T.C. Memo. 2011-20
UNITED STATES TAX COURT
ASMARK INSTITUTE, INCORPORATED, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 30238-07X. Filed January 24, 2011.
E. Michael Paturis, for petitioner.
William I. Miller, for respondent.
MEMORANDUM OPINION
MORRISON, Judge: Pursuant to section 7428(a),1 petitioner,
Asmark Institute, Inc., seeks a declaratory judgment that it
meets the requirements of section 501(c)(3) and is therefore
exempt from federal income taxation. It exhausted its
1
All section references are to the Internal Revenue Code of
1986, as amended.
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administrative remedies as required by section 7428(b)(2) and
Rule 210(c)(4).2 It received a final adverse determination
letter dated November 8, 2007. It invoked the jurisdiction of
this Court by a petition filed December 31, 2007. This case was
submitted for decision on the stipulated “Administrative record”
as defined in Rule 210(b)(12).
Background
The petitioner, Asmark Institute, Inc., will be referred to
as Asmark Institute. Asmark Institute had a for-profit
predecessor. We refer to this predecessor by its full name,
Asmark, Inc. The respondent will be referred to here as the IRS.
In briefing this case after trial, Asmark Institute failed to
propose findings of fact regarding most of the factual
disagreements that it had with the IRS.
1. Asmark, Inc.: The Predecessor of Asmark Institute
Asmark, Inc., a for-profit company, began in 1990 with 25
clients. By February 15, 2005, Asmark, Inc., provided risk
management services to 985 farm retailers.3 It developed
expertise in understanding government regulations that affect
agricultural businesses. It became a resource center for
agricultural businesses by providing educational material,
2
All Rule references are to the Tax Court Rules of Practice
and Procedure.
3
By “farm retailers” we mean businesses that sell goods and
services mostly to farms.
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training programs, and on-site inspections. It also created
computer programs that allowed businesses to file timely reports
with government agencies. Its mission was to help agricultural
businesses comply with government regulations. Its owners and
their ownership shares were Allen C. Summers, Jr. (37.5 percent),
his wife, Susan Summers (37.5 percent), and Johnnie R. Lawrence
(25 percent). Allen C. Summers served as president. We infer
that there were only two other officers, Susan Summers and
Johnnie R. Lawrence.
On its Form 1120S, U.S. Income Tax Return for an S
Corporation, for the calendar year 2005, Asmark, Inc., reported
ordinary business income of $472,378. It also reported that
“Compensation of officers” was $112,200. In the calendar year
2005, Asmark, Inc., paid salaries to its “officers” and
“directors” of $112,200. On its 2005 Form 1120S, Asmark, Inc.,
reported that “Salaries and wages” were $391,368. In the
calendar year 2005, Asmark, Inc. paid “salaries” and “wages” of
$391,368. During 2005, Asmark, Inc., paid “total salaries” of
$503,568 (which is the sum of $112,200 and $391,368).
Landmark Technologies, L.L.C., was a for-profit company that
owned properties used in the operations of Asmark, Inc. The
owners of Landmark Technologies, L.L.C., were Allen C. Summers,
Susan Summers, and Johnnie R. Lawrence.
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Asmark, Inc., recognized that it would greatly improve its
market share if it could gain access to the farm retailers who
were members of trade associations. Yet it was reluctant to
cooperate with the associations because it feared that it would
lose control of its trade secrets. By converting to a nonprofit
corporation, it believed that it would no longer be obligated to
protect its trade secrets and it could therefore cooperate with
the associations.
2. Organization of Asmark Institute
On March 22, 2005, Asmark Institute was incorporated as a
nonstock, nonprofit corporation under the laws of Kentucky.
Asmark Institute had its principal office in Owensboro, Kentucky.
Article II of its articles of incorporation, dated March 14,
2005, provides that Asmark Institute “is organized exclusively
for the purpose of serving as a resource center for compliance
materials and services for the agribusiness industry”. Article
VI provides in part:
Not withstanding [sic] any other provision of these
articles, the corporation shall not carry on any other
activities not permitted to be carried on:
a. By a corporation exempt from federal income tax
under Section 501(c)(3) of the Internal Revenue Code,
or corresponding section of any future federal tax
code, or
* * * * * * *
Article VII states in part:
The Corporation is irrevocable [sic] dedicated to and
is organized and operated exclusively for charitable
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purposes within the section of 501(c)(3) of the
Internal Revenue Code, or corresponding section of any
future code.
According to its bylaws, the purpose of Asmark Institute is
to:
(1) Serve as a national resource center for regulatory
compliance assistance to agricultural retailers and
related agricultural businesses, and trade
associations;
(2) Promote knowledge of regulatory compliance
requirements;
(3) Serve as the national coordinating institution for
creation, development and administration of compliance-
related aids, materials, products, tools or other
solutions pertinent to the needs of agricultural
retailers and related businesses;
(4) Advance industry-standards and conformity with
compliance as a means of benefitting the public health,
safety, welfare and environment;
(5) Promote industry-standard educational opportunities
and materials as a means of facilitating compliance and
safer work environments;
(6) Cooperate with departments and agencies of
federal, state and local governments in achieving
optimum compatibility between regulatory compliance
requirements and the efforts of industry and commerce;
(7) Promote cooperation and support between the state
and national trade associations and/or organizations
directly related to the interests of agricultural
retailers and related businesses;
(8) Communicate and cooperate with other industries and
organizations on issues of mutual interest; and
(9) Establish high standards of business ethics and
professionalism.
Asmark Institute was not affiliated with a governmental agency.
In June 2005, Asmark Institute filed an application asking
the IRS to recognize that it was exempt from tax under section
501(c)(3). At the time that it filed the application, Asmark
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Institute had not yet begun operations and did not have any
assets.
Asmark, Inc., transferred all of its assets, worth $205,000
and consisting of supplies, furniture, and computers, to Asmark
Institute. Asmark Institute did not assume the liabilities of
Asmark, Inc. The Asmark website announced that “On September 1,
2005, Asmark, Inc., officially became the Asmark Institute.” On
December 31, 2005, Asmark Institute entered into a lease
agreement with Landmark Technologies, L.L.C. This lease was
similar to the lease between Landmark Technologies, L.L.C., and
Asmark Institute’s predecessor, Asmark, Inc. The lease entitled
Asmark Institute to use a 16,164-square-foot office building
situated on a 3.22-acre lot. The building was used by Asmark
Institute as offices, a training facility, and warehouse space.
The rent was $120,000 per year.
On March 20, 2006, Asmark, Inc., was dissolved. The
dissolution did not occur earlier because its owners had been
waiting for the IRS to act on Asmark Institute’s application for
recognition of exempt status. When the IRS asked for more
information instead of reaching a decision, the owners decided to
dissolve the corporation.
3. Asmark Institute’s Employees
Asmark Institute had the same employees as its predecessor,
Asmark, Inc. Allen C. Summers served as president. Susan
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Summers served as secretary/treasurer. Johnnie R. Lawrence
served as vice president. Asmark’s board of directors consisted
of Allen C. Summers, representatives of its members (except
governments and educational institutions), and representatives of
the fertilizer and agrichemical industry.
Asmark Institute projected that its total salary expense
would be:
Asmark, Inc.
Projected Salaries
Position 2006 2007 2008
Officers/directors $533,000 $533,000 $533,000
Other salaries 270,000 280,000 290,000
Total salaries 803,000 813,000 823,000
Of the $533,000 projected to be the salaries for “Officers/
Directors”, $187,500 would be paid to Allen C. Summers, $187,500
would be paid to Susan Summers, and $157,500 would be paid to
Johnnie R. Lawrence.
4. Revenues
Asmark Institute believed that all of its income would be
derived from fees for the services it would render. It thought
that its fees for 2006, 2007, and 2008 would be $1,900,000, $2
million and $2,240,000, respectively. Asmark Institute did not
intend to collect any income from grants, donations, or
fundraising operations.
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5. Services Generally
The general function of Asmark Institute was to help
agricultural retailers comply with OSHA, EPA, DOT, and DHS
regulatory requirements. There were 75 separate regulatory
requirements for which Asmark Institute provided assistance.
Asmark Institute continued to provide the same regulatory
compliance services as Asmark, Inc. Its customer base was larger
than that of Asmark, Inc., because the trade associations
promoted its services to their members.
6. Membership
Asmark Institute had five categories of membership, as
follows:
(1) Charter member. A Charter member was an entity or
individual that had contracted to purchase services from Asmark,
Inc., or Asmark Institute before the date that Asmark Institute
began operations. Apparently, this date was considered to be
July 21, 2005. Asmark Institute’s website stated: “Clients of
Asmark on record on July 21, 2005 are considered charter members
of the new Asmark Institute.”
(2) Regular member. A Regular member was any member that
was admitted to Asmark Institute after the date Asmark Institute
was created and that did not fit into the other categories of
membership.
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(3) Association member. An Association member was “any
entity or individual of a state or national industry or trade
association or organization” who was not otherwise eligible for
membership.
(4) Government member. A Government member was a
department, authority, or agency of a federal, state, or local
government.
(5) Educational member. An Educational member was a
domestic not-for-profit institution of higher learning that was
not otherwise eligible for membership.
The benefits received by each class of member, and the fees
paid by each, were as follows:
Educational and Government members. No fees were assessed.
The benefits to such members included basic communications such
as a newsletter, a service called “safety matters”, Ask ERICA,
and updates. Ask ERICA is a service that is described later in
this opinion. We find that the benefits provided to the
Educational and Government members were relatively insignificant.
Association members. No fees were assessed. The benefits
offered included basic communications and the SABRS service
package (a package of services described below).
Regular and Charter Members. The fees for Regular and
Charter members were set forth in a “Price List & Distribution
Schedule”. The Price List & Distribution Schedule set forth the
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following service packages and prices for Regular and Charter
members:
Price List & Distribution Schedule
Service Package Price per Facility
Compass package $1,480 (for client with 1-99
locations)
Lighthouse package (no annual $2,180 (for client with 1-99
travel by state association) locations)
Lighthouse package (requiring $2,480 (for client with 1-99
annual travel by state locations)
association)
As of March 13, 2006, Asmark Institute had 976 Charter
members, 102 Regular members, 9 Association members, no
Government members, and no Educational members.4 It anticipated
that the number of Charter members would be unchanged, the number
of Regular members would increase to 1,198, the number of
Government members would increase to 150, and the number of
Educational members would increase to 250.
7. The SABRS Service Package, the Compass Service Package, and
the Lighthouse Package
Asmark Institute sold some of its services in bundled
packages. There were three types of service packages, described
by Asmark Institute’s marketing brochures as:
• “SABRSTM--Cut through the regulatory red tape!”
4
The parties agree that Asmark Institute had 976 Charter
members. Its website lists only 211 Charter members. The
parties do not explain the discrepancy.
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• “CompassTM--Helping you find your way!”
• “LighthouseTM--Navigate the regulations!”
We refer to the three service packages as the SABRS package, the
Compass package, and the Lighthouse package.
Of the three service packages, the one with the lowest level
of service was the SABRS package. It appears that if a trade
association was a member of Asmark Institute, the trade
association received the SABRS service package, and its members
received indirect benefits through the SABRS service package.
The trade association was not charged a fee. The trade
association’s members were not charged either, unless they
purchased an additional service. Asmark Institute provided
partial access to its computer system to the trade association,
which could then use the computer system to provide services to
the trade association’s members. The trade association and its
members could also place orders for materials for a fee from
Asmark Institute. The trade association’s members could also
order specialized services from Asmark Institute, which would
split the fee for the services with the trade association.
The next type of service package was the Compass package.
It appears that the Compass package was offered to any farm
retailer who chose the package. All retailers who chose the
package were considered Regular or Charter members of Asmark
Institute. If the retailer was a member of a trade association
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that itself was an Association member, then the trade association
participated in the delivery of services to the retailer and
shared in the revenue from the services.
Asmark Institute did not charge the Association member for
the Compass package. It charged the Regular or Charter member
who chose this package $1,480 per facility per year. Of this
$1,480 fee, $280 was shared with the Association member to which
the Regular or Charter member belonged. Asmark Institute
provided training to the trade association, which in turn
provided services to the trade association’s members. If the
retailer commissioned specialized work or products, Asmark
Institute split the fee with the trade association.
The next type of service package was the Lighthouse package.
It appears that the Lighthouse package was a service offered to
any farm retailer who chose the package. All retailers who chose
the package were considered Regular or Charter members of Asmark
Institute. If the retailer was a member of a trade association
that itself was an Association member, then that trade
association participated in the delivery of services to the
retailer and shared in the revenue from the services.
Asmark Institute did not charge the Association members for
the Lighthouse service package. It charged its Regular or
Charter members who chose the package $2,480 per facility per
year. Of this charge, $880 was shared with the Association
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member to which the Charter member or Regular member belonged.
Alternatively, if no on-site visit was required, the charge to
the Regular or Charter member was $2,180 per manned facility, and
Asmark Institute paid $580 of the fee to the trade association.
Work duties were split between Asmark Institute and the trade
association. A substantial portion of the work was done by
Asmark Institute. The Lighthouse package was roughly comparable
to the services that Asmark, Inc., had provided to its clients.
8. Specific Services.
On a list that it gave the IRS of its major activities and
benefits, Asmark Institute identified six particular services:
SVA, Ask ERICA, NTIP, myRMP, IURA, and SPCC. We describe each of
these services, the fee for each service, and whether the service
was offered through the three service packages.
a. Security Vulnerability Assessment (SVA)
Asmark Institute offered a service called the security
vulnerability assessment, or SVA. What follows is a description
of the SVA. Many farm retailers sell ammonium nitrate and
anhydrous ammonia for use as fertilizer. Ammonium nitrate can
also be used to make bombs. Anhydrous ammonia can also be used
to make illegal drugs. The SVA identified the ways in which a
farm retailer could prevent terrorists and criminals from
obtaining these chemicals. SVA was used by retailers to satisfy
requirements imposed by the Department of Homeland Security.
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The SVA service was offered through all three service
packages. For retailers who were not Regular or Charter members
but who belonged to an association that was an Association
member, the SVA service was provided through the SABRS service
package. For these retailers, the fee for the SVA program was
$75 to $300. Asmark Institute would share 40 percent of the fee
with the association. The farm retailer could not directly
access the Asmark Institute website. For farm retailers who had
enrolled in the Compass service package, the extra fee for the
SVA service was $27.50. None of the fee was apparently shared
with the retailer’s association. For farm retailers who had
enrolled in the Lighthouse package, the fee for the SVA service
was $27.50. Apparently, none of the fee was shared with the
association. The relative duties of the retailer, the
association, and Asmark Institute depended on the type of service
package.
Some farm retailers were not Regular or Charter members and
were not members of an association that was a member of Asmark
Institute. Such retailers did not participate in any of the
three service packages. However, they were eligible to purchase
the SVA service.
b. Nurse Tank Inspection Program (NTIP)
Asmark Institute offered a service called the Nurse Tank
Inspection Program, or NTIP. A nurse tank is a steel tank used
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to transport anhydrous ammonia, pressurized so that it is in
liquid form. See 49 C.F.R. sec. 173.315(m) (2009) (defining
nurse tank). Federal regulations require an identification plate
to be attached to each nurse tank in operation. Id. sec.
173.315(m)(1). Not infrequently, an identification plate falls
off a nurse tank. In 2004, the Department of Transportation
created an alternative regulatory scheme that allowed nurse tanks
to operate after losing their identification plates. 75 Fed.
Reg. 42367 (July 21, 2010) (describing special permit SP 13554,
in effect since 2004). Asmark Institute administered a national
registry of nurse tanks governed by this alternative regulatory
scheme. This registry is referred to as the Nurse Tank
Inspection Program. In order to qualify for the alternative
regulatory scheme, a retailer had to participate in the NTIP
program and pay $25. The alternative regulatory scheme came
about through the lobbying efforts of the Fertilizer Institute,
an organization which then shared with Asmark Institute a role in
administering the NTIP.
The NTIP program was offered through all three service
packages. Some farm retailers received the NTIP service through
the SABRS service package. These retailers received the NTIP
service at “cost”. We infer from the record that the cost was
$25. For farm retailers who received the NTIP service through
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the Compass or Lighthouse service package, the NTIP service was
also offered at “cost”. Some farm retailers were not Regular or
Charter members and were not members of an association that was
itself a member of Asmark Institute. Such retailers were
eligible to purchase NTIP.
The NTIP program was not offered to the clients of Asmark,
Inc. We infer, therefore, that NTIP was a new program started by
Asmark Institute.
c. myRMP
Another service offered by Asmark Institute was myRMP, a
web-based application for the preparation and maintenance of a
risk management plan. A risk management plan is used by a
facility that stores anhydrous ammonia to take steps to prevent
the uncontrolled release of the gas. Such releases are dangerous
to people and destructive of the ozone layer. Another purpose
of the myRMP program was, in the words of Asmark Institute, to
“address uneven enforcement by the various regions of EPA”. The
price of myRMP and the type of service depended upon the service
package. Some farm retailers received the myRMP service through
the SABRS service package. They were retailers who were members
of Association members of Asmark Institute but who were not
Regular or Charter members. For these retailers, the fee for the
myRMP service was $500. Of the $500 fee, the association
received 30 percent. The retailer did not have access to the
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Asmark Institute website directly. For farm retailers who had
enrolled in the Compass service package, the price of the myRMP
service was $300, with the association receiving 30 percent of
the price. The retailer had access to the website. For
retailers who had enrolled in the Lighthouse package, the fee for
the myRMP service was $88. Apparently, none of this fee was
shared with the association. The retailer had access to the
website.
Some farm retailers were not Regular or Charter members and
were not members of an association that was itself a member of
Asmark Institute. Such retailers were eligible to purchase
myRMP.
In 2007, the EPA awarded a $20,000 annual grant to Asmark
Institute for its work on the myRMP program.
The myRMP program was not offered to the clients of Asmark,
Inc. We infer, therefore, that myRMP was a new program started
by Asmark Institute.
d. Inventory Update Rule Amendment (IURA) Program
The Inventory Update Rule Amendment program, or IURA, was a
web-based tool for making reports to the EPA regarding the
movement of imported fertilizers within the United States. The
record does not indicate that IURA was offered through any of the
three service packages (i.e. SABRS, Compass, Lighthouse). The
IURA service required the payment of a fee.
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The IURA program was not offered to the clients of Asmark,
Inc. We infer, therefore, that the IURA program was a new
program started by Asmark Institute.
e. SPCC
Asmark Institute offered SPCC, a web-based tool for
preparing “Spill Prevention Control and Countermeasure” plans for
farm centers. SPCC was not offered through the SABRS service
package. SPCC was not offered through the Compass service
package. SPCC was offered through the Lighthouse service package
for a fee. The record does not reveal how or under what
circumstances the SPCC was offered to retailers other than
through the Lighthouse program.
The SPCC program was not offered to the clients of Asmark,
Inc. We infer, therefore, that SPCC was a new service offered by
Asmark Institute.
f. Ask ERICA
Asmark Institute offered a service called “Ask ERICA”. Ask
ERICA was a repository of agency interpretations from DOT, EPA,
and OSHA that were important to agribusiness. “ERICA” is the
acronym for Electronic Repository of Interpretations Critical to
Agriculture.
The Ask ERICA service was provided for no charge to the
Association members. It was also provided at no additional
charge to Regular and Charter members. The record is scanty on
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the terms by which Ask ERICA was provided to retailers who were
not Regular and Charter members. Asmark Institute made a vague
representation to the IRS that it “administers and/or acts as a
resource” for Ask ERICA, and that Ask ERICA was “available to the
entire industry (nonmembers and members)”. This representation
is ambiguous. Thus, the record does not reveal whether Ask ERICA
was offered to nonmembers for a fee.
The Ask Erica program was not offered to the clients of
Asmark, Inc. We infer, therefore, that Ask Erica was a new
program started by Asmark Institute.
9. Services to Section 501(c)(3) Organizations.
The IRS contends that there is no evidence in the record
that any of Asmark Institute’s clients are section 501(c)(3)
organizations. Asmark Institute objects to such a finding of
fact. It claims that a document in the record, “List of Federal,
State and County Government Entities Served by the Asmark
Institute”, demonstrates that it served section 501(c)(3)
organizations. But the document to which Asmark Institute refers
appears to be a list of governmental units, not section 501(c)(3)
organizations. We find that there is no evidence in the record
that any of Asmark Institute’s clients are section 501(c)(3)
organizations.
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10. Procedural History
As noted, Asmark Institute applied to the IRS for
recognition of tax-exempt status in June 2005. The IRS Tax
Exempt and Government Entities (TEGE) Division requested
additional information from Asmark Institute on March 1, 2006.
Asmark Institute supplied additional information on March 20,
2006. In November 2006, the IRS TEGE Division denied Asmark
Institute’s request for recognition of exempt status. In January
2007, Asmark Institute appealed the denial to the IRS Appeals
Office. To support its appeal, Asmark Institute sent the IRS
Appeals Office 11 additional documents. In November 2007, the
IRS Appeals Office determined that Asmark Institute was not
exempt under section 501(c)(3). Asmark Institute filed a
petition for declaratory judgment with the Tax Court. Asmark
Institute and the IRS stipulated that the administrative record
comprised 84 exhibits. At the request of the parties, the case
was submitted without trial under Rule 122.
Discussion
Section 7428(a) confers jurisdiction on the Tax Court to
“make a declaration” with respect to the “initial qualification”
of an organization seeking tax-exempt status under section
501(c)(3). Rule 217(a) provides that such an action for
declaratory judgment shall be resolved on the basis of the
administrative record. Furthermore, Rule 217(b)(1) provides that
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“the Court’s decision will be based upon the assumption that the
facts as represented in the administrative record as so
stipulated or so certified are true and upon any additional facts
as found by the Court if the Court deems that a trial is
necessary.”
Neither party expresses a view about who has the burden of
proof in this proceeding. As explained below, we find that a
preponderance of the evidence shows that Asmark Institute did not
satisfy the requirements of section 501(c)(3). Therefore, even
if the IRS has the burden of proof, the IRS has shown that Asmark
Institute was not entitled to tax-exempt status. Neither party
expresses a view as to the standard by which we should review the
IRS’s denial of recognition of tax-exempt status. Even if the
appropriate standard of review is de novo, i.e. even if we gave
no deference to the determination of the IRS, we believe the
determination should be sustained.
To be exempt from income tax under section 501(c)(3), an
organization must be “operated exclusively” for exempt purposes.
Exempt purposes include a “charitable” purpose. Here is the
standard for determining whether Asmark Institute meets the test:
Under the operational test * * * the critical inquiry
is whether * * * [an organization’s] primary purpose
for engaging in its * * * activity is an exempt
purpose, or whether its primary purpose is the
nonexempt one of operating a commercial business
producing net profits * * *
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B.S.W. Group, Inc., v. Commissioner, 70 T.C. 352, 356-357 (1978).
Asmark Institute argues that its activities served the charitable
purpose of “assisting agricultural retail centers to comply with
the myriad requirements of Federal and state laws designed to
protect the public.” It gives three examples of how it assisted
farm centers with legal compliance: (1) its security
vulnerability assessment program (SVA), (2) its risk management
program (myRMP), and (3) its nurse tank inspection program
(NTIP). In addition, Asmark Institute argues that it provided
free services. As evidence of the free services, it points to
the following five items:
•The attorney for Asmark Institute wrote a letter to the IRS
Appeals Office protesting the decision of the IRS TEGE
Division. The letter stated that “The compliance tool is
available without charge to the public.”
•The same letter stated that “The database has been turned
over to an unrelated company to administer and maintain and
which has agreed to make information therefrom available to
the public.”
•The SABRS service package provided free information to
members of trade associations who have signed an affiliation
agreement.
•The SABRS service package provided free posters to trade
associations.
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•For no charge, Asmark Institute’s president and CEO,
Allen C. Summers, testified at a hearing on “Preventing
Terrorist Attacks on America’s Chemical Plants” before
the House Committee on Homeland Security, Subcommittee
on Economic Security Infrastructure Protection and
Cybersecurity, on June 15, 2005.
Before analyzing Asmark Institute’s arguments, we will
summarize the IRS’s position that Asmark Institute conducted
commercial activity rather than charitable activity. First, the
IRS argues that Asmark competed with commercial firms. Second,
the IRS argues that providing services to agribusiness is not an
inherently charitable activity. Third, the IRS argues that
Asmark Institute offered the same services, charged the same
prices, and employed the same workers as its for-profit
predecessor, Asmark, Inc. Fourth, the IRS argues that the Asmark
Institute’s commercial nature is evinced by the fact that its
clients were for-profit businesses. Fifth, the IRS observes that
Asmark Institute’s relationships with trade associations were
designed to increase its client base. Sixth, the IRS argues that
Asmark did not educate the public because its educational and
compliance materials were available only for a fee.
As we will explain, we agree with the IRS that Asmark
Institute’s operations were commercial rather than charitable.
Its operations consisted mainly of compliance services provided
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for a fee. Therefore, we will first discuss whether the
providing of compliance services for a fee was charitable. We
will then discuss the free services provided by Asmark Institute.
Asmark Institute argues that by providing compliance
services to farm retailers for a fee, it generated public
benefits. For example, one service was to identify ways for its
members to comply with regulations designed to prevent the
uncontrolled release of anhydrous ammonia gas. But the public
benefit of preventing the release of ammonia into the air is no
different from the benefits of complying with many other legal
requirements. Many laws are supposed to produce benefits to the
public. Improving compliance with these laws should therefore
produce public benefits. This is not sufficient to constitute a
charitable operation. Were it otherwise, firms that assist their
clients in complying with the laws on a fee-for-service basis
could claim exemption from income tax.
Besides its paid services, Asmark Institute offered free
services. In considering whether the free services provided by
Asmark require us to characterize its operations as charitable
instead of commercial, we first observe that the free services it
provided were relatively small in relation to all of its
services. Of three major services provided by Asmark--the
Security Vulnerability Assessment, the Nurse Tank Inspection
Program, and myRMP--none was free. Asmark Institute identified
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five free services in its brief, but these do not tilt the scale.
The first free service was a “compliance tool”, as it was vaguely
described in the protest letter by Asmark Institute’s attorney.
We do not know what the “compliance tool” was, how it was
administered, and who it benefited. The second free service was
identified as “the database” in the same protest letter.
Similarly, we do not know specific information about “the
database”, how it was administered, and who it benefited.
The third free service identified by Asmark Institute was
the information that it made available to members of the trade
associations who participated in the SABRS service package. It
is obvious that this service was part of Asmark Institute’s
campaign to market itself to members of the trade associations.
Asmark Institute hoped to convince these members to pay it for
services. Thus, its distribution of free information to the
associations does not demonstrate that Asmark operated as a
charity.
The fourth free service identified by Asmark Institute was
its distribution of free posters to trade associations as part of
the SABRS service package. However, the portions of the
administrative record cited by Asmark Institute show that it
charged a fee for these posters. The posters were not in fact
free.
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Fifth, Asmark Institute argues that it provided a free
service to the Congress when its president and CEO testified
before a congressional committee. We have no reason to doubt
that the testimony of Mr. Summers was beneficial to the
committee. But we believe that the testimony also served private
interests. As a publication of the Fertilizer Institute noted
“Summers used his testimony to relay to the subcommittee the
fertilizer industry’s opposition to any legislation that mandates
the use of inherently safer technologies (IST).” On balance,
this testimony and the other free services provided by Asmark
Institute (for example, the standard services it provided to
Government members and Educational members, to whom it charged no
membership fee) do not convince us that Asmark Institute was
something other than a commercial provider of services.
Our conclusion that Asmark Institution’s operations were
commercial rather than charitable is fortified by the fact that
Asmark Institute competed with commercial firms,5 the fact that
Asmark Institute continued the same operations as its for-profit
predecessor (except for its expansion of its relationships with
trade associations, a move designed to increase its base of fee-
paying members), and the fact that its clients were for-profit
5
The administrative record establishes that Asmark Institute
took a more “hands-on” approach to compliance services than other
service providers.
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businesses that purchased Asmark Institute’s services in order to
minimize the costs of regulatory compliance.
In an additional attempt to explain why its operations were
charitable, Asmark Institute argues that its operations lessened
the burdens of government. According to section 1.501(c)(3)-
1(d)(2), Income Tax Regs., one purpose that qualifies as a
charitable purpose is the “lessening of the burdens of
Government”. An organization may be considered to lessen the
burdens of government if a government unit (1) has accepted as
its responsibility the activities conducted by the organization
and (2) recognizes that the organization is acting on the
government’s behalf. Columbia Park & Recreation Association,
Inc. v. Commissioner, 88 T.C. 1, 21 (1987), affd. without
published opinion 838 F.2d 465 (4th Cir. 1988). Asmark
Institute’s activity is to assist farm retailers in complying
with government regulations. The record does not show that a
government agency has accepted responsibility for Asmark
Institute’s activity. Nor does the record show that Asmark
Institute was acting on behalf of any government agency. There
are various letters from government agencies expressing their
appreciation for the efforts of Asmark Institute in improving
compliance with regulations. There is also evidence that
government agencies have expressed an interest in “working with”
Asmark Institute. There is also some evidence that the EPA gave
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Asmark Institute a $20,000 grant. These documents do not
establish that a government agency has accepted responsibility
for Asmark Institute’s activities, or that a government agency
has recognized that Asmark Institute is acting on the agency’s
behalf.
We find that Asmark Institute was not operated exclusively
for exempt purposes. It therefore was not tax exempt. We need
not reach the IRS’s additional argument that Asmark Institute was
operated for the benefit of private interests.
Decision will be entered
for respondent.