## Facts

- Edward Orton, Jr.’s will (probated in 1932) placed his pyrometric cone business into a trust, the Edward Orton, Jr., Ceramic Foundation, to be operated by trustees for scientific and educational purposes in ceramics.
- The Foundation manufactured and sold pyrometric cones, devices used in ceramic firing to measure combined effects of time, temperature, and atmosphere.
- The Foundation’s cones were widely used in commercial and academic settings and were treated as an industry standard, though competitors existed.
- The bulk of the Foundation’s operations involved manufacturing and selling cones at a profit.
- No profits were distributed to private individuals; earnings were reinvested in the Foundation’s operations and used to fund ceramics research, fellowships, grants, and related educational/scientific work, including in-house and university-based research.
- The Foundation had previously been recognized as tax-exempt, and the Tax Court found its governing terms and basic structure had not materially changed since that earlier exemption determination.
- After enactment of the feeder-organization rule, the IRS determined deficiencies for tax years 1962–1964, asserting the Foundation was not exempt, was a feeder under § 502, or alternatively had unrelated business taxable income.

## Issues

1. Whether the Foundation qualified for exemption under I.R.C. § 501(c)(3) for tax years 1962–1964.
2. Whether the Foundation was a “feeder organization” under I.R.C. § 502, losing exemption because it was operated primarily to conduct a trade or business for profit.
3. Alternatively, whether income from the cone business was unrelated business taxable income under I.R.C. §§ 511–513.

## Decision

- The Tax Court held the Foundation was an organization described in § 501(c)(3) and exempt under § 501(a) for 1962–1964.
- The court held the Foundation was not a feeder organization under § 502.
- The court held the Foundation did not have unrelated business taxable income from its pyrometric cone operations under §§ 511–513.
- Judge Raum dissented.

## Legal Principles

- To qualify under § 501(c)(3), an organization must be organized and operated exclusively for exempt purposes (including scientific and educational purposes) and must avoid private inurement.
- An organization does not lose § 501(c)(3) status merely because it operates a substantial revenue-producing activity if the activity is a subordinate means of carrying out the exempt purpose and earnings are devoted to that purpose without private benefit.
- Section 502 denies exemption to an entity operated for the primary purpose of carrying on a trade or business for profit, even if profits are paid to an exempt organization; an entity is not a § 502 feeder where its business activity is integral to, and conducted as part of, its own exempt program rather than as a separate profit-funneling operation.
- Income from a trade or business is not “unrelated” under § 513 when the activity is substantially related (apart from raising funds) to the organization’s exempt functions; where production and sale of a technical product directly advances the organization’s scientific and educational work, resulting income is not taxed as unrelated business taxable income.

## Conclusion

The Tax Court ruled that a ceramics foundation operating a profitable pyrometric cone business remained § 501(c)(3) exempt because the business was functionally tied to its scientific and educational mission, did not make it a § 502 feeder, and did not generate unrelated business taxable income under §§ 511–513.


Edward Orton, Jr., Ceramic Foundation v. Commissioner, 56 T.C. 147 (1971)