Disabled American Veterans v. C.I.R.

• Court: U.S. Court of Appeals — Sixth Circuit
• Writing for the Court: Before MARTIN and GUY, Circuit Judges, and LIVELY; RALPH B. GUY, Jr.; BOYCE F. MARTIN, Jr.
• Citation: Disabled American Veterans v. C.I.R., 942 F.2d 309 (6th Cir. 1991)
• Decision Date: 30 September 1991
• Docket Number: No. 90-1841,90-1841
• Parties: -5109 DISABLED AMERICAN VETERANS, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

Page 309

942 F.2d 309

68 A.F.T.R.2d 91-5109

DISABLED AMERICAN VETERANS, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

No. 90-1841.

United States Court of Appeals Sixth Circuit.

Argued April 2, 1991.

Decided July 5, 1991.

Rehearing Denied Sept. 30, 1991.

Donald C. Alexander (argued), Michael Quigley, Kurt C. Swainston, Cadwalader, Wickersham & Taft, Washington, D.C., for petitioner-appellee.

Abraham N.M. Shashy, Jr., Chief Counsel, I.R.S., Office of Chief Counsel, Gary R. Allen, Acting Chief, David M. Moore, Kenneth L. Greene (argued), Shirley D. Peterson, U.S. Dept. of Justice, Appellate Section Tax Div., Washington, D.C., for respondent-appellant.

Before MARTIN and GUY, Circuit Judges, and LIVELY, Senior Circuit Judge.

RALPH B. GUY, Jr., Circuit Judge.

The Commissioner of Internal Revenue (CIR) appeals an adverse judgment of the United States Tax Court, finding that Disabled American Veterans (DAV), a tax-exempt organization, did not have tax deficiencies over the ten-year period, 1974-85.

CIR raises two issues on appeal: whether monies received by DAV from other organizations for the use of names from DAV's donor list are excludable from unrelated business taxable income (UBTI) as royalties, pursuant to 26 U.S.C. § 512(b)(2); and whether the Tax Court correctly rejected the Commissioner's argument that collateral estoppel precludes DAV from presenting its case. We find that the Tax Court was collaterally estopped from considering this issue, and we reverse its decision for this reason.

I.

The facts in this case are not in dispute. DAV is a corporation, chartered by an Act of Congress in 1932, and exempt from federal income tax as a "social welfare organization" under § 501(c)(4) of the Tax Code. ¹ The primary purpose of the organization is to aid and assist wartime disabled veterans and their widows and dependents. DAV's principal source of revenue is donations it receives from the public, made almost entirely in response to direct mail solicitations.

During the years at issue--1974 through 1985--excepting 1976, DAV received a total of $279,862,262 in direct mail contributions. This was divided as follows:

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
                

DAV maintained its donor list in computerized form, which allowed it to solicit from prior contributors and to direct its mailings to individual donors by identifying them in terms of their zip codes, the amount of their contributions, the date of their latest contributions and other ways significant to a solicitor of charitable contributions. In addition, this type of record-keeping allowed DAV to reduce its fund-raising costs, both through complying with the bulk mail rates of the post office and through DAV's ability to purge names which did not justify additional mailings. This mailing list maintenance also helped DAV abide by state regulation of charities, as well as Better Business Bureau and National Charities Information Bureau guidelines. Between 15 and 18 percent of the names for DAV's donor list were purged each year as a result of death, unrecorded changes in address, or failures to contribute.

During the years in question, DAV, in keeping with a practice it had started in 1960, permitted exempt, commercial, and fund-raising organizations to use names from its mailing list for their own fund-raising purposes. It received a fee for this use. DAV also exchanged its lists for the lists of other organizations, submitting potential new lists to stringent testing and evaluation in which 10,000 to 50,000 names were randomly selected from the prospective list and sent sample mailings.

DAV's sale of names, accompanied by the permission for a one-time mailing, is described as a "list rental," a "rental," a "list reproduction," or a "list use." Both parties agree that the terms "rent" and "rental" are ones commonly used in the industry and have no factual or legal significance relating to the determination of whether petitioner's receipts from such transactions were "royalties" or "rents" within the meaning of the Tax Code.

DAV's "list rental activity" was a continuous, ongoing activity, to which it devoted what amounted to two full-time positions each year. DAV did not utilize volunteers or other unpaid workers in this activity. The organization entered into transactions directly with list users or through list brokers (professional marketers whose business it was to facilitate list rental transactions). Its "rental" information was printed on "rate cards." DAV sent its rate cards to mailing list brokers with whom DAV previously had dealings, and listed its rates in the Standard Rates and Data Service, a directory of mailing lists. DAV was also a member of the Direct Mail Marketing Association, a trade association composed of organizations using direct mail techniques in their operations. Officials of DAV regularly attended meetings and conventions of organizations involved in direct mailing efforts.

DAV delivered the rented list to the list user on magnetic tape or on a variety of preprinted labels, such as heat transfer, gummed, or Cheshire labels. DAV allowed list users to order selected segments of its donor list. For example, a list user could request a segment based on amount of donation, recency of donation, multiple donors, new donors, or zip codes. DAV would not engage in a rental that involved less than 10,000 names.

DAV, like other list owners, imposed conditions on the use of the names from its donor list. It retained the right to approve the dates a list user intended to mail materials, to examine and approve the materials to be mailed by the list user, and to require the removal of any reference to DAV in the materials mailed. DAV inserted "dummy" names in the rented list (i.e., names of people connected with DAV) in order to monitor the use of the names it rented to list users. DAV's National Finance Committee was responsible for review and approval of any proposed list user and of the acceptability of the mailing piece. A list rental would be approved only upon a majority vote of the members of the Committee. Occasionally DAV declined to "rent" or "exchange" segments of the DAV mailing list.

DAV set its rates in accordance with what other organizations were charging DAV for the use of names from their lists. The rates charged to other exempt and fund-raising organizations were higher than those charged to commercial organizations. During the years at issue, DAV's rates ranged from $20 to $45 per 1,000 names for commercial list users, and from $26 to $50 per 1,000 names for exempt and fund-raising list users. DAV increased its rates from $2 to $7 per 1,000 names for lists that were segmented as to amount of contribution, and from $1 to $6 for lists that were based on multiple donors, recent donors, and zip codes, and for names on heat transfer labels rather than magnetic tape.

From 1974 through 1979, DAV entered into transactions with 75 different list brokers, and rented portions of its donor list in 451 separate transactions. In each of the years 1980 through 1985, DAV entered into transactions with numerous list users. In 1984, for example, DAV provided list users with over 53 million names. DAV prepared a "journal voucher" to record income and expenses on a monthly basis. Each of the journal vouchers explained that its purpose was "to record billings applicable to rental of names and addresses for the month of ____." DAV's income from its list rental activity during the years at issue was as follows:

1974                           $ 1,301,971
                1975                             1,205,313
                1977                             1,025,727
                1978                             1,073,186
                1979                             1,237,108
                1980                             1,267,422
                1981                             1,285,408
                1982                             1,566,050
                1983                             1,956,883
                1984                             2,246,875
                1985                             2,038,441
                                      --------------------
                               TOTAL          $ 16,204,384
                

The Commissioner determined that the income DAV received from the sale of its lists, or portions thereof, during the years in question constituted UBTI and was therefore taxable. The income generated from the use of the mailing lists during these years totalled $16,204,384, with the claimed tax deficiency per year 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
                

With respect to its 1974, 1975, and 1977 tax years, DAV filed an Exempt Organization Business Income Tax Return, Form 990-T, and did not report the payments it received from its list rental business as unrelated business taxable income on those returns. For the 1978 through 1985 tax years, DAV did not file any Forms 990-T or otherwise report as income the payments it received.

In an earlier case, Disabled American Veterans v. United States, 227 Ct.Cl. 474, 650 F.2d 1178 (1981) (DAV1 ), the same two pa...