United Cancer Council, Inc. v. Comm'r of Internal Revenue

• Decision Date: 02 December 1997
• Docket Number: No. 2008–91X.,2008–91X.
• Citation: 109 T.C. No. 17,109 T.C. 326
• Parties: UNITED CANCER COUNCIL, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

109 T.C. 326

109 T.C. No. 17

UNITED CANCER COUNCIL, INC., Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 2008–91X.

United States Tax Court.

Dec. 2, 1997.

Leonard J. Henzke, Jr., James W. Curtis, Jr., MacKenzie Canter III, Theodore R. Weckel, Jr., and Joseph Greif, for petitioner. ^*

Dianne I. Crosby, Deidre A. James, Sandra M. Jefferson, and Chalmers W. Poston, Jr., for respondent.

CHABOT, Judge:

                            TABLE OF CONTENTS                              PageIntroduction and Statement of Issues ..................................... ““““Findings of Fact ......................................................... ““““   Background and Summary ................................................ ““““   Direct Mail Fundraising ............................................... ““““   W & H; AICR ........................................................... ““““   The Contract; Related Agreements ...................................... ““““        A.    The Contract (June 11, 1984) ............................... ““““        B.    The Escrow Agreement ....................................... ““““        C.    Petitioner's “Draw” Arrangement ............................ ““““        D.    Agreement To Continue At 50 Percent The Percentage Of Net                Housefile Mailing Income The Fundraising Contract                Required To Be Retained In The Escrow Account To                Reimburse W & H .......................................... ““““        E.    April 1987 Addendum to the Contract ........................ ““““   Direct Mail Fundraising Campaign: 1984--1989 .......................... ““““        A.    In General ................................................. ““““        B.    W & H's Advances Of The Initial Capital To Conduct The                Direct Mail Fundraising Campaign ......................... ““““        C.    Vendors Who Furnished Goods Or Services .................... ““““        D.    Rentals Of Mailing Lists ................................... ““““        E.    Sweepstakes Mailings ....................................... ““““        F.    Adverse Publicity .......................................... ““““        G.    Petitioner's Escrow Account“Related Problems ............... ““““              1.  Draws and Petitioner's Dispute with W & H Over the                    Calculation of cumulative Net Mailing Campaign                    Revenue .............................................. ““““              2.  W & H's Purchase And InvoiceControl Procedures ......... ““““        H.    Petitioner's Attempt To Obtain A Copy of Its Housefile ..... ““““   Petitioner's and W & H's Respective Accounting Treatments Of The     Direct Mail Campaign's Revenue And Expenses ......................... ““““   Petitioner's Allocation Of Expenses Between Fundraising And Public     Education ........................................................... ““““ Opinion ................................................................. ““““    I.  Status Under Sections 501(c)(3) And 170(c)(2) .................... ““““        A.    W & H As Insider ........................................... ““““        B.    Did Any Of Petitioner's Net Earnings Inure To W & H? ....... ““““   II.  Retroactivity Of Respondent's Revocation Of The Prior Favorable          Ruling Letter Issued To Petitioner ............................. ““““

Petitioner initiated this action pursuant to section 7428 ¹ for a declaratory judgment that for all periods beginning on or after June 11, 1984, it qualifies as an organization described in section 501(c)(3) which is exempt from tax under section 501(a) and that it qualifies as an organization described in section 170(c)(2). The action was initiated after respondent revoked a favorable ruling letter which had been issued to petitioner. The revocation is retroactive to June 11, 1984. Petitioner has exhausted its administrative remedies and satisfied the other statutory predicates (sec.7428(b); Rule 210(c)) ².

The issues for decision are as follows: ³

(1) Whether petitioner is operated exclusively for charitable, educational, scientific, or other exempt purposes under sections 501(c)(3) and 170(c)(2)(B).

(2) Whether any part of petitioner's net earnings inured to the benefit of private shareholders or individuals, within the meaning of sections 501(c)(3) and 170(c)(2)(C).

(3) If the answer to issue (1) is “no”, or the answer to issue (2) is “yes”, then whether the retroactive revocation of the favorable ruling letter was an abuse of discretion.

The parties have also raised ancillary issues, including the following: (1) whether petitioner's direct mail fundraising arrangement with Watson and Hughey Company (hereinafter sometimes referred to as W & H) constitutes a joint venture; (2) whether a portion of the direct mail campaign expenses petitioner incurred are properly allocable to public education; and (3) whether the mailings made under petitioner's nonprofit mail permits violate United States Postal Service regulations as cooperative mailings due to the nature of the fundraising arrangement between petitioner and W & H, and to W & H's co-ownership rights in petitioner's mailing list.

FINDINGS OF FACT

Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.

On June 1, 1990, petitioner filed for bankruptcy under chapter 7 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Indiana, Indianapolis Division. On January 28, 1991, the bankruptcy court granted petitioner's motion to lift the automatic stay and permit petitions to be filed in the Tax Court for purposes of initiating the instant declaratory judgment action and a related deficiency proceeding.⁴

When the petition was filed in the instant case, petitioner was a not-for-profit corporation in bankruptcy in Indiana. Gregory Fehribach, the trustee in bankruptcy, maintained an office in Indianapolis, Indiana.

Background and Summary

Petitioner was organized in 1963 as a Delaware not-for-profit corporation. Petitioner is a membership organization. Its members consist of local cancer agencies throughout the country. By letter dated March 31, 1969, respondent ruled that petitioner was exempt from Federal income tax under section 501(c)(3) and that donors may deduct contributions to petitioner under sections 170, 2055, 2106, and 2522.

Petitioner's founding members had previously been local chapters of the American Cancer Society (hereinafter sometimes referred to as the ACS). These founding members separated from the ACS because (1) they wanted to participate in United Way fundraising campaigns, which ACS prohibited at that time; and (2) they wanted to concentrate on cancer prevention and alleviation of pain and suffering of cancer victims, rather than research to develop a cure for cancer.

From 1963 until 1984, petitioner acted as a support organization for its “affiliate member agencies”. It published a quarterly newsletter, offered access to cancer educational materials, and held an annual meeting of its membership each fall. Petitioner was an umbrella organization, coordinating its affiliate member agencies which met the direct needs of cancer patients through the providing of medical supplies, cancer research, and public education about cancer prevention, detection, and treatment. Petitioner was supported primarily by the membership dues paid by its affiliate member agencies. Petitioner also received contributions in small amounts as a result of direct solicitations of individuals who were members of petitioner's board of directors or of the boards of directors of petitioner's affiliate member agencies. Until 1984, petitioner's annual budget never exceeded $50,000.

In 1983, some affiliate member agencies indicated they intended to withdraw from petitioner. This precipitated a budget crisis for petitioner. Its board of directors realized that petitioner might have to be dissolved unless other sources of funding could be secured for petitioner. The board directed petitioner's executive director to conduct a search for a professional fundraiser that could assist petitioner in conducting fundraising to meet its increased need for funds, without the necessity of petitioner's contributing initial capital for the fundraising effort.

As a result, during 1983 and 1984, petitioner and W & H discussed their possible entry into a fundraising contract. As of March 12, 1984, petitioner estimated it would have an operating deficit for 1984 of $13,000, without additional fundraising income. In addition to providing the initial capital to conduct petitioner's direct mail fundraising campaign, W & H offered to furnish funds with which petitioner could continue to operate.

On June 11, 1984, petitioner and W & H entered into a “Full Service Direct Response Fundraising Agreement” (hereinafter sometimes referred to as the Contract) for a term ending May 30, 1989. As of the date the Contract was entered into, petitioner was on the verge of insolvency; petitioner did not have money to start a direct mail or other fundraising program on its own. The Contract was amended by an addendum on April 8–9, 1987. Unless the context indicates otherwise, references to the Contract are to be taken as including both the Contract entered into in 1984 and the 1987 amendment. The Contract expired in May 1989, and was not renewed.

In conjunction with the formation of the Contract, W & H agreed to advance money to petitioner in order to cover the initial costs of the mailings. W & H also agreed to give to petitioner an immediate advance, or “draw”, against petitioner's projected future earnings from the Contract.

From 1984 until its bankruptcy in 1990, petitioner maintained its principal office in either Carmel or Indianapolis, Indiana. As part of the direct mail fundraising campaign petitioner conducted from 1984 through 1989 pursuant to the Contract, a...