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.
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
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.
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.
* * * * * * *
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,
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.
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
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.
i. To facilitate and encourage the reprographic or other reproduction by educational, library and research institutions and by other organizations and individuals of copyrighted literary works, including, without limitation, articles and other contributions to scientific, technical, medical and professional periodicals and other collective works and literary works of any other nature and in any other form.
ii. To provide procedures and facilities by which permissions or licenses to reproduce such material or portions thereof may be obtained from the copyright owners and through which license fees or other payments for such copying may be made to such copyright owners.
iii. To take such other actions which are incidental to or connected with or in advancement of the foregoing purposes, and, in general, to implement the recommendations of the Committee on the Judiciary of the United States Senate as contained in Report No. 94-473 that workable clearance and licensing procedures with respect to copyrighted material be voluntarily developed.
The certificate further provides that no part of the net earnings of petitioner shall inure to the benefit of "any member, director, officer of the Corporation or any private individual," except for reasonable compensation for services performed, and that none of the mentioned parties may share in the assets of the corporation upon dissolution. In the event of dissolution, the assets may be distributed only to a qualified section 501(c)(3) organization. The certificate also precludes petitioner from engaging in any substantial propaganda or lobbying activities, as well as participating in a political campaign.
Petitioner's bylaws, which were adopted on September 1, 1977, provide that, initially at least, the corporation will have no members, and that it will be governed by a self-perpetuating
Petitioner's officers and directors, as of October 27, 1978, were as follows:
Name Office Affiliation Michael Harris Chairman (Chief Vice President, Executive Officer) John Wiley & Sons, Inc. and Director (Publisher of technical and scientific journals) H. William Koch Vice Chairman and Director, American Director Institute of Physics David P. Waite President Formerly President of (Chief Operating Officer) Information Dynamics Corp. (systems engineering) Ben H. Weil Vice President, Senior Staff Adviser, Secretary and Director Exxon Research & Engineering Co. James Barsky Treasurer and Director President Academic Press Inc. (publisher of technical and scientific journals) Garth Hite Director Vice President, The Atlantic Monthly Press William McElroy Director Chancellor, University of California at San Diego
Barbara W. Tuchman Director Author Norman Garmezy Director Professor of Psychology, University of Minnesota
When the application for exempt status was filed in October of 1978, there was no direct relationship between petitioner and the AAP. Nevertheless, the Technical, Scientific and Medical (TSM) division of that organization had helped to provide the impetus for the establishment of a "photocopy clearance mechanism" (i.e., petitioner), and a TSM task force did the initial solicitation of funds on petitioner's behalf. Although petitioner was designed to be self-supporting once it reached a sufficient transaction level, its initial projected expenses (in the amount of some $200,000) were financed by outright contributions and to a lesser extent by license fees which petitioner was permitted to retain by permission of some publishers. A solicitation communication
I urge you to ask your company or society to help to fund the remaining development of the Copyright Clearance Center
A separate solicitation letter on petitioner's behalf, this one from the president of the AAP to the heads of unspecified publishing houses (Heads of Houses), similarly stressed the possibility of Government regulation in the absence of a clearinghouse mechanism. Such regulation, it was pointed out, could involve "minimal" royalty fees set by a Government tribunal, in contrast to the AAP-sponsored Copyright Clearance
In a form solicitation letter dated July 20, 1978, approximately 1 year after his initial letter, the AAP's president again requested contributions from AAP members to finance petitioner's startup expenses. The letter states:
The Center, an independent non-profit corporation, bears primary responsibility for this effort, and will be soliciting assistance from a wide variety of business corporations and non-profit publishers outside AAP. The AAP fundraising effort is addressed to its own members.
The administrative record does not disclose whether petitioner reached its contribution goal of $200,000, although $140,000 was raised by the end of 1977. The record is also unclear as to the amount contributed by commercial publishers; however, a June 30, 1978, list of "substantial contributors" reveals total contributions of $37,727 from four commercial publishers. In addition, the following amounts were received from other groups (as of September 30, 1978):
Scientific and professional societies (22) ......... $34,450 Commercial users (3) ............................... 13,000 University presses (7) ............................. 10,750 _______ Total .......................................... 58,200
Aside from these contributions to cover initial expenses, petitioner's operating revenues are derived solely from the charge it deducts from each license fee collected. While the fee paid by the user is determined solely by the copyright owner, the Center's charge is set at whatever level is necessary to cover its operating and administrative expenses. Users are not required to report copying which is exempted under sections 107 and 108 of title 17, U.S.C., or copying for which no license fee is charged, and the Center does not generally process such transactions because they yield no revenue to cover its expenses and the information is not readily available.
Petitioner's services are used by both commercial and not-for-profit organizations. As of June 30, 1979, there were 269 commercial and 286 not-for-profit organizations registered. Similarly, the publishers registered with petitioner are a heterogeneous group in this respect, as 45 percent are not-for-profit and 55 percent are commercial. In addition, the copying fee for approximately 11 percent of the publications is 25 cents or less, resulting in no financial return to the publisher.
In two letters in the record, Barbara Ringer, then the Register of Copyrights of the U.S. Copyright Office, expressed her views in respect of the public interests served by petitioner. A representative excerpt from one of the letters is set forth as follows:
There is little question that the existence of the Copyright Clearance Center has made it easier for libraries, educational institutions, and other users to comply with the new copyright law, while at the same time assuring authors and publishers of copyrighted materials the compensation to which they are entitled under the law for the use of the products of their creativity. The Center has had some of the problems that any new activity of this nature experiences in its initial development, but they are certainly not fundamental, and I look on them as growing pains. The CCC's fundamental purpose—to serve the public—is being realized, and the public would be hurt seriously if the CCC ceased to function. All those who depend upon the availability of materials from libraries and information centers benefit from the existence and activity of the Copyright Clearance Center. It is an operation very much in the public interest.
A donative element has not been established by your organization. Any public benefits from your activity are subordinate to your primary purpose of furthering the economic interest of publishers and copyright owners. The fact that your activities support a business purpose serving publishers and copyright owners is a strong indication that your activities are not charitable, as required by the Code and regulations.
On brief, the Government has transformed this rationale into three separate reasons for denying petitioner's request for exempt status: (1) Petitioner is not organized for any of the exempt purposes enumerated in section 501(c)(3); (2) petitioner is not operated for any of these same purposes; and (3) petitioner is organized and operated for nonexempt purposes which constitute more than an insubstantial part of its activities.
Petitioner may qualify for exemption from income taxation under sections 501(a) and 501(c)(3) only if it is organized and operated "exclusively" for one or more of the exempt purposes specified in section 501(c)(3). Sec. 1.501(c)(3)-1(a)(1), Income Tax Regs. Thus, qualification requires that petitioner meet a two-part test: (1) Its "articles of organization" must limit petitioner to one or more exempt purposes, and not authorize substantial activities not in furtherance of such purpose or purposes; and (2) it must not engage, other than in insubstantial part, in activities which do not further an exempt purpose. Sec. 1.501(c)(3)-1(b) and 1(c), Income Tax Regs. These are known, respectively, as the "organizational" and "operational" tests. In respect of the latter, "the purpose towards which an organization's activities are directed, and not the nature of the activities themselves, is ultimately dispositive of the organization's right to be classified as a section 501(c)(3) organization." B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352, 356-357 (1978). See also est of Hawaii, Inc. v. Commissioner, 71 T.C. 1067, 1078-1079 (1979), affd. 647 F.2d 170 (9th Cir. 1981).
Although an organization might be engaged in a single activity, such activity may be directed toward multiple purposes, both exempt and nonexempt. But, in the case of multiple purposes, it must be kept in mind that qualification for exemption depends upon whether the entity in question is organized and operated "exclusively" for one or more of the
the presence of a single [nonexempt] * * * purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly [exempt] * * * purposes. [Emphasis supplied.]
We are, of course, aware that in some cases the test has been restated in terms of "whether an organization's primary purpose is exempt or nonexempt." (Emphasis supplied.) See est of Hawaii, Inc. v. Commissioner, 71 T.C. 1067, 1079 (1979), affd. 647 F.2d 170 (9th Cir. 1981); cf. B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352, 357 n. 2 (1978). However, regardless of whether any real differences may be thought to exist between these two formulations,
Petitioner presses upon us with considerable vigor its contentions that it is a qualifying charitable organization, that it promotes social welfare by creating and operating channels of communication necessary to implement the copyright clause of the Constitution and the 1976 Copyrights Act and serves a governmental or quasi-governmental function, and that it promotes education and science—all exempt or charitable functions. While we do not necessarily agree with all of these contentions, certainly not in every detail, we are thoroughly satisfied that petitioner serves to a substantial degree one or more exempt purposes. The extensive and able presentation by petitioner's counsel leaves no doubt in our mind as to this conclusion. But that is not the end of the matter, for, as pointed out above, the existence of a substantial nonqualifying purpose is fatal to the claimed exemption "regardless of the number or importance of truly [exempt] * * * purposes." Better Business Bureau v. United States, supra. And, we are convinced on this record that there is here a substantial nonqualifying purpose.
We are not faced here with a truly joint undertaking of all parties—publishers, copyright owners, users, and governmental agency—concerned with proper enforcement of the copyright laws, in which efforts are focused on meeting the needs and objectives of all involved. Instead, petitioner was organized by a segment of a publishers' trade group, the Technical, Scientific, and Medical division of the AAP, and there is little persuasive evidence that petitioner's founders had interests of any substance beyond the creation of a device to protect their copyright ownership and collect license fees. Cf. North American Sequential Sweepstakes v. Commissioner, 77 T.C. 1087, 1094-1095 (1981). For example, the solicitation letters in the administrative record are almost entirely of a single dimension in their appeal for funds. The letters point out that in the absence of a clearinghouse mechanism there would be a danger of Government licensing, a system which the publishers apparently feared, because it would be compulsory and might result in "minimal royalty fees set by a government tribunal." Such possible unfavorable eventuality was contrasted with the "key element in the AAP Copyright Clearance
It is certainly not unexpected that letters soliciting contributions for petitioner would emphasize the interest of the donor in petitioner's success. Nevertheless, the letters in the record are so one-sided in language and tone that we cannot accept petitioner's contention that the letters simply "puff" the financial benefit to publishers. Aside from a passing reference in one letter to the benefits of the clearinghouse for users of copyrighted material, the focus of the solicitation campaign is clearly on "issues that bear upon the root interests of publishers." See p. 801 supra. Moreover, the administrative record is devoid of solicitation letters sent to users or other interested parties unrelated to the publishers, and we do not find any other convincing evidence suggestive of a substantial charitable purpose motivating the founders of petitioner. In short, we are satisfied on the record before us that, of three organizational purposes enumerated in petitioner's certificate of incorporation, petitioner's founders were preoccupied with the second: "To provide procedures and facilities by which permissions or licenses to reproduce such material or portions thereof may be obtained from the copyright owners and through which license fees or other payments for such copying may be made to such copyright owners." (Emphasis supplied.)
We recognize that the mere fact that a certain group derives a financial benefit from an organization's activities may not be sufficient to disqualify the organization under section 501(c)(3). For example, in Goldsboro Art League, Inc. v. Commissioner, 75 T.C. 337 (1980), the organization in question operated an art center which furnished various educational and charitable services for the community which were indisputably of an exempt character. As an incident to its overall activities, it operated two art galleries which invited artists to submit their works for exhibition and possible sale. Only those art works
In contrast, in the instant case we are unable to find such a clear separation of an indisputably charitable purpose and an incidental private benefit. Instead, it appears that the potential for a substantial private profit was the driving force behind the organization and operation of the Center. Petitioner contends that it has "other copyright functions and purposes," including maintaining and distributing its coding system and publicizing legal rights and duties under title 17, U.S.C., but these activities are merely ancillary to the goal of profitable exploitation of copyrights and minimizing infringement, and they fall far short of establishing an independent charitable purpose. Cf. Ann Arbor Dog Training Club v. Commissioner, 74 T.C. 207, 212 (1980).
We reach this conclusion notwithstanding that our review of the administrative record, as well as the legislative history of Pub. L. 94-553, leaves little doubt of the existence of a connection between sections 106 through 108 of revised title 17, U.S.C., and the operation of a clearinghouse mechanism. The success of the compromise struck in the limitation provisions of sections 107 and 108 depends in large part on compliance with section 106 for all copying which is within the area of protection afforded to the copyright holder. Moreover, both Congress and the Register of Copyrights apparently recognized the need for procedures for licensed copying on a large scale, without which enforcement of the copyright protection granted in section 106 would be at best costly and complex, and perhaps even impossible.
Petitioner relies heavily on the considerations just outlined, which persuasively establish the benefit of a clearinghouse mechanism to the effective operation of the new copyright statute. And petitioner would certainly have a strong case if the profit objective of the publishers represented only a minor
In this case, on the other hand, the financial benefits to the publishers are much more direct and substantial. In Kentucky Bar Foundation, the economic benefits to the bar members were termed "occasional" (in respect of a lawyer referral service, 78 T.C. at 926), and "intangible" (in respect of a fee arbitration plan, 78 T.C. at 929). In contrast, the financial benefits to publishers from petitioner's operations are not only frequent and concrete, but also potentially of considerable magnitude. Although the record does not include evidence of petitioner's revenues or remittances to publishers for any extended period, a 1978 draft solicitation letter discloses that September 1978 gross permission fees were $17,000, based on 10,375 copies reported. Moreover, the letter states that the latter figure was only about 2 percent of estimated monthly photocopying activity of U.S. libraries that would require permission from copyright owners. It is apparent, then, that publishers could foresee the possibility of substantial license
We are also not persuaded of charitable motives on the part of petitioner's founders by the statistics cited in respect of not-for-profit registrants, both users and publishers. The bare fact that approximately half of each group is composed of not-for-profit organizations does not compel the conclusion that there is absent a substantial nonexempt purpose. Simple subtraction leaves a remainder of half of the publishers reaping profits from fees collected from all of the users, not-for-profit as well as commercial. And this result is little changed by the 11 percent of publications for which licensing brings no immediate financial return to the publisher. This figure is relatively insignificant, and in any event, the decision to charge a minimal fee does not necessarily denote altruism, for the publishers concerned may anticipate future benefits from wider dissemination of their publications through photocopying. Moreover, the Center, itself, does not process transactions unless a fee is charged to cover its expenses.
In the context of the dominant objectives of petitioner's founders and the obviously anticipated substantial economic benefits, it is entirely irrelevant that the Register of Copyrights viewed petitioner from a different perspective, without any apparently serious or appreciable concern for the purpose that we have found to have in fact motivated the establishment of petitioner by its organizers. We have read the two
Decision will be entered for the respondent.
"we urge that those affected join together in an effort to establish a continuing understanding as to what constitutes mutually acceptable practices, and to work out means by which permissions for uses beyond fair use can be obtained easily, quickly, and at reasonable fees. Various proposals for some type of Government regulation over fair use and educational reproductions have been discussed since the hearings, but the committee believes that workable voluntary arrangements are distinctly preferable."
In addition, the committee stated in respect of unauthorized library copying (H. Rept. 83, supra at 36):
"Despite past efforts, reasonable arrangements involving a mutual understanding of what generally constitutes acceptable library practices, and providing workable clearance and licensing conditions, have not been achieved and are overdue. The committee urges all concerned to resume their efforts to reach an accommodation under which the needs of scholarship and the rights of authors would both be respected."