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 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,
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
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 ...