T.C. Memo. 1996-63
UNITED STATES TAX COURT
ALUMNI ASSOCIATION OF THE UNIVERSITY OF OREGON, INC.,
Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No 2132-94. Filed February 20, 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 $75,588 for 1990 and $105,183
for 1991.
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The issue for decision is whether petitioner's income from
an affinity credit card program is a royalty excluded by section
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, Alumni Association of the University of Oregon,
Inc., is an Oregon nonprofit corporation exempt from Federal
income tax under section 501(c)(3). Petitioner's principal place
of business is Eugene, Oregon. Petitioner was established to
advance the cause of higher education, promote the interests and
increase the usefulness of the University of Oregon, and
encourage good fellowship of its members to further its purposes.
Petitioner fulfilled its purposes by communicating with alumni
and sponsoring continuing educational activities and social
events. During the years at issue, petitioner had a staff of 12
or 13 employees.
B. History of the University of Oregon Alumni Association
Affinity Credit Card Program
In 1986 and 1987, petitioner became aware of affinity
credit card programs through news articles and discussions with
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representatives from other organizations. Petitioner received
unsolicited proposals regarding the affinity credit card program
from the United States National Bank of Oregon (USNB) and another
financial institution. Petitioner's then executive director,
Philip Super (Super), rejected both proposals.1 Super contacted
Donald Wirth (Wirth), the executive director of the Oregon State
University Alumni Association (OSUAA), to discuss the affinity
credit card program. Wirth and Super wanted their organizations
to develop an affinity credit card program.
Petitioner and the OSUAA formed a committee to solicit
proposals from several banks and to select a plan. Petitioner
and the OSUAA 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 Agreement2 (the Agreement) on June 23, 1987.
1
Philip Super was petitioner's executive director when
petitioner negotiated and implemented the affinity credit card
program. Dan Rodriguez (Rodriguez) became petitioner's executive
director starting in September 1988. Rodriguez was petitioner's
executive director during the years in issue.
2
The Agreement was amended on Apr. 9, 1987. 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.
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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 affinity credit card program.
USNB entered into the Agreement primarily to make money.
Its objectives in signing the affinity credit card 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 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 the University of Oregon and
to keep the University of Oregon's name before the public, to
provide a low-cost credit card to alumni and other University of
Oregon 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
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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 the University of Oregon 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 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 University of Oregon Foundation. Petitioner
forwarded USNB's requests to the University of Oregon Foundation.
The University of Oregon Foundation prepared a magnetic tape for
USNB's use. Employees of the University of Oregon Foundation
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spent no more than 1 hour preparing the tape. The University of
Oregon 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 particular mailing.
The University of Oregon Foundation is 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.
USNB gave petitioner a list of alumni cardholders each
quarter. Petitioner's employees spent about 2 hours each quarter
entering data regarding the cardholders.
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 promotional materials. 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 Old Oregon and The Alumni
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Insider
Petitioner's primary means of communicating with its alumni
is through Old Oregon and the Alumni Insider. Old Oregon is
published by the University of Oregon and is not connected with
or controlled by petitioner. Petitioner had no publication
before 1990. USNB advertised the affinity card program in Old
Oregon. Old Oregon accepted no other advertising. The record
does not show whether Old Oregon charged USNB to advertise.
Petitioner began its own publication, the Alumni Insider,
in 1990. The Alumni Insider was published quarterly and had a
circulation of about 10,000. The Alumni Insider was mailed to
petitioner's dues-paying members. The Alumni Insider published
two advertisements each year about the affinity credit card
program. The advertisements were designed by a professional
advertising agency at USNB's request. USNB paid for the design
of all advertisements published in the Alumni Insider.
Petitioner did not bill USNB for the advertisements until 1991.
Petitioner charged USNB $800 per year to publish the two
advertisements beginning in late 1991. The $800 charge was an
estimate of petitioner's cost to produce the advertisements.
Petitioner's employees do not know why USNB was not charged for
the first few advertisements.
Petitioner occasionally published advertisements for the
affinity credit card program in the Alumni Insider when it had
space available. Petitioner used a camera-ready copy provided
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by USNB for prior advertisements. Petitioner did not charge USNB
for these advertisements.
USNB gave petitioner a copy of each advertisement to review
and approve. It took one or two of petitioner's employees about
30 minutes to examine the advertisements. Petitioner's employees
examined the advertisements for typographical errors and content.
3. Design of the Credit Cards
USNB designed the cards issued under the program. The
Classic Visa card had a photograph of a University of Oregon
building easily recognizable by University of Oregon alumni and
the words "UNIVERSITY OF OREGON ALUMNI ASSOCIATION" printed on
it.3 The premier card had the same written notation as the
classic card but had no photograph.
F. Postagreement Activities by Petitioner
1. Petitioner's Solicitations of Alumni
The University of Oregon Printing Department printed and
mailed solicitation materials three times from 1987 to 1991.4
Two of these mailings preceded the years at issue, and one was
3
Petitioner's logo is a roof of a building with the letters
"U" and "O" on separate sides and the words "ALUMNI ASSOCIATION"
on the bottom half of the roof. Petitioner's logo is a
registered trademark.
4
Petitioner, in its proposed findings of fact, asserts that
it sent out promotional materials twice. Petitioner stipulated
that it mailed promotional materials three times from 1987 to
June 30, 1991. Because there is no evidence that the stipulation
is wrong, we accept it as correct.
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during the years at issue. The University of Oregon Printing
Department: (a) Printed and mailed a letter and brochure
supplied by USNB to 63,451 alumni in 1988; (b) printed and mailed
a letter prepared and supplied by USNB to about 14,500 University
of Oregon students in 1988; and (c) printed and mailed a letter
and brochure supplied by USNB to 39,900 University of Oregon
alumni in 1990. USNB fully reimbursed petitioner for all costs
associated with these mailings.
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 the University of Oregon
Printing Department was convenient to the parties. Both USNB
and petitioner hoped to benefit from the mailings.
Petitioner's mailings were not as sophisticated as USNB's
because 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.
Petitioner included information about the affinity credit
card program in its membership application materials. Petitioner
published information about the affinity credit card program in
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its annual report. The report went to petitioner's members.
USNB did not expect or require petitioner to mail direct
solicitation materials to satisfy its duty to inform members
about the affinity credit card program.
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 these 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 occasionally received requests for credit cards
from persons who were connected with the University of Oregon but
who were not alumni. Petitioner forwarded each request to USNB.
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. It was expected that alumni would contact USNB.
Petitioner maintained a list of USNB employees and their areas of
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service. Petitioner kept this list so it could refer alumni who
contacted its office to the appropriate USNB employee.
4. Involvement of Petitioner's Executive Director in the
Affinity Credit Card Program
Petitioner allocated 10 percent of Super's salary to develop
and implement the affinity credit card program for fiscal years
1986 and 1987 and from July to October 1987. Petitioner
allocated 5 percent of Super's salary to the affinity credit card
program from November 1987 to April 1988. Petitioner did not
allocate any salary to the affinity credit card program for the
years in issue (1990 and 1991). Petitioner's executive director
from September 1988 to present, Dan Rodriguez (Rodriguez), met
with USNB and a representative from the OSUAA once a year to
review the performance of the affinity credit card program.
These meetings lasted about 1-½ to 2 hours. Rodriguez worked
approximately 1 hour per month on the affinity credit card
program.
G. Petitioner's Travel Program
Petitioner arranged trips for its members through two travel
agencies. Petitioner earned $16,908 in fiscal year 1990 and
$14,396 in fiscal year 1991 from its travel program. These
figures do not include costs for travel to bowl games. For bowl
games, petitioner incurred net losses of $15,892 for fiscal year
1990 and $7,334 for fiscal year 1991.
H. Watches and Rings
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Petitioner entered into an agreement with Wayneco
Enterprises, Inc. (Wayneco). Wayneco agreed to provide class
rings and commemorative watches to alumni. Wayneco paid
petitioner $25 for each item purchased.
I. Petitioner's Income From the Affinity Credit Card
Program
Petitioner grossed $223,566 in 1990 and $305,296 in 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;
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
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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 a Valuable
Intangible Property Right
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 an easily
recognizable building on the University of Oregon's campus and
the words "UNIVERSITY OF OREGON ALUMNI ASSOCIATION". The premier
card also had those words but had no photograph. USNB's failure
to depict the building 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 University of Oregon seal with petitioner's logo.
Petitioner's logo is a registered trademark. 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
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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 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 practice 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
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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 1990 and 1991;
(b) alumni class rings and commemorative watches; and (c) the
affinity credit card program at issue here.
Unlike DAV, petitioner did not regularly rent its mailing
list. Petitioner was not involved in the direct mail industry.
Petitioner did not issue rate cards. Petitioner used minimal
staff time to administer its rentals. Petitioner allocated 10
percent of Super's salary to develop and implement the affinity
credit card program for fiscal year 1986-87 and from July 1987 to
October 1987. Petitioner allocated 5 percent of Super's salary
to the affinity credit card program from November 1987 to April
1988. The record does not indicate that petitioner allocated
any salary to the affinity credit card program for the years in
issue. 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.
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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 once during the years in issue (1990 and
1991) and twice during prior years.
We disagree. Petitioner's activities were de minimis and
intended to bolster petitioner's relationship with University of
Oregon 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. 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 one mailing 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
the Alumni Association of the University of Oregon.
In Sierra Club, Inc. v. Commissioner, 103 T.C. at 335, a
provider of financial services, American Bankcard Services, Inc.
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(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
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 its alumni aware of their ties to the University of
Oregon.
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 assisted USNB
in making solicitations, made its own solicitations, and provided
personal services to cardholders and prospective cardholders. We
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disagree. Petitioner's activities were de minimis and were done
to protect petitioner's goodwill with its members.
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.
In Oregon State Univ. Alumni Association, Inc. v.
Commissioner, T.C. Memo. 1996-34, we held that the taxpayer
engaged in de minimis activity where it referred occasional
requests for credit card applications or complaints about the
denial of a credit card application, 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. Here, petitioner has engaged
in less activity than the taxpayer in Oregon State. 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
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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
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 of 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.
5. Petitioner's Desire To Make Money From the Affinity
Credit Card Program
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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
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
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organizations from the trade or business of exchanging or renting
mailing lists to other tax-exempt organizations.5 Section 513(h)
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
5
Sec. 513(h) provides:
(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.
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U.S. 304, 313 (1960). The inference asserted by respondent is
rejected in the legislative history of section 513(h).
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
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States v. American College of Physicians, 475 U.S. 834, 837-838
(1986). Respondent contends that petitioner's participation
in 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
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rates with insurers, compiling lists of its members, soliciting
and collecting premiums from its members, sending premiums to the
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.
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We disagree with respondent's contention that petitioner was
unfairly competing with taxed businesses.
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.