The opinion of the court was delivered by: SIRICA
The sole issue before the Court for review in this case is whether or not plaintiff Big Mama Rag, Inc. (BMR), qualifies as a tax-exempt organization under the terms of 26 U.S.C. § 501(c)(3) (1976). Plaintiff seeks a declaration of its tax-exempt status under the provisions of 26 U.S.C. § 7428 (1976), a recently enacted statute which provides for determination of the tax-exempt status vel non of an organization by means of a declaratory judgment action. The cause is now before the Court on cross-motions for summary judgment; there are no issues of contested fact.
Although section 7428 itself does not enunciate the standard or scope of review to be employed by the district court in examining the Internal Revenue Service's (IRS) decision, analysis of the legislative history and of tax court practice in section 7428 cases indicates that the court is to review the decision de novo.
In most cases involving an initial determination of eligibility for tax exemption, however, the court need not consider any evidence other than the administrative record.
This is not to say that the court is prevented from considering additional evidence, but in doing so it must be cognizant of the specific requirement of the statute that the plaintiff have exhausted its administrative remedies. 26 U.S.C. § 7428(b)(2) (1976).
In this case both parties have stipulated that the facts are as they appear in the administrative record. In addition, although they disagree as to whether or not it is part of the administrative record, both parties agree that the Court should consider the conference memorandum prepared by the IRS staff after the September 7, 1976, hearing for plaintiff at the IRS national office. The Court finds that there is good cause for including this memorandum in the record, and therefore will consider it in reaching its decision.
Plaintiff is a feminist organization whose major efforts are directed toward producing a monthly newspaper, The Big Mama Rag, dealing with issues of concern to women. Plaintiff is organized under the Colorado nonprofit corporation act and seeks a declaration that it is a charitable and educational organization within the terms of Internal Revenue Code (IRC) § 501(c)(3), and thus that it is exempt from tax under IRS § 501(a) and, more important, that contributions to it are tax deductible under IRC § 170(a) and 170(c)(2). The IRS denied tax exempt status to BMR on October 17, 1974, and again on June 24, 1977, after plaintiff protested the earlier adverse ruling. Plaintiff has exhausted its administrative remedies.
BMR has, with two unimportant exceptions, an all volunteer staff and distributes without charge 2,100 of its 2,700 monthly copies. Administrative Record (Rec.), Tab 10 at 2. The remaining 600 are sold at competitive rates. Over 50 percent of the newspaper's income is derived from contributions, grants, and benefits, Rec., Tab 11, at 7; the remainder comes from subscriptions and advertising revenue. Although advertising is carried, it is limited to a maximum of 20 percent of total content (and presently constitutes about 10 percent of the total) and is restricted to advertising of goods and services that are of particular interest to women. Id.
The editorial stance of the newspaper is that it will print anything that will advance the cause of the women's movement; it refuses to publish material it considers damaging to that cause. Big Mama Rag, Vol. 1, No. 3, at 2, Col. 2. BMR, Inc., devotes a considerable minority of its time to promoting women's rights through workshops, seminars, and lectures of interest to women. Rec., Tab 10, at 4.
In order to qualify for tax-exempt status, an organization must be organized exclusively for one or more of the following purposes: religious, charitable, scientific, testing for public safety, literary, educational, or to foster national or international sports competition, or for prevention of cruelty to children or animals. I.R.C. § 501(c)(3); Treas.Reg. § 1.501(c)(3)-1(d)(1). In addition, it must serve a public, rather than a private, interest. The term "exclusively" in the statute and regulations has been interpreted by the Supreme Court to mean that the organization has as its "primary" activity the performance of exempt functions. Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279, 66 S. Ct. 112, 90 L. Ed. 67 (1945); accord Consumer Credit Counseling Service of Alabama, Inc. v. United States, C.A. No. 78-0081, 78-2 U.S.Tax Cas. (CCH) P 9660 (D.D.C. August 18, 1978); Treas.Reg. § 1.501(c) (3)-1(c)(1). BMR, Inc., has sought tax-exempt status primarily as an educational organization, although it has also argued that it may be considered a charitable organization as well. Rec., Tab 11, at 2.
The government advances two principal grounds for refusing to issue plaintiff a determination of tax-exempt status: first, that the content of the newspaper is not educational, nor is the material prepared in a manner generally accepted as educational in character; and, second, that the manner in which the newspaper is operated and distributed cannot be distinguished from ordinary commercial publishing practices.
In addition to responding to these arguments on the merits, plaintiff has argued that if BMR is found not to meet the regulations' definition of "charitable or educational," then the regulations must be struck down as offensive to the first amendment to the United States Constitution. Plaintiff contends that allowing the IRS such latitude in determining what organization should be granted and what organization denied tax-exempt status confers on it the power to regulate the content of speech, and that this is impermissible under the first amendment.
Before reaching the government's argument that the content of the newspaper is not educational, the Court will note briefly that it finds the contention that BMR is operated and distributed in a manner indistinguishable from ordinary commercial publishing practices to be wholly without merit. The administrative record clearly establishes: (1) that BMR is not designed or intended to make a profit, Rec., Tab 11, at 10, although it does hope to become self-supporting; (2) that it is currently operating with a nearly all-volunteer staff, Rec., Tab 10, at 2; (3) that 2,100 of the 2,700 copies of the newspaper distributed per issue are distributed free, Rec., Tab 10, at 2; (4) that BMR, Inc., devotes a substantial minority of its time to promoting women's rights through workshops, seminars, and lectures of interest to women, Rec., Tab 10, at 4; (5) that it operates a free library, Rec., Tab 10, at 3; (6) and that over 50 percent of its income comes from contributions, grants, and benefits, Rec., Tab 11, at 7. In ...