The opinion of the court was delivered by: Emmet G. Sullivan United States District Judge
MEMORANDUM OPINION AND ORDER
Plaintiff in this case, Airlie Foundation ("Airlie")seeks a declaratory judgment against defendant, the Internal Revenue Service ("IRS") under section 7428 of the Internal Revenue Code of 1986 (26 U.S.C. § 7428) as amended (the"Code" or"IRC"), that it (i)is an organization described in sections 170(c) and 501(c)(3) of the Code; (ii) is not a private foundation pursuant to section 509(a)(2) of the Code; and (iii) is exempt from federal income tax beginning January 1, 1995.
Plaintiff argues that the IRS applied"an unprecedented and poorly reasoned per se test" in determining that it did not qualify for tax-exempt status because it did not provide conference services for governmental and charitable patrons at fees"substantially below its costs." Pl.'s Mot. at 2. Plaintiff contends that, had the IRS applied the correct legal standard and considered"all of the relevant facts and circumstances," it "would have been compelled to recognize Airlie as exempt." Id.
Defendant maintains that it rightly denied plaintiff's application for recognition as a tax-exempt organization. It argues that, while plaintiff may conduct a limited number of charitable and educational activities,"those... are incidental to [its] primary activity, which is the operation of a conference center in a manner consistent with that of a commercial business." Def.'s Opp'n and Cross. Mot. ("Def.'s Mot") at 12.
Pending before the Court are plaintiff's and defendant's cross-motions for Summary Judgment.
Plaintiff is a Virginia non-stock corporation created in 1960 (AR 1, Form 1023, Ex. 1, p. S1) and recognized by the IRS as a tax exempt organization in 1963. It was organized to accomplish the following purposes:
(a) To study, promote, encourage and foster knowledge, understanding and appreciation of (i) the interrelationships which exist in the physical and social sciences, and (ii) the significance of unifying and integrating the knowledge gained about the physical and social sciences, in attaining for the people in the United States richer, happier and fuller lives; and to disseminate knowledge and basic factual material relating to the foregoing so that adults in the United States may healthily exercuse their mental faculties, better understand the society in which they live, and live harmoniously in an changing environment [and]
(b) In the field of adult education, to associate together and promote cooperation among administrators, scholars, scientific and professional groups, and others to engage in research, gather basic factual information, and publish and otherwise disseminate in any and all forms the results thereof; to conduct an educational conference center for groups and organizations that have an educational purpose and to hold, initiate, sponsor, aid in managing and directing, and to assist cooperative groups or organizations in holding, [sic] meetings, assemblies, seminars and conferences of a local, state, or national character; and by these and other means to arrive at and disseminate impartial and authoritative findings on questions of national and international importance, and thus to stimulate the growth of informed opinion with a view to preserving and strengthening the democratic processes and principles of freedom.
Plaintiff carries out its mission principally by organizing, hosting, conducting, and sponsoring educational conferences on its facilities. Pl.'s Proposed Findings of Fact ("PPF") ¶4. It has played a role in the development of programs in areas as diverse as civil and human rights, international relations, public policy, the environment, medical education, mental health and disability. Id. ¶5. Plaintiff sponsors events such as lectures, concerts, and art shows free of charge and provides meeting space for non-profit organizations, overnight accommodations for participants of its cultural programs, and public use of its grounds for large-scale charitable events. Id. at ¶¶ 14-16. Besides operating the conference center, plaintiff provides in-kind and administrative support for environmental studies conducted on its facilities by the International Academy for Preventative Medicine, Inc. Plaintiff receives a monthly fee of $12,500 for its services. Defs.' Statement of Facts ("SOF") ¶ 13.
On average, plaintiff hosts about 600 groups per year. It derives approximately 85 percent of its operating revenue from fees paid by these clients and approximately eight percent from its endowment. Pl.'s PFF ¶16. An average of 20 percent of Airlie's conference events are for government clients, 50 percent from nonprofit and/or educational clients, and 30-40 percent for"other" users.*fn1 Pl.'s PFF ¶17; Def.'s SOF ¶17. At most, ten percent of plaintiff's clients use its facility for private events and another ten percent at most represent private commercial clients pursuing their private interests. Pl.'s PFF ¶17.
Plaintiff maintains that"[t]he decision to serve principally the governmental and nonprofit sector rather than the commercial for- profit sector reflects a deliberate choice by the Foundation's Board at its creation as the most effective way to accomplish its educational and charitable purposes." Id. ¶24. According to industry data from 1999, plaintiff's average daily rate was almost twenty percent lower than the average rates for nearby conference centers. Id. ¶25. The expected operating pre tax profit margin for a commercial conference center should be approximately twenty percent of gross revenues. Plaintiff's actual operations during the years 1995-1998 reflected a pre-tax profit margin of barely four percent after excluding grants, investment income and unusual items."In other words, the Foundation uses the investment income from its endowment to subsidize its conference and its other public benefit activities." Id. ¶27.
In response to an inquiry by IRS, plaintiff provided a daily list of all patrons that used its facilities during 1999. The data revealed that, of the 651 events in 1999, plaintiff fully subsidized 4.75 percent and partially subsidized another 12.5 percent. Pl.'s PFF. ¶29. Subsidies varied depending on the patrons, but included discounts of ten percent, nearly 50 percent and 80 percent. Id. ¶30.
Plaintiff has traditionally operated on a break-even basis. While it did earn net income and pay more than $1.3 million in federal and state income taxes, its investment income during those years exceeded its ...