If a tax-exempt organization is allowed to generate revenues through advertising, a separate question arises as to whether the non-profit must pay taxes on those revenues as "unrelated business taxable income."

In United States v. American College of Physicians, the Supreme Court of the United States considered this question and held that there is no per se rule that the advertising revenues of an otherwise tax-exempt publication are taxable. [FN1] Rather, advertising revenue will not be taxable if the non-profit's "business of selling advertising space is ‘substantially related' - or, ... ‘contributes importantly' - to the purposes for which [the taxpayer] enjoys an exemption from federal taxation."  [FN2]

Regarding the specific medical journal at issue, the Supreme Court affirmed the trial court's determination that "[the publisher] did not use the advertising to provide its readers a comprehensive or systematic presentation of any aspect of the goods or services publicized. Those companies willing to pay for advertising space got it; others did not ... Some ads even concerned matters that had no conceivable relationship to the [publisher's] tax-exempt purposes." [FN3] Accordingly, the Court held that the advertising was not related to the publisher's educational purposes and that the revenue derived from the advertising was taxable. [FN4]

However, the Court noted that a publisher might

control its publication of advertisements in such a way as to reflect an intention to contribute importantly to its educational functions. By coordinating the content of the advertisements with the editorial content of the issue, or by publishing only advertisements reflecting new developments in the [field], for example, perhaps [a publisher] could satisfy the stringent standards erected by Congress and the Treasury. [FN5]

This would, however, require interaction between the editorial and business sides of a news venture in a manner that could raise ethical concerns. The editorial staff would need control over advertising to ensure that the advertising directly serves the educational mission. In addition, an organization publishing news on a wide range of topics, rather than a single "field" of educational content, might find it difficult to satisfy these requirements.

RETURN TO THE CHART

---

¹ 475 U.S. 834, 846-47 (1986).
² Id. at 847.
³ Id. at 849.
⁴ Id.
⁵ Id. at 849-50.