United States v. American College of Physicians

PETITIONER: United States
RESPONDENT: American College of Physicians
LOCATION: March Air Force Base

DOCKET NO.: 84-1737
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: United States Court of Appeals for the Federal Circuit

CITATION: 475 US 834 (1986)
ARGUED: Jan 21, 1986
DECIDED: Apr 22, 1986

Albert G. Lauber, Jr. -
John B. Huffaker -

Facts of the case

The American College of Physicians, a non-profit, tax-exempt organization, published a monthly medical journal. Within the journal were paid advertisements for products useful in the field of medicine specifically covered by the journal. Section 511(a)(1) of the Internal Revenue Code imposes a tax on "unrelated business taxable income" of tax-exempt organizations. The IRS asserted that the advertising income from the medical journal fell under this category. The American College of Physicians countered that the advertisements were "substantially related" to its tax-exempt purpose of maintaining high standards in medicine, and that they were therefore tax-exempt. When the IRS refused to give the organization a tax refund, it filed suit in United States Claims Court.

The Claims Court held that the advertisements were not substantially related to the organization's tax-exempt purpose and that the income was therefore taxable. On appeal, the Circuit Court of Appeals for the Federal Circuit reversed, ruling that the advertisements helped to educate the journal's readers and was therefore substantially related.


Were advertisements for medical products in the American College of Physicians' medical journal "substantially related" to the organization's tax-exempt purpose of maintaining high standards in medicine, and therefore tax-exempt?

Media for United States v. American College of Physicians

Audio Transcription for Oral Argument - January 21, 1986 in United States v. American College of Physicians

Warren E. Burger:

Mr. Lauber, I think you may proceed whenever you are ready.

Albert G. Lauber, Jr.:

Mr. Chief Justice, and may it please the Court:

The question here involves the taxability of profits derived by an otherwise tax-exempt professional association from the publication of commercial advertising in its monthly journal.

The subset of the tax world that we're in here is the unrelated business income for UBI tax, which Congress enacted in 1950.

Congress was spurred to enact that tax by the now-notorious acquisition by New York University of the Mueller Macaroni Company.

NYU had managed to convince a federal court of appeals that its spaghetti profits should be immune from tax, on the theory that those profits were destined to fund NYU's educational activities.

Congress enacted the UBI tax in 1950 to insure that henceforth charities would pay tax on their profits from such unrelated business ventures.

Congress's main objective in doing that was to prevent unfair competition, that is, to prevent a tax-exempt group that runs a business from getting a competitive advantage in the form of a tax subsidy over its taxpaying competitors in the marketplace.

Warren E. Burger:

Which competitors are you... give me an example.

Albert G. Lauber, Jr.:

Well, for Mueller, it was Ronzoni.

Here it's all the McGraw-Hill, all the other taxpaying publishers that publish medical journals and pay tax on their profits.

Warren E. Burger:

But they are profit-making entities, are they not?

Albert G. Lauber, Jr.:

Well, they all make profits.

All the Publishers of medical journals.

Some of the tax-exempt--

Warren E. Burger:

Is the American College of Physicans a non-profit-making institution?

Albert G. Lauber, Jr.:

--It is a non-profit making organization.

It's an educational organization under Section 501.

Warren E. Burger:

Does that distinguish them from Harpers Magazine and a lot of others?

Albert G. Lauber, Jr.:

Well, it does, but not for purposes of this particular tax because an otherwise tax-exempt charity, if it runs a business that's unrelated to its charitable purposes, has to pay tax on the profits only from that business, not from the dues and so forth, but the profits from that advertising business.

William H. Rehnquist:

I take it your earlier point was that Congress did not want to subsidize nonprofit organizations in competing against for-profit organizations in a business?

Albert G. Lauber, Jr.:

Exactly right.

Harry A. Blackmun:

Now, however, the American College of Physicians has been around a long time, hasn't it?

Albert G. Lauber, Jr.:

A lot of them have.

AMA's been around since 1848, I think.

Harry A. Blackmun:

Well, I'm not sure, but I think this one might even precede that.

And, well... okay.

Albert G. Lauber, Jr.:

It's a new tax on an old organization, put it that way.

For this tax to apply, there'd have to be three conditions met.

There must be a trade or business.