(Quick note: "Although the G.C.M. discussed below cannot be used or cited as precedent, it illustrates the type of analysis employed in applying the Rev. Rul. 67-4 standard to distinguish exempt publishing activities.")
In G.C.M. 38845 a for profit newspaper had been publishing a magazine. The magazine had first been published in 1850 and had come to be generally recognized as a magazine of literary distinction. The magazine was not profitable and the for profit corporation was about to cease its publication. An exempt private foundation purchased the magazine from the for profit corporation. The foundation established an independent nonprofit corporation to publish the magazine. The publishing foundation sought exemption under IRC 501(c)(3).
The publishing foundation planned to take a number of steps designed to assure that the magazine would maintain high standards of literary quality. Its board of directors consisted of independent persons selected for their acknowledged stature in journalism and the literary arts. The foundation planned to form an advisory board of distinguished writers to assist its board of directors in promoting literary excellence. The foundation planned to expand the magazine's editorial content to include articles on linguistics, the English language, and literary traditions. It also planned to conduct a writing competition for young people and to provide summer internships for college students. In addition, the foundation planned to publish public service pamphlets for distribution through libraries and schools and expected to conduct public seminars at colleges and universities to educate students in literary techniques and journalism methods.
The publishing foundation received its financial support from magazine sales, subscriptions, and advertising; contributions from two private foundations in amounts equal to the magazine's operating losses up to a specified maximum amount; and gross investment income which constituted less than one-third of its financial support. For the first year of its operations the publishing foundation had a substantial loss. The prospect of future profits was considered to be remote so that it would continue to be dependent on contributions.
Chief Counsel analyzed the organization's activities in terms of the four criteria contained in Rev. Rul. 67-4, supra, as follows.
A. The first criterion, that the content of the publications be educational, was satisfied because the content of the magazine was educational in that it would educate the public by adding to the sum total of knowledge on standards of literary excellence and on substantive issues of public policy, the arts and the humanities. The foundation would serve educational goals both through publication of the magazine and its ancillary activities. The foundation instructed the public in methods of obtaining knowledge through clear expression and analysis as well as by imparting substantive knowledge on the arts and humanities.
B. The second criterion, that the publication be prepared in accordance with methods traditionally accepted as educational in character, was also found satisfied. Of importance was that selection of articles would be chosen for literary merit rather than commercial appeal; the focus of articles would be on serious fiction, poetry and issues of public policy rather than on articles of popular mass appeal; many articles would be written by leading authors, journalists, professors of English and educators; and the foundation would be encouraging new writers through its ancillary activities. (In this context, the methodology criteria developed in Rev. Proc. 86-43, supra, would also be satisfied since the activities of this publishing foundation show that it seeks to promote writing that would develop facts that would materially aid a reader in a learning process or in understanding a viewpoint being advocated.)
C. The third criterion, that the distribution of the publication be necessary to achieve the organization's purpose, was found present since without publication and distribution of the magazine the foundation could not achieve its stated purpose of promoting literary excellence nor could it function as a forum for articles and writers unlikely to be published in profit-oriented magazines. The foundation was distinguished from the foreign language magazine described in Rev. Rul. 60-351, supra, which publication could not be shown as necessary to the achievement of any charitable or educational purpose, but rather was published and sold to the general public as a business enterprise.
D. Chief Counsel, in analyzing the fourth criterion, summarized the factors which the Service and the courts have relied on in deciding whether an organization's publishing activities are "sufficiently distinguishable from ordinary commercial practices so as to be conducted primarily as a means of carrying out some exempt purpose" as follows:
(1) Conducting as its sole activity publishing activities using standard commercial techniques which generate ongoing profits.
(2) Pricing its materials "competitively" with other commercial publications or to return a profit.
(3) Conducting an enterprise in a manner in which all participants expect to receive a monetary return.
(4) Publishing its materials almost exclusively for sale, with only a de minimis amount of material donated to charity.
(5) Creating or accumulating large profits and accumulating profits from sales activities which are greatly in excess of the amounts expended for educational purposes.
Chief Counsel further noted that the primary factor relied on to demonstrate an exempt purpose is that the foundation distributes its literature without regard to the realization of net profits. Thus, in Rev. Rul. 67-4 the organization's method of distributing its medical journal, by charging amounts for the publication which allowed only recovery of a portion of the costs, was the primary factor relied upon in distinguishing that organization's activities from ordinary commercial practices.
Chief Counsel noted that the magazine under consideration contained a much lower percentage of space devoted to advertising than was common among for profit magazines. In fact, the percentage of advertising was lower than that contained in many nonprofit publications. Further, the magazine contained no articles at all on certain subjects of popular appeal such as sports, fashion, food, drink, popular music and movies. The foundation did not engage in competitive pricing, did not emphasize monetary return, and was not accumulating profits—rather, it was operating at a loss.
After summarizing the operational characteristics of the publication activities, Chief Counsel completed the analysis by showing how other facts in the case related to attainment of the magazine's overall objective of promoting literary quality. The independent governing body, the advisory board, and the activities undertaken in association with colleges and universities were recognized as evidence of an intent to operate in a manner different from the normal operations of a commercial publishing enterprise. Chief Counsel concluded as follows:
The [foundation's] scholarly selection of topics, their treatment and the magazine's low percentage of advertising content lead to the conclusion that [the foundation's] publishing procedures are not those of ordinary commercial publishers. Rather, the [foundation] has provided sufficient evidence to establish that its purpose in publishing [the] magazine is to further section 501(c)(3) literary and educational purposes by promoting literary excellence for the educational benefit of the public. In short, the [foundation] has established its right to recognition of exemption by satisfying the test of Rev. Rul. 67-4.