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January 25, 1960


The opinion of the court was delivered by: Poos, District Judge.

This is an action by plaintiff for the recovery of Internal Revenue taxes for the years 1950, 1954, 1955 and 1956 in the amount of $703.82, plus interest.

The parties have stipulated the facts.

Plaintiff was incorporated December 17, 1945, under the General Not For Profit Corporation Act of the State of Illinois, S.H.A.Ill. ch. 32, § 163a et seq. The Articles of Incorporation state that the purpose of the corporation was to procure the writing and compilation by competent persons of articles, pamphlets and books explaining and summarizing verified knowledge about the universe and its living inhabitants, and to secure publication and distribution of its literature. On March 17, 1948, the Articles were amended to authorize plaintiff taxpayer to provide funds for loans to students in secondary schools, colleges and universities, and to change the name to Science and Research Foundation, Inc.

Since the amendment taxpayer has made one student loan.

On October 13, 1952, taxpayer, in order to fulfill its primary purpose, entered into a contract with Science Research Associates, Inc., a corporation (hereinafter called Associates) organized and operated for profit and incorporated under the laws of Illinois. The latter corporation is engaged in the production, distribution and sale of educational and business publications. Under the contract, Associates agreed to print and publish a minimum of fifteen booklets in the series, to distribute these booklets through its guidance service, and to publish a minimum of five different titles during the school years, 1954-1955, 1955-1956, and 1956-1957, for taxpayer. In addition, it also agreed to assume responsibility for planning the series, determining the content of the individual booklet and their format, but was required to submit all these to the decision of plaintiff for its approval. The cost of printing, promoting and distributing the booklets was to be borne by Associates, but taxpayer was obliged to pay the salary of the series editor and the fees for consulting editor and authors' fees. Under the agreement, Associates agreed to pay taxpayer royalties on all copies of each booklet sold, after the sale of the initial 15,000 copies, of eight per cent of the net sales of the booklets sold in the United States, and four per cent of the net sales of booklets sold outside of the United States.

The above mentioned contract was modified by letter dated December 16, 1953. In this letter it was agreed, among other things, that after taxpayer had received royalties equal to its total investment in the series, Associates would discontinue the payment of royalties to plaintiff. Rather, any additional royalties accruing in favor of plaintiff would be placed in a segregated fund to be used for the publication of new booklets or for the further circulation of those already published.

The plaintiff has no proprietary, financial or other interest of any kind in Associates, and none of the officers of plaintiff have any proprietary, financial or other interest of any kind in Associates. The evidence in the record shows that the officers and directors of taxpayer corporation received no salaries. All services rendered were gratuitous. The officers went to Chicago on unrelated, paid-for business enterprises, and while there took time off to find a publisher capable of performing, both from a printing capability and a distribution experience, the function of marketing among educational institutions the booklets containing the knowledge that the founder of the corporate fund desired to be placed in educational channels.

It is apparent from the stipulation and other evidence introduced that no private profit was involved. This corporation taxpayer had no large amount of funds with which to carry out its corporate purposes. It appears from the stipulation that the total funds of the corporate taxpayer were either received from Dr. Charles Shamel, who had devoted the latter part of his life and a large part of his fortune to research in various fields of science and education, or from his estate. The total corporate funds did not exceed $33,000. The funds that it spent with Associates, $13,825.85, were expended chiefly for the salary of the series editor, consulting editors' fees, and authors' fees. The contract with Associates provided for these payments by taxpayer. The third paragraph of the contract provides: "The publisher agrees to pay the costs of printing, promoting and distributing the booklets."

It further appears from the record that the directors and officers of taxpayer are Irving E. Pearson, who is Executive Secretary of the Illinois Education Association, Dr. Claude Vick, who is Director of Professional and Public Relations for Illinois Education Association, and James E. Hanselman, who serves as an investment counsellor to the corporate taxpayer, and who is also with the brokerage firm of H.E. Edwards & Son in Springfield, Illinois.

Dr. Shamel acquired a large estate during his lifetime. He donated a 230-acre tract of land in Charles County, Maryland, to the National Education Association, and he gave a 750-acre farm in Christian County, near Taylorville, Illinois, to Blackburn College. He created the corporate taxpayer for the purpose as disclosed by its charter, viz.:

    "Procuring the writing and compilation by competent
  persons of articles, pamphlets and books in clear,
  simple and readable style, explaining and summarizing
  verified knowledge, especially the latest, about the
  universe and its living inhabitants, including man,
  which has been accumulated by scientists and the
  publication of the same with their widest possible
  distribution and sale without profit, thereby
  assisting all, especially the young to gain a true
  understanding of the wonderful universe in which they
  live, and so help each of them to live happier, more
  useful lives, and also to assist in carrying on, from
  time to time, researches on specific scientific
  subjects and useful inventions."

A study of the record discloses a purpose in view of an intense desire on his part to disseminate scientific knowledge as cheaply as possible. Wide search was made to find someone having the capability to do this. The taxpayer finally found Associates and the aforementioned contract resulted. It must be kept in mind that the corporate fund was none too large to accomplish this purpose, but accomplish it the taxpayer did. Copies of the pamphlet and booklets are in evidence. It was a part of Mr. Shamel's plan that the editor and authors were to be paid. This was carried out as disclosed by the contract. The taxpayer made application for an exemption which was denied. There is no dispute that the purpose here involved was within the purview of the Congressional intention, but the dispute is rather as to the method used to accomplish the purpose.

The question under the facts is aptly stated in the brief of the government: "whether plaintiff was entitled to an exemption under Section 501(c)(3) of the Internal Revenue Code of 1954 [26 U.S.C.A. § 501(c)(3)] as a foundation organized and operated exclusively for educational purposes when its sole activities consisted of subsidizing a commercial organization engaged in the business of publishing and selling books and pamphlets for a profit."

The position of the government is clear as stated in its brief. This position is opposed in a like clear manner by the taxpayer. The pertinent ...

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