Sierra Club, Inc. v. Comm'r of Internal Revenue, 8650-91.

• Citation: 103 T.C. 307,103 T.C. No. 17
• Decision Date: 24 August 1994
• Docket Number: No. 8650-91.,8650-91.
• Parties: SIERRA CLUB, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Tax Court

103 T.C. 307

103 T.C. No. 17

SIERRA CLUB, INC., Petitioner,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 8650-91.

United States Tax Court.

Aug. 24, 1994.

B. Holly Schadler and Karl L. Kellar, Washington, DC, for petitioner.

Dianne I. Crosby, Bethesda, MD, for respondent.

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Introduction
                History of the Affinity Card Program
                Chase Lincoln
                Agreement with ABS
                ABS-Concept Agreement
                Concept-Chase Lincoln Agreement
                Amendment to ABS-Concept Agreement and Concept-Chase Lincoln Agreement
                SC-Chase Lincoln Agreement
                ABS-Concept Modification
                Discussion
                

 I.  Preliminary Matters
                 II. Motions for Partial Summary Judgment
                

  A. Petitioner's Motion
                  B. Respondent's Motion
                  C. Replies
                

 III. Analysis
                

  A. Business Arrangements
                

   1. Marketing Efforts
                   2. Credit Cards
                   3. Compensation of Petitioner
                

  B. Questions Presented
                  C. Joint Venture
                

   1. Introduction
                   2. A Question of Intent
                   3. Factors Considered
                

    a. Agreements
                    b. A Proprietary Interest in Profits
                

     (1) Luna v. Commissioner                26
                     (2) Revenues and Expenses               27
                     (3) Petitioner's Share of Expenses      28
                     (4) Petitioner's Obligation and Rewards 30
                

    c. Books of Account
                    d. Management and Control
                    e. Other Factors
                

   4. Conclusion
                

  D. Agency
                

   1. Respondent's Theory
                   2. NCAA and FOP
                   3. Question Presented
                   4. Recapitulation of the Agreement
                   5. Analysis
                

    a. Financial Risks and Rewards
                

     (1) Net Profits Interest    40
                     (2) Gross Profits Interest  41
                

    b. Control
                

     (1) Introduction           42
                     (2) History                42
                     (3) The Agreement          43
                     (4) Post Agreement Events  44
                

   6. Conclusion
                

  E. License
                

   1. Introduction
                   2. Definition of Royalties
                   3. Petitioner's Position
                   4. Respondent's Position
                   5. Analysis
                

    a. Ambiguity
                    b. Question Presented
                    c. The Agreement
                    d. Pre- and Post-agreement Events
                

   6. Conclusion
                

 IV. Conclusion
                

OPINION

HALPERN, Judge:

We have previously issued a report in this case: Sierra Club, Inc. v. Commissioner, T.C.Memo. 1993-199 (Sierra Club I). In that report, we dealt with the question of whether income from petitioner's rental of its mailing lists constituted unrelated business taxable income within the meaning of section 512(a)(1) (hereafter, UBTI).¹ We held that, since the mailing lists are intangible property, all consideration received for the use of those lists did not constitute UBTI because it constituted royalty income within the meaning of section 512(b)(2). We granted petitioner's motion for partial summary judgment with regard to that question. We concluded that material questions of fact did exist as to whether any of the income derived by petitioner from its mailing list transactions was not royalty income because it constituted (1) sales income from the sale of the media on which the mailing lists were furnished or (2) income from the sale of substantial services provided in connection with the rental of the mailing lists. Accordingly, we denied petitioner's motion for partial summary judgment with regard to those questions. The parties have settled those questions, and we need not further concern ourselves with them. The parties, however, have filed additional motions for partial summary judgment, which we address in this report.

We will not repeat the preliminaries concerning respondent's determinations and other matters set forth in Sierra Club I. Suffice it to say that, in its petition, among other things, petitioner assigned error to respondent's determinations that royalties received by petitioner with respect to an “affinity credit card” program engaged in by petitioner during some of the years here in question constituted UBTI. Petitioner has moved for partial summary judgment that such income did not constitute UBTI because it constituted royalty income within the meaning of section 512(b)(2) (petitioner's motion), and has filed a memorandum of points and authorities in support thereof (petitioner's memorandum in support). Respondent has filed a notice of objection to petitioner's motion (respondent's objection) and a memorandum of law in support thereof (respondent's memorandum objecting). Petitioner has filed a reply (petitioner's reply). Respondent has moved for partial summary judgment in her favor with regard to the affinity card issue (respondent's motion), and has filed a memorandum of points and authorities in support thereof (respondent's memorandum in support). Petitioner has opposed respondent's motion (petitioner's objection) and respondent has replied thereto (respondent's reply). For the reasons stated, we will grant petitioner's motion and deny respondent's.

Introduction

The parties have filed a joint stipulation of facts and attached stipulated documents as well as various affidavits and the memoranda previously described. We accept the stipulated facts as being true for purposes of deciding the motions before us. The stipulation of facts and attached documents are incorporated herein by this reference. In opposing each other's motion, the parties have claimed that there are unresolved genuine issues of material fact to be tried or other disputes with regard to factual issues. Nevertheless, to make its case, both in support of its own motion and in opposition to its opponent's, each party relies on the stipulated underlying contractual agreements establishing the affinity card program. We will describe those agreements, set forth certain pertinent provisions, and state certain other undisputed facts as a first step in our analysis.

History of the Affinity Card Program

The affinity card program in issue (the affinity card program or, simply, the program) is the product of numerous agreements among various parties. Among those parties are petitioner and a corporation named American Bankcard Services, Inc. (ABS). In 1980, petitioner was approached by a predecessor of ABS and entered into the negotiations that resulted in the agreements in question. In its initial proposal to petitioner, the predecessor of ABS described how affinity card programs work in essentially the following terms: Simply stated, the affinity group contracts with a financial institution to issue credit cards to its members and supporters. In return for encouraging its members and supporters to accept and use the credit cards, the financial institution pays the affinity group a percentage of the monthly sales volume resulting from transactions made with the cards. The financial institution provides the affinity group with certain other benefits and services.

Chase Lincoln

The financial institution that participated in the program eventually entered into by petitioner was Chase Lincoln First Bank N.A. (Chase Lincoln).

Agreement with ABS

On February 20, 1986, petitioner entered into an agreement with ABS, entitled: “SIERRA CLUB BANKCARD AGREEMENT” (the SCABS agreement). The following are among the provisions contained in the agreement:

SC and ABS desire to make available to the members of SC one or more packages of financial services upon the terms and conditions hereinafter set forth.

NOW, THEREFORE, it is agreed by the parties hereto as follows:

ARTICLE 1. The Services

ABS proposes to offer members of SC the product and service options set forth in Attachment “A” hereto (* * *) the “Services”).

ARTICLE 2. SC Participation

2.1 SC agrees to cooperate with ABS on a continuing basis in the solicitation and encouragement of SC members to utilize the Services provided by ABS, all as more specifically described herein.

* * *

2.3 ABS has entered into a written agreement whereby * * * [Chase Lincoln] has agreed to act as a financial institution to issue bankcards for SC. SC has selected Chase Lincoln as the financial institution to be the issuer of Sierra Club bankcards under this Agreement. * * *

* * *

ARTICLE 3. Program Control

* * *

3.2 ABS shall provide SC with monthly computer reports which set forth the Total Cardholder Sales Volume, as defined in Attachment “B” hereto, and the royalty fee payable to SC.

3.3 ABS shall be entitled to offer to SC members who select one of the options in Attachment “A” such other services or products as are mutually agreed upon from time to time between the parties hereto and for which mutually agreed upon compensation is paid to SC.

3.4 ABS shall keep and maintain true, correct and complete books of account and records from which SC royalty fees can be determined. * * * SC shall have the right at any time to examine, inspect, and audit all such books and records, and all such other papers and files of ABS relating to the performance of their Agreement.

3.5 ABS agrees that it will not use or permit to be used the SC name or marks without prior written consent in each and every instance.

ARTICLE 4. Sharing of Income and Expense

4.1 ABS agrees to remit or cause to be remitted to SC on a monthly basis throughout the term of this Agreement a royalty fee calculated in accordance with Attachment “B”. * * *

4.2 ABS shall be responsible for the development of all promotional and solicitation materials and programs designed to encourage the acquisition and usage of the Services by the members of SC subject to the approval by SC of all such materials and programs. The cost of such materials and programs shall be borne by ABS, and SC shall not be liable for any costs related thereto with the exception specified in Section 4.3 below. SC shall cooperate fully with ABS in encouraging the acquisition and use of the Services.

4.3 SC may elect to pay for the production and mailing costs associated with direct mail or other solicitations to its members to encourage their acquisition and use of the Services. In the event SC so elects, the royalties payable by ABS shall be adjusted as provided...