Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-89-09005/USCOURTS-ca10-89-09005-0/pdf.json

Parties Involved:
Commissioner of Internal Revenue
Appellee
National Collegiate Athletic Association
Appellant

Document Text:

PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

NATIONAL COLLEGIATE ATHLETIC ) 

ASSOCIATION, ) 

) 

Petitioner-Appellant, ) 

) 

FI LED 

United State~ C!:,1.m of Apr,e(lls 

Tenth Circuit 

SEP 2 0 19§0 

ROBERT L. HOECKER 

Clerk 

v. ) 

) 

COMMISSIONER OF INTERNAL REVENUE, ) 

) 

No. 89-9005 

Respondent-Appellee. ) 

Appeal from the United States Tax Court 

(Tax Court No. 24889-87) 

C.W. Crumpecker, Jr. (George H. Gangwere and W. Ann Hansbrough 

with him on the briefs) of Swanson, Midgley, Gangwere, Clarke & 

Kitchin, Kansas City, Missouri, for Petitioner-Respondent. 

Bruce R. Ellisen, Attorney (Shirley D. Peterson, Assistant 

Attorney General; and Gary R. Allen and Robert S. Pomerance, 

Attorneys, with him on the brief), Tax Division, Department of 

Justice, Washington, D.C., for Respondent-Appellee. 

Before SEYMOUR and TACHA, Circuit Judges, and BRATTON,* District 

Judge. 

SEYMOUR, Circuit Judge. 

*Honorable Howard c. Bratton, Senior United States District Judge, 

District of New Mexico, sitting by designation. 

Appellate Case: 89-9005 Document: 01019844553 Date Filed: 09/20/1990 Page: 1 
The National Collegiate Athletic Association (NCAA), the· 

petitioner in this case, appeals from the decision of the tax 

court, which determined a deficiency of $10,395.14 in unrelated 

business income tax due for the 1981-1982 fiscal year.

1 On 

appeal, the NCAA challenges the court's conclusion that revenue 

received from program advertising constituted unrelated business 

taxable income under I.R.C. § 512, not excludable from tax as a 

royalty under section 512(b)(2), I.R.C. § 512(b)(2), 

I. 

2 We reverse. 

The NCAA is an unincorporated association of more than 880 

colleges, universities, athletic conferences and associations, and 

other educational organizations and groups related to 

intercollegiate athletics, for which it has been the major 

governing organization since 1906. The NCAA is also an "exempt 

organization" under section 50l(c)(3) of the Code, I.R.C. § 

50l(c)(3), and hence is exempt from federal income taxes. One of 

the purposes of the NCAA, as described in the organization's 

constitution, is "[t]o supervise the conduct of ..• regional and 

national athletic events under the auspices of this Association." 

1 Unless otherwise noted, citations to the Internal Revenue 

Code or to Treasury Regulations refer to the law in force as of 

1982, when the tax year in question ended, 

2 Our determination that the advertising revenue is not 

unrelated business taxable income obviates the need to consider 

whether the income should nonetheless be excluded from taxation as 

a royalty under I,R,C, § 512(b)(2). 

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Appellate Case: 89-9005 Document: 01019844553 Date Filed: 09/20/1990 Page: 2 
Rec., exh. 3-C, at 7. Pursuant to this purpose, the NCAA sponsors 

some seventy-six collegiate championship events in twenty-one 

different sports for women and men on an annual basis. The most 

prominent of these tournaments, and the NCAA's biggest revenue 

generator, is the Men's Division I Basketball Championship. The 

tournament is held at different sites each year. In 1982, 

regional rounds took place at a variety of sites, and the 

Louisiana Superdome in New Orleans was the host for the "Final 

Four," the tournament's semifinal and final rounds. In that year, 

the Championship consisted of forty-eight teams playing fortyseven games on eight days over a period of almost three weeks. 

The teams played in a single-game elimination format, with each of 

the four regional winners moving into the Final Four. 

The NCAA contracted with Lexington Productions, a division of 

Jim Host and Associates, Inc, ("Host" or "Publisher"), in 1981 to 

print and publish the program for the 1982 Final Four games.

3 The 

3 The agreement read in part: 

"WHEREAS, NCAA desires to arrange for the 

publication and sale of, and for the sale of advertising 

space in, its 1982 National Collegiate Basketball 

Championship souvenir program; and 

WHEREAS, Publisher has agreed to provide said 

services on the terms hereinafter set forth; 

NOW THEREFORE, it is AGREED as follows: 

1, Appointment and Authorization, NCAA hereby 

grants to the Publisher the exclusive right to print and 

to publish as co-publisher with the NCAA the 1982 

National Collegiate Basketball Championship Program for 

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Appellate Case: 89-9005 Document: 01019844553 Date Filed: 09/20/1990 Page: 3 
purpose of such programs, according to the NCAA's then-director of 

public relations, is 

"to enhance the experience primarily for the fans 

the semifinals and finals to be held in New Orleans, LA, 

on March 27 and 29, 1982, and NCAA hereby appoints 

Publisher as its exclusive agent for the sale of 

advertising to be included in said program publication .. 

2. Services. The Publisher agrees to produce the 

program in accordance with copy submitted to Publisher 

by the NCAA and to deliver the agreed upon number of 

copies .... Publisher agrees further to use its best 

efforts to secure national and local advertising for 

said program. Publisher agrees to accomplish the 

foregoing ... under the following terms: 

(a) Publisher shall plan, organize and 

conduct an advertising sales program for the 

aforementioned publication. 

(b) Publisher shall create and develop 

advertising ideas. 

(c) Publisher shall bill all advertising 

clients ... and furnish the NCAA with a 

complete record of sales billed, amount 

collected, and amount of ... commissions. 

(d) Publisher shall agree to pay all 

layout, printing, production and freight 

costs, and all costs and expenses incurred in 

the selling of the advertising. 

3. Advertising Limitations. a) Advertising in 

the program shall not exceed 35% of the total pages in 

the program, including the cover pages .... f) The 

NCAA reserves the right of final approval for all 

advertising in the aforementioned program. 

* * * 

6. Compensation and Expense. Publisher agrees to 

pay to NCAA for co-publishing and advertising rights the 

sum of $50,000 or 51% of net revenues, whichever is 

greater. Net revenues shall mean gross revenues for all 

NCAA program sales and advertising sales less printing 

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Appellate Case: 89-9005 Document: 01019844553 Date Filed: 09/20/1990 Page: 4 
attending the game, ... [It also] gives the NCAA an 

opportunity to develop information about some of its 

other purposes that revolve around promoting sports [as 

a] part of higher education and demonstrating that 

athletes can be good students as well as good 

participants." 

Rec,, vol. II, at 21-22. 

Prior to the middle of the 1970s, the host institution 

produced the Final Four program. The NCAA took over production 

until the late 1970s, when it began contracting with Host for the 

Final Four program. In 1982, Host began producing the programs 

for all rounds of the Championship. The motive for contracting 

the program production to Host was, according to the NCAA, to 

achieve consistency and quality at each round's game sites; making 

a profit was not the primary incentive, See id, at 25-26. 

The "Official Souvenir Program" for the 1982 Final Four round 

of the tournament was some 129 pages long, and it featured 

pictures of NCAA athletes such as Michael Jordan and articles on 

the NCAA itself, on New Orleans, on individual athletes, on 

championships from prior years, and on the Final Four teams: 

costs, vendor commissions, advertising commissions, 

sales taxes, and advertising production expense, . , , 

NCAA shall have the right to examine Publisher's 

financial records pertaining to the NCAA accounts at any 

time," 

Rec,, vol, I, doc, 2, exh. B, at 1-3. Host and the NCAA also 

entered into an oral agreement under which Host produced a uniform 

program for the regional tournament games, 

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Appellate Case: 89-9005 Document: 01019844553 Date Filed: 09/20/1990 Page: 5 
Georgetown, Houston, Louisville, and North Carolina. 

Advertisements made up a substantial portion of the program, some 

of which were placed by national companies. Among the products 

and services so displayed were Buick automobiles, Miller beer, 

Texaco motor oil, Fuji film, Maxwell House coffee, Nike sneakers, 

McDonald's fast food, Coca-Cola soda, Xerox photocopiers, ESPN 

cable network, and Popeyes Famous Fried Chicken. Other 

advertisers were local New Orleans merchants. A number of the New 

Orleans advertisements, including those for restaurants, hotels, 

and rental cars, apparently were directed at out-of-town 

tournament attendees. But these advertisements were exceeded in 

number by those placed by New Orleans/Louisiana companies not 

specifically related to the tourist industry. Among the local 

advertisers were the Canal Barge Company, the National Bank of 

Commerce in Jefferson Parish, Breit Marine Surveying, Inc., 

Pontchartrain Materials Corp., McDermott Marine Construction, and 

4 Tri-Parish Construction & Materials, Inc. See rec., exh, 5-E, 

The NCAA's total revenue from the 1982 Men's Division I 

Basketball Championship was $18,671,874, See rec., exh. 1-A, at 

10 (schedule 2 at 1), The NCAA reported none of this amount as 

unrelated business taxable income on its federal income tax return 

4 Only the Final Four program was included in the record, and 

so we use it as an example. The NCAA's director of public 

relations testified that the program for the earlier rounds 

differed very little from the Final Four program. See rec., vol. 

II, at 33. 

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Appellate Case: 89-9005 Document: 01019844553 Date Filed: 09/20/1990 Page: 6 
for the fiscal year ending August 31, 1982. The Commissioner 

mailed the NCAA a notice of deficiency in which he determined that 

the NCAA was liable for $10,395.14 in taxes on $55,926.71 of 

unrelated business taxable income from the program advertising 

revenue. The NCAA petitioned the tax court for a redetermination 

of the deficiency set forth by the Commissioner. The tax court 

determined that this revenue was unrelated business taxable 

income, and that it was not excludable from the tax as a royalty. 

II. 

Under section 7482(a) of the Code, I.R.C. § 7482(a), we 

review tax court decisions "in the same manner and to the same 

extent as decisions of the district courts in civil actions tried 

without a jury." This case presents us with neither a purely 

factual question, to which we apply a clearly erroneous standard, 

nor a purely legal question, which we consider de novo. See Love 

Box Co. v. Commissioner, 842 F.2d 1213, 1215 (10th Cir.), cert. 

denied, 109 S. Ct. 62 (1988). Instead, we must decide a mixed 

question of law and fact in which "the facts are admitted or 

established and the law is undisputed; the sole issue is whether 

the law applied to the facts satisfies the statutory standard." 

Supre v. Ricketts, 792 F.2d 958, 961 (10th Cir. 1986) (citing 

Pullman-Standard v. Swint, 456 U.S. 273, 289 n.19 (1982)). We 

apply the clearly erroneous standard where the mixed question is 

primarily factual, but if it "primarily involves the consideration 

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Appellate Case: 89-9005 Document: 01019844553 Date Filed: 09/20/1990 Page: 7 
of legal principles, then a de novo review by the appellate court 

is appropriate. " Id. at 961. The NCAA' s principal objections in 

this case are to the "conclusions drawn by the tax court in 

arriving at its determination." Pollei v. Commissioner, 877 F.2d 

838, 839 (10th Cir. 1989). Because "(w]e are equally as able as 

the tax court to draw conclusions from the undisputed facts 

presented .•. , we review de novo the tax court's application of 

the law to the facts before us." Id. (citation omitted). 

III. 

Section 511 of the Code imposes a tax on the unrelated 

business taxable income of exempt organizations. Section 

512(a)(l) of the Code defines the term "unrelated business taxable 

income" as "the gross income derived by any organization from any 

unrelated trade or business ... regularly carried on by 

it •. II The term "unrelated trade or business" means "any 

trade or business the conduct of which is not substantially 

related ••. to the exercise or performance by such organization" 

of its exempt function. I.R.C. § 513(a). Under the heading 

"Advertising, etc., activities," section 513(c) provides that "the 

term 'trade or business' includes any activity which is carried on 

for the production of income from the sale of goods or the 

performance of services .... (A]n activity does not lose 

identity as a trade or business merely because it is carried on 

..• within a larger complex of other endeavors which may, or may 

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Appellate Case: 89-9005 Document: 01019844553 Date Filed: 09/20/1990 Page: 8 
not, be related to the exempt purposes of the organization. " · 

I.R.C. § 513(c). 

The NCAA's advertising revenue therefore must be considered 

unrelated business taxable income if: "(1) It is income from 

trade or business; (2) such trade or business is regularly carried 

on by the organization; and (3) the conduct of such trade or 

business is not substantially related (other than through the 

production of funds) to the organization's performance of its 

exempt functions." Treas. Reg. § 1.513-l(a); see also United 

States v. American College of Physicians, 475 U.S. 834, 838-39 

(1986). If a taxpayer shows that it does not meet any one of 

these three requirements, the taxpayer is not liable for the 

unrelated business income tax. See Veterans of Foreign Wars v. 

Commissioner, 89 T.C. 7, 19-20 (1987). 

The NCAA concedes that its program advertising was a "trade 

or business" not "substantially related" to its exempt purpose, 

The only question remaining, therefore, is whether the trade or 

business was "regularly carried on" by the organization. The 

meaning of the term "regularly carried on" is not defined by the 

language of the statute, Accordingly, we turn to the Treasury 

Regulations for assistance. 5 

5 We of course accord the Treasury Regulations deference unless 

they are unreasonable or plainly inconsistent with the Code. See 

~C~o=mm=i=s~s~1~·o=n=e=r----=-v~·--=P~o~r~t=l=a=n=d=-=C~e=m=e=n=t=-=C=o~., 450 U.S. 156, 169 (1981). 

Neither party challenges the validity of the regulations, and both 

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Appellate Case: 89-9005 Document: 01019844553 Date Filed: 09/20/1990 Page: 9 
Section 1.513-l(c) of the Treasury Regulations provides a 

discussion of the phrase "regularly carried on." The general 

principles set out there direct us to consider "the frequency and 

continuity with which the activities productive of the income are 

conducted and the manner in which they are pursued." Treas. Reg. 

§ 1.513-l(c)(l) (emphasis added). As a cautionary note, the 

regulations emphasize that whether a trade or business is 

regularly carried on must be assessed "in light of the purpose of 

the unrelated business income tax to place exempt organization 

business activities upon the same tax basis as the nonexempt 

business endeavors with which they compete." Id. 

The regulations then move beyond the general principles and 

set out a process for applying the principles to specific cases. 

The first step is to consider the normal time span of the 

particular activity, and then determine whether the length of time 

alone suggests that the activity is regularly carried on, or only 

intermittently carried on. See id.§ l.513-l(c)(2)(i). If the 

activity is "of a kind normally conducted by nonexempt commercial 

organizations on a year-round basis, the conduct of such 

[activity] by an exempt organization over a period of only a few 

weeks does not constitute the regular carrying on of trade or 

business." Id. (emphasis added). As an example of a business not 

argue that they provide the analytical framework for our inquiry 

here. 

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Appellate Case: 89-9005 Document: 01019844553 Date Filed: 09/20/1990 Page: 10 
regularly carried on, the regulations describe a hospital 

auxiliary's operation of a sandwich stand for only two weeks at a 

state fair. In contrast, the regulations deem the operation of a 

commercial parking lot every Saturday as a regularly-carried-on 

activity. Id. 

If the activity is "of a kind normally undertaken by 

nonexempt commercial organizations only on a seasonal basis, the 

conduct of such activities by an exempt organization during a 

significant portion of the season ordinarily constitutes the 

regular conduct of trade or business." Id. (emphasis added). The 

operation of a horse racing track several weeks a year is an 

example of a regularly-conducted seasonal business, because such 

tracks generally are open only during a particular season. Id. 

A primary point of contention in this case is whether the 

NCAA's advertising business is normally a seasonal or year-round 

one, and whether it is intermittent or not. The tax court noted 

that the Commissioner looked at the short time span of the 

tournament, concluded that it was as much a "seasonal" event as 

the operation of a horse racing track, and then argued that the 

time involved in the tournament program advertising made it a 

regularly carried on business. The court observed that the NCAA, 

which did not agree with the Commissioner's "season" conclusion, 

also focused on the tournament itself in contending that the 

event's short time span made the activity in question 

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Appellate Case: 89-9005 Document: 01019844553 Date Filed: 09/20/1990 Page: 11 
intermittent. 6 The tax court rejected these arguments as 

"plac[ing] undue emphasis on the tournament itself as the measure 

for determining whether petitioner regularly carried on the 

business at issue .... Although sponsorship of a college 

basketball tournament and attendant circulation of tournament 

programs are seasonal events, the 'trade or business' of selling 

advertisements is not." Rec., vol. I, doc. 13, at 15-16. 

We agree that to determine the normal time span of the 

activity in this case, we should consider the business of selling 

advertising space, since that is the business the Commissioner 

contends is generating unrelated business taxable income. There 

is no dispute that the tournament itself is substantially related 

to the NCAA's exempt purpose and so, unlike the horse racing 

track, it should not be the business activity in question. See 

American College of Physicians, 475 U.S. at 839 ("Congress has 

declared unambiguously that the publication of paid advertising is 

a trade or business activity distinct from the publication of 

accompanying .•• articles") (emphasis added). Since the 

publication of advertising is generally conducted on a year-round 

basis, we conclude that if the NCAA's sale of program advertising 

was conducted for only a few weeks, that time period could not, 

standing alone, convert the NCAA's business into one regularly 

carried on. 

6 On appeal, the Commissioner and the NCAA make essentially the 

same arguments. 

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Appellate Case: 89-9005 Document: 01019844553 Date Filed: 09/20/1990 Page: 12 
In regard to the question of how long the NCAA conducted its 

advertising business, the tax court stated that "[i]t is 

inappropriate to decide whether the trade or business at issue is 

regularly carried on solely by reference to the time span of the 

tournament ifself." Rec., vol. I, doc. 13, at 15-16. The tax 

court, observing that the agency relationship between the NCAA and 

Host allowed the court to attribute Host's activities to the NCAA, 

noted that the NCAA had "not produced any evidence. regarding 

the extent or manner of Host's conduct in connection with the 

solicitation, sale, and publication of advertising for the 

tournament programs." Id. at 18. The court went on to conclude 

that "[w]ithout such evidence [the NCAA] has not proven that 

neither it nor Host carried on the activity of selling program 

advertising regularly. [The tax court] will not assume Host's 

conduct in this regard was infrequent or conducted without the 

competitive and promotional efforts typical of other conu:sercial 

endeavors." Id. We believe the tax court focused its analysis in 

the wrong direction. 

The tax court held, and the Commissioner argues, that the 

amount of preliminary time spent to solicit advertisements and 

prepare them for publication is relevant to the 

regularly-carried-on determination, and that the length of the 

tournament is not relevant. This position is contrary to the 

regulations and to existing case law. The language of the 

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Appellate Case: 89-9005 Document: 01019844553 Date Filed: 09/20/1990 Page: 13 
regulations alone suggests that preparatory time should not be 

considered. The sandwich stand example in the regulations, for 

instance, included a reference only to the two weeks it was 

operated at the state fair. See Treas. Reg. § 1.513-l(c)(a)(i). 

The regulations do not mention time spent in planning the 

activity, building the stand, or purchasing the alfalfa sprouts 

for the sandwiches. 

The case closest to the one here also does not evaluate 

preparatory time. In that case, Suffolk County Patrolmen's 

Benevolent Ass'n v. Commissioner, 77 T.C. 1314 (1981), an exempt 

organization staged a professional vaudeville show every year as a 

fundraising event, using a company with which it had contracted. 

The organization derived the vast majority of its receipts from 

the sale of advertising in a program guide distributed to show 

patrons and to anyone who requested it. The shows generally 

consisted of three or four performances stretching over two 

weekends. The tax court found that preparation for the shows and 

the program, including the solicitation of advertisements, lasted 

eight to sixteen weeks, but it then emphasized that 

"nowhere in the regulations or the legislative history 

of the tax on unrelated business income is there any 

mention of time apart from the duration of the event 

itself .••. The fact that an organization seeks to 

insure the success of its fundraising venture by 

beginning to plan and prepare for it earlier should not 

adversely affect the tax treatment of the income derived 

from the venture." 

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Appellate Case: 89-9005 Document: 01019844553 Date Filed: 09/20/1990 Page: 14 
Id. at 1323-24. 

As in Suffolk County, the advertising here was solicited for 

publication in a program for an event lasting a few weeks. The 

~CAA did put on evidence as to the duration of that event. While 

the length of the tournament is irrelevant for purposes of 

assessing the normal time span of the business of selling 

advertising space, we hold that, contrary to the tax court's 

conclusion, the tournament must be considered the actual time span 

of the business activity sought to be taxed here. The length of 

the tournament is the relevant time period because what the NCAA 

was selling, and the activity from which it derived the relevant 

income, was the publication of advertisements in programs 

distributed over a period of less than three weeks, and largely to 

spectators. 7 Obviously, the tournament is the relevant time frame 

for those who chose to pay for advertisements in the program. 

This case is unlike American College of Physicians, 475 U.S. at 

836, where advertisements were sold for each issue of a monthly 

medical journal. Accordingly, we conclude that the NCAA's 

involvement in the sale of advertising space was not sufficiently 

long-lasting to make it a regularly-carried-on business solely by 

reason of its duration. 

7 There was testimony that some programs also were sold to 

members of the public not attending the tournament, but who wanted 

the program as a souvenir of the tournament. See Suffolk County 

Patrolmen's Benevolent Ass'n v. Commissioner, 77 T.C. 1314, 1317 

(1981) (vaudeville show program made available to any non-patron 

who requested it). 

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The next step of the regulation's analysis is to determine 

whether activities which are intermittently conducted are 

nevertheless regularly carried on by virtue of the manner in which 

they are pursued. In general, according to the regulations, 

"exempt organization business activities which are engaged in only 

discontinuously or periodically will not be considered regularly 

carried on if they are conducted without the competitive and 

promotional efforts typical of commercial endeavors." Treas. Reg. 

§ 1.513-l(c)(2)(ii). As an example of an activity not 

characteristic of commercial endeavors, the regulations refer to 

"the publication of advertising in programs for sports events or 

music or drama performances." Id. (emphasis added). The NCAA 

places considerable emphasis on this latter sentence and 

criticizes the tax court, which stated only that there was 

insufficient evidence from which the court could draw conclusions 

on the manner of Host's conduct of its advertising activities. As 

the NCAA stresses, the tax court did not distinguish the 1982 

Basketball Championship from the "sports events" referred to in 

the regulation above. 

On appeal, the Commissioner initially agreed with the tax 

court that the record was devoid of evidence with which the NCAA 

could show that Host's efforts were not of a sufficiently 

competitive and promotional nature. But the Commissioner then 

went on to focus on the Final Four program, a part of the record. 

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He characterized the program's advertisements as "typical print 

media advertisements," and distinguished them from the 

advertisements in the vaudeville show programs, which "'more 

closely resembled complimentary contributions than commercial 

selling agents.'" Appellee's Brief at 27 (quoting Suffolk County, 

77 T.C. at 1322). The sentence referring to sports events in the 

regulations was, according to the Commissioner, directed more at 

advertising in high school sports programs than at the type of 

advertising in the program here. 

Addressing first the tax court's conclusion, we fail to see 

what evidence in addition to the advertisements themselves the tax 

court could require. The regulations discuss the business of 

advertising but refer only to advertisements published in 

programs, and not to any efforts to secure the advertisements. In 

Suffolk County, the tax court disregarded all but the 

advertisements themselves and stated that it is "entirely 

reasonable for an exempt organization to hire professionals in an 

effort to insure the success of a fundraiser, and there are no 

indications [in the applicable statutes and regulations] ... 

that the use of such professionals would cause an otherwise 

infrequent intermittent activity to be considered regularly 

carried on." 77 T.C. at 1323. 

The Commissioner's assertion that the advertisements 

themselves are of a commercial nature deserves more discussion. 

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It is true that a number of the advertisements are virtually· 

indistinguishable from those that might appear in magazines like 

Sports Illustrated, A substantial number of other advertisements, 

however, particularly those placed by Louisiana companies not 

engaged in the tourist industry, seem to us to resemble more 

closely the "complimentary contributions" of Suffolk County, 

The difficult question of whether the NCAA's advertising is 

of the type envisioned as commercial in nature, or instead as 

consistent with that connected to the "sports events" referred to 

in the regulations, is not one which we must answer now, however. 

For the final step in the process spelled out by the regulations 

requires us to consider whether, promotional efforts 

notwithstanding, an intermittent activity occurs "so infrequently 

that neither [its] recurrence nor the manner of [its] conduct will 

cause [it] to be regarded as trade or business regularly carried 

on. 11 Treas. Reg. § 1.513-l(c) (2) (iii). We conclude that the 

advertising here is such an infrequent activity, The programs 

containing the advertisements were distributed over less than a 

three-week span at an event that occurs only once a year. We 

consider this to be sufficiently infrequent to preclude a 

determination that the NCAA's advertising business was regularly 

carried on. 

Our conclusion is buttressed by the regulation's admonition 

that we apply the regularly-carried-on test in light of the 

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purpose of the tax to place exempt organizations doing business on 

the same tax basis as the comparable nonexempt business endeavors 

with which they compete. See Treas. Reg.§ 1.513-l(c)(l), The 

legislative history of the unrelated business income tax also 

convinces us that we must consider the impact an exempt 

organization's trade or business might have on its competition. 

The tax was a response to the situation prevailing before 1950, 

when an exempt organization could engage in any commercial 

business venture, secure in the knowledge that the profits 

generated would not be taxed as long as the destination of the 

funds was the exempt organization. The source of those funds did 

not affect their tax status. See,~, Trinidad v. Sagrada Orden 

de Predicadores, 263 U.S. 578, 581 (1924); C.F. Mueller Co. v. 

Commissioner, 190 F.2d 120, 121 (3rd Cir. 1951); see also American 

College of Physicians, 475 U.S. at 837-38. As more and more 

exempt organizations began acquiring and operating commercial 

enterprises, there were rumblings in Congress to do away with the 

perceived advantage enjoyed by these organizations. The case 

which most forcefully brought this point home was that involving 

the C.F. Mueller Co. That company, a leading manufacturer of 

macaroni products, was in 1947 acquired and organized for the 

purpose of benefitting the New York University's School of Law, a 

t t d t . 1 ' t't t' 8 ax-exemp e uca iona ins i u ion. See C.F. Mueller, 190 F,2d 

8 New York University also owned a leather company and 

chinaware manufacturing operations. Other educational 

institutions operated a number of enterprises: automobile parts, 

cotton gins, oil wells, theaters, an airport, a radio station, a 

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Appellate Case: 89-9005 Document: 01019844553 Date Filed: 09/20/1990 Page: 19 
at 121. This acquisition prompted an outcry from a number of· 

sources. 

In President Truman's 1950 message to Congress, for example, 

he stated that "'an exemption intended to protect educational 

activities has been misused in a few instances to gain competitive 

advantage over private enterprise through the conduct of business 

.•• entirely unrelated to educational activities.'" Kaplan, 

Intercollegiate Athletics and the Unrelated Business Income Tax, 

80 Colum. L. Rev. 1430, 1433 (1980) (quoting Message of the 

President, 96 Cong. Rec. 769, 771 (1950)). Primarily to "restrain 

the unfair competition fostered by the tax laws," American College 

of Physicians, 475 U.S. at 838 (citing H.R. Rep. No. 2319, 81st 

Cong., 2d Sess., 36-37 (1950)), Congress imposed a tax on the 

business income of exempt organizations, but only on that income 

substantially unrelated to the organization's exempt purposes.

9 

hydroelectric plant, haberdasheries, citrus groves, and cattle 

ranches. See Kaplan, Intercollegiate Athletics and the Unrelated 

Business Income Tax, 80 Colum. L. Rev. 1430, 1432 & n.8 (1980). 

9 Although prevention of unfair competition was the main 

purpose behind the unrelated business income tax, revenue raising 

concerns also played a role in Congress' actions, for Congress 

feared that exempt organizations, with a tax-induced competitive 

advantage, would drive other enterprises out of business. 

Congress believed this would mean that "'(e]ventually all the 

noodles produced in this country will be produced by corporations 

held or created by universities ... and there will be no revenue 

to the Federal Treasury from this industry. That is our 

concern.'" Kaplan, 80 Colum. L. Rev. at 1433 (quoting Revenue 

Revision of 1950: Hearings Before the House Comm. on Ways and 

Means, 81st Cong., 2d Sess. 580 (1950) (remarks of Rep. Dingell)); 

see also Louisiana Credit Union League v. United States, 693 F.2d 

525, 540-41 (5th Cir. 1982). 

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See Revenue Act of 1950, Pub. L. No. 814, § 301, 64 Stat. 906·, 

947. 

Although we have observed that the purpose of the unrelated 

business income tax was to prevent unfair competition10 between 

companies whose earnings are taxed and those whose are not, it is 

not necessary to prove or disprove the existence of actual 

competition. See United States v. American Bar Endowment, 477 

U.S. 105, 114-15 (1986); Louisiana Credit, 693 F.2d at 541. But 

analyzing the business in question in terms of its possible effect 

on prospective competitors helps to explain why an activity can 

occur "so infrequently" as to preclude a designation as a business 

regularly carried on. While the operation of a parking lot on a 

weekly basis occurs sufficiently frequently to threaten rival 

parking lot owners, the hospital auxiliary's annual sandwich stand 

is too infrequent a business to constitute a threat to sandwich 

shop owners. The competition in this case is between the NCAA's 

program and all publications that solicit the same advertisers. 

The competition thus includes weekly magazines such as Sports 

10 The term "unfair competition" is the hallmark of the 

unrelated business income tax, but the content of that term has 

been called into question. As one commentator has noted, 

"different tax treatment ... implies only that N.Y.U. would keep 

a larger share of Mueller's profits than would Ronzoni's 

owners .... Why must a fair tax code treat students and 

scholars who are the beneficiaries of Mueller's profits as if they 

were 'equal to' Ronzoni's investors?" Rose-Ackerman, Unfair 

Competition and Corporate Income Taxation, 34 Stan. L. Rev. 1017, 

1020 ( 1982). 

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( 

\ 

Illustrated and other publications which solicit automobile,· 

beverage, photocopier, and fried chicken advertisements, to name a 

few. Viewed in this context, we conclude that the NCAA program, 

which is published only once a year, should not be considered an 

unfair competitor for the publishers of advertising. Application 

of the unrelated business tax here therefore would not further the 

statutory purpose. We hold that the NCAA's advertising business 

was not regularly carried on within the meaning of the Code. 

The decision of the tax court is REVERSED. 

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