A federal appeals court has overturned a 1983 ruling that revoked the tax-exempt status of the Presbyterian and Reformed Publishing Company (P&R). The ruling is seen as a victory for religious publishers incorporated as not-for-profit organizations.

The U.S. Third Circuit Court of Appeals on August 31 overturned the U.S. Tax Court ruling that revoked P&R’s tax-exempt status. The small publisher, related to the Orthodox Presbyterian Church, had been battling the Internal Revenue Service (IRS) for seven years.

P&R spokesman John Murdoch said the IRS may have been trying to establish a legal precedent that would revoke tax exemption for all religious publishers. He suggested that the IRS targeted P&R because of the company’s limited financial ability to defend itself.

The IRS launched the case in 1977 when it informed P&R that its tax-free status was being reconsidered. In 1981 the IRS ruled against P&R and ordered the payment of back taxes dating to 1969. It cited P&R’s increased sales and business activities as justification for its action. The U.S. Tax Court in 1983 affirmed the IRS, citing management decisions that “replicate those of commercial enterprises.”

P&R maintained that its similarity to commercial operations was irrelevant to tax-exempt consideration, and argued that it met the criteria for not-for-profit organizations. Those organizations can make a profit, but profits cannot be distributed to stockholders or owners. Profits must either be refunneled into the organization or donated to other charitable causes.

The U.S. Third Circuit Court of Appeals agreed that P&R operates as a not-for-profit organization. The court ruled that denying tax-exempt status because of an organization’s profitable business procedures “does not reflect either the dynamic quality of our society or the goals that generated the grant of tax-exempt status to religious publishers.”

The tax division of the U.S. Justice Department has until November 27 to appeal the decision to the U.S. Supreme Court.

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