## Facts

- The American College of Physicians (ACP) was a § 501(c)(3) tax-exempt medical organization with charitable and educational purposes, including improving medical education and public health.
- ACP published a monthly scholarly medical journal, *Annals of Internal Medicine*, containing paid advertisements for pharmaceuticals and medical supplies and equipment.
- For the 1975 tax year, ACP paid federal income tax on net advertising income, then sought a refund, claiming the advertising revenue was not unrelated business taxable income (UBTI) under IRC §§ 511–513.
- The Claims Court denied the refund, finding the advertising activity was not substantially related to ACP’s exempt purposes and therefore produced taxable UBTI.
- The Federal Circuit reversed, reasoning that the advertisements sufficiently contributed to educating readers of the journal.
- The Supreme Court granted certiorari.

## Issues

1. Whether the Internal Revenue Code and Treasury regulations impose a blanket rule treating all commercial advertising income in tax-exempt professional journals as UBTI.
2. Whether ACP’s advertising income was derived from a trade or business that was not substantially related to ACP’s exempt purposes, making it taxable UBTI under IRC §§ 511–513 and applicable regulations.

## Decision

- The Court unanimously rejected a categorical rule that all commercial advertising by tax-exempt professional journals is automatically UBTI; the statute and regulations require a facts-specific substantial-relation inquiry.
- The Court held ACP’s paid advertising activity was a trade or business regularly carried on, and the only disputed element was whether it was substantially related to exempt purposes.
- Relying on the trial court’s supported factual findings, the Court concluded the advertisements did not contribute importantly to ACP’s educational purposes and were therefore not substantially related.
- The Court reversed the Federal Circuit, effectively reinstating the Claims Court’s determination that ACP’s advertising profits were taxable UBTI.

## Legal Principles

- UBTI applies when a tax-exempt organization derives income from a trade or business that is regularly carried on and not substantially related to exempt purposes (aside from the organization’s need for income).
- “Substantially related” requires that the activity itself contribute importantly to accomplishing exempt purposes, not merely generate funds used for exempt activities.
- Commercial character alone does not determine relatedness; the analysis turns on how the activity functions in relation to the exempt mission based on the facts.
- Appellate courts should not displace supported trial-level fact-finding when applying the substantial-relation standard to an organization’s operations.

## Conclusion

The Court held that professional-journal advertising is not per se unrelated business activity, but ACP’s advertising revenues were taxable UBTI because the advertisements functioned primarily as commercial promotions and did not contribute importantly to ACP’s exempt educational objectives.


United States v. American Coll. of Physicians, 475 U.S. 834 (1986)