## Facts

- Presbyterian and Reformed Publishing Company (P&R) was incorporated in 1931 as a nonprofit religious publisher to disseminate a Presbyterian doctrinal system through publishing activities.
- Its charter barred dividend distributions and required that surplus income be used to improve publications, extend their influence, or support institutions teaching the same doctrine, in practice aligned with the Orthodox Presbyterian Church.
- The IRS recognized P&R as tax-exempt in 1939 based on its religious publishing activities and use of income for operating purposes.
- For decades P&R operated modestly, then experienced significant revenue growth beginning in the late 1960s after an unexpectedly successful title.
- During the 1970s P&R expanded its catalog, increased sales and profits, accumulated funds, acquired land, and built a warehouse and office facility; it also shifted from volunteer labor to paid staff and paid author royalties.
- The IRS initiated proceedings to revoke exemption, and in 1980 issued a determination revoking P&R’s § 501(c)(3) status on the ground that it was not operated exclusively for religious purposes and had become a commercial publisher with only an attenuated church relationship.
- The Tax Court upheld loss of exemption but limited retroactive revocation to 1975; P&R appealed.

## Issues

1. Whether P&R ceased to be “operated exclusively” for religious purposes under I.R.C. § 501(c)(3) because it became profitable and employed businesslike publishing practices.
2. Whether the IRS abused its discretion in revoking P&R’s long-recognized § 501(c)(3) exemption based primarily on increased profitability and operational growth.

## Decision

- The Third Circuit reversed the Tax Court and restored P&R’s § 501(c)(3) status.
- The court held the IRS abused its discretion in revoking the exemption.
- The court concluded that P&R’s primary purpose and operations remained religious despite expanded scale, profits, and professionalized methods.

## Legal Principles

- Under § 501(c)(3)’s operational test, “operated exclusively” is construed to mean operated primarily for exempt purposes; incidental nonexempt aspects do not defeat exemption.
- Profitability and use of ordinary business methods do not, by themselves, establish a nonexempt commercial purpose; the focus is whether the organization’s primary purpose is exempt and whether earnings serve private interests.
- Accumulating funds and investing in facilities may be consistent with advancing an exempt mission when earnings are reinvested into exempt activities rather than distributed as private benefit.
- Revocation of recognized exempt status may be set aside as an abuse of discretion when the agency’s stated reasons do not reasonably demonstrate a shift away from exempt purposes.

## Conclusion

The court held that a religious publisher does not lose § 501(c)(3) status merely because it becomes financially successful and operates more professionally; because P&R’s mission and use of earnings remained religious and nonprivate, the IRS’s revocation was an abuse of discretion and was reversed.


Presbyterian & Reformed Publ’g Co. v. Comm’r, 743 F.2d 148 (3d Cir. 1984)