Disabled American Veterans v. Comm'r of Internal Revenue
| Decision Date | 27 March 1990 |
| Docket Number | 37361-87.,Docket Nos. 34856-87 |
| Citation | 94 T.C. 60,94 T.C. No. 6 |
| Parties | DISABLED AMERICAN VETERANS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
D, an organization exempt from Federal income tax, ‘rented‘ the names on its donor list to other organizations, both tax- exempt and for profit, for one-time mailings. D conceded that its ‘rental‘ activity was a trade or business, regularly carried on, that was unrelated to its exempt purpose.
HELD, the amounts D received from its ‘rental‘ activities were royalties which are excluded from UBTI because section 512(b)(2) excludes all royalties from UBTI whether or not derived from the active conduct of a trade or business. National Collegiate Athletic Assn. v. Commissioner, 92 T.C. 456 (1989); National Water Well Assn. Inc. v. Commissioner, 92 T.C. 75 (1989); and Fraternal Order of Police v. Commissioner, 87 T.C. 747 (1986), affd. 833 F.2d 717 (7th Cir. 1987), distinguished. Bart A. Brown, Jr., Donald C. Alexander, and Michael Quigley, for the petitioner.
Genevieve K. Murtaugh and Reid M. Huey, for the respondent.
In these consolidated cases, the Commissioner determined deficiencies in petitioner's Federal income tax as follows:
+--------------------+
¦Year ¦Deficiency ¦
+------+-------------¦
¦1974 ¦$347,594 ¦
+------+-------------¦
¦1975 ¦316,287 ¦
+------+-------------¦
¦1977 ¦228,335 ¦
+------+-------------¦
¦1978 ¦253,155 ¦
+------+-------------¦
¦1979 ¦324,387 ¦
+------+-------------¦
¦1980 ¦324,213 ¦
+------+-------------¦
¦1981 ¦278,851 ¦
+------+-------------¦
¦1982 ¦346,397 ¦
+------+-------------¦
¦1983 ¦455,566 ¦
+------+-------------¦
¦1984 ¦598,530 ¦
+------+-------------¦
¦1985 ¦626,338 ¦
+--------------------+
After concessions, the issues presented at trial were, (1) whether payments to petitioner for the use of names from petitioner's list of donors are ‘royalties‘ within the meaning of section 512(b)(2) 1 (and, therefore, excluded from unrelated business taxable income (‘UBTI‘)) or are ‘rents‘ (not excluded from UBTI), and (2) whether petitioner's exchange of the right to use names from its list of donors for a similar right to use names from the mailing lists of other organizations gives rise to imputed UBTI. After trial, we held oral argument on the legal issues in these cases. Following this hearing, respondent conceded the second issue.
On the dates the petitions were filed in these cases, petitioner maintained its principal office in Cold Spring, Kentucky. Petitioner is a corporation chartered by an Act of Congress on June 17, 1932, and is qualified as an organization exempt from Federal income tax pursuant to section 501(a) by virtue of its being an organization described in section 501(c)(4). Petitioner's primary objective is to aid and assist wartime disabled veterans and their widows and dependents. For many years, petitioner has solicited contributions from the general public to obtain funds to perform its exempt functions. Petitioner's principal source of funds is donations from the public, made almost entirely in response to direct solicitations that petitioner mailed to potential donors.
Petitioner established and maintained a list of its donors (‘Donor List‘) so that additional contributions could be solicited from prior contributors. For petitioner's Donor List to remain productive, stale names were removed and new names were added. Names became stale when donors died, moved without a forwarding address, or ceased contributing. Petitioner obtained contributions and revenues in response to direct solicitations mailed twice a year to potential donors from 1974 through 1983 and three times a year during 1984 and 1985. Just prior to each of the petitioner's own mailings, obsolete names were deleted and the names of new contributors were added to the Donor List. On receipt of address correction notifications from the U.S. Post Office showing that a former donor had died or moved without a forwarding address, petitioner removed these names from the Donor List. Petitioner also corrected the Donor List when the U.S. Post Office returned a mailing with a forwarding address. Petitioner purged between 15 percent and 18 percent of the names from the Donor List each year.
Petitioner received contributions and revenues from its direct mail solicitations during these years in the following amounts:
+------------------+
¦1974 ¦$20,449,412 ¦
+-----+------------¦
¦1975 ¦20,036,437 ¦
+-----+------------¦
¦1977 ¦20,693,711 ¦
+-----+------------¦
¦1978 ¦20,460,662 ¦
+-----+------------¦
¦1979 ¦21,321,348 ¦
+-----+------------¦
¦1980 ¦23,984,143 ¦
+-----+------------¦
¦1981 ¦24,457,036 ¦
+-----+------------¦
¦1982 ¦26,496,183 ¦
+-----+------------¦
¦1983 ¦31,778,546 ¦
+-----+------------¦
¦1984 ¦33,405,956 ¦
+-----+------------¦
¦1985 ¦36,778,828 ¦
+-----+------------¦
¦Total¦279,862,262 ¦
+------------------+
The parties agree that the Donor List is intangible personal property. Petitioner maintained its Donor List in computerized form during these years. Petitioner's computerized Donor List enabled it to identify individual donors and segment them according to several categories such as geographic locale, amount of contribution (for example, $1, $5, $10), recency of contribution (for example, contribution within the last 6 months, contribution within the last 1 year), and other selections. Segmenting the Donor List by amount of contribution allowed petitioner to mail different solicitations to appeal to contributors based on the amount of their prior contribution and to remove unproductive donors enabling petitioner to receive higher average contributions. Petitioner could mail solicitations at bulk rate by segmenting the list by zip code. All of these measures allowed petitioner to reduce its fund-raising costs to comply with the standards of the Council of Better Business Bureaus and the National Charities Information Bureau.
During the years at issue, petitioner, pursuant to a practice begun in 1960, permitted Exempt, Commercial, and Fund-raising Organizations to use names from the Donor List for mailings (‘Mailing List‘) on behalf of their organizations (‘Exempt Organizations‘ means organizations exempt from Federal income tax that are described in section 501(c) and to which contributions are also deductible under sections 170(c)(2) and 170(c)(3); ‘Commercial Organizations‘ means profit seeking, nonexempt organizations; and ‘Fund-raising Organizations‘ means all organizations other than Exempt or Commercial Organizations).
Petitioner received payments for the use of a Mailing List (such permitted use by Exempt, Commercial, and Fund-raising Organizations is hereinafter referred to as ‘List Rental Activities‘). Respondent determined that the payments petitioner received from List Rental Activities during the years at issue gave rise to UBTI for each of those years. During the years at issue, petitioner also exchanged the use of names from the Donor List for the right to use names from the mailing lists of Exempt, Commercial, and Fund-raising Organizations. In accordance with the usual terminology among mailing list owners, mailing list users, and mailing list brokers, a transaction in which a list owner furnishes names from its list to a list mailer, together with the privilege of mailing to the names on such list on a one-time basis, is described as a ‘list rental‘ or a ‘rental‘ or, to a lesser extent, as a ‘list reproduction‘ or ‘list use.‘ 2 The Direct Mail Marketing Association's (‘DMMA‘) list glossary defined the term ‘list rental‘ as
Tax Court, 1990.
Disabled American Veterans v. C.I.R.94 T.C. No. 6, 94 T.C. 60, Tax Ct. Rep. (CCH) 46,388, Tax Ct. Rep. Dec. (P-H) 94.6
1 All section references are to the Internal Revenue Code of 1954 as in effect for the years in issue, unless otherwise indicated.
2 Use of the terms ‘list rentals,‘ ‘List Rental Activities,‘ ‘rentals,‘ ‘rents,‘ ‘rented,‘ ‘royalties,‘ and ‘list use‘ does not imply any legal or factual conclusions about whether petitioner's receipts from such transactions were ‘royalties‘ or ‘rents.‘
An arrangement in which a list owner furnishes names on his or her list to a mailer, together with the privilege of using the list on a one-time basis only (unless otherwise specified in advance). For this privilege, the list owner is paid a royalty by the mailer. (List Rental is the term most often used although ‘List Reproduction‘ and ‘List Usage‘ more accurately describe the transaction, since ‘Rental‘ is not used in the sense of its ordinary meaning of leasing property.)
The DMMA is a trade association composed of organizations using direct mail techniques in their operations. During the years at issue, petitioner was a member of DMMA. Representatives of petitioner regularly attended meetings and conventions of persons interested in direct mail matters.
Petitioner's ‘rental‘ information was printed on rate cards (also known as data cards). During the years at issue, it was widely known among mailing list brokers and direct mailers that petitioner's mailing list was available for ‘rental‘ and ‘exchange,‘ and petitioner sent its rate cards to mailing list brokers with whom petitioner had previously had dealings. Petitioner also listed its rates in the Standard Rates and Data Service, a directory of mailing lists, in the free listing section.
Petitioner set its rental rates according to what other organizations were charging petitioner. During the years 1974 through 1985, petitioner's rental rates ranged from $20 to $45 per 1,000 names for Commercial users and from $26 to $50 per 1,000 names for Exempt and Fund-raising users. Petitioner increased the rates by $2 to $7 per 1,000 names for names categorized by amount of...
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