OREGON STATE UNIVERSITY ALUMNI ASSOCIATION, INC., Pеtitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No 2133-94.
UNITED STATES TAX COURT
January 30, 1996
T.C. Memo. 1996-34
COLVIN, Judge
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
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 nonрrofit corporation exempt from Federal income tax under section
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 cоntacts from other organizations. The executive director of the Alumni Association of the University of Oregon (AAUO), Philip Super (Super), told Wirth about proposals
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 accеss to petitioner‘s mailing list and to obtain petitioner‘s endorsement. USNB believed that it would be easier to market credit cards
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 аpplications 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
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 renewаble 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 proсessed 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.
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.
The Oregon Stater did not generally accept pаid 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
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
Pеtitioner 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 аnd 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
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 рroblem. 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
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 аnd 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
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
B. Royalty Income
Royalty income is excluded from UBTI. Sec.
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
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 phоtograph 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
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 thе 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
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 рrogram 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
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.
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
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
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
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 рetitioner‘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
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
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
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
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
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
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
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 nо 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.
For the foregoing reasons, we hold that petitioner‘s income from the affinity credit card program is a royalty for purposes of section
To reflect the foregoing,
Decision will be entered under Rule 155.
Notes
Tax Reform Act of 1986, Pub. L. 99-514, sec. 1601(a), 100 Stat. 2085, 2766.(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.