Mississippi State University Alumni, Inc. v. Commissioner
| Decision Date | 28 August 1997 |
| Docket Number | Docket No. 9043-95. |
| Citation | 74 T.C.M. 458 |
| Parties | Mississippi State University Alumni, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
James K. Hasson, Jr., Atlanta, Ga., John W. Bonds, Jr., and Amanda B. Scott, for the petitioner. Lourdes Gonzalez De Mendoza and Charles P. Hanfman, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies in petitioner's Federal income tax of $13,374 for the tax year ending June 30, 1989, $20,059 for the tax year ending June 30, 1990, and $26,143 for the tax year ending June 30, 1991.
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 taxable 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.
Some of the facts have been stipulated and are so found.
The State of Mississippi operates Mississippi State University (MSU) in the town of Mississippi State, Mississippi.
Petitioner's principal office was in Mississippi State, Mississippi, when it filed the petition in this case. Petitioner is MSU's alumni organization.
Petitioner informs alumni about MSU, solicits gifts from alumni and supporters, and organizes alumni chapters. Petitioner uses direct mail and telemarketing to raise funds for MSU. Petitioner requests contributions from MSU alumni and sends them Mississippi State Alumnus magazine (Alumnus) and information about homecoming, class reunions, and chapter events. Petitioner has about 100 chapters.
Petitioner keeps a mailing list of MSU alumni so MSU and petitioner can communicate with them. Petitioner has kept these records on its computer since 1981. During the years in issue, petitioner updated its alumni mailing list daily.
Petitioner reports to MSU's Office of University Relations, which is headed by MSU's vice president for advancement. Petitioner is exempt from Federal income tax under section 501(c)(3).
Petitioner had about 12 to 14 full-time employees from 1988 to 1991. Petitioner also employed students part time. MSU generally paid petitioner's employees.
Steve C. Grafton (Grafton) was petitioner's executive director from September 1987 to July 1994. He reported to MSU's vice president for advancement and to petitioner's board of directors. He usually worked 50 to 60 hours a week during the years in issue.
Frances Carr (Carr) has worked for petitioner since around 1979. She processed annual fund gifts, made address changes on the data base, and produced lists, labels, and diskettes during the years in issue. Student employees assisted her during the years in issue.
Petitioner hired a marketing coordinator in 1990. See paragraph F, below.
Peoples Bank & Trust (PB&T), a bank the principal office of which is in Tupelo, Mississippi, was engaged in the credit card business, including issuing affinity credit cards. An affinity credit card is a card designed for and marketed to members of a group or organization. PB&T received finance charges, merchant fees, and interchange income from affinity credit cards it had issued.
In 1987, PB&T told petitioner it would like to issue affinity credit cards for petitioner. Later in 1987, petitioner sent letters to several financial institutions, including PB&T, seeking proposals for an affinity credit card program.1 The letter detailed the major features petitioner wanted in any proposal.
Edwin Brown (Brown), a vice president of PB&T, answered petitioner's letter and represented PB&T in affinity credit card negotiations with petitioner. PB&T wanted permission to use petitioner's mailing list, marks, and logos.
On November 20, 1987, petitioner and PB&T agreed (1987 agreement) that PB&T would administer an affinity card program targeted to petitioner's members.
The 1987 agreement was to be effective for 3 years. Thereafter, it would be automatically renewed for terms of 1 year, unless either party notified the other in writing at least 90 days before the end of the initial or current renewal term that it would not renew the agreement.
PB&T agreed to apply its customary credit policies to credit card applications from petitioner's members. Cardholder agreements between PB&T and the cardholders were to govern cards that PB&T issued.
PB&T offered the VISA Classic and Master-Card Red and Ochre under the 1987 agreement. PB&T agreed to charge each cardholder an annual fee of $9, to use an interest rate of 15.96 percent, and to consult with petitioner before raising the rate.
PB&T agreed to provide the following services at no cost to the cardholders: $200,000 air/common carrier insurance, collision damage waiver on automobile rental, emergency cash service, and a travel service. PB&T agreed to offer credit life insurance, credit disability insurance, and unemployment insurance to cardholders at the cardholder's expense.
PB&T agreed to pay petitioner 45 cents for each cardholder transaction and $3 for each card membership and annual fee paid to PB&T. The 1987 agreement did not say whether the payments were intended to be royalties or business income.
PB&T agreed not to assess merchant discount charges or processing fees on purchases from petitioner by alumni and on gifts made to the MSU Annual Fund by cardholders if the transaction was charged to the affinity credit card. Petitioner received thousands of dollars of contributions through this arrangement.
PB&T agreed to give petitioner space for four lines with 60 characters up to six times a year on PB&T's monthly statements to cardholders without cost to petitioner or cardholders to promote alumni activities.
The 1987 agreement said that petitioner was not a partner of or joint venturer with PB&T and that petitioner did not agree to bear any loss PB&T might suffer in the affinity credit card program.
Petitioner agreed to state in a letter or other message that PB&T wrote and sent, and bearing petitioner's executive director's name or a facsimile of his signature, that PB&T was the exclusive provider of the affinity credit cards. PB&T agreed to prepare and pay for all endorsement and marketing material and activities. PB&T agreed to submit to petitioner for advance approval each endorsement and related marketing material.
The 1987 agreement did not require petitioner to keep copies of credit card applications or provide them to alumni.
The 1987 agreement gave PB&T the exclusive right to use petitioner's name on the affinity credit cards and in related marketing materials.
MSU gave PB&T permission to use MSU's registered trademark, the "walking bulldog", on the affinity credit cards and related marketing material. MSU did not charge petitioner or PB&T for PB&T's use of the MSU trademark because MSU wanted petitioner to receive all of the payments from PB&T for the affinity credit card program. Petitioner agreed to use its best efforts to keep MSU's permission to use the trademark.
PB&T agreed that all membership lists petitioner provided were to remain petitioner's property and confidential. PB&T agreed to use petitioner's mailing lists only for the affinity credit card unless PB&T had petitioner's written consent to use them for other purposes. PB&T agreed to give address changes it received from cardholders to petitioner monthly at no charge.
PB&T processed applications, established and loaded accounts on its computer system, produced credit cards, accepted and posted transactions, generated statements, and processed payments. Petitioner did none of this work.
PB&T drafted and sent letters to promote the affinity credit cards to petitioner's members in March or April 1988. In April 1989, PB&T drafted and sent letters endorsing the affinity credit card to parents of MSU students. That letter stated that petitioner offered the credit cards in cooperation with PB&T and urged parents to apply for cards for their students. Each letter was printed on petitioner's letterhead and had a facsimile of Grafton's signature.
PB&T developed solicitation materials during the years in issue. Grafton reviewed these materials for accuracy, quality, style, and consistency with petitioner's position. It took him 3 to 5 minutes to review an endorsement letter prepared by PB&T. He did not make changes to those letters.
At petitioner's suggestion, PB&T mailed promotional material to MSU's faculty and staff. On June 2, 1988, petitioner billed PB&T $226.28 for 4,000 envelopes, $78.12 for 4,000 sheets of stationery, and $93.72 for 3,124 address labels for faculty and staff of MSU that petitioner provided to PB&T for this mailing.
Petitioner gave PB&T copies of petitioner's list of the names and addresses of its members twice during the years in issue on 8 ½-inch computer diskettes. The lists had about 55,000 names. PB&T could not operate the diskettes and paid an outside company to convert them to a format it could use.
Carr made these copies of the mailing list diskettes for PB&T in less than 30 minutes. To generate the two lists for PB&T, Carr used the computer program and the procedure that she used to generate similar lists for petitioner.
PB&T sent address changes for cardholders to petitioner about once a month. Petitioner added the new addresses to its data base.
Petitioner asked PB&T to advertise the credit cards in Alumnus and Affairs of State, a...
To continue reading
Request your trial