dissenting: The majority holds an organization primarily and directly engaged in the manufacture and sale of a commercial product at a profit to be exempt from taxation. It also holds that the income received by the organization from its commercial activities is not unrelated-business taxable income and must therefore altogether escape taxation. I dissent from botb conclusions. They are completely at odds with the purposes of the applicable congressional legislation.
Prior to his death, Edward Orton, Jr., conducted the business of manufacturing “pyrometric cones” as a private profit-making enterprise. His will bequeathed the business to a board of trustees which was to operate it in a trust. The will specified that the trust had two purposes: (1) The “first and principal purpose” was “to provide a stable and dependable organization for continuing the manufacture and sale of” the cones of the highest quality “commercially feasible, at a reasonable price.” (Emphasis supplied.) (2) The “second and subsidiary purpose” was to provide a “Research Organization” for overcoming technical and manufacturing difficulties and for thus advancing the ceramic arts and industries. With regard to pricing, the will provided as follows :
(d) [T]he price at which cones shall be sold shall be set to produce a gross income, of which approximately eighty percent will be required to meet the manufacturing costs, including sales, overhead, and the maintenance of proper capital reserves for extensions, depressions, or disasters, and including the cost of experimental work undertaken specifically for the needs of the cone manufacturing process itself. The remainder of the gross receipts of the cone manufacturing business being approximately twenty percept of the same, should be expended upon Research. It is the testator’s belief that the great majority of consumers of cones will willingly approve of the principle of charging a profit of twenty percent the same to be spent in research for their own ultimate benefit. [Emphasis supplied.]
During the years in issue, and in accordance with the terms of Orton’s will, the taxpayer continued the commercial enterprise which had been conducted by Orton prior to his death, in the same location, with the same product, in competition at least to some extent with other firms, and earning a profit. Each year, its annual net sales were in excess of $325,000. Moreover, in accordance with the terms of the will, the research activities conducted within the taxpayer’s physical plant were confined primarily to the development of the commercial product which the taxpayer manufactured and sold to the public: the pyro-metric cone. The table below reflects the amounts spent by the taxpayer on such in-house research as well as the amounts distributed for research at other institutions:
In-house research Distributions
$54, 000 $34, 908 1962.
32, 800 17, 033 Jan. 1, 1963 — June 30, 1963.
66, 600 32, 700 July 1, 1963 — June 30, 1964.
57,000 45, 000 July 1, 1964 — -June 30, 1965
The conclusion is virtually inescapable that the taxpayer’s manufacturing operations, not its charitable distributions, dominated the organization’s activities, and that the scale of the taxpayer’s manufacturing operations far exceeded that which might be appropriate and helpful to furthering the organization’s scientific and educational purposes.
The social or economic utility of the taxpayer’s product does not render its manufacture and sale to the public at a profit any less commercial, or more charitable than the manufacture and sale of other products. In any event, the manufacture and sale of the pyro-metric cone is certainly no less commercial than the publication and sale of religious literature, Fides Publishers Ass'n v. United States, 263 F. Supp. 924, 935 (N.D. Ind.);1 Scripture Press Foundation v. United States, 285 F. 2d 800 (Ct. Cl.), certiorari denied 368 U.S. 985; Parker v. Commissioner, 365 F. 2d 192 (C.A. 8), affirming in part a Memorandum Opinion of this Court, the publication and sale of the results of economic research, American Institute For Economic Research v. United States, 302 F. 2d 934 (Ct. Cl.), certiorari denied 372 U.S. 976, the operation of bingo games for the purpose of financing medical services for children, Help the Children, Inc., 28 T.C. 1128, or the furnishing of medical services, Lorain Avenue Clinic, 31 T.C. 141; Sonora Community Hospital, 46 T.C. 519, affirmed per curiam 397 F. 2d 814 (C.A. 9). Moreover, the fact that the taxpayer may not have accumulated substantial funds but applied such funds instead to the development of its product does not adequately differentiate this case from those cited and distinguished by the majority. Indeed, to the extent that the taxpayer’s exempt status permits it to finance the development of its product at a faster rate than its nonexempt competitors can develop theirs, the effect of the majority’s decision may be to promote the very sort of anticompetitive advantage which Congress sought to eliminate in 1950.2
1. With regard to the majority’s decision that the taxpayer is exempt from taxation, I would add the following: The majority, I fear, has too mechanically relied upon our prior decision in Edward Orton, Jr. Ceramic Foundation, 9 T.C. 533, affirmed 173 F. 2d 483 (C.A. 6), which in 1947 upheld the exempt status of the taxpayer now before us. There we relied heavily upon the then-current doctrine that the destination of an organization’s income (i.e., for Charitable purposes) was more important than its source (i.e., a commercial enterprise) in determining the organization’s exempt status (9 T.C. at 540) :
The manufacture and sale of the standard cones was not the ultimate purpose of the foundation. That was merely a means of accomplishing its real purpose. The income from this business was to be used for financing the research work. In applying the exemption clause of the statute, the test is not the origin of the income, but its destination. Trinidad v. Sagrada Orden de Predicadores, 263 U.S. 578; Roche’s Beach, Inc. v. Commissioner, 96 Fed. (2d) 776. * * *
However, in 1950 Congress enacted legislation designed to terminate the so-called “destination-of-income” test and thereby curtail the anti-competitive abuses which were thought to have developed under it: An exempt organization which conducted a business enterprise could charge lower prices, earn a higher rate of return, or invest its profits (unreduced by corporate taxation) in improvements at a faster rate than could its tax-paying competitors. H. Rept. No. 2319, 81st Cong., 2d Sess., pp. 36, 41 (1950); S. Eept. No. 2375, 81st Cong., 2d Sess., pp. 28, 35 (1950); see Crosby Valve & Cage Co. v. Commissioner, 380 F. 2d 146, 148-149 (C.A. 1), affirming 46 T.C. 641; SICO Foundation v. United States, 295 F. 2d 924, 926 (Ct. Cl.); C. F. Mueller Co., 55 T.C. 275, 297-298. The approach taken in the 1950 legislation was two-pronged: (1) An organization which otherwise qualified for exemption as a charity but which was also engaged directly in the conduct of an active trade or business was to be taxed on its “unrelated business taxable income,” that is, on income generated by activities not integrally related to the performance of the organization’s exempt functions. (2) And where a charitable organization conducted an active trade or business indirectly through a “feeder” (a separately incorporated subsidiary), the feeder would be taxed in the same manner as competitive corporations. The underlying purpose was to tax commercial enterprises operated by charitable organizations on the same basis as their tax-paying rivals, regardless of whether such enterprises were operated directly as divisions of charitable organizations, or indirectly as separately incorporated feeders. The congressional effort was thus to deal comprehensively with the problems created by previously exempt organizations which had engaged in commercial activities, irrespective of differences in corporate structure. See H. Eept. No. 2319, 81st Cong., 2d Sess.,p. 37 (1950); S. Rept. No. 2375, 81st Cong., 2dSess.,p.29 (1950) :
Some of the witnesses who appeared before your committee took the position that this unrelated business income should be taxed only if received by a subsidiary organization. However, it is difficult to see why a difference in tax treatment should be allowed merely because in one ease the income is earned directly by an educational or charitable organization, while in the other it is earned by a subsidiary of such an organization. In both cases the income is derived from the same type of activities and disposed of in the same manner. Moreover, in most cases the business functions now .carried on by subsidiaries could be transferred to the parent if the tax were applied only to the income of the subsidiaries.
Thus, it is clear that Congress understood that it was taxing the income generated by a commercial enterprise regardless of the organizational mechanism that was selected as a means for carrying on that enterprise; it intended to leave no loophole. Notwithstanding the 1950 legislation, the majority today asserts that “there has been no change in the law” since the date of the first Orton case and concludes that it must rely upon our decision in that case.
To be sure, Congress did not amend section 101(6), I.R.C. 1939 (the statutory predecessor of section 501(c)(3)), in 1950. But by terminating the “destination-of-income” test and by attempting to remedy the anticompetitive advantages described above, Congress radically altered the entire statutory context. Accordingly, the weight to be accorded to the first Orton case must be evaluated in the light of that change. The correct principles to be applied in this situation are indicated by Commissioner v. Sunnen, 333 U.S. 591, which approved a different result for a later tax year from that reached in prior litigation for an earlier tax year in respect of the same taxpayer, the same controlling instrument and the same statutory language. Although the Supreme Court’s opinion was focused upon res judicata and collateral estoppel, which it held to be inapplicable where there had been a significant change in “the legal atmosphere” (333 U.S. at 600) between the dates of the two oases, its decision of necessity represents a conclusion also that the doctrine of stare decisis is similarly inapplicable in such circumstances. The Court made clear that the change in “the legal atmosphere” might be wrought by >any of a variety of circumstances, such as the rendition of a judicial declaration by a State court or the intervening development of legal principles by the Supreme Court itself (333 U.S. at 600) and that the earlier decision would likewise not have any binding effect if there were “an interposed alteration in the pertinent statutory provisions or Treasury regulations” (333 U.S. at 601).
Surely, the changes introduced by the 1950 Act and the accompanying extensive legislative history which made plain the intention of Congress to tax the profits of a commercial enterprise regardless of the fact that they were committed to be paid out for charitable purposes represent as much a change in “the legal atmosphere” within the meaning of Sunnen as any of the other intervening events referred to in that opinion. In my judgment the change in “the legal atmosphere” created by the 1950 legislation was of such character as to call for reconsideration of the decision in the first Orton case. The majority avoids this task by asserting that to do so would amount to “judicial legislation.” But the cry of “judicial legislation” in the context of this case merely raises a bugaboo. Congress did not decide the Orton case; that decision represents judge-made law. Indeed, far from codifying Orton in 1950, Congress terminated the “destination-of-income” test upon which that case relied. Accordingly, since the courts were the source of that judge-made law they have a particular responsibility for it. To wait for Congress to take care of a problem that the courts themselves have created is an abdication of that responsibility, and to characterize an exercise of that responsibility disparagingly as “judicial legislation” is hardly warranted in the circumstances of this case.
Equally remarkable is the majority’s misuse of an excerpt from the following paragraph from the Senate Finance Committee’s report (S. Kept. No. 2375, 81st Cong., 2d Sess., p. 29 (1950)) :
In neither the House bill nor your committee’s bill 'does this provision deny the exemption where the organizations are carrying on unrelated active business enterprise, nor require that they dispose oí such businesses. Both provision's merely impose the same tax on income derived from an unrelated trade or business as is borne by their competitors. In fact it is not intended that the tax imposed on unrelated business income will have any effect on the tax-exempt status of any organization. An organization which is exempt prior to the enactment of this hill, if continuing the same activities, would, still he exempt after this bill becomes law. In a similar manner any reasons for denying exemption prior to enactment of this bill would continue to justify denial of exemption after the bill’s passage. [Emphasis supplied.]
From the italicized fragments of the paragraph, the majority would infer that in enacting the 1950 legislation Congress intended that all organizations previously treated as tax-exempt would continue to be so treated. However, a fair reading of the entire paragraph reveals that the Finance Committee’s intention was simply that if an organization were otherwise entitled to exemption, it would not automatically lose that exemption because it had unrelated business income. In passing upon the 1950 legislation, neither Congress nor the Finance Committee intended to freeze the exempt status of any specific organization which may have resulted from a prior judicial opinion based on criteria that are erroneous when considered in the light of the 1950 Act. We continue to have the responsibility for inquiring into the validity of such individual exemptions, giving appropriate weight to the congressional objective reflected in the 1950 legislation.
Forest Press, Inc., 22 T.C. 265, affords no basis for concluding that this responsibility has been discharged by the majority. That case involved a taxable year antedating the 1950 legislation. Moreover, the focus of that decision was upon the fact that although the terms of its certificate of incorporation did not restrict the scope of its activities, in fact the taxpayer was organized for and performed an exclusively noncommercial educational function. It is not without significance that Forest Press, Inc., omitted any reference to our earlier Orton decision.
2. I would also note the following with regard to the majority’s conclusion that the taxpayer was not the recipient of unrelated-business taxable income. By imposing a tax on only mvrelated-business income of an otherwise bona fide exempt charitable organization, Congress attempted to avoid taxing business income derived from an exempt organization’s activities which were necessarily and integrally part of the organization’s exempt functions. Thus, the regulations, which follow the intent of Congress as reflected in the reports of the congressional committees, make explicit that the sort of activity intended to escape the tax is (1) a relatively small-scale enterprise (in comparison with the organization’s charitable activities), (2) which is integrally related to the performance of the organization’s exempt functions, and (3) which has as its primary purpose the advancement of such exempt functions. See Regs. sec. 1.513-2(a) (4); H. Rept. No. 2319, 81st Cong., 2d Sess., pp. 36-38 (1950); S. Rept. No. 2375, 81st Cong., 2d Sess. pp. 28-31 (1950). Here the taxpayer’s activities were dominated by its manufacturing and sales operations. Moreover, the manufacturing and sales operations were conducted on a scale that far exceeded that which might have been appropriate to furthering the organization’s scientific 'and educational purposes. They were hardly incidental or related to the taxpayer’s charitable activities within the understanding of Congress or the terms of the regulations.
Furthermore, in my opinion, the majority’s emphasis on the Commissioner’s burden of proof in respect of this issue is unwarranted. There is no dearth of evidence in the record before us. The record contains ample evidence to support the Commissioner’s position. Given such a record, the fact that the burden of proof is upon the Commissioner rather than the taxpayer is no justification for the result reached by the majority.
Tietjens, TanneNwald, and Simpson, JJ., agree with this dissent.In the Fieles ease the court stated (p. 935) :
“The exemption can only be denied, then, if the taxpayer is being operated for some non-exempt purpose which is substantial in nature. Such a purpose does exist. It may be described as the publication and sale of religious literature at a profit. In effect, the sole activity of Fides defines at least one purpose for which it is operated. It could not be otherwise. If it were, every publishing house would be entitled to an exemption on the ground that it futhers the education of the public.”
The majority states that “there is no evidence that petitioner used its exempt status to gain an unfair competitive advantage.” The absence of such evidence is irrelevant to the issues now before this Court. In enacting the 1950 legislation, Congress sought to curb the anticompetitive harms generated by the exemption of income flowing from the active conduct of a commercial enterprise. However, the terms of that legislation are unconditional and do not require us to examine in each case whether the feared anticompetitive abuses have actually occurred. And in any event, the record discloses that the taxpayer devoted substantial sums to research and development, that its product was superior to those of its competitors, and that its manufacturing and sales operations were profitable even though its cones were relatively highly priced. Furthermore, even if the results of the taxpayer’s research were made publicly available, such research (financed by the purportedly tax-exempt income) was probably more readily available to it and at an earlier time than to others and oriented toward the problems which it (rather than its competitors) encountered.