United States Tax Court

“ Petitioner was incorporated by 'est' graduates as the first step in the implementation of the royalty agreement. Their objective is to develop and expand the principles and concepts of 'est.' They intend to provide 'est' training and seminars, to develop, promote, and sell 'est' publications, engage in 'est' *1072 educational work, provide 'est' lectures, and generally engage in related educational efforts in the State of Hawaii. ”

“ Each tax-exempt organization is required to agree not to become involved in any activity resembling 'est' in a geographical location where a tax-exempt organization licensed to present 'est' programs is functioning for 2 years after the termination of its licensing agreement. ”

“ Membership in petitioner is limited to graduates of the training designated 'Erhard Seminars Training.' In order to retain membership status, an individual must vote in the election of the directors of the corporation at least once in the first 3 years and once in every successive group of three elections. To be eligible for election to the board of directors, an individual must be a resident of Hawaii and a graduate of 'Erhard Seminars Training.' Directors and officers receive no compensation for their services. ”

“ Petitioner contends that respondent's determination is erroneous because none of its members benefited from its activities and it is unrelated to, and dealt at arm's length with, International, a for-profit corporation. The burden of proof is on petitioner. Rule 217 (c) , Tax Court Rules of Practice and Procedure.
The operational test (see sec. 1.501 (c) (3) -1 (c) , Income Tax *1079 Regs.) focuses on the purpose rather than the nature of an organization's activities. ”

“ According to petitioner's literature, it 'is designed to transform one's level of consciousness and one's ability to experience, resulting in an expanded awareness and the unblocking of one's natural abilities.' These sessions are conducted by persons who are called 'trainers.' Graduates of the standard training participate in regular activities called 'seminars.' 'Est' also presents public lectures given by Werner Erhard and others active in this field. Erhard himself speaks to about 10,000 people per month throughout the United States. ”

“ As to clarification of the grounds on which the exemption was denied, petitioner has totally failed to convince us that there is any need, much less good cause, for additional evidence. With respect to additional evidence concerning the royalty payments, our view of the facts, see p. 1081 infra, renders irrelevant the question of the reasonableness of the royalty payments. ”

“ He conducts trainings, seminars, and lectures for members of various groups including the medical profession, psychologists, lawyers, minority groups, business and professional organizations, law enforcement agencies, educators, and college and public school students.
As of April 1974, 'est' was training more than 800 people per month in San Francisco, Los Angeles, Honolulu, Aspen, and New York City. Between October 1971 and April 1974, 'est' trained over 18,000 people. It is rapidly growing throughout the United States and in other parts of the world. ”

“ PMSA is a Panamanian corporation which engages in the ownership and promotion of literary, artistic, and educational publications, patents and licenses, and the promotion of individuals involved in literary, artistic, and educational activities. ”

“ In light of our decision herein in respondent's favor on other grounds, this argument would not affect the outcome of the case.
FN14. We also note that petitioner's argument as to reasonableness is based on the assertion that the payments did little more than reimburse the recipient for its out-of-pocket costs. Assuming that the fact conforms to the assertion (and the administrative record seems to validate this assumption) , there is no indication whatsoever of the constituent elements of such costs upon the basis of which a determination of reasonableness might be made. Cf. ”

“ For our purposes, we accept the statement as true. See Rule 217 (b) , Tax Court Rules of Practice and Procedure.
FN6. We infer from the record that EST, Inc., retains all such rights in the United States except those which have been relinquished to PMSA, i.e., rights in Hawaii.
FN7. Notwithstanding this provision in the royalty agreement, a licensing agreement between petitioner and International provides that petitioner will reimburse EST, Inc., for certain expenses. See par. 11 of licensing agreement, p. ”