Oregon State Univ. Alumni Ass'n v. Commissioner

T.C. Memo. 1996-34

UNITED STATES TAX COURT

OREGON STATE UNIVERSITY ALUMNI ASSOCIATION, INC.,
Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No 2133-94. Filed January 30, 1996.

Philip N. Jones, Carolyn W. Miller, and Stephen J.

Klarquist, for petitioner.

Brenda M. Fitzgerald, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COLVIN, Judge: Respondent determined deficiencies in

petitioner's Federal income tax of $89,590 for 1990 and $120,288

for 1991.

The issue for decision is whether petitioner's income from

an affinity credit card program is a royalty excluded by section
 - 2 -

512(b)(2) from the tax on unrelated business income. We hold

that it is.

Section references are to the Internal Revenue Code in

effect for the years in issue. Rule references are to the Tax

Court Rules of Practice and Procedure.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

A. Petitioner

Petitioner, Oregon State University Alumni Association,

Inc. (OSUAA), is an Oregon nonprofit corporation exempt from

Federal income tax under section 501(c)(3). Petitioner's

principal place of business is Corvallis, Oregon. Petitioner was

established to promote the interests and ideals of Oregon State

University (OSU), to stimulate and encourage loyalty in

its students and former students, and to develop a sense of

responsibility for continued progress in OSU educational

programs. Petitioner had 12 employees in 1989-90 and 13 in 1990-

91.

B. History of the OSU Alumni Association Affinity Credit
Card Program

In 1986 and 1987, petitioner's executive director, Donald

Wirth (Wirth), became aware of affinity credit card programs

through news articles and contacts from other organizations. The

executive director of the Alumni Association of the University of

Oregon (AAUO), Philip Super (Super), told Wirth about proposals
 - 3 -

he had received from the United States National Bank of Oregon

(USNB) and another financial institution. Wirth and Super wanted

their organizations to develop an affinity credit card program.

Petitioner and the AAUO formed a committee to solicit

proposals from several banks and to select a plan. Petitioner

and the AAUO formed the committee to increase their bargaining

power and to avoid duplication of effort. The committee was

headed by Wirth and Super. Its members were volunteers from both

organizations. After reviewing 8 to 10 plans, the committee

chose USNB's plan. After negotiations, the parties signed an

Affinity Credit Card Agreement1 (the Agreement) on June 23, 1987.

On September 30, 1987, USNB held a press conference and

issued a news release announcing the affinity credit card

program. One of petitioner's representatives gave a brief speech

at the press conference. Petitioner did not otherwise inform the

news media of the credit card program.

USNB entered into the Agreement primarily to make money.

Its objectives in signing the Agreement were to gain access to

petitioner's mailing list and to obtain petitioner's endorsement.

USNB believed that it would be easier to market credit cards

1
The Agreement was amended on Apr. 26, 1991. The parties
changed the word "fees" to "royalties" in par. 4 of the
Agreement. Neither party contends that the amendment affects any
issue in dispute.
 - 4 -

through an affinity credit card program than to market credit

cards otherwise.

Petitioner established the affinity credit card program to

keep alumni aware of their ties to OSU, to keep OSU's name before

the public, to provide a low-cost credit card to alumni and other

OSU supporters, and to provide revenue for its programs without

placing undue demands on its staff.

C. The Affinity Credit Card Agreement

USNB agreed to prepare and mail, at its expense, promotional

materials and credit card applications to petitioner's members.

USNB also agreed: (1) To announce petitioner's activities and

alumni news four times each year, at USNB's expense, on periodic

statements mailed to alumni credit card holders; and (2) to place

a full-page color advertisement in petitioner's publication at

the standard rate at least twice annually during the term of the

Agreement.

Petitioner agreed: (1) To give USNB the names, addresses,

and graduation dates of its members; (2) to license the use of

its name, logo, and official seal of OSU to USNB; and (3) to

inform its members of the affinity credit card program, at its

expense, at least once per year. The Agreement did not require

petitioner to mail any solicitation materials to alumni.

Petitioner could prepare, at its discretion, materials containing
 - 5 -

announcements of its activities and alumni news four times

annually to accompany USNB's periodic statements.

USNB agreed to pay petitioner $4 for each new account, $4.50

for renewal of a Classic Visa card, $7 for renewal of a Premier

Visa card, and 1 percent of all authorized cash purchases and

advances. The Agreement was for 5 years and was automatically

renewable for 1-year periods unless terminated by either party.

D. List of Alumni

USNB asked petitioner for the list of alumni about once a

year. USNB was to solicit credit card applications from those

members and issue a card to approved applicants.

The data base of alumni was kept on a computer owned and

possessed by the Oregon State University Foundation (OSU

Foundation). Petitioner forwarded USNB's request to the OSU

Foundation. The OSU Foundation prepared a magnetic tape for USNB

to use. Employees of the OSU Foundation spent no more than 1

hour preparing the tape. The OSU Foundation processed the

information and delivered the magnetic tape to petitioner at no

charge. Petitioner sent the tape to USNB. USNB returned the

tape to petitioner after using it for a mailing.

The OSU Foundation was not owned or financed by petitioner.

The data base was not available on the open market. Petitioner

updated this list and recorded pre- and post-graduation

information about each alumnus.
 - 6 -

USNB gave petitioner a list of alumni cardholders each

quarter. Petitioner's employees spent about 2 hours each quarter

entering data regarding credit card holders.

E. Postagreement Activities by USNB

1. USNB Mailings to Petitioner's Members

USNB hired and paid an advertising agency and direct mail

house to write, design, print, and mail solicitation materials to

petitioner's members. These mailings cost about $1.25 per item.

Petitioner gave signatures of its president to USNB to duplicate

on the promotional materials. USNB placed petitioner's logo on

the promotional materials in three places. An employee of

petitioner spent about 1 hour reviewing the material for each

mailing and occasionally suggested minor changes or made

corrections. Petitioner might suggest that USNB "tone down" the

pitch of the solicitation or correct the spelling of a name.

Petitioner had no authority to finally approve USNB's materials.

2. USNB's Advertising in the Oregon Stater

Petitioner's primary means of communicating with its alumni

is through the Oregon Stater and mailings. During the years at

issue, the Oregon Stater was mailed six times per year and had a

circulation of about 85,000. USNB paid petitioner to advertise

the affinity credit card program in the Oregon Stater. USNB gave

petitioner a copy of each advertisement to review and approve.
 - 7 -

It took one or two of petitioner's employees about 30 minutes to

examine the advertisements.

The Oregon Stater did not generally accept paid advertising.

USNB paid petitioner $3,600 for the 1989-90 school year and

$3,000 for the 1990-91 school year for these advertisements.

These amounts equaled petitioner's cost to publish the

advertisements.

3. USNB's 800 Number for Affinity Credit Card Holders

All advertisements and solicitations asked the recipient to

contact USNB directly. The promotional materials listed USNB's

800 number. There was one minor exception: a newspaper article2

entitled "Alumni Association to offer credit card", written by

Suzanne Downing, a columnist for the Daily Barometer (not

otherwise identified in the record), stated: "For more

information, contact the Alumni Association office."

4. Design of the Credit Cards

USNB designed the cards issued under the program. The

classic VISA card had a photograph of the OSU Memorial Union

Building, which is easily recognizable by OSU alumni, and the

words "OREGON STATE UNIVERSITY Alumni Association". Petitioner's

logo consists of a depiction of this building, petitioner's name

and address, and OSU's name. Petitioner's logo is not

2
The record does not state when or where this article was
published.
 - 8 -

registered. The premier card had the same notation as the

classic card but had no photograph.

5. USNB-OSU Business School Survey of Student Banking
Needs

In February 1988, USNB commissioned the OSU Business School

to survey students about their banking needs. USNB gave

petitioner $5,000 for the study. The survey was conducted by

OSU students under the direction of two OSU Business School

professors. Petitioner's employees acted as go-betweens for USNB

and the business school. Petitioner disbursed the grant money as

needed.

F. Postagreement Activities by Petitioner

1. Petitioner's Solicitation of Alumni

The OSU printing department printed and mailed solicitation

materials six times from 1987 to 1991.3 Four of these mailings

preceded the years at issue, and two were during the years at

issue. The OSU printing department: (a) Mailed a letter

petitioner wrote and materials supplied by USNB to 58,809 alumni

in 1988; (b) remailed 4,234 packets to alumni who did not receive

the first mailing at a time not specified in the record; (c)

printed and mailed letters written by USNB to 2,293 OSU seniors

in 1988, promoting the affinity card; and (d) printed and mailed

3
The OSU printing department also printed a letter, written
and designed by USNB, to OSU students. The record does not
indicate when this letter was printed or whether it was mailed.
 - 9 -

a letter written by USNB to 9,212 OSU students in 1988, promoting

a banking package.

Petitioner printed and mailed materials written by USNB

promoting the affinity credit card twice in 1990. One mailing

was to 66,432 OSU alumni and the other was to 6,955 OSU seniors.4

Petitioner spent $19,967 to print and mail solicitation materials

in 1990. USNB reimbursed petitioner for $15,761 of that cost.

Petitioner spent $73 to print and mail solicitation materials in

1991. USNB did not reimburse petitioner for any of that amount.

Petitioner was not obligated by the Agreement to print and

mail these materials but did so because it cost less than the

direct mail house USNB hired, USNB did not have enough in-house

printing and mailing capacity, and OSU's printing department was

available and convenient to the parties. Both USNB and

petitioner hoped to benefit from the mailings.

Petitioner hired a professional writer to write one of these

letters. Petitioner used an off-campus print shop three times to

help design letters. After USNB gave brochures to petitioner,

the OSU printing department printed the letters, stuffed the

envelopes with letters and brochures, and mailed them.

Petitioner's mailings were not as sophisticated as USNB's because

4
The parties stipulated that this mailing was in 1990.
Petitioner states on brief that it was in 1989. Because there is
nothing in the record to indicate that the stipulation is
incorrect, we accept the stipulated date.
 - 10 -

the cardholder's accounts were not preapproved, they did not

contain some material recommended by professional marketers, they

were not in full color, and they were of ordinary size. USNB

received more positive responses from its mailings than it did

from petitioner's mailings. Ninety-five percent of the

cardholders became cardholders because of USNB's marketing

efforts.

2. Petitioner's Occasional Assistance to Alumni

After the affinity credit card program began, petitioner

occasionally received requests from alumni for credit card

applications. In each case, petitioner sent a brochure to the

person making the request.

Petitioner received a few complaints from alumni who had

been denied a credit card. Petitioner referred those complaints

to USNB and asked USNB to look into the problem. USNB decided

whether to issue a credit card. On each occasion, USNB told

petitioner that the alumni member was contacted and the matter

handled appropriately.

Petitioner requested on behalf of certain alumni that USNB

send preapproved applications, expedite applications, and

establish some credit limits above the standard.

Some alumni asked Wirth about the credit card program. He

mailed a cover letter and application to each of those alumni.

Wirth told eight of those alumni to send the applications to him
 - 11 -

rather than to USNB so that he could make sure that they were

processed faster. Petitioner contacted USNB to request that

credit limits higher than the standard be set for certain alumni.

In about 14 letters sent to individual alumni, Wirth suggested

that the alumnus contact him or petitioner if the alumnus needed

further assistance.

3. Involvement of Petitioner's Executive Director in the
Affinity Credit Card Program

Wirth met with USNB and a representative from the AAUO once

each year to review the performance of the affinity credit card

program. These meetings lasted about 1½ to 2 hours. Petitioner

allocated 15 percent of Wirth's salary to the affinity credit

card program in 1988 and 1989, and none for the years in issue.

Petitioner did not allocate any of its secretary's salary to the

affinity credit card program.

On January 14, 1991, Wirth encouraged each member of

petitioner's board of directors to get 10 new cardholders. Also

on January 14, 1991, Wirth urged board members to look for

opportunities to give out applications for the affinity credit

card.

G. Petitioner's Travel Program

Petitioner let travel agencies use its mailing list to

arrange trips for alumni in 1988, 1990, and 1991. Petitioner

received a fee for each member who went on a trip. Petitioner

received $2,028 in 1988, $27,446 in 1990, and $14,105 in 1991
 - 12 -

from the travel program. Petitioner allocated 5 percent of

Wirth's salary and 50 percent of its secretary's salary to the

travel program during the years at issue.

H. Other Licensing Agreements and Proposals

Petitioner entered into an agreement with Wayneco

Enterprises, Inc. (Wayneco), on August 17, 1987. Wayneco agreed

to provide class rings and commemorative watches to alumni and to

pay petitioner $25 for each item purchased. Petitioner made no

salary allocation for this agreement.

Other organizations made proposals for similar programs to

petitioner. Petitioner rejected the solicitations because they

did not benefit petitioner's members or did not further

petitioner's purpose.

I. Petitioner's Income From the Affinity Credit Card Program

Petitioner grossed $254,252 for 1990 and $357,998 for 1991

from the affinity credit card program.

OPINION

A. Taxation of Unrelated Business Income

Section 511(a)(1) imposes a tax on the unrelated business

taxable income (UBTI) of certain tax-exempt organizations.

Petitioner is subject to tax on its unrelated business income

under section 511(a)(2)(A) because it is tax exempt under section

501(c). Income is UBTI if: (1) The income arises from a trade

or business; (2) the trade or business is regularly carried on;
 - 13 -

and (3) the trade or business is not substantially related to the

organization's tax-exempt purpose. Sec. 512(a)(1); Veterans of

Foreign Wars v. Commissioner, 89 T.C. 7, 19-20 (1987).

B. Royalty Income

Royalty income is excluded from UBTI. Sec. 512(b)(2). A

royalty is a payment to use valuable intangible property rights.

Disabled Am. Veterans v. Commissioner, 94 T.C. 60, 70 (1990),

revd. on other grounds 942 F.2d 309 (6th Cir. 1991). Whether

income is a royalty is decided based on the facts and

circumstances. Sec. 1.512(b)-1, Income Tax Regs.

Respondent contends that USNB’s payments are not royalties

because: (1) USNB did not pay petitioner to use a valuable

intangible property right; (2) petitioner did not use its own

mailing list; (3) the payments to petitioner were for services

rendered by petitioner; and (4) the enactment of section 513(h)

precludes royalty treatment.

1. Whether USNB Paid Petitioner To Use Valuable
Intangible Property Rights

Respondent contends that USNB did not pay petitioner to use

valuable intangible property rights because USNB did not display

petitioner's logo on the cards. We disagree.

The classic VISA card bore a photograph of the Memorial

Union Building and the words "OREGON STATE UNIVERSITY Alumni

Association." The premier card also had those words but had no

photograph. USNB's failure to depict the Memorial Union Building
 - 14 -

on the premier card does not show that petitioner failed to

exchange a valuable intangible right.

In the Agreement, petitioner gave USNB access to valuable

intangible property rights. The Agreement gave USNB permission

to use the OSU seal with petitioner's logo. Petitioner

maintained all rights to the logo which it did not specifically

give to USNB. USNB could not use petitioner's name or logo after

the Agreement terminated. USNB's objectives in signing the

Agreement were to gain access to petitioner's mailing list and to

obtain petitioner's endorsement. Those are valuable intangible

property rights. Sierra Club, Inc. v. Commissioner, 103 T.C.

307, 344 (1994). We find respondent's contention about how USNB

designed the credit cards unconvincing. We conclude that

petitioner’s income from the affinity credit card program was

received in exchange for the use of valuable intangible property

rights.

2. Whether Petitioner's Use of Its Mailing List Is
Inconsistent With Royalty Treatment

Respondent contends that petitioner's income from its

mailing list is not a royalty because petitioner’s use of its

mailing list was a trade or business.

In Disabled Am. Veterans v. United States, 227 Ct. Cl. 474,

650 F.2d 1178, 1184 (1981), the Court of Claims held that the

Disabled American Veterans (DAV) conducted the trade or business

of renting its mailing list. From 1974 to 1979, DAV rented
 - 15 -

parts of its donor list 451 times. Disabled Am. Veterans v.

Commissioner, 942 F.2d at 311. DAV continuously rented names

on its list during the years in issue. Disabled Am. Veterans v.

United States, 650 F.2d at 1184. In renting its donor list, DAV

followed the usual practices of the direct mail industry. Id.

DAV prepared rate cards showing the rates it charged to

customers. Id. It was widely known among list brokers that

DAV's mailing list was available for rental. Id. at 1185. DAV

employed two full-time employees to administer its list rentals.

Disabled Am. Veterans v. Commissioner, 942 F.2d at 311.

Petitioner's mailing list rental activity is unlike DAV's

rental activity. Petitioner received income from the use of its

mailing list only for: (a) Alumni trips in 1988, 1990, and 1991;

(b) alumni class rings and commemorative watches; and (c) the

affinity credit card program at issue here. Petitioner rejected

other proposals to use its mailing list because those proposals

did not benefit petitioner's members or further petitioner's

purpose.

Unlike DAV, petitioner did not regularly rent its mailing

list. Petitioner was not involved with the direct mail industry.

Petitioner did not issue rate cards. Petitioner used minimal

staff time to administer its list rentals. Petitioner allocated

15 percent of Wirth's salary to the affinity credit card program

in 1988 and 1989, and none for the years in issue. Petitioner
 - 16 -

did not allocate any of its secretary's salary to the affinity

credit card program.5 Petitioner allocated 5 percent of Wirth's

salary to the travel program from 1988 through 1991. Petitioner

allocated 25 percent of its secretary's salary to the travel

program in 1988 and 1989 and 50 percent in 1990 and 1991. These

allocations are not comparable to the level of commitment

exhibited by DAV. We conclude that petitioner’s use of its

mailing list is entirely consistent with classifying the

resulting income as a royalty.

3. Whether USNB's Payments Were for Services: Extent of
Petitioner’s Role

Respondent contends that USNB paid to obtain petitioner's

cooperation and assistance.

a. Petitioner's Solicitation of Its Members

Respondent contends that petitioner's solicitation of its

members for the credit card program precludes royalty treatment

for the resulting income because petitioner mailed some

solicitation materials twice during the years at issue (1990 and

1991) and four times during prior years; hired a professional

writer to write one letter; used an off-campus print shop three

times; and reviewed solicitation materials prepared by USNB.

5
Respondent asserts that 25 percent of petitioner's
secretary's salary was allocated to the affinity credit card
program. However, respondent cites and we have found no support
for this assertion in the record.
 - 17 -

We disagree. Petitioner's actions were de minimis and

intended to bolster petitioner's relationship with OSU alumni.

Petitioner agreed to inform its members of the existence of the

affinity credit card program at least once per year, but was not

required to mail any solicitation materials to alumni. USNB

developed all marketing materials except one letter. Petitioner

reviewed those materials, but USNB retained final decision-making

authority. Petitioner might have asked USNB to "tone down" the

solicitation materials or to correct the spelling of a name.

USNB agreed to prepare and mail promotional materials.

Petitioner's two mailings during the years at issue (1990 and

1991) included a letter and brochure designed by USNB. Ninety-

five percent of the cardholders became cardholders due to USNB’s

marketing efforts. Petitioner included information about the

program in its application materials. Petitioner apparently was

using the credit card program in part to encourage alumni to join

OSUAA.

In Sierra Club, Inc. v. Commissioner, 103 T.C. at 335, a

provider of financial services, American Bankcard Services, Inc.

(ABS), and not the Sierra Club, was responsible for developing

promotional materials. ABS submitted a proposed marketing plan

which the Sierra Club reviewed. Id. at 336. ABS placed

advertisements in the Sierra Club's magazine and paid for them on

the same terms that applied to unrelated advertisers. Id. The
 - 18 -

Sierra Club could pay for direct mail or other solicitations.

Id. at 313. If the Sierra Club did so, any royalties payable by

ABS were adjusted. Id. ABS was responsible for soliciting

members. Id. at 337. ABS was obligated to develop all

promotional materials. If the Sierra Club paid production and

mailing costs, ABS would compensate it for those costs. Id. at

312. The agreement in Sierra Club required that the Sierra Club

fully cooperate with ABS by encouraging its members to acquire

and use the services. Id. at 313. Petitioner's activities are

substantially similar to those of the Sierra Club. Petitioner’s

solicitation activities were de minimis and were intended

primarily to protect petitioner’s relationship with its members

and to keep alumni aware of their ties to OSU.

b. Petitioner's Providing of Services To Promote
the Affinity Credit Card Program

Respondent contends that petitioner’s income from the credit

card activity was not a royalty because petitioner referred

occasional requests for credit card applications or complaints

about the denial of a credit card application to USNB; told

about 14 alumni to contact its offices if they needed further

assistance; and requested that USNB send preapproved applications

to certain alumni, expedite about eight applications, and

establish some credit limits above the standard. We disagree.

Petitioner's activities were de minimis and were done to protect

petitioner's goodwill with its members. When petitioner asked
 - 19 -

USNB to make exceptions for certain alumni members, petitioner

was seeking to influence how USNB ran its business, not

conducting its own business.

In Sierra Club, Inc. v. Commissioner, supra, ABS promised

the cardholders that they would receive a rebate of the annual

fee if they participated in the program for a second year. Id.

at 343. ABS breached that agreement. Id. The Sierra Club

helped arrange refunds to members. Id. We found that the Sierra

Club's actions were done to protect its good name. Id.

Similarly, petitioner was acting to preserve its good name with

alumni. We hold that USNB's payments to petitioner were not

compensation for services rendered and that petitioner’s

activities are compatible with the treatment of those payments as

royalty income.

4. Petitioner's Financial Risks and Rewards

In deciding whether income a taxpayer receives is royalty

income, we may consider the taxpayer's financial risks and

rewards, including whether the taxpayer has a net profits and

gross profits interest. See Sierra Club, Inc. v. Commissioner,

supra at 333.

In Sierra Club, the taxpayer did not have a net profits

interest in the royalty payments because its income was based on

a percentage of the total charges. Id. at 333. Instead, it had

a gross profits interest. A gross profits interest is the right
 - 20 -

to share in the gross profits without bearing the risk of loss.

Id. Gross profits are the difference between sales and the cost

of goods sold. Black's Law Dictionary 703 (6th ed. 1990).

Petitioner had a gross profits interest in the credit card

program, not a net profits interest. Petitioner received a fixed

percentage of all of the authorized cash purchases and advances,

and a fixed amount for new accounts, regardless whether USNB had

losses from the affinity credit card program. Here, as in Sierra

Club, no provision was made to periodically compute net income or

loss from the credit card program. The fact that petitioner did

not have a net profits interest supports petitioner's contention

that its income from the program was a royalty.

In Sierra Club, the taxpayer paid no direct mail costs.

Sierra Club, Inc. v. Commissioner, supra at 333. We said that if

the taxpayer had borne some of the expenses of marketing credit

cards to its members, its interest would have been less of a

gross profits interest. Id. at 334. During the years in issue,

petitioner spent a total of $20,040 and was reimbursed by USNB

for $15,761. This amount is de minimis and does not affect our

conclusion that petitioner did not have a net profits interest.

5. Petitioner’s Desire To Make Money From the Affinity
Credit Card Program

Respondent points out that petitioner entered into the

affinity credit card agreement in part to make money. This,

however, is not a basis for us to conclude that petitioner’s
 - 21 -

income from the affinity credit card program was not a royalty.

Nor does a desire to make money, standing alone, establish that

petitioner is engaged in a trade or business. See Commissioner

v. Groetzinger, 480 U.S. 23, 35 (1987) (not every income-

producing endeavor is a trade or business); Whipple v.

Commissioner, 373 U.S. 193, 197 (1963) (the income tax law

distinguishes between a trade or business and transactions

entered into for profit but not connected with a trade or

business). Not all activity conducted with the expectation of

gain is a trade or business for purposes of UBTI. Disabled Am.

Veterans v. United States, 650 F.2d at 1185. To be engaged in a

trade or business, petitioner must be involved in the activity

with continuity and regularity and the primary purpose for

engaging in the activity must be for profit. Commissioner v.

Groetzinger, supra at 35.

6. Whether the Enactment of Section 513(h) Prevents
Treatment of USNB's Payments to Petitioner as Royalties

Respondent argues that the enactment of section 513(h) shows

that Congress intended to treat income earned from mailing list

rentals as income from a trade or business. Section 513(h)

exempts from tax amounts earned by certain tax-exempt

organizations from the trade or business of exchanging or renting

mailing lists to other tax-exempt organizations.6 Section 513(h)

6
Sec. 513(h) provides:
(continued...)
 - 22 -

is effective for exchanges and rentals of member lists after

October 22, 1986. Respondent contends that the enactment of

section 513(h) implies that renting mailing lists is generally a

trade or business. As in Sierra Club, Inc. v. Commissioner, 103

T.C. 307 (1994), respondent asks us to infer from the enactment

of section 513(h) that Congress generally views gross income from

the licensing of mailing lists as UBTI, unless excepted by

section 513(h). We do not draw that inference.

It is at best hazardous to infer the intent of an earlier

Congress from a later one. See Firestone Tire & Rubber Co. v.

Bruch, 489 U.S. 101, 114 (1989); United States v. Price, 361

U.S. 304, 313 (1960). The inference asserted by respondent

is rejected in the legislative history of section 513(h).

(...continued)
(1) In general.--In the case of an
organization which is described in section
501 and contributions to which are deductible
under paragraph (2) or (3) of section 170(c),
the term "unrelated trade or business" does
not include--

* * * * * * *

(B) any trade or business which consists of--

(i) exchanging with another such
organization, names and addresses of donors
to (or members of) such organization, or

(ii) renting such names and addresses to
another such organization.

Tax Reform Act of 1986, Pub. L. 99-514, sec. 1601(a), 100 Stat.
2085, 2766.
 - 23 -

A colloquy between Congressmen Daniel Rostenkowski (D-Ill.),

Chairman of the Ways and Means Committee, and John Duncan (R-

Tenn.), Ranking Republican Member of the Ways and Means

Committee, occurred in the House of Representatives on the day

that the conference report which included section 513(h) was

passed. Congressman Rostenkowski’s comments were as follows:

I also have discussed with Congressman Duncan the issue
of whether the provision of the bill which excludes
certain income from unrelated trade or business income
creates any inference under present law. We have
reached a common understanding regarding the following
specific issue:

The question relates to section 1601 of the bill which
excludes from unrelated trade or business income
revenues from the use of a tax-exempt organization's
mailing list by another such organization. Section
1601 of the bill, which specifically exempts certain
such revenues from the tax on unrelated business income
in the future, carries no inference whatever that
mailing list revenues beyond its scope or prior to its
effective date should be considered taxable to an
exempt organization.

132 Cong. Rec. 26208 (Sept. 25, 1986).

We conclude that section 513(h) does not apply here. See

Sierra Club, Inc. v. Commissioner, T.C. Memo. 1993-199.

7. Whether Royalty Treatment Is Consistent With the Role
of the Tax on Unrelated Business Income

The unrelated business income tax (UBIT) was enacted to

prevent tax-exempt organizations from unfairly using their tax-

exempt status to compete with commercial businesses. United

States v. American College of Physicians, 475 U.S. 834, 837-838

(1986). Respondent contends that petitioner's participation in
 - 24 -

the affinity credit card program is the type of unfair

competition between tax-exempt organizations and taxable

businesses that Congress intended to subject to the UBIT. We

disagree. Petitioner's activity was de minimis. USNB was

competing with other credit card issuers, but petitioner was not.

Respondent cites United States v. American Bar Endowment,

477 U.S. 105 (1986). In American Bar Endowment, the Supreme

Court found that the taxpayer's activity created the kind of

unfair competition that led to the enactment of section 512. Id.

at 114. The American Bar Endowment (ABE) raised money by

providing group insurance policies to its members. Id. at 107.

ABE bought a group policy for its members and paid a negotiated

premium to the insurance company. Id. at 107-108. If the

insurance company's cost of providing insurance to the group was

lower than the premium, the company refunded the excess. Id. at

108. The excess amounts were called dividends. Id. ABE

required all members to agree, as a condition of participating in

the group insurance program, that ABE and not the members would

keep the dividends. Id. ABE told its members that the members'

share of the dividends, less ABE's administrative costs, was a

tax-deductible contribution from the members to ABE. Id.

ABE actively administered the group insurance program. Id.

ABE's activities included choosing insurers, negotiating premium

rates with insurers, compiling lists of its members, soliciting

and collecting premiums from its members, sending premiums to the
 - 25 -

insurer, keeping files on each policyholder, answering members'

questions about insurance policies, and screening claims for

benefits. Id. The Court held that ABE was engaged in a trade or

business. Id. at 114.

The Court found that this arrangement created unfair

competition because ABE's members could deduct part of their

premium payment as a charitable contribution. This deduction

lowered the cost of ABE's insurance to its members. Id. at 114-

115. Nonexempt businesses would be disadvantaged if ABE were not

taxed on its earnings from the insurance program because ABE

would not need to be as profitable to receive the same return on

its investment. Id. at 115.

This case is not like American Bar Endowment. ABE paid

premiums to insurance carriers; petitioner did not make payments

to USNB. ABE required members to assign any amounts paid in

excess of the cost of the insurance to ABE. Petitioner imposed

no similar obligation on its members. ABE members could deduct

excess payments assigned to ABE as charitable contributions.

Petitioner's members could not deduct their payments to USNB.

ABE collected premiums and screened claims for benefits.

Petitioner did not bill cardholders, collect payments, or decide

who was eligible to receive a credit card.

We disagree with respondent's contention that petitioner was

unfairly competing with taxed businesses.
 - 26 -

C. Conclusion

For the foregoing reasons, we hold that petitioner’s income

from the affinity credit card program is a royalty for purposes

of section 511.

To reflect the foregoing,

Decision will be

entered under Rule 155.