Copyright Clearance Ctr., Inc. v. Comm'r of Internal Revenue

• Decision Date: 15 November 1982
• Docket Number: Docket No. 4591-81X.
• Citation: 79 T.C. 793
• Parties: COPYRIGHT CLEARANCE CENTER, INC., PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

79 T.C. 793

COPYRIGHT CLEARANCE CENTER, INC., PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 4591-81X.

United States Tax Court

Filed November 15, 1982.

P is a corporation organized to provide a service through which public and private libraries, commercial organizations, and others may centrally pay license fees for copying of certain copyrighted publications. P does not provide copies of documents, but rather operates as a clearinghouse for licensing of copying and as a conduit for the transfer of license fees to copyright holders. P was organized by a publishers' trade association, and its initial expenses were financed primarily by contributions solicited from publishers in accordance with the expected financial benefit to each publisher from P's operations. Held: P was organized and operated for the “substantial” nonqualifying purpose of profitable exploitation of copyrights, and this purpose was not merely “incidental” to one or more exempt purposes served by P. Thus, P was not organized and operated “exclusively” for exempt purposes, as required by sec. 1.501(c)(3)-1(a)(1), Income Tax Regs., and it is therefore not qualified as an organization described in sec. 501(c)(3), I.R.C. 1954. Leonard J. Henzke, Jr., and William J. Lehrfeld, for the petitioner.

Adeline P. Malone, for the respondent.

OPINION

RAUM , Judge:

The Commissioner determined that petitioner does not qualify for exemption from income taxation as an organization described in section 501(c)(3), I.R.C. 1954, and petitioner has invoked the jurisdiction of this Court to obtain a declaratory judgment as to its exempt status.¹ The question presented is whether petitioner is organized and operated exclusively for exempt purposes. The case was submitted on the basis of the stipulated administrative record, which is incorporated herein by reference. The factual representations in the administrative record are accepted as true. Rule 217(b), Tax Court Rules of Practice and Procedure.

The Copyright Clearance Center, Inc. (hereinafter petitioner or the Center), is a corporation organized in July of 1977 under the Not for Profit Corporation Law of New York. At the time the petition was filed, its principal office was at Salem, Mass. Petitioner's application for recognition of exemption under section 501(c)(3) was filed with the Internal Revenue Service under date of October 27, 1978. The Commissioner issued a final adverse ruling on December 12, 1980.

Since January 1, 1978, petitioner has provided a service through which libraries (public and private), commercial organizations, and others may centrally pay license fees for copying of certain copyrighted publications. Petitioner does not, itself, provide copies of documents; instead, it operates as a clearinghouse for licensing of copying and as a conduit for the transfer of license fees to copyright holders. Publishers register with the Center and display a “Code” on the first page of each registered publication, which states the license fee (if any) for copying of that publication. The Center also publishes a list of license fees for pre-1978 publications, because these do not bear the first page codes. Petitioner's services are available only to users who register with it, though there is apparently no charge for registration.

Petitioner's operations are more fully explained in the following excerpt from its “Handbook for Libraries and Other Organizational Users Which Copy From Serials and Separates”:

The Copyright Clearance Center, Inc., has been established as an independent, not-for-profit centralized mechanism whose use can obviate the need to obtain hundreds or thousands of individual licenses from publishers by libraries, library consortia, information-on-demand businesses, access services, and others needing the right to prepare photocopies beyond the limited extent otherwise permitted by the new law.² Existence of the Center does not in any way prevent publishers from continuing their normal permissions programs, or users from asking for them, but the Center's programs should also be of real benefit and convenience to publishers.

The initial planners of the Center were largely publishers, authors, information-center managers, librarians, and others in the technical, scientific, and medical areas—-areas in which the photocopying of “articles” is already widespread and important. However, this planning always called for the services of the Center to be open to use by the publishers and users of all types of collections of short works (journals, magazines, newsletters, proceedings, symposia, etc.), including separates, and this is now the case operationally. Indeed, it is anticipated that, perhaps with some modifications, the Center will be able to accommodate works of all types, regardless of length. The Board of Directors and Advisory Committee of the new Center are broadly representative of authors, publishers, and document users. *ss

The Copyright Clearance Center, Inc., does not itself provide copies of documents. That is presently the role of the publishers themselves, of directly licensed or Center-using information businesses and other access services, of resource libraries, and of libraries and information services within organizations. It should also be clearly understood that payments through the Center are not required when the copy supplier (including an internal library) has direct licenses from the publishers to make its copies. To repeat, what the Center can and does do is to provide libraries and other organizations needing permission to make copies legally with a simple, centralized mechanism through which to report and to pay for this copying after it has been done, hence with no delay for those needing copies.

The costs of operating the Center's system (its Operations and Administrative Offices) will be deducted from the publisher-stated copying payments received * * * through a processing charge periodically determined by the Center's Board of Directors, before copying revenues are transmitted quarterly to the serial publishers or authors. Because of the efficiency of the Center's system design, which maximizes computer processing, this internal handling cost will be small ($0.25 per article copy for 1978), and can be reduced considerably as the volume of reported copying increases. (Reports that handling costs will consume copying payments are therefore completely unfounded, especially since funds contributed by concerned parties will make it unnecessary to amortize the expenses involved in bringing the Center into full operation.)

The Center has also designed its systems, including reporting and payment options, to minimize the incremental internal operating expenses of user organizations.

In order to fully understand the nature of petitioner's organization and its operations, as well as the issues presented in this declaratory judgment proceeding, it is necessary to review the recent legislative activity in respect of title 17, U.S.C., entitled “Copyrights.” In recognition of the technological and commercial changes which had taken place since the last previous revision of the copyright laws in 1909, a movement for general revision of those laws was given new life in 1955 with legislative appropriations for research and study of the major issues involved.³ Although the first bills of this revision campaign were introduced in Congress in 1964,⁴ it was not until October 19, 1976, that Pub. L. 94-553, 90 Stat. 2541, was signed into law, with most of its provisions effective January 1, 1978. 90 Stat. 2572.

Of particular relevance to the instant proceeding are sections 106 through 108 of revised title 17, U.S.C. Section 106 grants to the owner of a copyright the exclusive right, inter alia, “to reproduce the copyrighted work in copies.” Sections 107 and 108 limit this right, however, by providing that neither the “fair use” of the copyrighted work (section 107) nor the nonsystematic or single-copy copying in specified circumstances by libraries and archives (section 108) constitutes an “infringement of copyright.” The codification of the judicially created “fair use” doctrine in section 107 does not include a definition of that term, but the statute identifies several factors to be considered in making a determination in each case, such as the purpose and extent of the reproduction, the nature of the work, and the commercial effect of the reproduction on the copyrighted work.

The statute itself, as borne out by the legislative history, reveals an attempt to strike an equitable compromise between the seemingly irreconcilable concerns of publishers, on the one hand, and libraries, commercial users, and other “consumers” of publications, on the other hand.⁵ With the ever-increasing access of libraries and businesses to photocopying equipment, publishers and authors feared an erosion of their traditional copyright protection if multiple copies of a publication could be made by the consumer rather than purchased from the publisher.⁶ Conversely, there was a recognized need for a certain amount of copying for scholastic and archival purposes without the administrative and monetary costs which necessarily attend a requirement of licensed reproduction. Beyond these limited exceptions for specific purposes, Congress apparently foresaw licensing as the norm for reproduction done on a systematic basis or motivated by a commercial objective. ⁷ While the statute makes no mention of the nature of the envisioned licensing process, the Senate report states: “Concerning library photocopying practices not authorized by this legislation [i.e., the limitations on the copyright provided for in section 108], the committee recommends that workable clearance and licensing procedures be developed.” S. Rept. 473, 94th Cong., 1st Sess. 71 (1975).⁸

Against this background, the Association of American Publishers (AAP) incorporated petitioner in July of 1977 as a...