Fraternal Order of Police Ill. State Troopers Lodge No. 41 v. Comm'r of Internal Revenue
| Decision Date | 29 September 1986 |
| Docket Number | Docket No. 9035-81,3944-83. |
| Citation | 87 T.C. 747,87 T.C. No. 45 |
| Parties | FRATERNAL ORDER OF POLICE ILLINOIS STATE TROOPERS LODGE NO. 41, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner, an exempt organization under section 501(c)(8), published The Trooper magazine. In addition to articles relating primarily to the duties of police officers, The Trooper contained two types of business listings covering a wide range of professional, consumer, and leisure products and services. The first type, the Business Directory, classified and arranged the listers in the same manner as the yellow pages of a telephone directory. The second type, referred to as ‘large listings‘ contained the usual elements of advertisements such as blocking, illustrations, signatures, trademarks and emblems. Respondent determined that petitioner's receipts from the listings constituted unrelated business taxable income.
HELD: The business listings constitute ‘advertising.‘ HELD FURTHER, The publication of advertising constitutes a trade or business within the meaning of section 513 and, therefore, the receipts from the business listings are ‘unrelated business taxable income.‘ United States v. American College of Physicians, 475 U.S. (1986). Held further, The receipts from the listings publication are not royalties excluded from taxation by section 512. John J. Vassan, Patrick B. Mathis, and George E. Marifian, for the petitioner.
Matthew J. Fritz, for the respondent.
Respondent determined deficiencies in petitioner's income tax as follows:
+--------------------------------+
¦Year ended Sept. 30--¦Deficiency¦
+---------------------+----------¦
¦1976 ¦$65,769.80¦
+---------------------+----------¦
¦1977 ¦83,174.05 ¦
+---------------------+----------¦
¦1978 ¦42,677.52 ¦
+---------------------+----------¦
¦1979 ¦47,620.63 ¦
+---------------------+----------¦
¦1980 ¦94,353.90 ¦
+--------------------------------+
The issue for decision is whether the receipts of petitioner generated by certain listings in The Trooper magazine constitute income derived from an unrelated trade or business under section 511, 1 and if so, whether such receipts are excludable from unrelated business taxable income as royalties under section 512(b)(2).
Some of the facts have been stipulated and are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by reference.
Petitioner, the Fraternal Order of Police, Illinois State Troopers Lodge Number 41 (‘FOP‘), is a not-for-profit corporation organized under the laws of the State of Illinois and had its principal place of business in Springfield at the time it filed its petition. Petitioner is an exempt organization under section 501(c)(8). Its active members are regularly appointed and commissioned police officers in the Illinois Department of Law Enforcement or troopers in the Illinois State Police. FOP's constitution and bylaws state that its purpose is to assist worthy members, their families, widows, and orphans.
In August 1975, FOP formed the Troopers Alliance (‘Alliance‘). Alliance had basically the same membership as FOP and was formed to carry out the specific goal of providing money for hospitalization and dental programs for members and their families.
In September 1975, Alliance entered into a solicitation and publishing agreement (agreement I) with Organization Services Corporation (OSC) for the publication of a magazine known as The Trooper. Under Agreement I, Alliance was to receive 20 percent of the ‘gross advertising revenue actually collected‘ by OSC. Agreement I referred to parties solicited to place ‘listings‘ in the magazine as ‘advertisers‘ and to ‘listings‘ as ‘advertising‘. The solicitation program was referred to as the ‘ad solicitation program,‘ the ‘advertising marketing program,‘ and the ‘marketing of advertising.‘ Agreement I also provided that OSC was to determine the ‘advertising rates . . . for local and national advertisers‘ and referred to the receipts to be derived from the contracts as ‘advertising revenue.‘
On December 20, 1975, Alliance assigned all of its right, title and interest in Agreement I to petitioner. On December 23, 1975, petitioner and OSC canceled Agreement I and entered into a second Solicitation and Publishing Agreement (‘Agreement II‘). Agreement II was identical in all material respects to Agreement I, except that under the new Agreement petitioner was given greater control over the bank account into which the revenues were to be deposited. Petitioner's executive committee was then informed that Alliance had been disbanded and that its ‘ad solicitation program‘ would thereafter be conducted by petitioner. The committee was also advised that future proceeds from the program would be used to provide death benefits, legal assistance, scholarships, hardship assistance, and possibly dental insurance for FOP members and their families.
On December 24, 1978, petitioner and OSC entered into another publishing agreement (‘Agreement III‘). Agreement III provided that OSC was to publish each issue of The Trooper within ten weeks after having collected $150,000 in ‘advertising revenue.‘ Agreement III also increased FOP's share of ‘gross advertising revenue actually collected‘ from 20 percent to 23 percent.
The Trooper is comparable in quality to most nationally published commercial magazines, and in content, is almost identical to Law and Order, an independent magazine published for policemen. Its editorials and articles are of particular interest to police officers and cover a wide range of professional, commercial, consumer, and leisure topics. The Trooper's circulation during the years in issue was approximately 2,000. Copies were distributed to FOP members and associate members, businesses and individuals having listings in The Trooper, Illinois legislators and other public officials, as well as other persons designated by petitioner from time to time. One of petitioner's officers served as executive editor of the magazine and petitioner had the right to censor text, editorials, and business listings, as well as to control any reprints.
The business listings in The Trooper were of two types, both of which covered a wide range of professional, commercial, consumer, and leisure goods or services. The first type of listing was the Business Directory which classified and arranged the listers in the same manner as the ‘yellow pages‘ of a telephone directory. The Business Directory was preceded by this statement:
ON THE FOLLOWING PAGES, listed by category of service or product, are advertisers who support The Trooper magazine. Consider these fine companies when making purchases for yourself or your family.
The second type of listings were referred to as ‘large listings‘ and included such well known companies or products as American Airlines, Michelob Beer, Johnny Carson Clothes, Midas Mufflers, and Ryder Trucks. The Trooper had an ‘Advertisers' Index‘ which contained the name of the sponsor of each large listing and the page upon which its listing was located. Large listings contained the usual elements associated with advertisements such as blocking, illustrations, signatures, trademarks and emblems. Many of the large listings contained well-known slogans used by the sponsors in their national advertising.
OSC employed an independent contractor to solicit listings for individuals and corporations. The contractor or one of his employees would contact a potential lister and, after a brief introduction, would inform the potential lister that FOP was putting together the next issue of The Trooper, the proceeds from which would be added to FOP's death fund and used to aid the families of policemen and troopers killed or injured in the line of duty. The potential lister would then be asked to sponsor a ‘nice listing‘ in the magazine. All solicitations were monitored by FOP members.
The rates for listings during the years in issue were as follows:
Each sponsor of a listing in The Trooper received an acknowledgement form which read in part, as follows:
Businesses listing in The Trooper frequently noted on their checks that...
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