Sierra Club, Inc. v. Commissioner
| Decision Date | 10 May 1993 |
| Docket Number | Docket No. 8650-91. |
| Parties | Sierra Club, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
B. Holly Schadler and Karl L. Kellar, 607 Fourteenth St., N.W., Washington, D.C., for petitioner. Dianne I. Crosby, for respondent.
By notice of deficiency dated February 11, 1991, respondent determined deficiencies in petitioner's Federal income tax liabilities for petitioner's taxable years ended September 30, 1985, 1986, and 1987, in the amounts of $12,654, $22,591, and $152,514, respectively. In its petition, petitioner assigned error to respondent's determinations that (1) income from petitioner's rental of its mailing lists constituted unrelated business taxable income within the meaning of section 512(a)(1)1 and (2) royalties received by petitioner with respect to an "affinity credit card" program engaged in by petitioner likewise constituted such unrelated business taxable income. In its petition, petitioner also sought a refund of Federal income taxes paid for its taxable years ended September 30, 1985, 1986, and 1987, on account of income from the rental of its mailing lists.
Among motions presently before the Court is petitioner's motion for partial summary judgment filed October 8, 1992. Respondent objected to petitioner's motion and filed her own motion for partial summary judgment on December 15, 1992. Petitioner has made various motions in response to respondent's motion, which, in effect, amount to an objection thereto. The common subject of petitioner's and respondent's motions for partial summary judgment is whether income from petitioner's rental of its mailing lists constitutes unrelated business taxable income within the meaning of section 512(a)(1). Petitioner argues no, while respondent argues yes. As will be explained, we agree with petitioner.
The parties have filed a joint stipulation of facts and attached stipulated documents as well as various affidavits and memoranda of law. We accept the stipulated facts as being true for purposes of deciding the motions for partial summary judgment. The stipulation of facts and attached documents are incorporated herein by this reference. The following recitation of facts is drawn primarily from the joint stipulation. Certain other facts (which facts we deem noncontroversial) are included.
Petitioner is exempt from most Federal income taxation under section 501(a) as an organization described in section 501(c)(4). Petitioner was organized in 1892 to:
explore, enjoy, and protect the wild places of the earth; to practice and promote the responsible use of the earth's ecosystems and resources; to educate and enlist humanity to protect and restore the quality of the natural and human environment; and to use all lawful means to carry out these objectives.
At the time the petition in this case was filed, petitioner's principal office was located in San Francisco, California.
During the years in question, petitioner raised funds to support its activities. As part of its fund-raising activities, petitioner developed and maintained mailing lists composed of names, addresses, and related information regarding its members, donors, catalog purchasers, and other supporters. Petitioner had exclusive ownership rights in its mailing lists, including the right to all net income from its mailing lists. Petitioner updated and maintained its lists on a regular basis. In order to acquire names of prospective members and supporters, petitioner would sometimes undertake list exchanges with other organizations (granting the right to use names from petitioner's lists in exchange for the right to use names from another organization's lists). Petitioner permitted other tax-exempt organizations and commercial entities to pay a fee in order to use petitioner's mailing lists on a one-time basis per transaction. Users paid a fee as set forth in a rate schedule.
The external uses of petitioner's lists of members, donors, and other supporters were overseen and administered by Names in the News, a professional list manager and broker. Chilcutt Direct Marketing, Inc., performed similar services with respect to petitioner's list of catalog purchasers. Orders for petitioner's mailing lists were filled by Triplex Direct Marketing Corp. (Triplex), a computer service bureau that maintained a computerized database of petitioner's mailing lists. Petitioner retained the right to: (1) Refuse any request to use its lists, (2) review any mailing to be sent by a user of its lists, and (3) approve the mailing schedule for any user. Petitioner inserted seed names in its mailing lists in order to protect against abuse and unauthorized use of its mailing lists.
During the years in issue, petitioner reported gross income from the customers' use of its mailing lists as follows:
1985 .......................... $142,636
1986 .......................... 317,579
1987 .......................... 452,042
Discussion
A summary judgment is appropriate "if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law." Rule 121(b). Summary judgment is a device used to expedite litigation and is intended to avoid unnecessary and expensive trials of phantom factual questions. Cox v. American Fidelity & Casualty Co., 249 F.2d 616, 618 (9th Cir. 1957); Espinoza v. Commissioner [Dec. 38,853], 78 T.C. 412, 415-416 (1982); Shiosaki v. Commissioner [Dec. 32,519], 61 T.C. 861 (1974). It is not, however, a substitute for a trial in that disputes over factual issues are not to be resolved in such proceedings. Espinoza v. Commissioner, supra; Matson Navigation Co. v. Commissioner [Dec. 34,783], 67 T.C. 938 (1977); Giordano v. Commissioner [Dec. 33,011], 63 T.C. 462 (1975). The party moving for summary judgment has the burden of showing the absence of a genuine issue as to any material fact. Shiosaki v. Commissioner, supra; Hitachi Sales Corp. v. Commissioner [Dec. 48,467(M)], T.C. Memo. 1992-504.
The opposing party is to be afforded the benefit of all reasonable doubt, and any inference to be drawn from the underlying facts contained in the record must be viewed in a light most favorable to the party opposing the motion for summary judgment. United States v. Diebold, 369 U.S. 654 (1962); Espinoza v. Commissioner, supra. Nevertheless, the opposing party cannot rest upon the allegations or denials in his pleadings, but must "set forth specific facts showing that there is a genuine issue for trial." Rule 121(d); Morrison v. Commissioner [Dec. 40,506], 81 T.C. 644, 650-651 (1983). Since the effect of granting a motion for summary judgment is to decide the case against a party without allowing him an opportunity for a trial, such motion should be "cautiously invoked" and only granted after a careful consideration of the case. Associated Press v. United States, 326 U.S. 1, 6 (1945); Shiosaki v. Commissioner, supra.
Section 511(a)(1) imposes a tax on the unrelated business taxable income (UBTI) of certain otherwise tax-exempt organizations described in section 511(a)(2). Among the organizations described in section 511(a)(2) are organizations described in section 501(c)(4)(petitioner is described in section 501(c)(4)). UBTI is gross income derived from a trade or business, regularly carried on, that is not substantially related to the organization's tax-exempt purpose, less related deductions, and subject to certain modifications. Secs. 512(a)(1) and 513. The modifications to be made in computing UBTI are described in section 512(b). Section 512(b)(2) excludes from the computation of UBTI "all royalties" and all deductions directly connected thereto.2 Thus, put simply, royalty income, within the meaning of section 512(b)(2), is not subject to the tax imposed on UBTI notwithstanding that (1) it is earned by an organization described in section 511(a)(2), from (2) a trade or business unrelated to that organization's exempt purposes, which (3) business is regularly carried on by that organization. The question here presented concerns the meaning of the term "royalties", as used in section 512(b)(2).
In Disabled American Veterans v. Commissioner [Dec. 46,388], 94 T.C. 60 (1990)(hereinafter referred to as DAV II), revd. on other grounds 942 F.2d 309 (6th Cir. 1991), this Court considered the meaning of the term "royalties", as used in section 512(b)(2).3 That case involved the proper classification (as section 512(b)(2) royalties or something else) of payments received by an organization described in section 501(c)(4) in consideration of that organization making available to others its donor list for limited use by such others. We accepted the conventional definition of the term "royalties": "payments for the use of valuable intangible property rights". Id. at 70. We rejected respondent's arguments that, as used in section 512(b)(2), the term "royalties" included only royalties from passive sources. Id. at 75. We stated our disagreement with the Court of Claims that section 512(b)(2) is written in language that restricts "royalties" to include only royalties from passive sources. Id. ().
Furthermore, in the course of our analysis in DAV II, we made it clear that Congress did not intend to exclude from section 512(b)(2), royalties derived from carrying on a trade or business:
The structure of the statute, i.e., the relationship between section 512(a) and 512(b), suggests that Congress did not mean to exclude royalties...
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