Amicus Curiae Brief — United States v. American College of Physicians

IN THE

Supreme Court of the Cnited States

OCTOBER TERM, 1985

BEST AVAILABLE COPY

UNITED STATES OF AMERICA

Petitioner

.

THE AMERICAN COLLEGE OF PHYSICIANS

Respondent

On Writ of Certiorari to the United States Court

of Appeals for the Federal Circuit

BRIEF FOR THE AMERICAN MEDICAL ASSOCIATION

AND THE MASSACHUSETTS MEDICAL SOCIETY

AS AMICI CURIAE IN SUPPORT OF RESPONDENT

GEORGE A. PLATz*

FRANK V. BATTLE, JR.

J. TIMOTHY KLEESPIES

SIDLEY & AUSTIN

One First National Plaza

Chicago, Illinois 60603

(312) 853-7000

Attorneys for Amici Curiae

American Medical Association and

Massachusetts Medical Society

Of Counsel:

KIRK B. JOHNSON

KATHLEEN R. CURTIS * Counsel of Record

Midwest Law Printing Co., Chicago 60611, (312) 321-0220

QUESTION PRESENTED

Is publication in the journal of a tax-exempt medical

society, one purpose of which is medical education, of

advertisements for items used in the practice of medicine,

most of which pertain to pharmaceutical products and con-

tain extensive prescribing information mandated by regu-

lations of the Food and Drug Administration, “substan

tially related to” the tax-exempt purposes of such soci

ety, so that income received by the society from such

advertisements is not subject to the tax on “unrelated

business income”’ imposed by Sections 511-513 of the In

ternal Revenue Code?

QUESTION PRESENTED

TABLE OF AUTHORITIES

SUMMARY OF ARGUMENT ...

ul

TABLE OF CONTENTS

ARGUMENT:

l

THE ADVERTISING REVENUES OF

RESPONDENT THE AMERICAN COLLEGE

OF PHYSICIANS ARE NOT TAXABLE

UNDER THE PLAIN LANGUAGE OF SEC-

TION 513(a) OF THE INTERNAL REVENUE

CODE, THE LEGISLATIVE HISTORY OF

THAT SECTION, AND THE REGULA-

TIONS, RULINGS AND DECISIONS APPLY-

ING THAT SECTION TO OTHER ACTIV-

ITIES

a

A. Income-Producing Activities Of A Tax-

Exempt Organization Are “Substantial-

ly Related” To Its Tax-Exempt Pur-

poses, And Thus Not Taxable, If They

Contribute To The Achievement Of

Such Purposes, Regardless Of Whether

They Are Carried On In The Manner

Of An Ordinary Commercial Business .

l. The Legislative History Of The

Revenue Act Of 1950 Demonstrates

That Congress Did Not Intend To

Tax Activities “Customarily Car-

ned On” By A Tax Exempt Organ-

ization Which Had Some Reiation-

ship To The Organization’s Tax-

Exempt Purposes ..............

| ill

2. Generally Applicable Treasury

Regulations, Internal Revenue Serv-

ice Rulings Thereunder With Re-

spect To Activities Other Than

Advertising, And Lower Court De-

| cisions All Recognize The Broad

| Definition Of ‘Substantially Re-

| lated” Activities Which Congress

Cettne cbuneebsscescee 11

B. Respondent’s Advertising Is “Substan-

tially Related” To Its Tax-Exempt Pur-

pose Of Providing Medical Education

Within The Meaning Of Section 513(a)

And Is Thus Not Taxable ......... 14

Il. THE ARGUMENTS ADVANCED BY THE

UNITED STATES FOR DEPARTING FROM

THE PLAIN LANGUAGE OF SECTION 513

OF THE INTERNAL REVENUE CODE IN

THIS CASE ARE WITHOUT MERIT .... 17

A. Taxation Of Respondent’s Advertising

Revenues Is Not Justified By The 1967

Treasury Regulations .............. 17

1. The Language Of Example 7 Of

The Regulations Does Not Impose

A Tax On The Advertising Reve-

nues Of Respondent ........... 18

If Example 7 Of The Regulations

Were Construed As Urged By

Petitioner, It Would Be Invalid

Because Of Its Inconsistency With

The Statute And The Substantive

Provisions Of The Regulations .... 20

bo

B. Taxation Of Respondent’s Advertising

Revenues Is Not Justified By The 1969

Amendment Or The Legislative History

Of That Amendment .............. 21

iV

1. Section 513(c) Does Not Apply A

Per Se Rule To Tax Advertising

Revenues Of The Type Involved In

(Eee re ee

The Legislative History Of Section

| 513(c) Does Not Indicate An Intent

To Tax Advertising Revenues Of

The Type Involved In This Case ..

3. The 1969 Legislative History Of

Section 513(c) Cannot Change The

Plain Meaning Of Section 513(a),

Eomacted In 1900 .....cccccccees

C. Neither The Commercial Nature Of

Respondent’s Advertising Nor Consid-

erations Of Administrative Convenience

Support Taxation Of Respondent’s Ad-

a TTT TT

bo

SAUDE 00 ca 0encccersoscsnnrcedhuwaan

y

TABLE OF AUTHORITIES

Cases PAGE

American College of Physicians v. United States,

Bs & Fo Se R .) pee 11, 22

American Standard, Inc. v. United States, 602

ep & £: es: ee rer Tre 21

Commissioner v. Acker, 361 U.S. 87 (1959) ... 21, 25

Commissioner v. Engle, 464 U.S. 206 (1984) .. 21, 28

Edward Orton, Jr. Ceramic Foundation v. Com-

missioner, 56 T.C. 147 (1971) .............. 27

Hi-Plains Hospital v. United States, 670 F.2d 528

Be OPP eT rte 13, 14, 22, 27

Jones v. Commissioner, 743 F.2d 1429 (9th Cir.

DE Seucduahosstncdeeussdescenssenseonssas 21, 28

Koshland v. Helvering, 298 U.S. 441 (1936) ... 21

Manhattan General Equipment Co. v. Commis-

sioner, 297 U.S. 129 (19386) ................ 21

Maryland State Fair and Agricultural Society,

Inc. v. Chamberlin, 55-1 U.S. Tax Cas. (CCH)

SE GA GED GOED cocsececcesccsscccsens 13

Massachusetts Medical Society v. United States,

OR, 8 F: Bt PPP 22

Mobile Arts and Sports Association, Inc. v. United

States, 148 F. Supp. 311 (S.D. Ala. 1957) .. 13

San Antonio Bar Association v. United States, 80-2

U.S. Tax Cas. (CCH) ¢ 9594 (W.D. Tex. 1980). 13, 27

Securities and Exchange Commission v. Sloan, 436

a GE GPU eee ccevevecesncocesencenss 3, 7, 26

vi

State of Washington v. Commissioner, 692 F.2d

ee Ge SS ED bd onewecsinesssceceeess 21

Tennessee Valley Authority v. Hill, 437 U.S. 153

SEE D0beenebhedakdenestadbanseswindeeces 3, 7, 26

United States v. Cartwright, 411 U.S. 546 (1973) .. 21

United States v. Price, 361 U.S. 304 (1960) ... 5, 26

United States v. Vogel Fertilizer Co., 455 U.S. 16

SED 6640000 90s6nbeun decks eobenseuseeeecés 20, 21

Statutes

Food, Drug and Cosmetic Act § 502(n), 21 U.S.C.

DE. Siddededd des eeeedevendtenesseensee 19

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

DA tiedcaukeschenesbasadetes chanenseen 3, 6

ED 85 65046-4660 04040008 64468600 60RSs 18

DD cccdduhassneéacedvensscieress 1, 2, 12, 18

DY Ae biveeetawdseueeteneedounsnecenekh passim

DE a vo6y6i56004406000esbencensnseehet passim

DT sheghectedetuneaegesnehsedsdeoeans passim

DT Gs i edeeeuesennesseuaceenesdceanent passim

DE: cluavuesbadesentssaunessaceeseenet 13

DE .caunecaesasesensesaccnasensadouens 20

Revenue Act of 1950, ch. 994, 64 Stat. 906 et seg. . 6, 8, 10, 11

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

ee ee GP GE sncdcccoccceseciccessn 4, 7,21, 23

vil

Legislative Materials

Competitive Problems in the Drug Industry: Hear-

ings Before the Subcomm. on Monopoly of the

Senate Select Comm. on Small Business, 90th

Camm, Bat Bee. CBRE) ccccccccccccccescece

96 Cong. Rec. 9364-9366 (1950) ...............

H.R. Rept. No. 2319, 81st Cong., 2d Sess. (1950) .

H.R. Rept. No. 413, 91st Cong., Ist Sess. Pt. 1

DD 66500eseeussesedendededsegsesucseces

GEE Sc ecdcecccesacedsmevensedcoscesevsess

Revenue Revision of 1950: Hearings Before the

House Comm. on Ways and Means, 81st Cong.,

ee ED ci enesdudvecseecectenesenes

Revenue Revisions of 1950: Hearings on H.R. 8920

Before the Senate Finance Comm., 81st Cong.,

et Ss, SE nencngeedesescudesaneeseses

S. Rept. No. 2375, 81st Cong., 2d Sess. (1950) .

S. Rept. No. 552, 91st Cong., Ist Sess. (1969) ..

Staffs of the Joint Comm. on Taxation and the

Senate Finance Comm., 91st Cong., Ist Sess.,

Summary of H.R. 13270, Tax Reform Act of

1969, August 18, 1969 (Comm. Print) .... 5, 24, 27

23-24

8,9

24

vill

Regulations

BE Caries BONO TD ccccccccccccccccces

Treas. Reg. (26 C.F.R.):

Revenue Rulings

Revenue Ruling 69-267, 1969-1 C.B. 160

Revenue Ruling 69-268, 1969-1 C.B. 160

Revenue Ruling 69-269, 1969-1 C.B. 160

Revenue Ruling 73-104, 1973-i C.B. 263

Revenue Ruling 73-105, 1973-1 C.B. 264

Revenue Ruling 74-399, 1974-2 C.B. 172

-516, 1975-2 C.B. 220

-123, 1985-32 1.R.B. 8

—~]

7"

Revenue Ruling

Revenue Ruling 8&5

Articles

ll, 17.

PEMD. wncccesdevesdduseooscess

DRED cecccentanccesecececes

§ 1.513-1(dX4Xiv), Example (6) .......

§ 1.513-1(dX4Xiv), Example (7) .......

“eee © @

“ese eeee

*“*e ee # *

“ese ee @ *@

19,

13

20

20

passim

Nonberg, Taxation of Advertising in Exempt

Organization Publications, Tax Mgmt. Memo.

Ses Ge Oe GED necedsecediecesccesvease:

Note, The Macaroni Monopoly: The Developing

Concept of Unrelated Business Income of Ex-

empt Organizations, 81 Harv. L. Rev.

TEE abeecdsosocesesesvesscecesecs

1280

No. 84-1737

IN THE

Supreme Court of the United States

OCTOBER TERM, 1985

UNITED STATES OF AMERICA

Petitioner

Vv.

THE AMERICAN COLLEGE OF PHYSICIANS

Respondent

On Writ of Certiorari to the United States Court

of Appeals for the Federal Circuit

BRIEF FOR THE AMERICAN MEDICAL ASSOCIATION

AND THE MASSACHUSETTS MEDICAL SOCIETY

AS AMICI CURIAE IN SUPPORT OF RESPONDENT

INTEREST OF AMICI CURIAE

Amici American Medical Association (““AMA”’) and

Massachusetts Medical Society submit this brief with the

written consent of all parties, copies of which consents

are being filed herewith. Amicus AMA is a national,

voluntary non-profit organization of physicians. AMA was

founded in 1846 to promote the science and art of medi-

cine and the betterment of public health. AMA is exempt

from Federal income tax under Internal Revenue Code

Section 501(cX6).

~ =

Like the respondent in this case, AMA publishes

scholarly medical journals in furtherance of its exempt

purposes. In addition to scholarly articles, such journals

contain display advertising for prescription drugs, books,

continuing medical education and medical equipment and

classified advertising primarily for medical positions.

AMA has pending in the United States District Court

for the Northern District of Illinois (Civil No. 82-C-7213)

a case raising the issue presented in this case. AMA

believes that its situation is similar to that of respondent

and that the decision in this case will affect the result

of AMA’s litigation and consequently AMA’s future pub-

lishing operations.

Amicus Massachusetts Medical Society (the “‘Society’’)

is a non-profit, special act corporation organized and exist-

ing under the laws of the Commonwealth of Massachusetts

since 1781. It is the oldest American medical association

in continuous existence. Approximately 70% of the physi-

cians registered to practice medicine in the Common-

wealth of Massachusetts are members of the Society,

which is the primary professional physicians’ organization

in Massachusetts. Among its principal concerns are pro-

moting progress and improvement in the care, treatment

and cure of patients. The Society is exempt from Federal

income tax under Internal Revenue Code Section 501(cX6).

The charter of the Society directs it to engage in the

publication and distribution of journals and periodicals to

be devoted primarily to the science and practice of medi-

cine, and to conduct educational programs. Since 1921, the

Society has published The New England Journal of Medi-

cine. The New England Journal contains, in addition to

scholarly articles on medicine, advertising similar to that

in the publications of respondent; consequently the Society

believes that the decision in this case will substantially

affect its taxability under the Internal Revenue Code.

afin

SUMMARY OF ARGUMENT

The Internal Revenue Code has always implemented a

policy of exempting from taxation the income received by

certain defined organizations thought to promote desirable

social goals. Internal Revenue Code, § 501. Section 511

of the Internal Revenue Code, however, applies an

unrelated business income tax to activities of such tax-

exempt organizations which are “not substantially related”’

to the organizations’ tax-exempt purposes. This “not

substantially related” test, which appears in Section 513(a)

of the Code, was enacted in 1950 and has never been

amended. Thus, as in Tennessee Valley Authority v. Hill,

437 U.S. 153 (1978), and Securities and Exchange Com-

mission v. Sloan, 436 U.S. 103 (1978), the Court in con-

struing the test should place principal reliance upon the

legislative history of the 1950 enactment and not, as peti-

tioner urges, on later Congressional action that did not

alter the test. It is clear from the legislative history of

the 1950 enactment that Congress did not intend to

change the non-taxable nature of traditional sources of in-

come of tax-exempt organizations which had some rela-

tionship to the organizations’ tax-exempt purposes. The

general provisions of the Treasury Regulations, and In-

ternal Revenue Service rulings in areas other than adver-

tising, remain true to this intent.

The advertising in the journal of respondent American

College of Physicians plainly meets the “substantially re-

lated” test as it was intended to be applied by the Con-

gress that enacted it. Advertising in scholarly journals

was a traditional means of raising income by tax-exempt

medical societies at the time the unrelated business in-

come tax was passed. And the advertising in respondent’s

journal, which relates primarily to pharmaceutical prod-

ucts and contains extensive prescribing information in a

-”

complete and balanced format mandated by the Food and

Drug Administration, unquestionably furthers in a sub-

stantial way respondent’s purpose of providing medical

education to its members.

Treasury Regulations directed to advertising income of

tax exempt organizations which were adopted in 1967,

some seventeen years after Congress enacted what is now

Section 513(a), do not make respondent’s advertising in-

come taxable. The part of those Regulations which peti-

tioner argues has such effect, Example 7 to Treas. Reg.

§ 1.513-1(dX4Xiv), is addressed to advertising “designed

and selected in the manner of ordinary commercial adver-

tising.’’ Pharmaceutical advertising of the type published

by respondent, containiug extensive mandated prescrib-

ing information of considerable educational value to physi-

cians, is not “ordinary commercial advertising.” Moreover,

to the extent that Example 7 purports to make a con-

clusive presumption that any advertising “designed and

selected in the manner of ordinary commercial adver-

tising’’ is “‘not substantially related’”’ to an organization’s

tax-exempt purposes, it is inconsistent with both the

generally applicable provisions of the Regulations and the

purpose and intent of Section 513(a) and must be held

invalid.

Nor do the enactment of Section 513(c) of the Internal

Revenue Code as part of the Tax Reform Act of 1969

or the legislative history of such enactment provide a

ground for taxing respondent’s advertising income. Sec-

tion 513(c) itself does no more than permit application of

the “not substantially related” test of Section 513(a) to

a single “activity . . . carried on within a larger aggre-

gate of similar activities;” it does not change the test in

any way. Although the House and Senate Reports on the

Tax Reform Act of 1969 express the opinion that adver-

exfinn

tising by tax-exempt organizations is taxable, that opin-

ion is couched in general terms and does not apply to

highly educational advertising of the type published by

respondent. On the contrary, a report by the staffs of the

committees which considered the 1969 legislation expressly

recognizes that “technical comment” in a pharmaceutical

advertisement must be separated from “pure advertising.”

Staffs of the Joint Comm. on Taxation and the Senate

Finance Comm., 91st Cong., Ist Sess., Summary of H.R.

13270, Tax Reform Act of 1969, Aug. 18, 1969, p. 31

(Comm. Print). In any event, as this Court has observed

in such cases as United States v. Price, 361 U.S. 304, 313

(1960), statements in committee reports of a later Con-

gress are of little value in construing a statute enacted

by another Congress some nineteen years earlier.

The commercial nature of respondent’s advertising is not

relevant to the taxability of the income it produces. Peti-

tioner concedes that respondent’s subscription income “‘is

unquestionably exempt from tax” notwithstanding the

similarity of respondent’s journals to commercial periodi-

cals. Nor does administrative convenience require dispens-

ing with a case-by-case examination of advertising to

determine whether it is related to an organization’s tax-

exempt purpose. The Internal Revenue Service follows

a case-by-case approach with respect to other activities

of such organizations, without disabling effects.

The Court of Appeals correctly applied the letter and

the intent of Section 513(a) of the Internal Revenue Code

in this case, and its decision should be affirmed.

=

ARGUMENT

THE ADVERTISING REVENUES OF RESPONDENT

THE AMERICAN COLLEGE OF PHYSICIANS ARE NOT

TAXABLE UNDER THE PLAIN LANGUAGE OF SECTION

513(a) OF THE INTERNAL REVENUE CODE, THE LEG-

ISLATIVE HISTORY OF THAT SECTION, AND THE

REGULATIONS, RULINGS AND DECISIONS APPLYING

THAT SECTION TO OTHER ACTIVITIES.

The Internal Revenue Code has always exempted from

taxation certain defined kinds of organizations thought to

perform useful social functions. Internal Revenue Code,

Section 501. Respondent has qualified for exemption under

this section, and the Court of Appeals held that this ex-

emption prevents taxation of the income received by re-

spondent from advertisements published in its medical

journals. Petitioner contends that such income falls within

an exception to the exemption contained in Sections 511

through 513 of the Internal Revenue Code, which impose

what is known as the unrelated business income tax. Peti-

tioner’s contention ignores the history and prior applica-

tion of the unrelated business income tax and the very

substantial contribution respondent’s advertising makes to

the education of its members.

A. Income-Producing Activities Of A Tax-Exempt Organiza-

tion Are “Substantially Related’’ To Its Tax-Exempt

Purposes, And Thus Not Taxable, If They Contribute To

The Achievement Of Such Purposes, Regardless Of

Whether They Are Carried On In The Manner Of An

Ordinary Commercial Business.

The unrelated business income tax, now codified at In-

ternal Revenue Code Sections 511 through 513, 26 U.S.C.

$$ 511-513, was enacted in the Revenue Act of 1950, ch.

994, § 301, 64 Stat. 947. These provisions impose a tax

upon the income, derived by an organization otherwise

= =

exempt from Federal income tax, from a “trade or busi-

ness the conduct of which is not substantially related. . .

to the exercise or performance by the organization of its

[exempt purposes].” Section 513(a) (emphasis supplied).

Although one of several concerns resulting in enactment

of the unrelated business income tax was “unfair competi-

tion”, see, e.g., H.R. Rept. No. 2319, 8ist Cong., 2d Sess.,

at 36 (1950),' the statutory requirement for taxability is

that the income “is not substantially related’’ to the

exempt purposes of the organization. Thus, under the

plain language of the statute, neither the existence of com-

petition nor the ordinary commercial character of the

business is the touchstone for imposition of the tax.

The “not substantially related” test of Section 513(a)

has never been amended since its enactment in 1950. The

Tax Reform Act of 1969, upon which petitioner places sc

much reliance, made it possible to apply the test to a

single “activity . . . carried on within a larger aggregate

of similar activities’”’ by adding Section 513(c) to the Code,

but it did not change the test. See page 22, infra. Thus

it is the 1950 statute, its legislative history, and rulings

under it that principally determine what sorts of “ac-

tivities” are subject to the unrelated business income tax.

The inquiry the Court must make here is not unlike that

it made in Tennessee Valley Authority v. Hill, 437 U.S.

153 (1978), and Securities and Exchange Commission v.

Sloan, 436 U.S. 103, 119-121 (1978), in which the Court

concluded that the legislative history produced by the

Congress which passed the statute in question was far

' This report places its discussion of the unrelated business in-

come tax in a section entitled “Sources of Additional Revenue.”

Id. at 24.

= =

more pertinent in ascertaining the statute’s meaning than

reports issued by subsequent Congresses which had not

amended the statute.

1. The Legislative History Of The Revenue Act Of 1950

Demonstrates That Congress Did Not Intend To Tax

Activities “‘“Customarily Carried On" By A Tax

Exempt Organization Which Had Some Relationship

To The Organization's Tax-Exempt Purposes.

When Congress enacted the unrelated business income

tax in 1950, it did not mean to alter significantly the tradi-

tional treatment of tax-exempt organizations. From its

genesis, the unrelated business income tax was intended

to apply only to income-producing activities of a tax-

exempt organization which bore little or no relation to

the organization’s exempt activities.? In his message to

Congress transmitting a request for a revision of tax laws,

President Truman criticized the existing “exemption . . .

misused in a few instances to gain competitive advantage

over private enterprise through the conduct of business

and industrial operations entirely unrelated to educational

activities.”” Revenue Revision of 1950: Hearings Before the

House Comm. on Ways and Means, 81st Cong., 2d Sess.

at 4 (1950) (hereinafter cited as 1950 House Hearings) (em-

phasis supplied).

Testimony of Treasury representatives at the 1950 hear-

ings before both the House Ways and Means and the

Senate Finance Committees emphasized that the new tax

2 The paradigm example of such activities was the ownership by

New York University of the C.F. Mueller Company, a macaroni

manufacturer. It was noted in Congressional debates that “there

is nothing in the charter of that university, nor is there anything

in its curriculum that is even remotely connected with the manu-

facture of spaghetti ... .” 96 Cong. Rec. 9366, June 28, 1950

(remarks of Congressman Lynch).

wiles

was directed at unusual and clearly unrelated activities.

Treasury Secretary Snyder stated before both Commit-

tees that the unrelated business tax would apply to busi-

ness operations of exempt organizations that were “clearly

unrelated” to their exempt purposes (emphasis supplied),

such as “the manufacture of food products, leather goods,

vegetable oils, and the distribution of petroleum prod-

ucts,” but that “{tJhe bill would not tax their income from

related activities . . . customarily carried on by educa-

tional and charitable organizations.” 1950 House Hearings

at 19; Revenue Revisions of 1950: Hearings on H.R. 8920

Before the Senate Finance Comm., 81st Cong., 2d Sess.

(1950) at 7 (hereinafter cited as 1950 Senate Hearings).

Vance Kirby, Tax Legislative Counsel of the Treasury,

complained of business operations bearing “no relation”

to the tax exempt purposes of the organization, and

assured the Committee that “traditional sources of income”’

would remain tax exempt. 1950 House Hearings at 165.

Similarly, the reports of the legislative committees on

the bill which became the Revenue Act of 1950 demon-

strate that Congress intended to tax unusual sources of

income, but to leave untaxed the usual and traditional

sources of income for tax-exempt organizations where

some relationship with its tax-exempt purpose existed.

Thus income received by a college “from charges for ad-

missions to football games” would be related, but “‘the

manufacture and sale of automobile tires . . . would or-

dinarily be considered an unrelated business.”’ H.R. Rept.

No. 2319, 81st Cong., 2d Sess. at 109 (1950); accord S.

Rept. No. 2375, 81st Cong., 2d Sess. at 107 (1950).

This great a contrast between activities given for ex-

amples cannot have been accidental. Although a football

game has some relationship to a college’s educational pur-

pose, education is not its predominant function. But this

—10—

and other traditional sources of support were to be ex-

cluded from the unrelated business tax. Manufacturing

tires is not a traditional activity, and hence would be sub-

ject to tax.

This theme was continued in the floor debates on the

revenue Act of 1950. In debate, legislators stated that

the unrelated business income tax was directed at busi-

nesses which were “totally unrelated” and not “even

remotely connected”’ with the exempt purposes of the

organization. 96 Cong. Rec. 9366, June 28, 1950 (remarks

of Congressman Lynch). The unrelated business income

tax was directed at exempt organizations which operated

“businesses wholly unrelated to the purposes’”’ for which

the organizations were chartered, and was to apply in

situations where “{t]here is no possible connection between

some of the operations and the normal activities of these

institutions.” Jd. at 9365. Other statements were to the

effect that the statute was directed at abuses in which

an organization “‘would, in effect, sell its tax exemption,

and would go into some business unrelated entirely with

the purpose” of the organization. Jd. at 9364 (remarks of

Congressman Simpson). Furthermore, the unrelated busi-

ness income tax was to be imposed “‘only after being cer-

tain that no harm would be done to legitimate operations.”

Id. at 9365 (remarks of Congressman Lynch).

In light of the foregoing, and in the absence of any sug-

gestion in the 1950 legislative history of a more stringent

definition of “substantially related,” the Court of Claims

correctly concluded in 1976 that:

The 1950 Act was a fairly limited measure, designed

to distinguish the customary activities of exempt

organizations from the operation of independent busi-

ness enterprises entirely unrelated to the educational

purpose of the organization.

«|=

American College of Physicians v. United States, 530

F.2d 930, 933 (Ct. Cl. 1976) (emphasis supplied). Congress

had no intention when it enacted the Revenue Act of 1950

of taxing such traditional activities as advertising in pro-

fessional journals of tax-exempt organizations when that

advertising bore some relationship to the purposes of the

organization. See Note, The Macaroni Monopoly: The

Developing Concept of Unrelated Business Income of Ex-

empt Organizations, 81 Harv. L. Rev. 1280, 1291 (1968).

And no attempt was made to tax such advertising under

the 1950 statute for seventeen years after the statute was

enacted.

2. Generally Applicable Treasury Regulations, Internal

Revenue Service Rulings Thereunder With Respect

To Activities Other Than Advertising, And Lower

Court Decisions All Recognize The Broad Definition

Of ‘‘Substantially Related’’ Activities Which Con-

gress Intended.

The generally applicable Treasury regulations promul-

gated under Sections 511 through 513 recognize the nature

of the statutory test. They state that business activities

are not subject to the unrelated business income tax

“where the conduct of the business activities has causal

relationship to the achievement of exempt purposes’’ and

where such activities “contribute importantly” to the

accomplishment of those exempt purposes. Treas. Reg.

§ 1.513-1(dX2), set out at Pet. App. 47a-48a. The regula-

tions further state that resolution of the issue “depends

in each case upon the facts and circumstances involved.”

Id.

Decisions of the Internal Revenue Service in areas other

than advertising recognize the exempt nature of income

from traditional activities of a tax exempt organization

even though such activities are carried on in the manner

of an ordinary commercial business, where there is some

adie

relationship to the organization’s tax-exempt purposes. In

Revenue Ruling 73-104, 1973-1 C.B. 263, income obtained

by an art museum from the sale of greeting cards dis-

playing reproductions of selected works from the museum’s

collection and other collections, which were sold in a shop

operated in the museum, by mail order through a catalog

published by the museum, and to retail stores at quantity

discounts, was held to be non-taxable. The ruling states

that “(t]he fact that the cards are promoted and sold in

a clearly commercial manner at a profit and in competi-

tion with commercial greeting card publishers does not

alter the fact of the activity’s relatedness to the museum’s

exempt purpose.” 1973-1 C.B. at 264.

Similarly, the operation by a museum of a restaurant,

Revenue Ruling 74-399, 1974-2 C.B. 172, and the opera-

tion by a hospital of a gift shop, a cafeteria and coffee

shop, and a parking lot, Revenue Rulings 69-267, 69-268

and 69-269, 1969-1 C.B. 160-61, all are related activities,

even though such activities are conducted to raise revenue

and are operated in the manner of ordinary commercial

establishments.

Of particular relevance here is Revenue Ruling 75-516,

1975-2 C.B. 220, presenting the issue whether inewme which

an organization exempt under Section 501(cX6) derives

from the rental of display space at its convention “‘to ex-

hibit and demonstrate products and services used by the

[organization’s] members in their businesses”’ is related

or unrelated income. The Ruling holds that “(the display

and presentation of instructional material concerning the

common business interests of the members, as part of an

annual membership convention, contribute importantly to

the advancement of the organization’s exempt purpose”

of ‘imparting general information to members about chang-

ing business conditions and the availability of new prod-

ucts and services” and that income derived therefrom is

aittie

“related” and not taxable. Thus, income received by a

tax-exempt medical society from exhibitors of medical

products at its conventions is not taxable, even though

such exhibitors disseminate to physicians attending the

conventions materials that are identical to the advertise-

ments placed by such exhibitors in medical journals.®

Furthermore, in instances in which the Internal Revenue

Service attempted to extend the unrelated business in-

come tax to traditional sources of support of tax-exempt

organizations, those efforts were rejected by the courts.

Maryland State Fair and Agricultural Society, Inc. v.

Chamberlin, 55-1 U.S. Tax Cas. (CCH) 49399 (D. Md.

1955) (horse racing “customary” and conducted “habitual-

ly” in conjunction with fair); Mobile Arts and Sports As-

sociation, Inc. v. United States, 148 F. Supp. 311 (S.D.

Ala. 1957) (Senior Bow! football game an “integral part”’

of organization’s civic and educational program).

More recent decisions of lower courts construing the

provisions of the unrelated business income tax also have

uniformly considered the presence or absence of a substan-

tial relationship between the activity and the organiza-

tion’s exempt purposes to be the sole determinant of tax-

ability. Hi-Plains Hospital v. United States, 670 F.2d 528

(5th Cir. 1982); San Antonio Bar Association v. United

States, 80-2 U.S. Tax Cas. (CCH) 4 9594 (W.D. Tex. 1980).

“The regulations [Treas. Reg. § 1.513-1(d)] require a case-

by-case identification of the exempt purpose, an analysis

of how the activity contributes to that purpose and an

3 Section 513(d), effective October 4, 1976, now expressly provides

that qualified trade show activities, including activities described

in Revenue Ruling 75-516, do not give rise to unrelated business

income. The Internal Revenue Service on August 12, 1985 declared

Revenue Ruling 75-516 obsolete in light of Section 513%(d). Rev.Rul.

85-123, 1985-32 I.R.B. 8.

colin

examination of the scale on which the activity is con-

ducted.” Hi-Plains Hospital, supra, 670 F.2d at 531. The

question of whether an activity contributes importantly

to an organization’s exempt purpose must be considered

“in light of the particular facts and circumstances of [the

organization’s] case.”’ Id.

B. Respondent’s Advertising Is ‘“‘Substantially Related’’ To

Its Tax-Exempt Purpose Of Providing Medical Educa-

tion Within The Meaning Of Section 513(a) And Is Thus

Not Taxable.

Respondent’s exempt purposes, as conceded by peti-

tioner, 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 preven-

tion of disease and for the improvement of public

health.”

J.A. 16a. In furtherance of its exempt purposes respon-

dent publishes Annals of Internal Medicine, which since

1927 has contained both scholarly articles relevant to the

practice of internal medicine and advertisements relating

only to medical products, 80 percent of which are for pre-

scription drugs.

This is not “garden variety commercial” advertising.

The contents of advertisements for prescription drugs are

dictated by the Food and Drug Administration. FDA

regulations, 21 C.F.R. Part 202, require such advertising

to contain detailed information as to the composition of

the drug, its indications, contraindications, precautions,

side effects, effectiveness and dosage. A prescription drug

advertisement thus constitutes a mini-article about the

advertised drug and has substantial educationai value in

its own right.

=x =

The uncontested testimony of respondent’s witnesses at

the trial in this case establishes that drug advertising

fulfills an important educational function.

Respondent’s witnesses testified that “(t]he sophisticated

decision of when to use and not use drugs” is “at the

very heart of internal medicine,” J.A. 43a (testimony of

Dr. Stewart Bondurant, Dean of the School of Medicine

of the University of North Carolina), and that it is es-

sential for a physician to keep up with developments in

drugs.

The “use of journals” is “one of the keystones of a per-

sonal program of continuing education,” J.A. 44a (testi-

mony of Dr. Bondurant). The use of journals includes the

review of advertisements. “{I}t’s especially important that

. . . the editorial content be iooked at in a sort of point-

counterpoint relationship with the advertising in [respon-

dent’s] Journal, because neither one alone would give a

practicing physician a full basis of knowledge about using

the drug.” J.A. 38a (testimony of Dr. Louis Lasagna, Pro-

fessor of Pharmacology and Medicine at the University

of Rochester School of Medicine). Dr. Bondurant also testi-

fied as to the educational value of drug advertising, stating

that “(t]he material in the advertisements serves in a very

effective way . . . as an alerting function,” J.A. 43a, and

that such advertising complements the scientific portion

of the journal. /d.

The educational value of drug advertising has been

noted elsewhere. In testimony before the Monopoly Sub-

committee of the Select Committee on Small Business of

the United States Senate on August 10, 1967, Dr. James

L. Goddard, who was then Commissioner of the Food and

Drug Administration, stated that the purpose of proposed

new FDA regulations specifying the contents of prescrip-

tion drug advertising was “to get [drug companies] to

—1l6—

adopt the basic concept that drug advertising is educa

tional and thus should be truthful, that it differs from

advertising of motor vehicles and other items in our

economy, that there is a special significance here.’’ Dr

Goddard further testified before the Subcommittee on that

date as follows:

Medical advertising has been cited before this com

mittee as one of the forms of continuing education

of the doctor. I would agree with this appraisal, for—

whether good or bad—industry spends some $3,000

per year per doctor on promotion. I have described

to you our attempts to assure better medical adver

tising. We will continue to strengthen our monitor

ing of such advertising

Competitive Problems in the Drug Industry Hearings

Before the Subcomm. on Monopoly of the Senate Select

Comm. on Smali Business, 90th Cong., lst Sess. at 749

and 821 (1967)

The advertising in respondent’s journal is required by

law to be educational. It is sought out and used for its

educational content by physicians as part of their con

tinuing education. It complements the editorial content of

respondent’s journal and respondent’s other educational

programs. Such advertising therefore “contributes impor

tantly” to respondent's exempt educational purpose and,

under the standard of Section 513(a), is substantially re

lated to such purpose. The income from such advertising

is not unrelated business income

= =

THE ARGUMENTS ADVANCED BY THE UNITED

STATES FOR DEPARTING FROM THE PLAIN LAN-

GUAGE OF SECTION 513 OF THE INTERNAL REVENUE

CODE IN THIS CASE ARE WITHOUT MERIT.

Petitioner urges reversal of the decision below principal-

ly upon the grounds (1) that Treasury Regulations adopted

in 1967 set forth a “per se rule” or “blanket rule” that

all advertising is taxable (Pet. Brf., pp. 11-18, 27-28), and

(2) that Congress in 1969 specifically approved this “per

se rule” (/d. at 18-26). Petitioner also argues that rever-

sal of the decision below is supported by considerations

of administrative convenience and the commercial purpose

and effects of respondent’s advertising (Pet. Brf., pp. 41-

43). None of these arguments is sufficient to overcome

the plain language of Section 513(a) and the clear intent

of Congress in enacting that provision.

A. Taxation Of Respondent's Advertising Revenues Is Not

Justified By The 1967 Treasury Regulations.

Petitioner derives its “per se rule” from language in

Example 7 to Treasury Regulation § 1.513-1(dX4Xiv),

adopted in 1967, which states that a professional associ-

ation’s publication of advertising “designed and selected

in the manner of ordinary commercial advertising is not

an educational activity."’ Pet. App. 52a-53a. In so doing

petitioner fails to take into account the remaining lan-

guage of Example 7, which clearly distinguishes the adver-

tisements hypothesized there from those of respondent.

Petitioner also fails to give sufficient weight to the rele-

vant, generally applicable substantive provision of Treasury

Regulation § 1.513-1(dX2), stating that activities are “sub-

stantially related’ to an organization’s tax-exempt pur-

poses if they “contribute importantly to the accomplish-

ment of those purposes,”’ and that whether given activities

==

meet this test “depends in each case upon the facts and

circumstances involved.” In light of the full language of

the Treasury Regulations, and in light of the language

and purpose of Section 513(a) of the Internal Revenue

Code, Example 7 simply cannot be construed to impose

a tax on respondent's advertising. If it were so construed,

it would plainly be invalid.‘

1. The Language Of Example 7 Of The Regulations

Does Not Impose A Tax On The Advertising Reve-

nues Of Respondent.

Example 7 to Treasury Regulation § 1.513-l(d\4Xiv) does

not create a “per se rule” applicable to advertising of the

type published by respondent. This example does nothing

more than apply the substantial relationship test to a set

of hypothetical “facts and circumstances” that differs great-

ly from the present case. In Example 7 the “form, con-

tent, and manner of presentation of the advertising messages

are governed by the basic objective of the advertisers to

promote the sale of the advertised products,” and “the

informational function of the advertising is incidental to

the controlling aim of stimulating demand for the adver-

tised products and differs in no essential respect from the

informational function of any commercial advertising.”

By contrast, the advertisements at issue in the present

case, which are primarily advertisements for prescription

* Respondent, an organization exempt under Section 501(cX3) of

the Internal Revenue Code, contends that Example 7 is not at

issue here because the Example by its terms is applicable only

to organizations exempt under Section 501(cX6) of the Code. Amici,

as organizations exempt under Section 501(cX6), take no position

with respect to this contention of respondent. Amici wish to note,

however, that Example 7 expressly recognizes that an organiza

tion exempt under Section 501(cX6) may have as one of its tax

exempt purposes the “continuing education of its members in

matters pertaining to their profession.”

==

drugs,® are quite different in several respects. Advertise-

ments for prescription drugs are not “designed and

selected in the manner of ordinary commercial advertis-

ing.”’ No less an authority than the Commissioner of

the Food and Drug Administration has testified before

Congress that drug advertising “differs from advertising

of .. . other items in our economy.” See pages 15-16,

supra. The “form, content, and manner of presentation’”’

of such advertising are not “governed by the basic ob-

jective of the advertisers to promote the sale of the adver-

tised products.” Rather, they are closely regulated by the

Food and Drug Administration. Drug advertisements con-

tain detailed and essential information mandated by Sec-

tion 502(n) of the Food, Drug and Cosmetic Act, 21 U.S.C.

§ 352(n), and regulations of the FDA thereunder, codified

at 21 C.F.R. Part 202. These advertisements are used by

physicians as an integral part of their continuing educa-

tion, J.A. 38a, 43a, and in fact are actively sought out

by physicians to enhance and update their medical know!-

edge. The informational function of such advertising is not,

as in the case of the advertising in Example 7, merely

“incidental;” it is substantial and it contributes important-

ly to respondent’s exempt educational purpose.

In order to make Example 7 apply to respondent’s

advertising, petitioner is forced to argue that the intent

of the Example is to declare ali advertising in profes-

sional journals to be taxable (Pet. Brf., p. 27). Such a con-

struction is plainly inconsistent with the statement in

Treas. Reg. § 1.513-1(dX2) that the “facts and circum.

stances” of “each case’’ must be examined. Furthermore,

if this had been the intent of the regulations, it is wholly

5 Much of respondent's non-drug advertising is for medical em

ployment opportunities. This is also outside the scope of Example

i, which relates to “products.”

—20—

improbable that the rule would have been stated in the

context of a factually-oriented Example. Indeed, if the

Treasury Department had intended to tax all advertising

revenues received by professional journals, it would not

have bothered to issue Examples 6 and 7 at ail.

2. If Example 7 Of The Regulations Were Construed

As Urged By Petitioner, It Would Be Invalid Be-

cause Of Its Inconsistency With The Statute And

The Substantive Provisions Of The Regulations.

To the extent Example 7 purports to declare any kind

of advertising income taxable merely because the adver

tising is “designed and selected in the manner of ordinary

commercial advertising,”” the Example must be held in

valid. The comparability of an activity of a tax exempt

organization to “ordinary commercial” activities is simply

not determinative of whether the activity is “substantially

related” to the purposes of the organization within the

meaning of Section 513(a) of the Code. The legislative his

tory of Section 513(a) and Internal Revenue Service ru!

ings under that Section contain countless examples of ac

tivities held to be “substantially related” despite being

conducted in an “ordinary commercial” manner, such as

college football games, museum gift shops, and hospital!

cafeterias. See pages 9, 11-13, supra. Moreover, such a

reading of Example 7 brings it into direct conflict wit

the substantive provisions of Treas. Reg. § 1.513-1(d\2)

Example 7 is part of an interpretive regulation promul

gated under Section 7805(a) of the Internal Revenue Code

As such, it is not entitled to the same deference as a

regulation issued under a specific grant of authority to

the Commissioner of Internal Revenue. l/nited States

Vogel Fertilizer Co., 455 U.S. 16, 24 (1982). It was. more

over, adopted some 17 years after the statute it purports

interpret, and thus hardly constitutes a “contemporane

- =

ous construction” of that statute. Finally, because it is

an example and not a substantive regulation, it constitutes

little more than an advisory opinion issued on a truncated

set of hypothetical facts.

In light of the foregoing, whatever presumptions may

normally exist in favor of a Treasury Regulation (Pet.

Brf., p. 33) do not save Example 7 as construed by peti-

tioner. This Court has repeatedly held that “[a} regula-

tion which . . . operates to create a rule out of harmony

with the statute, is a mere nullity.”” Manhattan General

Equipment Co. v. Commissioner, 297 U.S. 129, 134 (1936),

see also, Commissioner v. Acker, 361 U.S. 87, 92 (1959).

“(Whhere . . . the provisions of the |statute] are unam-

biguous, and its directions specific, there is no power to

amend it by regulation.” Koshland v. Helvering, 298 US.

441, 447 (1936). Recent decisions of this and other courts

have not hesitated to invalidate interpretations of the tax

laws by the Treasury Department containing infirmities

similar to those present here. See, ¢.g., Commissioner v.

Engle, 464 U.S. 206 (1984); United States v. Vogel Fer.

tilizer Co., 455 U.S. 16 (1982); United States v. Cartwright,

411 U.S. 546 (1973); Jones v. Commissioner, 743 F.2d 1429

(9th Cir. 1984); State of Washington v. Commissioner, 692

F.2d 128 (D.C. Cir. 1982); American Standard, Inc. v.

United States, 602 F.2d 256 (Ct. Cl. 1979).

B. Taxation Of Respondent's Advertising Revenues Is Not

Justified By The 1969 Amendment Or The Legislative

History Of That Amendment.

Petitioner argues that Section 513(c), which was added

to the Internal Revenue Code as part of the Tax Reform

Act of 1969, and the legislative history of that provision

support its contention that respondent’s advertising is per

se taxable. Section 513(c) plainly has no such effect, and

reports of Congressional committees in 1969 do not and can-

not alter the meaning of Section 513(a) as enacted in 1950

29

l. Section 513(c) Does Not Apply A Per Se Rule To Tax

Advertising Revenues Of The Type Involved In This

Case.

Prior to the enactment of Section 513%(c), a single com-

ponent of a “trade or business” which, considered in its

entirety, was related to an organization’s exempt purpose

was not subject to the unrelated business income tax. See

American College of Physicians v. United States, 530

F.2d 930 (Ct. Cl. 1976); Massachusetts Medical Society

v. United States, 514 F.2d 153 (ist Cir. 1975). Section

913(c) merely removed this impediment to the taxation

of a component of an overall exempt activity when that

component was “not substantially related” to the organiza-

tion's exempt purpose. Section 513(c) does not, however,

address whether a component of an overall activity is

related or unrelated. It merely treats such component as

a separate trade or business. Each component must then

be tested under the standard of Section 513(a).

Congress undoubtedly could have made all advertising

taxable, but it did not do so. Instead, it enacted a broad

rule applicable equally to all activities of tax-exempt

organizations, not just advertising. Thus, the analysis of

the advertising content of a medical journal to determine

whether or not such advertising is substantially related

to the organization’s exempt purposes is the same as the

analysis involved in any case in which an overall activity

consists of two or more severable activities. See Hi-Plains

Hospital v. United States, 670 F.2d 528 (5th Cir. 1978)

sales of prescription drugs by hospital pharmacy to patients

of hospital (related), to patients of hospital staff physicians

related), and to public (unrelated)—sale-by-sale analysis

required). Such an analysis is precisely what the Court

of Appeals undertook in this case

—23—

2. The Legislative History Of Section 513(c) Does Not

Indicate An Intent To Tax Advertising Revenues Of

The Type Involved In This Case.

In its brief, petitioner suggests that the legislative

history to the 1969 amendment demonstrates Congress’

intent to adopt the per se rule advanced by petitioner.

This is not true.

The bulk of the comments regarding Section 513(c) in

both the House and Senate Reports on the Tax Reform

Act of 1969 relate to the specific effect of that Section,

i.e., “that an activity is not to lose its identity as a trade

or business merely because it is carried on within a larger

aggregate of similar activities.’”” H.R. Rept. No. 413, 91st

Cong., Ist Sess. Pt. 1, at 50 (1969). To the extent the

Reports refer to the 1967 Treasury Regulations on adver-

tising income or the “relatedness” requirement of Sec-

tion 513(a), they do not evidence an intent to declare all

advertising to be taxable.

The reference in the report of the House Ways and

Means Committee to the 1967 regulations is qualified,

stating only that “(iz general, [the committee] is in agree-

ment with the purpose of the regulations.” Jd. (emphasis

supplied). Petitioner places great weight on the statement

occurring a few lines later in this report to the effect that

the committee had concluded that advertising is not re-

lated, and therefore should be taxed. Pet. Brf., p. 25. But

this conclusion was obviously also meant to be “in gen-

eral,” for the same committee, in the technical explana-

tion portion of its report, further describes the effect of

the new Section 513(c) to be that:

. . . the advertising contained in a publication of an

exempt organization may be subject to the tax under

section 511 even though the editorial content of the

publication may be related to the exempt purposes

of the organization.

—24—

H.R. Rept. No. 413, supra, Pt. 2, at 26 (emphasis sup-

plied). The term “‘may”’ scarcely denotes a per se rule.

That the House had no intention of taxing advertising

of the specific type published by respondent is made clear

by the summary of the bill passed by the House which

was prepared by the staffs of the Joint Committee on

Taxation and the Senate Finance Committee. In listing

arguments against the fragmentation approach of Section

513(c) that would require treating advertising as a sepa-

rate activity, the staffs noted the practical problem created

because

This bill ignores the fact that it is difficult to sepa-

rate technical comment (such as where technical bene-

fits of a pharmaceutical product is described in an

advertisement in a medical journal) from pure adver-

tising.

Staffs of the Joint Comm. on Taxation and the Senate

Finance Comm., 91st Cong., Ist Sess., Summary of H.R.

13270, Tax Reform Act of 1969, August 18, 1969, at 31

(Comm. Print). Obviously the staffs of these committees

believed that it was necessary to “separate’’ medical

advertising containing ‘“‘technical comment”’ such as that

in respondent’s publications from ‘“‘pure advertising”’

before applying the unrelated business income tax; if they

had believed income from pharmaceutical advertisements

to be taxable, there would have been no reason to con-

sider how “difficult” it was to separate them from “pure

advertising.”

The report of the Senate Finance Committee, S. Rept.

No. 552, 91st Cong., lst Sess. (1969), quoted by petitioner

at Pet. Brf., p. 27, does not strengthen petitioner’s argu-

ment. The Senate report repeatedly states that “the com-

mittee agrees with the House” and that its members “‘ap-

prove the intent of the House provision.” /d., at 75. Thus

the taxation of advertising approved by the Senate was

subject to the same “in general’’ qualification—and the

same exclusion of ‘technical comment” advertising—as

that approved by the House.

Knowledgeable persons within the Internal Revenue

Service itself have not considered the 1969 congressional

action to result in the taxation of all advertising, as

demonstrated by the statement made in 1976 by an at-

torney in the Exempt Organizations Technical Branch of

the IRS, expressing his own views, that “(t]he question

of which advertising, if any, is related may be a fertile

area for future litigation.”” Nonberg, Taxation of Adver-

tising in Exempt Organization Publications, Tax Mgmt.

Memo. 76-12, at 7 (1976).

3. The 1969 Legislative History Of Section 513(c) Can-

not Change The Plain Meaning Of Section 513(a),

Enacted In 1950.

Even if the legislative history of Section 513(c) sup-

ported petitioner’s “per se rule,” it would not provide a

basis for reversing the application of Section 513(a) by the

court below. The only statutory change made by Congress

in 1969 was the adoption in Section 513(c) of the fragmen-

tation principle. Congress did nothing to change Section

513(a), which still must be applied to each of the com-

ponents of the overall activity. If Congress had intended

to decree that all advertising activities are unrelated

trades or businesses, it could have done so by simple and

clear amendment to the Code. It did not do so.

Congress cannot without amending a statute add some-

thing which is not there. Commissioner v. Acker, 361 U.S.

87, 93 (1959). In this case Congress did not amend Sec-

tion 513(a); it merely commented upon Section 513(a) in

committee reports. Such reports obviously cannot over-

rule the language and structure of the statute and are

of little value in determining its meaning, especially when

—26—

they are made long after the statute’s enactment. As

stated by the Court in United States v. Price, 361 U.S.

304, 313 (1960):

[T]he views of a subsequent Congress form a hazard-

ous basis for inferring the intent of an earlier one.

Accord, Tennessee Valley Authority v. Hill, 437 U.S. 153,

193 (1978); Securities and Exchange Commission v. Sloan,

436 U.S. 108, 121 (1978).

Because the intent of Congress in enacting the provi-

sions of Section 513(a) in 1950 is clear, any inconsistent

intent expressed in Congressional committee reports some

19 years later is of no effect. If Congress wishes to change

the meaning of Section 513(a), it must do so by statutory

enactment, not by “legislative history” created years after

the fact.

C. Neither The Commercial Nature Of Respondent’s Adver-

tising Nor Considerations Of Administrative Convenience

Support Taxation Of Respondent’s Advertising Income.

Petitioner argues that policy considerations suppor? tax-

ation of respondent’s advertising. It contends that because

respondent conducts a “commercial advertising business”

in competition with other publishers, and because respon-

dent supposedly “was motivated entirely by revenue rais-

ing . . . concerns,” it should pay tax on its advertising

profits “just as any other publisher would have to do.”

Pet. Brf., pp. 41, 43. The difficulty with this argument

is that it has no statutory basis and is flatly inconsistent

with the treatment of tax-exempt organizations embodied

in the Internal Revenue Code. On numerous occasions the

courts and the Internal Revenue Service itself have held

that a commercial mode of operation, a revenue-raising

purpose, and the existence of commercial competitors do

not render taxable an activity related to an organization’s

tax-exempt purpose. E.g., Rev. Rul. 73-104, supra (sale

—27—

of greeting cards); Rev. Rul. 74-399, supra (operation of

restaurant); San Antonio Bar Association v. United

States, 80-2 U.S. Tax Cas. (CCH) 4 9594 (W.D. Tex. 1980)

(sale of legal forms); Edward Orton, Jr. Ceramic Founda-

tion v. Commissioner, 56 T.C. 147 (1971); nonacgq. 1972-2

C.B. 4 (sale of pyrometric cones). Indeed, as petitioner

admits, the subscription income received by respondent

from its supposedly commercially competitive journal “‘is

unquestionably exempt from tax.” Pet. Brf., p. 43. The

statutory touchstone is the existence of a substantial rela-

tionship between the activity and an organization’s tax-

exempt purpose, and it is the policy of the tax laws to

exempt such activities from taxation regardless of how

many organizations wish to participate in them.

Petitioner also argues that conducting a case-by-case ex-

amination of whether advertising is related “would en-

tail formidable burdens on IRS audit resources”. Pet. Brrf.,

p. 42. This, however, is exactly what the IRS does with

respect to activities of tax-exempt organizations other than

advertising, apparently without disabling effects. See, e.g.,

Hi-Plains Hospital v. United States, 670 F.2d 528 (5th

Cir. 1982); Rev. Rul. 73-105, 1973-1 C.B. 264. Moreover,

Congress passed Section 513(c) in 1969 despite the con-

cern expressed by the staffs of its committees that “‘it

is difficult to separate technical comment (such as where

technical benefits of a pharmaceutical product is described

in an advertisement in a medical journal) from pure adver-

tising.” Staffs of the Joint Comm. on Taxation and the

Senate Finance Comm., 91st Cong., Ist Sess., Summary

of H.R. 13270, Tax Reform Act of 1969, August 18, 1969,

at 31 (Comm. Print), discussed at page 24, supra. Plainly

Congress did not have the same worry about “IRS audit

resources” that petitioner expresses. In any event, the

“bureaucratic convenience”’ of establishing a “bright-line

rule” cannot justify a construction of a Treasury Regula-

= =

tion that produces a result inconsistent with the intent

of the Internal Revenue Code provision being applied.

Jones v. Commissioner, 743 F.2d 1429, 1433 (9th Cir.

1984). See also Commissioner v. Engle, 464 U.S. 206, 227

(1934)

CONCLUSION

For the reasons stated herein, the judgment of the

Court below should be affirmed.

Respectfully submitted,

GEORGE A. PLATz*

FRANK V. BATTLE, JR

J. TimoTHY KLEESPIES

SIDLEY & AUSTIN

One First National Plaza

Chicago, [Illinois 60603

(312) 853-7000

Attorneys for Amici Curiae

American Medical Association and

Massachusetts Medical Society

(jf ("nun ge

KIRK B. JOHNSON

KATHLEEN R. CuRTIS

November 14, 1985 * Counsel of Recor: