Presbyterian & Reformed Publishing Co. v. Comm'r of Internal Revenue

• Decision Date: 23 December 1982
• Docket Number: Docket No. 1759-81X.
• Citation: 79 T.C. 1070
• Parties: PRESBYTERIAN AND REFORMED PUBLISHING CO., PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

79 T.C. 1070

PRESBYTERIAN AND REFORMED PUBLISHING CO., PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 1759-81X.

United States Tax Court

Filed December 23, 1982.

Petitioner, a publisher of religious materials, was granted tax-exempt status in 1939 under sec. 101(6), I.R.C. 1939. Between 1975 and 1979, petitioner's sales, profits, and cash accumulations were significant; it began paying royalties to authors; its staff changed from volunteers to paid employees; it engaged in selling and buying books with other publishing companies; it increasingly adopted a commercial method of operation. The District Director of Internal Revenue informed petitioner of the possible revocation of its exempt status in 1978 and the Commissioner issued a final determination letter in 1980.

Held, petitioner was not operated exclusively for an exempt purpose under sec. 501(c)(3), I.R.C. 1954, and was not entitled to continued tax-exempt status;

Held, further, respondent abused his discretion in making the revocation retroactive to 1969; respondent's alternative position advocating retroactive revocation of the exemption to 1975 is sustained. Susan M. Clapp, for the petitioner.

William F. Halley, for the respondent.

FEATHERSTON, Judge:¹

Respondent retroactively revoked petitioner's status as an organization exempt from Federal income tax under sections 501(a) and 501(c)(3).² Petitioner challenges respondent's revocation and has invoked the jurisdiction of this Court for a declaratory judgment pursuant to section 7428. The issues presented are whether petitioner was operated exclusively for an exempt purpose within the meaning of section 501(c)(3), and, if not, whether the Commissioner abused his discretion in making revocation retroactive to January 1, 1969

FINDINGS OF FACT³

At the time it filed the petition in this case, Presbyterian & Reformed Publishing Co. (petitioner) maintained its principal place of business at Marble Hill Road, Harmony, N.J. It was incorporated on January 21, 1931, under the laws of the State of Pennsylvania. The certificate of incorporation states that petitioner was “formed for the purpose of the transaction of a printing and publishing business.” Of the three original incorporators, shareholders, and directors, Samuel G. Craig (Samuel) received 48 shares out of the 50 shares of no par value stock issued.

At the first meetings of incorporators and of directors, held on February 5, 1931, Samuel was elected chairman of the board of directors as well as president and treasurer of petitioner. The bylaws unanimously adopted at the incorporators' meeting included a provision (paragraph 21) stating that directors would receive no stated salary for their services (although this could be altered by resolution), but that nothing precluded a director “from serving * * * in any other capacity and receiving compensation therefor.” Another provision grants the directors power to establish and change the salaries of petitioner's officers.

Paragraph 38 of the bylaws restricts the sale and transfer of stock and waives the “right of the owners or holders thereof to receive pecuniary return by way of dividends.” The paragraph provides petitioner with buy-back rights for all shares, and notice of these restrictions was endorsed on each share of stock. Paragraph 38 explains the waiver of dividends and sets forth petitioner's purposes as follows:

(A) In order to further and effectuate the primary purpose of the Company to state, defend and disseminate (through every proper means connected with or incidental to the printing and publishing business) the system of belief and practice taught in the Bible, as that system is now set forth in the Confession of Faith and Catechisms of the Presbyterian Church in the United States of America, each owner or holder of any of the stock of this Company waives the right to receive dividends thereon and agrees that any income which might otherwise be available for the payment of dividends shall be applied by the Board of Directors for the improvement of the form and quality or for the extension of the influence of its publications, or for the publication of the writings of others either for gratuitous or paid distribution, or otherwise, by donation, gift to, or endowment of any agency or institution engaged in the teaching or inculcating of said system of belief and practice.

The bylaws were amended by unanimous vote of the stockholders in attendance on January 1, 1976, in the following manner:

46. If the Presbyterian and Reformed Publishing Co., Inc., a non-profit organization, should ever be dissolved, its assets will be given to the Westminster Theological Seminary, Philadelphia, PA. * * * This theological seminary, like the Presbyterian and Reformed Publishing Co., is a non-profit organization and is also dedicated to the defense of Biblical Christianity as set forth in the Westminster Confession of Faith.

On December 12, 1939, the Internal Revenue Service issued a determination letter which granted petitioner an exemption from Federal income taxation under the provisions of section 101(6) of the Revenue Act of 1936.⁴ In this determination letter, the Deputy Commissioner of Internal Revenue made the following factual finding to support his determination:

Your actual activities consist of publishing a religious paper known as “Christianity Today”, a Presbyterian journal devoted to stating, defending, and furthering the gospel. Your income is derived from subscriptions, contributions and gifts and is used to defray maintenance and general operating expenses.

The letter further states that petitioner was not required to file returns for 1937 and subsequent years—-

so long as there is no change in your organization, your purposes, or your method of operation.

Any changes in your form of organization or method of operation, as shown by the evidence submitted, must be immediately reported to the collector of internal revenue for your district in order that the effect of such changes upon your exempt status may be determined.

Petitioner has been predominantly a family-run concern, with its presidency passing in 1953 from Samuel to his son, Charles H. Craig (Charles);⁵ and since 1976, Charles' son, Bryce Craig (Bryce), has been a full-time employee and officer.

Although Charles never received a degree in theology, both Samuel and Bryce graduated from theological seminary, Samuel from Princeton and Bryce, in 1974, from Westminster Theological Seminary (Westminster). (Westminster, like petitioner, is committed to Presbyterian “reformed” doctrine as set forth in the Westminster Confession of Faith.) While petitioner is not affiliated with any particular church, its link to reformed Presbyterian doctrine is evident in its bylaws and the commitment of its stockholders, officers, and directors. Among 12 more recent members of the board of directors, nearly all had some overt religious affiliation: 4 were, or had been, church pastors, and 4 were in some way connected with Westminster. None received compensation for their services as directors.

Neither Samuel nor Charles ever received any compensation from petitioner. Petitioner has received volunteer help in manuscript reading and editing, packing and shipping books, and clerical duties from various individuals over the past 20 to 25 years. While the actual printing has always been done by an independent printer, for many years Charles himself performed numerous pre-printing tasks: He read the mail, prepared and typed invoices, unloaded books from trucks, read manuscripts and edited them, read proofs, and arranged for artists to work on the book covers.

In 1976, Bryce began working full-time as treasurer and assistant director. He and his father shared the duties of managing petitioner's day-to-day operations from 1976 through the first part of 1978. Thereafter, Bryce assumed full management and Charles became semiretired, visiting petitioner's facility only about once or twice a week. In contrast to his father and grandfather, Bryce received salaries from 1976 to 1979, inclusive, of $12,000, $13,250, $15,000 and $15,350. As of the beginning of 1979, none of the seven other employees received annual salaries over $12,500, and five were paid under $6,250; ⁶ the two most highly paid were hired in 1978 for newly created positions. The wages and salaries paid by petitioner rose from under $550 in 1972 to about $16,200 (including commissions) in 1976 to about $57,600 in 1979.⁷

Petitioner's publishing operations were initially run out of Samuel's house and later out of Charles' house in Nutley, N.J. Neither Samuel nor Charles received any payment or reimbursement for expenses. After Charles became a director and assumed more responsibilities, he concluded that his house in Nutley, N.J., was not “adequate to carry on the publishing business.” Correspondence and proofs covered the dining room table; the telephone rang frequently; storage space (in a former grocery store) was insufficient. To alleviate the problem, in 1969 Charles and his wife personally purchased a house with a cinderblock truck garage in East Orange, N.J., for approximately $30,000. Petitioner's operations were moved to the garage while the house was rented to people unconnected with petitioner. Charles paid fire and liability insurance on the house and garage from 1969 through 1978 (the period in which he owned the property); and in 1970 he purchased and had installed a heating system for the garage at a cost of $1,460. He also received rent from petitioner sufficient to cover the real estate taxes he personally paid while leaving a modest excess for other expenses.⁸ This garage, along with Charles' home, was used by petitioner until March 1978, after which the garage property was sold, at a loss, for $28,000.

As early as March 2, 1974, petitioner informed the Internal Revenue Service (IRS) that it was accumulating a surplus for a “building fund”...