ments to the College’s educational) function.

Comprehensive and systematic presentation of var-

ious aspects of the goods or services advertised, as the

trial court would require, would doubtless enhance

the strength of the relationship between the informa-

tion content of the advertisements and the College’s

educational function. The failure to present the in-

formation in that manner, however, does not estab-

lish the lack of an important contribution to the

exempt function of the advertisements that were pub-

lished in Annals. While new advertisements could be

considered of greater educational value than old, re-

peated ads, the trial court failed to examine the con-

tribution of the old, repeated ads to the educational

function. Similarly, systematic presentation of ad-

vertisements on some subject relevant to the College’s

educational function would doubtless further that

educational purpose. However, the failure of the Col-

lege to take additional steps that may have resulted

in a more substantial relation to the exempt purpose

does not establish that the content of the advertise-

ments is not already substantially related to that

purpose.

It was not necessary, in order to resolve the issue

before it, for the trial court to find that the primary

purpose of the advertising activity was to raise reve-

nue. That finding is relevant only inferentially in

that, if its primary purpose was commercial, the ad-

vertising business was not carried on primarily for

the convenience of the College’s members. The record

presents a very close question, but we cannot con-

19a

clude, on the basis of the record before us, that the

trial court’s finding, that the advertising was not

carried on “primarily for the convenience of [the

College’s] members,” is clearly erroneous. That the

primary purpose may have been commercial, how-

ever, does not preclude a finding that the activity is

substantially related to an exempt function.

We conclude that the trial court’s finding, that the

advertising in Annals is not substantially related to

the College’s tax-exempt, educational purpose, was

clearly erroneous. While the educational function of

the advertising may well have been secondary to the

purpose of raising revenues, the evidence of record

establishes that the advertising in Annals fulfilled an

important educational function. The advertisements

served to apprise internists of developments in their

field. The trial court made no finding that the size

and extent of the activity was excessive. On the basis

of the evidence of record, the size and extent of the

advertising activity appears to be reasonable in rela-

tion to the editorial content of Annals.”

The evidence of record establishes that the contri-

bution of the advertisements to the exempt purpose

is an important one. We hold that the sales of ad-

vertising in Annals are substantially related to the

exempt purpose of the College to educate internists

and, therefore, are not taxable under section 511.

Not all the advertisements that were published in

Annals, however, would appear to be substantially

related to the exempt educational function.“ Treas-

ury Reg. § 1.513-1(d) (3) (1976) provides

* Treas. Reg. § 1.513-1(d) (3) (1976).

8 The trial court cited the example of an advertisement for

Medical Economics magazine, which offers financial and busi-

ness advice to the practicing physician.

20a

where income is realized by an exempt organiza-

tion from activities which are in part related to

the performance of its exempt functions, but

which are conducted on a larger scale than is

reasonably necessary for performance of such

functions, the gross income attributable to that

portion of the activities in excess of the needs of

exempt functions constitutes gross income from

the conduct of unrelated trade or business. * * *

The Government, however, does not argue in this ap-

peal that some portion of the advertising in Annals

was in excess of what would be reasonably necessary

for performance of the exempt function. Accordingly,

it is not necessary for us to resolve that issue in this

appeal.”

REVERSED

*“ Cf. Hi-Plains Hospital vy. United States, 670 F.2d 528, 533

(5th Cir. 1982) (holding that hospital pharmacy sales were

substantially related to exempt function and remanding case

to district court to resolve treatment of smal! amount of sales

that were not substantially related to exempt purpose).

Zila

UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

Appeal No. 84-715

THE AMERICAN COLLEGE OF PHYSICIANS, APPELLANT

THE UNITED STATES, APPELLEE

NIES, Circuit Judge, concurring.

I concur in result and jein the opinion except in

the following respect. In my view, a portion of appel-

lant’s advertising business “is carried on . . . by the

organization primarily for the convenience of its

members.” In particular, the advertisements for posi-

tions in the field and for services and publications

directed to members in their professional capacity,

including the advertisement for Medical Economics

magazine, would fall under this exemption.

22a

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

No. 84-715

415-82T

THE AMERICAN COLLEGE OF PHYSICIANS, APPELLANT

Vv.

THE UNITED STATES, APPELLEE

JUDGMENT

On Appeal from the U.S. Claims Court

This Cause having been heard and considered, it is

Ordered and Adjudged: Reversed.

DATED September 17, 1984

Petition for Rehearing,

Denied, December 5, 1984

Suggestion for Rehearing

In Banc, Declined,

December 5, 1984.

ENTERED By

ORDER OF THE COURT

s/ George E. Hutchinson

GEORGE E. HUTCHINSON

Clerk

Issued as a Mandate: December 13, 1984

23a

APPENDIX C

UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

No. 84-715

THE AMERICAN COLLEGE OF PHYSICIANS, APPELLANT

THE UNITED STATES, APPELLEE

ORDER

A petition for rehearing and a suggestion for re-

hearing in banc having been filed in this case.

UPON CONSIDERATION THEREOF, it is Or-

dered by the court that the petition for rehearing be,

and the same is hereby, Denied.

The suggestion for rehearing in banc is declined

FOR THE COURT

s/ George E. Hutchinson

GEORGE E. HUTCHINSON

Clerk

Date: December 5, 1984

24a

APPENDIX D

IN THE UNITED STATES CLAIMS COURT

No. 415-82T

AMERICAN COLLEGE OF PHYSICIANS, PLAINTIFF

THE UNITED STATES, DEFENDANT

[Filed Oct. 21, 1983]

OPINION

KOZINSKI, Chief Judge.

Plaintiff American College of Physicians, a tax-

exempt organization, challenges the Commissioner’s

determination that income earned from advertising

in the College’s journal, Annals of Internal Medicine,

is subject to the Unrelated Business Income Tax

(UBIT). 26 U.S.C. $§ 511-513 (1976).

Facts '

The College is an organization exempt from taxa-

tion under section 501(c)(3). Its tax-exempt pur-

poses are to uphold and maintain high standards in

| The court made oral findings of fact after trial which was

held on September 14, 1983.

25a

medical education, medical practice and medica] re-

search; to encourage research, especially in clinical

medicine; and to foster measures for the prevention

of disease and for the improvement of public health.

In furtherance of its exempt purposes, the College

publishes Annals of Internal Medicine which contains

scholarly articles relevent to the practice of internal

medicine. Annals has a worldwide reputation as one

of the most respected journals in its field. The journal

is provided to the College’s members without charge

and to nonmembers on a per issue basis or by sub-

scription.

Each monthly issue of Annals contains commercial

advertisements relating exclusively to medical prod-

ucts (primarily drugs) and classified notices relating

principally to employment in the practice or teaching

of medicine. These advertisements are not dispersed

throughout the journal but appear in discrete “stacks”

at the beginning and end of the publication. In gen-

eral, the College’s advertising rates are competitive

with those of other medical journals.

Questions Presented

Sections 511-513 of the Internal Revenue Code pro-

vide that the income of otherwise tax-exempt organi-

zations is taxable if it is earned by regularly conduct-

ing a trade or business not substantially related to

the organization’s exempt purposes. The parties have

stipulated that the College’s activity of soliciting and

publishing advertisements in Annals was a regularly

conducted trade or business. They disagree as to

whether it is substantially related to the College's

exempt purposes.

Even if publishing advertisements in Annals is held

not to be substantially related to the College’s exempt

26a

purposes, the income is nevertheless tax-exempt if the

advertisements are published primarily for the con-

venience of the College’s members. 26 U.S.C. § 513

(a)(2) (1976). The parties further disagree as to

whether the advertising in Annals meets this

standard.

Discussion

A. The Relatedness lasue

Under section 513(a) the income from a trade or

business is tax-exempt if the conduct of the trade or

business is substantially related to the performance

of the organization’s tax-exempt purposes. To come

within section 513, the relationship between the busi-

ness and the tax-exempt purpose must be a substan-

tial one, Le. it must “contribute importantly” to the

accomplishment of the organization’s exempt pur-

poses. Treas. Reg. § 1.513-1(d)(2) (1975).

1. Defendant argues that, to avoid the UBIT, the

very conduct or operation of the business, rather than

merely its product, must be substantially related to

the tax-exempt purpose. To illustrate this proposi-

tion, defendant refers to an example in the regula-

tions which concludes that income from advertise

ments solicited by a student-run newspaper is tax-

exempt. Treas. Reg. 1.513-1(d) (4) (iv) example (5)

(1975). Defendant explains that students working on

the paper are engaging in an educational activity:

learning how to run a newspaper. The publication

of advertising teaches students how to solicit business,

set prices and lay out ads. The income for the ad-

vertising is exempt, defendant argues, because the

very operation of the advertising business contributes

importantly to the educational function. Whether

the advertisements themselves advance the organiza-

tion’s tax-exempt purposes is, in defendant's view,

irrelevant.

27a

While defendant’s test fits neatly within the ex-

ample given, it is not clear that the Commissioner has

consistently followed it. See, e.g., Rev. Rul. 75-516,

1975-2 C.B. 220; Rev. Rul. 69-463, 1969-2 C.B. 131;

Rev. Rul. 69-267, 1969-1 C.B. 160.* At least until the

Internal Revenue Service itseif takes a position more

consistent with the view suggested by its attorney,

the court will consider whether the conduct or the

product of a business is related to the organization’s

tax-exempt purposes.

2. Plaintiff does not contend that the conduct of

the advertising business is substantially related to

the College’s exempt purposes, so the inquiry is

whether the advertising itself is so related. Plain-

tiff’s theory is that the advertising performs an edu-

cational function, supplementing the journal’s edi-

torial content. Medicine is a constantly changing

2In Rev. Rul. 69-267, 1969-1 C.B. 160, for example, a hos-

pital operated a gift shop patronized by patients, visitors and

employees. The operation of the gift shop was held to be sub-

stantially related to the hospital’s exempt purposes because

“(bly providing a facility for the purchase of merchandise

and services to improve the physical comfort and mental well-

being of its patients, the hospital is carrying on an activity

that encourages their recovery and therefore contributes im-

portantly to its exempt purposes.” There is no indication

that the gift shop was operated by patients; its relationship

to the hospital’s tax-exempt purpose lay in the fact that the

goods and services it provided could enhance the comfort of

the patients. See also Rev. Rul. 69-268, 1969-1 C.B. 160

(hospital cafeteria is substantially related) ; Rev. Rul. 69-269,

1969-1 C.B. 160 (hospital parking lot is substantially related) .

While each of these operations might have been deemed

tax-exempt as operated primarily for the convenience of the

patients, see pp. 5-7 infra, the Commissioner chose instead

to rule that they were substantially related to the hospital’s

tax-exempt purpose.

28a

science and the advertising contains factual and tech-

nical data which, according to plaintiff, can help

physicians keep up.

The court finds plaintiff’s argument unpersuasive.

The evidence is clear that plaintiff did not use the

advertising to provide its readers a comprehensive or

systematic presentation of any aspect of the goods or

services publicized.* Those companies willing to pay

for advertising space got it; others did not. More-

over, some of the advertising was for established

drugs or devices and was repeated from one month

to another, undermining the suggestion that the ad-

vertising was principally designed to alert readers of

recent developments.* Some ads even concerned mat-

ters that had no conceivable relationship to the Col-

lege’s tax-exempt purposes. See, e.g., n. 7 infra.

The advertising, moreover, was typical commercial

publicity. Some ads were eye-catching, others strictly

factual; some covered a fraction of a page, others

several pages; some were in black and white, many

were in bright color. Many ads were identical to

those appearing in medical journals published by

non-exempt organizations. The differences between

ads plainly reflected the advertiser’s marketing strat-

3 The hit-or-miss nature of the advertising was highlighted

by one of plaintiff's own witnesses who suggested that ads

could help readers understand the journal’s editorial content

by supplementing articles discussing a particular drug or

medical device. Yet it is clear that no effort was made to

coordinate the advertising with the journal’s editorial content.

Thus, if an article discussed a particular new drug or device,

it would be pure coincidence for that product also to be

featured in an advertisement in the same issue of the journal.

* For example Annals often carried ads for Valium, Insulin

and Maalox. See, e.g., Annals of Internal Med., July 1975 at

1-0, 1-58 & 1-64.

29a

egy rather than their probable importance to the

reader. That the advertisements were placed in

stacks—a fact upon which plaintiff places significant

reliance—had no bearing on their purported educa-

tional function. It suggests instead that the ads

were considered distracting and out of step with the

sober and understated tenor of the journal’s editorial

content.

All advertising is, of course, educational or infor-

mational to some degree. However, Treasury Regula-

tions provide that advertising income of journals like

Annals generally is taxable. Treas. Reg. § 1.512(a)-

1(f) (1975). Example 7 under Treas. Reg. § 1.513-

1(d) (4) (iv) closely resembles the situation here,

positing a tax-exempt organization that sells adver-

tising space in its journal but limits the advertising

to matters within the professional interest of its

“members. The organization requires the advertising

to conform to certain standards of taste, fairness

and accuracy, but otherwise leaves the content and

form of the advertising to the discretion of the ad-

vertisers. Despite the informational character of the

advertising, the example concludes that “the publica-

tion of advertising designed and selected in the man-

ner of ordinary commercial advertising is not an

educational activity of the kind contemplated by the

exemption statute.”

To avoid the UBIT an exempt organization would

have to run its advertising business much differently

than did plaintiff. For example, it might make a

concerted effort to provide advertising that compre-

hensively surveys a particular field, includes all re-

cent developments in that field, or otherwise makes

a systematic presentation on some subject relevant to

the organization’s exempt purposes. To qualify for

30a

exemption, the advertising package as a whole must

serve an identifiable educational objective that goes

substantially beyond the informational content of

the individual advertisements. This standard is not

met where, as here, the comprehensiveness and con-

tent of the advertising package is entirely dependent

on each manufacturer’s willingness to pay for space

and the imagination of its advertising agency.

The court therefore finds that the advertising in

Annals did not contribute importantly to the College’s

tax-exempt purposes. Rather, any educational func-

tion it may have served was incidental to its purpose

of raising revenue.

B. The Convenience Issue

Even though the advertising in Annals is not sub-

stantially related to the College’s exempt purposes,

the income gained from it would nevertheless be tax-

exempt if the advertising business was carried on

primarily for the convenience of the College’s mem-

bers. 26 U.S.C. §513(a)(2) (1976).

1. There is little guidance on the subject of when

income subject to the UBIT nevertheless remains tax-

exempt because it derives from activities conducted

primarily for the convenience of the organization’s

members. The statute itself simply provides that “the

term ‘unrelated trade or business’ . . . does not in-

clude any trade or business . . . which is carried on

... by the organization primarily for the convenience

of its members... .” 26 U.S.C. § 513(a) (2) (1976).

In order to qualify under this language, it would

appear that the activity in question has to be carried

on for the convenience of the organization’s members

in their capacity as members. Were the statute con-

strued otherwise, there would be no end to the types

of goods or services an organization could provide its

3la

members while avoiding tax on the income so derived.

This would significantly undercut the purpose of the

UBIT.®

While the legislative history of section 513(a) (2)

is sparse, it supports this interpretation. The House

and Senate Reports give the examples of dining

rooms, restaurants and dormitories operated by a

university for use by its students as falling within

this exception. H.R. Rep. No. 2319, 8lst Cong., 2d

Sess. 37 (1950), reprinted in 1950-2 C.B. 380, 409;

S. Rep. 375, 81st Cong., 2d Sess. 29 (1950), reprinted

im 1950-2 C.B. 483, 505. Each of these examples in-

volves facilities that assist students in fulfilling their

role as students. For example, dormitories allow stu-

dents to live close to classrooms and libraries, and

to share quarters with other students. On campus

restaurants and cafeterias facilitate student inter-

action before, after and between classes.* See also

* Thus, tax-exempt organizations could, as a side-line, oper-

ate vacation resorts, catalogue shopping services, apartment

houses or any other enterprises so long as acceas were largely

limited to members. All such enterprises could be described

as operating for the convenience of the members, yet their

activities would be entirely unrelated to the organization’s

tax-exempt purposes. Allowing organizations to engage in

such enterprises tax free would raise concerns about unfair

competition with taxable entities; such concerns were the

principal impetus for enactment of the UBIT. See Disabled

American Veterans v. United States, 227 Ct. Cl. 474, 479

(1981) ; H.R. Rep. No. 2319, 8ist Cong., 2d Sess. 36 (1950),

reprinted in 1950-2 C.B. 380, 409; S. Rep. No. 2375, 81st

Cong., 2d Sess. 28 (1950), reprinted in 1950-2 C.B. 483, 504;

Treas. Reg. § 1.513-1(b) (1975).

*The Supreme Court has recognized that student inter-

action serves an important educational function. See Sweatt

Vv. Painter, 339 U.S. 629, 634 (1950) ;: McLaurin v. Oklahoma

State Regents, 339 U.S. 637, 641 (1950).

32a

St. Luke’s Hospital vy. United States, 494 F. Supp. 85,

92 (W.D. Mo. 1980) (pathology tests performed by

hospital primarily for the convenience of member

physicians).

The advertising here may have served the con-

venience of Annals readers in their capacity as phy-

sicians but not in their capacity as members of the

College. The difference is subtle but important. The

members’ interests as members concern such matters

as attending the College’s educational functions, par-

ticipating in research and testing, disseminating

health information to the public and promoting qual-

ity medical education. The members’ interests as

physicians are much broader an include all of the

aspects of medical practice. The advertising in An-

nals may assist practicing physicians by informing

them of new products, publicizing the availability of

positions and helping them sell their medical equip-

ment. The advertising does not, however, have any

connection with their responsibilities as members of

the College."

2. In any event, the court finds that the advertis-

ing business was not carried on primarily for the

convenience of the College’s members in any capacity.

In another context, the Supreme Court has inter-

preted the term “primarily” to mean “‘of first im-

T An advertisement for another publication, Medical Eco-

nomics, illustrates this point. The ad, which appeared regu-

larly in Annals, promised that Medical Economics would help

provide answers to such questions as whether “the new Seville

fis] worth its $12,479 base price” and that it would instruct

readers on how to “double [their] gain through a quirk in

the tax law.” Annals of Internal Med., July 1975 at I-40.

While such iseues may be of interest to the reader, their

resolution surely has no bearing on his responsibilities as a

member of the College.

33a

portance’ or ‘principally.’” Malat vy. Ridell [sic], 383

U.S. 569, 572 (1966) (construing section 1221(1) of

the Internal Revenue Code which denies capital gain

treatment to “property held . . . primarily for sale

. In the ordinary course of . . . business”). There

seems to be no reason to depart from this common

sense definition in interpreting section 513(a) (2).

The advertising business of Annals was operated

in material respects like the advertising business of

any other publication. All advertising serves the con-

venience of some of those seeing it, otherwise it

would be ineffective and unprofitable. However. the

primary purpose of advertising from the publisher’s

perspective is to make money. While the enhanced

convenience of the readers may have been a welcome

incidental benefit, the court finds that the College’s

primary purpose in carrying advertising in Annals

was to raise revenue.

Conclusion

The advertising published in Annals is not substan-

tially related to the College’s exempt purposes nor is

it published primarily for the convenience of the Col-

lege’s members.

The clerk is directed to dismiss the petition with

costs to the prevailing party.

34a

APPENDIX E

IN THE UNITED STATES CLAIMS COURT

No. 415-82 T

AMERICAN COLLEGE OF PHYSICIANS

THE UNITED STATES

[Filed Oct. 24, 1983]

JUDGMENT

Pursuant to the opinion of October 21, 1983, it

was held that plaintiff is not entitled to recover with

the complaint to be dismissed.

IT IS ORDERED AND ADJUDGED this date,

pursuant to Rule 58, that the complaint is dismissed,

with costs to the prevailing party.

FRANK T. PEARTREE

Clerk of Court

35a

APPENDIX F

Internal Revenue Code of 1954 (26 U.S.C.), as

amended and as in effect for the years at issue ‘

Sec. 501. EXEMPTION FroM TAX ON CORPORA-

TIONS, CERTAIN TRUSTS, ETC.

(a) Exemption From Tazxation.—An organi-

zation described in subsection (c) or (d) or sec-

tion 401(a) shall be exempt from taxation un-

der this subtitle unless such exemption is denied

under section 502 or 503.

(b) Tax on Unrelated Business Income and

Certain Other Activities—An organization ex-

empt from taxation under subsection (a) shall

be subject to tax to the extent provided in parts

II and III of this subchapter, but (notwithstand-

ing parts II and III of this subchapter) shall be

considered an organization exempt from income

taxes for the purpose of any law which refers to

organizations exempt from income taxes.

lowing organizations are referred to in subsec-

tion (a):

(1) Corporations organized under Act of

Congress, if such corporations are instru-

mentalities of the United States and if, un-

der such Act, as amended and supplemented,

such corporations are exempt from Federal

income taxes.

(2) Corporations organized for the ex-

clusive purpose of holding title to property,

collecting income therefrom, and turning

over the entire amount thereof. less ex-

36a

penses, to an organization which itself is

exempt under this section.

(3) Corporations, and any community

chest, fund, or foundation, organized and

operated exclusively for religious, charita-

ble, scientific, testing for public safety, lit-

erary, or educational purposes, or for the

prevention of cruelty to children or animals,

no part of the net earnings of which inures

to the benefit of any private shareholder or

individual, no substantial part of the activ-

ities of which is carrying on propaganda, or

otherwise attempting to influence legislation,

and which does not participate in, or inter-

vene in (including the publishing or dis-

tributing of statements), any political cam-

paign on behalf of any candidate for public

office.

(4) Civie leagues or organizations not or-

ganized for profit but operated exclusively

for the promotion of social welfare, or local

associations of employees, the membership

of which is limited to the employees of a

designated person or persons in a particular

municipality, and the net earnings of which

are devoted exclusively to charitable, educa-

tional, or recreational purposes.

(5) Labor, agricultural, or horticultural

organizations.

(6) Business leagues, chambers of com-

merce, real-estate boards, boards of trade,

or professional football leagues (whether or

not administering a pension fund for foot-

ball players), not organized for profit and

no part of the net earnings of which inures

37a

to the benefit of any private shareholder or

individual.

(7) Clubs organized and operated exclu-

sively for pleasure, recreation, and other

nonprofitable purposes, no part of the net

earnings of which inures to the benefit of

any private shareholder.

Sec. 511. LMPOSITION oF TAX ON UNRELATED

BUSINESS INCOME OF CHARITABLE,

ETC., ORGANIZATIONS.

(a) Charitable, Etc., Organizations Taxable at

Corporate Rates.—

(1) imposition of tax.—There is hereby

imposed for each taxable year on the unre-

lated business taxable income (as defined

in section 512) of every organization de-

scribed in paragraph (2) a normal tax and

a surtax computed as provided in section 11.

In making such computation for purposes

of this section, the term “taxable income”

as used in section 11 shall be read as “unre-

lated business taxable income.”’

(2) Organizations subject to tax.—

(A) Organizations described in sec-

tion 401(a) and 501(c).—The taxes

imposed by paragraph (1) shall apply

in the case of any organization (other

than a trust described in subsection (b)

or an organization described in section

901(¢c)(1)) which is exempt, except as

provided in this part or part II (relat-

ing to private foundations), from tax-

38a

ation under this subtitle by reason of

section 501(a).

(B) State colleges and wniversities.

—The taxes imposed by paragraph (1)

shal] apply in the case of any college or

university which is an agency or in-

strumentality of any government or

any political subdivision thereof, or

which is owned or operated by a govern-

ment or any political subdivision

thereof, or by any agency or instru-

mentality of one or more governments

or political subdivisions. Such taxes

shall also apply in the case of any cor-

poration wholly owned by one or more

such colleges or universities.

Spec. 512. UNRELATED Business TAXABLE IN-

COME.

(a) Definition.—For purposes of this titl—

(1) General rule.—Except as otherwise

provided in this subsection, the term “unre

lated business taxable income” means the

gross income derived by any organization

from any unrelated trade or business (as

defined in section 513) regularly*®arried on

by it, less the deductions allowed by this

chapter which are directly connected with

the carrying on of such trade or business,

both computed with the modifications pro-

vided in subsection (b).

39a

(b) Modifications.—The modifications re

ferred to subsection (a) are the following:

(1) There shall be excluded al] dividends,

interest, and annuities, and all deductions

directly connected with such income.

2) There shall be excluded all royalties

(including overriding royalties) whether

measured by production or by gross or tax-

able income from the property, and all de

ductions directly connected with such in-

come.

(3) In the case of rents—

(A) Except as provided in subpara-

graph (B), there shall be excluded—

(i) all rents from real property

(including property described in

section 1245(a)(3)(C)), and

(ii) all rents from personal

property (including for purposes

of this paragraph as personal! prop-

erty any property described in sec-

tion 1245(a)(3)(B)) leased with

such real property, if the rents at-

tributable to such personal prop-

erty are an incidental amount of

the total rents received or accrued

under the lease, determined at the

time the personal property is

placed in service.

(B) Subparagraph (A) shall not

apply—

(i) if more than 50 percent of

the total rent received or accrued

40a

under the lease is attributable to

personal property described in sub-

paragraph (A) (ii), or

(ii) if the determination of the

amount of such rent depends in

whole or in part on the income or

profits derived by any person from

the property leased (other than an

amount based on a fixed percentage

or percentages of receipts or sales).

ductions directly connected with rents

excluded under subparagraph (A).

Sec. 513. UNRELATED TRADE on BUSINESS.

(a) General Rule—The term “unrelated

trade or business” means, in the case of any or-

ganization subject to the tax imposed by section

511, any trade or business the conduct of which

is not substantially related (aside from the need

of such organization for income or funds or the

use it makes of the profits derived) to the exer-

cise or performance by such organization of its

charitable, educational, or other purpose or func-

tion constituting the basis for its exemption un-

der section 501 (or, in the case of an organiza-

tion described in section 511(a)(2)(B), to the

exercise or performance of any purpose or func-

tion described in section WOl(c)(3)), except

that such term does not include any trade or

business—

(1) in which substantially all the work

in carrying on such trade or business is

4la

performed for the organization without

compensation ; or

(2) which is carried on, in the case of an

organization described in section 501(c) (3)

or in the case of a college or university de

scribed in section 511(a)(2)(B), by the

organization primarily for the convenience

of its members, students, patients, officers,

or employees, or, in the case of a local asso-

ciation of employees described in section 501

(c)(4) organized before May 27, 1969,

which is the selling by the organization of

items of work-related clothes and equipment

and items normally sold through vending

machines, through food dispensing facilities,

or by snack bars, for the convenience of its

members at their usual places of employ-

ment; or

(3) which is the selling of merchandise,

substantially all of which has been received

by the organization as gifts or contribu-

tions.

> > > * *

poses of this section, the term “trade or busi-

ness” includes any activity which is carried on for

the production of income from the sale of goods

or the performance of services. For purposes of

the preceding sentence, an activity does not lose

identity as a trade or business merely because it

is carried on within a larger aggregate of simi-

lar activities or within a larger complex of other

endeavors which may, or may not, be related to

the exempt purposes of the organization. Where

an activity carried on for profit constitutes an

42a

unrelated trade or business, no part of such

trade or business shall be excluded from such

classification merely because it does not result

in profit.

* * * * *

Treasury Regulations on Income Tax (1954 Code)

(26 C.F.R.):

§ 1.512(a)-1. Definition.

7 > * * * ,

(f) Determination of unrelated business tax-

able income derived from sale of advertising in |

exempt organization periodicals—(1) In gen-

eral. Under section 513 (relating to the defini-

tion of unrelated trade or business) and § 1.513-

1, amounts realized by an exempt organization

from the sale of advertising in a periodical con-

stitute gross income from an unrelated trade or

business activity involving the exploitation of an

exempt activity, namely, the circulation and

readership of the periodical developed through

the production and distribution of the reader-

ship content of the periodical. Paragraph (d)

of this section provides for the allowance of

deductions attributable to the production and

distribution of the readership content of the

periodical. Thus, subject to the limitations of

paragraph (d)(2) of this section, where the cir-

culation and readership of an exempt organiza-

tion periodical are utilized in connection with the

sale of advertising in the periodical, expenses,

depreciation, and similar items of deductions at-

tributable to the production and distribution of

the editorial or readership content of the periodi-

cal shall qualify as items of deductions directly

ee -

43a

connected with the unrelated advertising activ-

ity. Subparagraphs (2) through (6) of this

paragraph provide rules for determining the

amount of unrelated business taxable income at-

tributable to the sale of advertising in exempt

organization periodicals. Subparagraph (7) of

this paragraph provides rules for determining

when the unrelated business taxable income of

two or more exempt organization periodicals may

be determined on a consolidated basis.

(2) Computation of unrelated business tax-

able income attributable to sale of advertising—

(i) Excess advertising costs. If the direct ad-

vertising costs of an exempt organization period-

ical (determined under subparagraph (6) (ii)

of this paragraph) exceed gross advertising in-

come (determined under subparagraph (3) (ii)

of this paragraph), such excess shall be allow-

able as a deduction in determining unrelated

business taxable income from any unrelated

trade or business activity carried on by the or-

ganization.

* * 7 . >

(3) Income attributable to exempt organiza-

tion periodicals—(i) In general. For purposes

of this paragraph the total income attributable

to any exempt organization periodical is the sum

of its gross advertising income and is circulation

income.

(ii) Gross advertising income. The term

“gross advertising income” means all amounts

derived from the unrelated advertising activities

of an exempt organization periodical (or for

purposes of this paragraph in the case of a taxa-

ble organization, all amounts derived from the

44a

advertising activities of the taxable organiza-

tion).

See subparagraph (4) of this paragraph for a

discussion of the factors to be considered in de-

termining allocable membership receipts of an

exempt organization periodical under the stand-

ard described in the preceding sentence.

§ 1.513-1. Definition of unrelated trade or busi-

ness.

(a) In general. As used in section 512 the

term “unrelated business taxable income” means

the gross income derived by an organization

from any unrelated trade or business regularly

carried on by it, less the deductions and subject

to the modifications provided in section 512. Sec-

tion 513 specifies with certain exceptions that

the phrase “unrelated trade or business” means,

in the case of an organization subject to the tax

imposed by section 511, any trade or business

the conduct of which is not substantially related

(aside from the need of such organization for

income or funds or the use it makes of the

profits derived) to the exercise or performance

by such organization of its charitable, educa-

tional, or other purpose or function constituting

the basis for its exemption under section 501

exceptions of section 512 or 513 is applicable,

gross income of an exempt organization subject

to the tax imposed by section 511 is includible

in the computation of unrelated business tax-

able income if: (1) It is income from trade or

business; (2) such trade or business is regularly

45a

carried on by the organization; and (3) the con-

duct of such trade or business is not substan-

tially related (other than through the produc-

tion of funds) to the organization’s perform-

ance of its exempt functions.

(b) Trade or business. The primary objective

of adoption of the unrelated business income tax

was to eliminate a source of unfair competition

by placing the unrelated business activities of

certain exempt organizations upon the same tax

basis as the nonexempt business endeavors with

which they compete. On the other hand, where

an activity does not possess the characteristics

of a trade or business within the meaning of sec-

tion 162, such as when an organization sends

out low-cost articles incidental to the solicitation

of charitable contributions, the unrelated busi-

ness income tax does not apply since the organi-

zation is not in competition with taxable organi-

zations. However, in general, any activity of a

section 511 organization which is carried on for

the production of income and which otherwise

possesses the characteristics required to consti-

tute “trade or business” within the meaning of

section 162—and which, in addition, is not sub-

stantially related to the performance of exempt

functions—presents sufficient likelihood of un-

fair competition to be within the policy of the

tax. Accordingly, for purposes of section 513

the term “trade or business” has the same mean-

ing it has in section 162, and generally includes

any activity carried on for the production of in-

come from the sale of goods or performance of

services. Thus, the term “trade or business” in

section 513 is not limited to integrated aggre-

46a

gates of assets, activities and good will which

comprise businesses for the purposes of certain

other provisions of the Internal Revenue Code.

Activities of producing or distributing goods or

performing services from which a particular

amount of gross income is derived do not lose

identity as trade or business merely because they

are carried on within a larger aggregate of sim-

ilar activities or within a larger complex of

other endeavors which may, or may not, be re-

lated to the exempt purposes of the organiza-

tion. Thus, for example, the regular sale of

pharmaceutical supplies to the general public

by a hospital pharmacy does not lose identity as

trade or business merely because the pharmacy

also furnishes supplies to the hospital and pa-

tients of the hospital in accordance with its ex-

empt purposes or in compliance with the terms

of section 513(a)(2). Similarly, activities of

soliciting, selling, and publishing commercial ad-

vertising do not lose identity as a trade or busi-

ness even though the advertising is published in

an exempt organization periodical which con-

tains editorial matter related to the exempt pur-

poses of the organization. However, where an

activity carried on for the production of income

constitutes an unrelated trade or business, no

part of such trade or business shall be excluded

from such classification merely because it does

not result in profit.

ciples. In determining whether trade or business

from which a particular amount of gross in-

come derives is “regularly carried on,” within

the meaning of section 512, regard must be had

47a

to the frequency and continuity with which the

activities productive of the income are conducted

and the manner in which they are pursued.

This requirement must be applied in light of the

purpose of the unrelated business income tax to

place exempt organization business activities

upon the same tax basis as the nonexempt busi-

ness endeavors with which they compete. Hence,

for example, specific business activities of an

exempt organization will ordinarily be deemed

to be “regularly carried on” if they manifest a

frequency and continuity, and are pursued in a

manner, generally similar to comparable com-

mercial activities of nonexempt organizations.

(d) Substantially related—(1) In general.

Gross income derives from “unrelated trade or

business,” within the meaning of section 513(a),

if the conduct of the trade or business which

produces the income is not substantially related

(other than through the production of funds) to

the purposes for which exemption is granted.

The presence of this requirement necessitates an

examination of the relationship between the busi-

ness activities which generate the particular in-

come in question—the activities, that is, of pro-

ducing or distributing the goods or performing

the service involved—and the accomplishment of

the organization’s exempt purposes.

(2) Type of relationship required. Trade or

business is “related” to exempt purposes, in the

relevant sense, only where the conduct of the

business activities has causal relationship to the

achievement of exempt purposes (other than

through the production of income); and it is

48a

“substantially related,” for purposes of section

513, only if the causal relationship is a substan-

tial one. Thus, for the conduct of trade or busi-

ness from which a particular amount of gross

income is derived to be substantially related to

purposes for which exemption is granted, the

production or distribution of the goods or the

performance of the services from which the gross

income is derived must contribute importantly to

the accomplishment of those purposes. Where the

production or distribution of the goods or the

performance of the services does not contribute

importantly to the accomplishment of the exemp:

purposes of an organization, the income from the

sale of the goods or the performance of the serv-

ices does not derive from the conduct of related

trade or business. Whether activities productive

of gross income contribute importantly to the

accomplishment of any purpose for which an

organization is granted exemption depends in

each case upon the facts and circumstances in-

volved.

* > * * *

(4) Application of principles—(i) Income

from performance of exempt functions. Gross

income derived from charges for the perform-

ance of exempt functions does not constitute

gross income from the conduct of unrelated trade

or business. The following examples illustrate

the application of this principle:

Example (1). M, an organization described

in section 501(c) (3), operates a school for train-

ing children in the performing arts, such as act-

ing, singing, and dancing. It presents perform-

ances by its students and derives gross income

49a

from admission charges for the performances.

The students’ participation in performances be-

fore audiences is an essential part of their train-

ing. Since the income realized from the per-

formance derives from activities which contrib-

ute importantly to the accomplishment of M’s

exempt purposes, it does not constitute gross in-

come from unrelated trade or business. (For

specific exclusion applicable in certain cases of

contributed services, see section 513(a)(1) and

paragraph (e)(1) of this section.)

Example (2). N is a trade union qualified for

exemption under section 501(c) (5). To improve

the trade skills of its members, N conducts re-

fresher training courses and supplies handbooks

and technical manuals. N receives payments

from its members for these services and mate-

rials. However, the development and improve-

ment of the skills of its members is one of the

purposes for which exemption is granted N; and

the activities described contribute importantly to

that purpose. Therefore, the income derived from

these activities does not constitute gross income

from unrelated trade or business.

Example (3). O is an industry trade associa-

tion qualified for exemption under section 501

(c)(6). It presents a trade show in which

members of its industry join in an exhibition of

industry products. O derives income from

charges made to exhibitors for exhibit space and

admission fees charged patrons or viewers of the

show. The show is not a sales facility for indi-

vidual exhibitors; its purpose is the promotion

and stimulation of interest in, and demand for,

the industry’s products in general, and it is con-

50a

ducted in a manner reasonably calculated to

achieve that purpose. The stimulation of de-

mand for the industry’s products in general is

one of the purposes for which exemption is

granted O. Consequently, the activities produc-

tive of O’s gross income from the show—that is,

the promotion, organization and conduct of the

exhibition—contribute importantly to the achieve-

ment of an exempt purpose, and the income does

not constitute gross income from unrelated trade

or business.

* * * * *

(iv) Exploitation of exempt functions. In cer-

tain cases, activities carried on by an organiza-

tion in the performance of exempt functions may

generate good will or other intangibles which are

capable of being exploited in commercial en-

deavors. Where an organization exploits such an

intangible in commercial activities, the mere fact

that the resultant income depends in part upon

an exempt function of the organization does not

make it gross income from related trade or busi-

ness. In such cases, unless the commercial activi-

ties themselves contribute importantly to the

accomplishment of an exempt purpose, the in-

come which they produce is gross income from

the conduct of unrelated trade or business. The

application of this subdivision is illustrated in

the following examples:

* * * * *

Example (5). Y, an exempt university, pro-

vides facilities, instruction and faculty supervi-

sion for a campus newspaper operated by its

students. In addition to news items and editorial

5la

commentary, the newspaper publishes paid ad-

vertising. The solicitation, sale, and publication

of the advertising are conducted by students,

under the supervision and instruction of the uni-

versity. Although the services rendered to ad-

vertisers are of a commercial character, the

advertising business contributes importantly to

the university’s educational program through the

training of the students involved. Hence, none

of the income derived from publication of the

newspaper constitutes gross income from unre-

lated trade or business. The same result would

follow even though the newspaper is published by

a separately incorporated section 501(c)(3) or-

ganization, qualified under the university rules

for recognition of student activities, and even

though such organization utilizes its own facili-

ties and is independent of faculty supervision,

but carries out its educational purposes by means

of student instruction of other students in the

editorial and advertising activities and student

participation in those activities.

Example (6). Z is an association exempt un-

der section 501(c)(6), formed to advance the

interests of a particular profession and drawing

its membership from the members of that pro-

fession. Z publishes a monthly journal contain-

ing articles and other editorial material which

contribute importantly to the accomplishment of

purposes for which exemption is granted the or-

ganization. Income from the sale of subscrip-

tions to members and others in accordance with

the organization’s exempt purposes, therefore,

does not constitute gross income from unrelated

trade or business. In connection with the publi-

52a

cation of the journal, Z also derives income from

the regular sale of space and services for general

consumer advertising, including advertising of

such products as soft drinks, automobiles, arti-

cles of apparel, and home appliances. Neither

the publication of such advertisements nor the

performance of services for such commercial ad-

vertisers contributes importantly to the accom-

plishment of any purpose for which exemption

is granted. Therefore, notwithstanding the fact

that the production of income from advertising

utilizes the circulation developed and maintained

in performance of exempt functions, such income

is gross income from unrelated trade or business.

Example (7). The facts are as described in

the preceding example, except that the advertis-

ing in Z’s journal promotes only products which

are within the general area of professional inter-

est of its members. Following a practice com-

mon among taxable magazines which publish

advertiisng, Z requires its advertising to comply

with certain general standards of taste, fairness,

and accuracy; but within those limits the form,

content, and manner of presentation of the ad-

vertising messages are governed by the basic

objective of the advertisers to promote the sale

of the advertised products. While the advertise-

ments contain certain information, the informa-

tional function of the advertising is incidental

to the controlling aim of stimulating demand for

the advertised products and differs in no essen-

tial respect from the informational function of

any commercial advertising. Like taxable pub-

lishers of advertising, Z accepts advertising only

from those who are willing to pay its prescribed

53a

rates. Although continuing education of its mem-

bers in matters pertaining to their profession is

one of the purposes for which Z is granted ex-

emption, the publication of advertising designed

and selected in the manner of ordinary commer-

cial advertising is not an educational activity of

the kind contemplated by the exemption statute;

it differs fundamentally from such an activity

both in its governing objective and in its method.

Accordingly, Z’s publication of advertising does

not contribute importantly to the accomplishment

of its exempt purposes; and the income which it

derives from advertising constitutes gross in-

come from unrelated trade or business.

(e) Exceptions. Section 513(a) specifically

states that the term “unrelated trade or busi-

ness” does not include—

(1) Any trade or business in which substan-

tially all the work in carrying on such trade or

business is performed for the organization with-

out compensation; or

(2) Any trade or business carried on by an

organization described in section 501(c)(3) or

by a governmental college or university described

in section 511(a)(2)(B), primarily for the con-

venience of its members, students, patients, offi-

cers, or employees; or, any trade or business

carried on by a local association of employees

described in section 501(c)(4) organized before

May 27, 1969, which consists of the selling by

the organization of items of work-related clothes

and equipment and items normally sold through

vending machines, through food dispensing facili-

ties, or by snack bars, for the convenience of its

members at their usual places of employment; or

54a

(3) Any trade or business which consists of

selling merchandise, substantially all of which

has been received by the organization as gifts or

contributions.

An example of the operation of the first of the

exceptions mentioned above would be an exempt

orphanage operating a retail store and selling to

the general public, where substantially all the

work in carrying on such business is performed

for the organization by volunteers without com-

pensation. An example of the first part of the

second exception, relating to an organization de-

scribed in section 501(c)(3) or a governmental

college or university described in section 511

(a)(2)(B), would be a laundry operated by a

college for the purpose of laundering dormitory

linens and the clothing of students. The latter

part of the second exception, dealing with certain

sales by local employee associations, will not ap-

ply to sales of these items at locations other than

the usual place of employment of the employees;

therefore sales at such other locations will con-

tinue to be treated as unrelated trade or business.

The third exception applies to so-called “thrift

shops” operated by a tax-exempt organization

where those desiring to benefit such organization

contribute old clothes, books, furniture, et cetera,

to be sold to the general public with the proceeds

going to the exempt organization.

* > . * °

te tn te

Joa

APPENDIX G

The advertisements reproduced on the following

pages appeared in the January 1975 issue of Annals

of Internal Medicine (at pages 139, 141, and 148-149,

respectively), and in the February 1975 issue of An-

nals of Internal Medicine (at pages I31, 133, 153, and

186, respectively ).

EDITOR'S NOTE

THE FOLLOWING PAGES WERE POOR

HARD COPY AT THE TIME OF FILMING.

IF AND WHEN A BETTER COPY CAN BE

OBTAINED, A NEW FICHE WILL BE

ISSUED.

He didn’t hear about Robitussin-DM’

| ,.onone of his commercials.

— AH-ROBINS 7

COUGH FORMULA

Introduction of Insulin in

the United States by Lilly

Se a ae ve

PUP Pere pe re) erly

58a

fy ANNALS of Internal Medicine

CLASSIBIEDISERUIGES

Classified advertising 1s accepted by the ANNALS as a

service to its readers, and every effort is made to insure that

these advertisements are directly relevant to the practice of

medicine. We retain the right, therefore, to refuse any

advertisement that we consider not relevant. In addition,

we advise respondents to investigate each offer as we do not

assume any responsibility concerning the advertisers, ther

Positions, practices, services or products.

First among the acceptable categories of classified

advertisements are those by physicians seeking position :. by

government or private organizations seeking physician

employees or by individual physicians seeking associates.

Other acceptable categories include announcements of post

graduate courses and symposia, and advertisements of

practices for sale, medica! facilities for rent or sale, medical

equipment and apparatus for sale, medical employment

bureau advertising, academic posts to be filled, available

posts for imternms and residents, and medical books and

journals wanted or for sale

CLASSIFIED ADVERTISING RATES

Personal, Non-Display, Advertising:

Minimum number of tines - 3

{42 characters per line - this includes spaces and each

punctuation mark)

Rate per line, one time $4.00

Rate per line, two times - $3.85

Rate per line, three times - $3.70

Rate per line, four through seven times - $3 60

BOX NUMBER - $1.50 per insertion

PAYMENT - Do not send check with order. We will submit

an invoice

*NOTE: Special layouts may require additional charges (uniess

Camera ready Copy 1s provided)

Commercial, Display, Advertising.

Minimum number of column inches - 1 (approx. 10 lines

per inch)

3 column page - 13 picas each column

Rate per column inch, one time - $60.00 (pius $6.00

ea. add. line)

Rate per column inch, two times - $55.00 (plus $6.00

ea. add. line)

Rate per column wich, three to five times $50 (plus

$5.50 ea. add. tine)

Rate per column inch, six times - $47.50 (plus $5.20

ea. add. line)

PAYMENT - Do not send check with order. We will submit

an invoice

DEADLINE FOR RECEIPT OF ALL COPY

Copy for all classitied advertisement orders must be received by us by the first of the month prior to publication date

(December 1st for the January issue, etc). Send order to

Classified Advertising Department, ANNALS OF INTE RNAL MEDICINE, 4200 Pine Street, Philadelphia, Pa. 19104

Try ye’ reer”

1-48

PLEASE BE SURE TO SPECIFY IN WHICH ISSUE(S) Y

FEBRUARY. etc.)

OUR ADVERTISEMENT IS TO APPEAR (JANUARY,

“Box No. AIM «ANNALS OF INTERNAL MEDICINE, 4200 Pine Street, Philadelphia, PA 19104

PRIVATE INTERNAL MEDICINE

PRACTICES, solo. associate and group, in

Tennessee, Washington, California, Texas,

Kansas, Lousiana and F torida. Requested

Dy Internists and other physicians in

Practice at locations. We will put you m

contact with these physicians. No cost to

you or requesting physicians. Not an

employment agency. Write with C.v. and

references to Sanford Smuth, Director of

Physician Planning, Hospital Management

Corporation, 12421 East Freeway, P.O. Box

9836, Houston, Texas 77015.

713/455/1761. PliaS«

STRAIGHT MEDICAL INTERNSHIP and

fist year residency positions available in

California county nospitat program for July,

1975. Full-time teaching staff with UCLA

appointments. Apply to T.A. Don Michael.

Annals of Internal Medicine + January 197

M.D... F.AC.P., Department of Medicine,

Kern General Hospital, 1830 * tower Street.

Bakerstieid, Catiforma 93305. P2ja2u

INFECTIOUS OISEASE SPECIALIST

Jom other full-tunme staff im teaching and

Chical responsibilities on a 500-Ded, univer-

Sty -affihated community hospital wn Central

New York. For further detaris write Chief

of Medicine, Wilson Memorial Hospital,

Jonnson City, New York 13790 P3Ja2«

AUDIOTAPE JOURNALS. 30--nute re

corded itectures for physicians and athed

neaith om cassettes or reets. Over 150 topics,

many with 2 x 2 stides For cataiog write

Continuing Medical Education, University

of Wisconsin, 451 WARF Buriding, Madison,

wisconsin 53706. P4sa3x

WORKSHOP IN APPLIED PATHORHY-

sio.osy CARDIOVASCULAR

ONSEASE, Aprii 4-5, 1975. 9 nours AMA

Credit. Fee: $35. write: Continuing Medical

Education, University of Wisconsin, 460

WARE Building, Madison, Wisconsin 53706

tor registration information. PSJja3x

INTERNISTS—40 Physicians multispeciaity

Chimie seeks 2 Internists with speciaity train

img om gastroenterology and pulmonary

Gseases. Salary two years, then partnersnip.

Contact Medicai Oirector, Billings Clinic,

Box 2555, Biilings, Montana 59103. P6sa2«

CARDIOLOGIST: 35. Asst. Prot. Med.,

ABIM, Expertise intenswe Care/C ardiac

Catn. Desires position Mea. School, Affit-

ated Hospital or Academic Group. Address

Box 174, aim Plisa2z

PP CTT eS | OLN OTA FPO LRT YD PPh VT TY ee! Vee DOK VP wre yg

59a

_/ — ASSISTANT

COMMISSIONER

The NYC Dept. of Hesith seeks @ capable administrator to assume the

responsibility of Assistant Comrovssioner for Communicable & Cnronic O'sease

Service

2 years of the required experience.

Recuirements encompass at teast 5 years of full time paid experience a5 an

administrator in a comparable medical program: plus NYS license to practice

medicine. A masters degree in public neaithn may be substituted for as much as

Quelifiea candidates ere invited to submit C.V. including selary requirements

Comnussioner Lowell E. Bellin, MO-MPH

New York City Health Oept.

125 Worth St... NY, NY 10013

An equa! opportunity employer M/F

THE OCEPARTMENT OF MEDICINE,

UNIVERSITY OF PENNSYLVANIA, is

seeking a Board-certified internist tc neada

new Section of General Medicine, which will

be concernec with teaching, patient care

and research. The position is a full-time

faculty appointment, with major administra-

tive responsibilities, including direction of @

new residency program. Quatified candi-

Gates are invited to submit thew credentials

to Or. A. S. Reiman, 3400 Soruce Street,

Philadeiphia, Pa. 19104. The University of

Pennsyivania is an equal opportunity

employer. PJ iaix

NEPHROLOGY FELLOWSHIP - available

in University affiliated 650 bed teaching

Veterans Administration Hospital located in

the San Fernando Vailey, CA. Program

offers good exposure to broad spectrum of

Srobiems in clinical nephrology, hemo

dialysis and teaching seminars. Research

elective during second year. Salary $19600.

Nondiscrimination in employment. write to

Chief Medica! Service, Box 172, AiM

PBia2~

GASTROENTEROLOGIST, 32,

univ. trained im al! endoccopic procedures

with additional tiwer disease experience.

Seeks nospita! based or group practice in So.

Calif. or Ariz. Available July, "75. Box 173,

AIM, PlQJa6x

A.B.1.M.,

NEPHROLOGIST-INTERNIST, ABIM,

Univ. trarned im Clinical Nephrology, diaty-

SS, transplantation, seeks assn., partnership

or hospite! based practice. Available July

1975. Box 177, AIM, Pl6Jaix

BOARD ELIGIBLE OR CERTIFIED

INTERNIST anc Famity Practitvoner

wanted ‘or prwate practice im sunny

southern New Vexico. 160 bed JCAH accre-

Gited, well equipeed developing medical

center i progresswe town of 50,000.

Coverage, various financial arrangements

available. Write: Chairman, Physicians Re

cruitment Committee, Memorial Generai

Hospital, Las Cruces, NM 88@001. Pi?ja3r

INTERNIST WANTEO-Doars cert./elig. to

join S$ other internists in 16-man multi

speciaity group in Central Wyom'ng com

munity of 45,000 with large referral! area.

Subspeciaity interest desirable, Exciting

opportunity to practice subspeciaity and

general interna! mecicine-and enjoy the out-

door tife. Reply with curriculum vitae to

Box 175. AIM, Pl 3Ja3x

INTERMIST-CHEST PHYSICIAN, 29,

ABIM cert., traned im fiberoptic Dronchos-

copy, intencive resp. care, & pulm, func

test. Avaliadie July 1975. Box 178, AIM.

Pil 6Jlaix

DIRECTOR OF MEDICAL EDUCATION

for 500-bded community teaching hospital,

coasta! city on Great Lakes. Cen‘*er

approved for training in wide range of cline

cal speciaities. Hospital has educationa’

atmospnere with interested educational

coordinators in each clinical dept. Applicant

will De challenged to develop 4 top-notch

organization-wide program. Good educa-

tional background, knowledge of med.

education techniques, interest in al! fields of

med., @ high degree of communications

skills, and a managerial attitude required.

Minimum retated experience acceptabie.

Substantial salary with growth potential

plus good benefit program. Send C.V. in

configence to Arthur A. Lepinot, Hosp. &

Med. Planning, inc, 702 Abbott Ra., East

Lansing, Mi 48623. P25Jalx

INTERNIST-GASTROENT., 34, Univ.

trained, Doard eligible. Recently finished

G.!. fellowship. Extensive experience in

endoscopy. Seeks group practice in New

Engiand, S.F., of Mpls. Box 179, AIM.

Pl Salix

GENERAL INTERNAL MEDICINE

FELLOWSHIPS Applications are being

accepted for Fellowship positions available

1 Juty 1975 in General internal Medicine

and Therapeutics at the University of

Chicago Hospitals aed Clinics. The program

involves the advanced trainin ' gener!

internists with the aim of developing extra

ordinary cormoetence in Gerere' internal

Medicine. Special ernpnasy. 1s given to clink

cal therapeutics, continuing medical educa

tion, health care delivery, and quality of

care assessment. The program is suited for

iNdividuals who wish to become practicing

generat imternists, directors of medical

education, ecademic general internists with

teaching and research) responsibility ang

experts in the development of health care

Gelivery and quality of care assessment pro-

grams. in addition to the Department of

Medicine, the program will draw on re

sources from throughout the University,

‘cluding the School of Socisi Service

Administration, Schoo! of Education, Cen-

ter for Health Administration Studies,

Schoo! of Library Science, Graduate Schoo!

of Business, and Computer Center. Pre

requisites inciude completion of a second

Year of internal medicine residency or its

equivalent. For further information write:

Richard Byyny, M.O., Oirector, General

Internal Medicine, Cepartment of Medicine,

University of Cnricago Hospitals and Clinics,

950 East 59th Street, Chicago, itlinols

60637. P9Ja2x

PULMONARY: 2 nospita!-Dased pulmonery

Ohysicians seek associate in university

affiliated community hospital with Pub

monary Fetiowshio Program. Liberal

Starting salary leading to partnership. Ocean-

side living. Forward CV to Arthur F. Gelb,

M.0., of Robert Lugiiani, M.0., Pulmonary

Oisease institute, a medical group, 1045

Atlantic Avenue, Suite 902, Long Beach,

CA 908613. P2 Rade

MEDICAL ONCOLOGIST. Muitispeciaity

Group in midwest seeks to expand On-

cology Dept. interested parties send CV to

Box 183, Alm. P24aJialx

GASTROENTEROLOGIST,

Univ. trained, Extensive endoscopy sand

motility exper. Avell. July, 75. Seek

hospital-based or group practice in North

ABIM, al

CAREERS

We have many challenging

openings for physicians with

and without industry experience

CLINICAL RESEARCH

MED'CAL/MARKETING

OCCUPATIONAL MEDICINE

INSURANCE MEDICINE

Our clients pay all fees. Send

your curriculum vitae, geogra-

phic preference, and salary

requirements in confidence to:

me SAMPSON-NEILL

sn ASSOCIATES iNC.

543 Valiey Road

Upper Montclair, NJ. 07043

(201) 763-9600

First In Executive Search

For The healt? industries

_ J

east. Box 184, AIM, P26Jalx

g »

MEAITH INDUSTRY | inv. tromec. exces, oncoscony, 'cotones.

copy, desires G! position Wash., O.C. area.,

N.Y., N.J., Conn., Fla. only. Available 7/75,

Box 180, AIM P20Jaix

GENERAL INTERNIST, unriwers (y-trained,

age 30, board eligible, military service com

pleted, seeks position with smal! group for

July, 1975. Sowtnern New England or

Northeast preferred. Write Box 181, AIM.

P2lJja2«

PHYSICIANS

Private practice (solo, partnerships,

grOucs) Opportunities exist in many

communities of tne Southeastern and

Soutnwestern United States.

As 4 public service to the communities

we serve, we are performing @ free, no

obligation, service acting as a tisison

between physicians interested in practice

OPportunities and communities in need

of thew services. All communities have

modern, JCA approved hospitals,

modern offices, and recognized needs for

additional prysicians.

For details call cotiect 615-327-9551 or

write with C.V. to

4. Ryan, Jr

Corporate Ovrector, Medica! Relations

Corporstion of America

Park Plaza

Nashville, Tennessee 37203

Annels of Interra!l Medicine * January 1975

1-49

60a

Articles you'll want

to read in upcoming issues

of Medical Economics.

sted below you |! find a few articles we inne

n tne next several issues

, _ oo a

V jwont wan THSS

(

| Medical ¢ mM

Tro r? > tr , ‘ rr 1a

ese a t Ke € OTe € a1 t

designed to Neip you wilh (ne MCal dsper

fy on orect e

“Beware of income-Reporting Traps

on Your Tax Return”

A pictorial guide to avoiding

nnocent bloopers that could

cost you thousands

“Testing the Newest American Smaii Car’

An expert doctor / driver puts the

new Pacer through its paces-

and climbs out smiling

“Move Over, Raiph Nader!

We Need a Directory

of Patients”

internist Michael

Halberstam proposes

a whimsical question

naire to counter doctor

directories

of dollars

“Ig It True What They Say About Young Doctors?”

Do doctors in their 30s start up faster. charge more, anc

ve it up more? Our Continuing Survey reveals striking

) s—but not what you might expect

contrasts with older MO

“Recertification: Put Yourself to the Test”

— are exhilarating even at 50, says Internist

Richard C. Bates Yeu gain useful information as we

as esoteric pears to cast before house staffers

“Test Your Billing and Collecting Savvy”

You're probably losing money if you're not close to your accounts

receivable system. This quiz can help you plug 'eaks

medicat

@CONOMICS

Kato Powder is KC!

blended with natural

tomato powder and subtle

spices. Mixed with a mere

2 ounces of cold water,

it provides a dose uf

potassium chloride ina

good tasting low sodium

tomato juice drink

Refreshingly different

Patients take it and like it!

—— ——

in potassiom .be«rapy

Kato is = Natural

- .

“

th foe

62a

Beautiful Medicine

For mid voticosities,teg pain, and fatigue

they work Gs great as they look

Controtied graduated compression —a

special knit for greater support at foot and

onide, with Gradually fess suppor! higher up on

the ogit »

No tournique?l-like band — socks stay up

because twq-way stretch gives great fit ond

corort : ;

Medically correc! design —hetps prevent

pdema, reduces venous pooling of blood

», Lasting qualify tor ecinomy — available at

"pharmacies everywhere

- —

ES on a %

*~ ERASTIC SUPPORT HOSIERY

f Yn Ss

° Decade Gif support hosiery

~~ is ROfalike

\ Bake Oove & Comper, Get uM

OaA 1200 N ;

65a

APPENDIX H

The advertisements reproduced on the following

pages appeared in the February 1975 issue of Annals

of Internal Medicine (at pages 159, 150, and 146-147,

respectively ).

66a

<< ttt ‘(it

New

from ANSPOR

SKGF @@ CEPHRADINE ik

SK&F

SMITH KLINE

& FRENCH

LABORATORIES

Takea

‘deep breath.

Now hoid it.

aia we tell you

ics let go.

69a

“This sensation of air hunger [has] both

intensity and quality...the length of time that the

breath can be held depends upon P»,,Po.,H,

lung volume, level of physical activity, prior

hyperventilation, level of CO, acclimatization

(tolerance), motivation and self discipline.*

Okay. Exhale.

You've just experienced air hunger. It is only

an intimation of what your patients with reversible

bronchospasm may experience. You rarely think

about breathing. They rarely stop thinking about it.

Alupent’ (metaproterenol sulfate). It can

heip take your bronchial asthmatic’s mind off his

lungs by relieving reversible bronchospasm.

Alupent. The first single-entity bronchodilator

effective in both tablet and aerosol dosage form.

Alupent ~ wt

(metaproterenol sulfate) ==

Tablets and Metered Dose Inhaler @ ‘

e next page tor Drve! surtwnary of the presc 1ming mtormahon

4ailour and Hamilton, Lyle espa

fosby Company, 1971. ed 2. pp 136-137

7Tla

APPENDIX I

The advertisements reproduced on the following

pages appeared in the February 1975 issue of The

American Journal of Medicine (at pages A85, A108,

and A40-A41 respectively). The American Journal

of Medicine is published by a division of Dun and

Bradstreet, a taxable commercial publisher.

i2a

potients Per itrote us

helps decrecse tt

ity of angina oftack

wde effects

Peritrate can olso hetp reduce

glycenn requirements ond therefore

nitroglycerin side effects Is it y

wonder so many physicians cantinue to

preter Peritrote praphylaxrs for thew

angince potients?

LONG-ACTING PROTECTION

AGAINST ANGINA PAIN”

Peritrute SA

Sustoined Action

<< sem, (pentaerythritol tetronitrate! 80mg

er, “gon

New

from

SK&F @@CEPHRADINE 98

apsules: 250 and 500 ma

for oral suspension 125 and 250 ma. /5 mi

SK&F

SMITH KLINE

& FRENCH

LABORATORIES

73a

ANSPOR

Takea

deep breath.

Now hold it.

Until we tell you

to let go.

75a

“This sensation of air hunger [has] both

intensity and quality...the length of time that the

breath can be held depends upon P».,Po.,pH,

lung volume, level of physical activity, prior

hyperventilation, level of CO, acclimatization

(tolerance), motivation and self discipline.*

Okay. Exhale.

You ve just experienced air hunger. It is only

an intimation of what your patients with reversible

bronchospasm may experience. You rarely think

about breathing. They rarely stop thinking about it.

Alupent’ (metaproterenol sulfate). It can

help take your bronchial asthmatic’s mind off his

lungs by relieving reversible bronchospasm.

Alupent. The first single-entity bronchodilator

effective in both tablet and aerosol dosage form.

Alupent ~ wy

(metaproterenol sulfate) =

Tablets and Metered Dose Inhaler ry

® 6. &. SOveemmenT rereries orrice, 1905 461531 10208

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.