Royalty from sale of interest in scholarly journal not taxable.

• Author: O'Driscoll, David

The Service ruled that an exempt educational and literary organization's sale of a half-interest in its scholarly journal to a commercial publisher (P) did not affect the organization's exempt status under Sec. 501(c)(3), and the royalties do not constitute unrelated business taxable income (UBTI).

Facts

A is a nonprofit organization under a Sec. 501(c)(3) tax-exemption ruling since 1976. Its principal aim is to honor, preserve, study and disseminate scholarship about the life and works of the author B. Its primary activity is publishing a scholarly journal, C. Other activities include educational conferences, a newsletter, a scholarly archive and educational outreach. In the past, all of A's operations have been in writing, publishing and distributing C. Advertising revenues have been de minimis.

To more efficiently publish and distribute C, A proposes entering into an agreement to sell a one-half interest in C to P, a for-profit corporation. Under the agreement, A would receive a onetime payment for the one-half interest; A would be responsible for virtually all C's editorial functions, and P would be responsible for all printing and dissemination costs. P would pay A a 15% royalty on revenues from institutional subscriptions and a 25% royalty on nonsubscription revenue earned, including rights and permissions to copy or republish.

None of A's officers and directors has any financial interest in P, and none is related to any P officers or directors. According to A, the directors have performed due diligence in negotiating the proposed agreement with P, and believe the agreement is a fair market value (FMV) transaction.

Exempt Status

In the rifling, the IRS stated the sale and joint publication agreement is similar to a joint venture between A and P. Under Rev. Rul. 98-15, a Sec. 501(c)(3) organization may form and participate in a partnership and meet the operational test of the statute if (1) participation in the partnership furthers a charitable or educational purpose and (2) the partnership arrangement permits the exempt organization to act exclusively in furtherance of its exempt purpose and only incidentally for the benefit of the for-profit partners.

In Rev. Rul. 2004-51, the Service applied this test and approved a joint venture when a large university provided educational material to a for-profit partner that disseminated the material through interactive video technology. However, in that case the partnership activity was only an...