The IRS is particularly concerned with determining whether an organization's "exempt purpose transcends the profit motive rather than the other way around." [FN1] However, the mere fact that a venture is not profitable is not determinative of whether exempt purposes exceed profit motives. Although operation at a loss and at a small scale are at least indicative of operation for a charitable or other tax-exempt purpose, the IRS will investigate whether a lack of profits is merely the result of poor business planning as opposed to charitable intent. [FN2]

Thus, in Revenue Ruling 77-4, the fact that a newspaper had been operating without a profit for several years was not sufficient to support a finding of non-commercial operation where it was otherwise indistinguishable from a for-profit business. [FN3] In contrast, the fact that a non-profit organization shows substantial accumulated profits may be enough for the IRS to deny or revoke an exemption. [FN4] The IRS will carefully consider an accumulation of profits to determine whether it is the result of commercial activity or an unpredicted rise in interest in the organization's materials. [FN5]

Rulings in which subscription fees and advertising have been found not to bar an exemption generally involve close attention to whether those revenues cover or exceed costs. While "[f]urnishing ... services at cost lacks the donative element necessary to establish ... activity as charitable," charging subscription fees below cost can support a finding of non-commercial intent. [FN6] Thus, the IRS ruled that a non-profit publisher of religious literature was tax-exempt, despite its reliance on advertising and subscriptions, where those revenues were not sufficient to support its operations:

The organization is not operated in an ordinary commercial manner. Subscriptions are procured through the cooperation and effort of individual churches and church-associated groups. Although the organization receives substantial income from the sale of subscriptions and advertising space, such revenue does not cover its costs of operations. It must depend upon contributions to make up the difference. No earnings inure to the benefit of any private shareholder or individual. [FN7]

Despite this preference for keeping revenues from advertising and subscriptions below cost, "it has been recognized that it is often necessary for an organization to earn a profit from a business activity in order to carry out its charitable purpose." [FN8] In Pulpit Resource, the Tax Court held that a modest profit made by a religious publisher from subscription fees did not disqualify it for a tax exemption, where the record reflected that the publisher had attempted but failed to raise funds in other ways and donated its profits to charity. [FN9]

Similarly, the IRS ruled that a non-profit organization operated to disseminate a health and nutrition magazine did not lose its 501(c)(3) status after its acquisition of a magazine, despite fact that the magazine generated substantial revenues through subscription fees and newsstand sales, and carried paid advertising that covered costs:

An important distinguishing feature is that [the magazine] is not operated to produce a profit. Prices are set at a rate that covers costs. [The magazine]'s expenses include costs which a commercially oriented magazine would never have. The best example is the expense incurred in conducting its frequent reader participation surveys, tabulating the results, analysis of results, and the expense of notification of readers who are at particularly high risk with regard to a specific disease or condition. To our knowledge, [the magazine at issue] is unique, and is consequently not in competition with other publications. [The publisher] does not advertise its magazine. It does accept commercial advertising, but does not accept the advertisements of products that it considers to be medically harmful. Consequently, it receives no revenue from the two most lucrative sources of advertising income - tobacco and alcohol advertising. [FN10]

It was clearly relevant to the IRS's determination that the advertising was tailored to the educational message of the organization and that advertising revenues were used to pay for extraordinary costs associated with the development of educational content.


1 Elisian Guild, Inc. v. United States, 412 F.2d 121, 124 (1st Cir. 1969).
2 Id. at 125.
3 Rev. Rul. 77-4, 1977-1 C.B. 141.
4 Incorp. Trustees of Gospel Worker Soc'y v. United States, 510 F. Supp. 374 (D.D.C. 1981), aff'd w/o opinion, 672 F.2d 894 (D.C. Cir. 1981) (publisher of nondenominational religious literature lost 501(c)(3) exemption based upon substantial accumulated profits, abrupt increase in salaries of its top personnel and fact that publisher was in direct competition with commercial publishers) .
5 See Presbyterian and Reformed Publ'g Co., 743 F.2d at 157-59 (where non-profit organization had historically required donations to meet costs, sudden accumulation of profits due to unanticipated demand for books published by organization would not cause organization to lose exempt status, particularly where accumulated profits would be used to expand exempt activities).
6 Peoples Translation Serv., 72 T.C. at 49-50. See also Pulpit Resource, 70 T.C. at 610-11 (charging subscription fees that are low, but not below cost, "suggests a commercial as opposed to a charitable purpose").
7 Rev. Rul. 68-306, 1968-1 C.B. 257.
8 Pulpit Resource, 70 T.C. at 611.
9 Id. at 611-12.
10 I.R.S. Tech. Adv. Mem. 87-51-007 (September 14, 1987).


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