T.C. Memo. 1996-63

UNITED STATES TAX COURT

ALUMNI ASSOCIATION OF THE UNIVERSITY OF OREGON, INC., 

Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No 2132-94. Filed February 20, 1996.

Philip N. Jones, Carolyn W. Miller, and Stephen J.

Klarquist, for petitioner.

Brenda M. Fitzgerald, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COLVIN, Judge: Respondent determined deficiencies in

petitioner's Federal income tax of $75,588 for 1990 and $105,183

for 1991.
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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 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.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

A. Petitioner

Petitioner, Alumni Association of the University of Oregon,

Inc., is an Oregon nonprofit corporation exempt from Federal

income tax under section 501(c)(3). Petitioner's principal place

of business is Eugene, Oregon. Petitioner was established to

advance the cause of higher education, promote the interests and

increase the usefulness of the University of Oregon, and

encourage good fellowship of its members to further its purposes. 

Petitioner fulfilled its purposes by communicating with alumni

and sponsoring continuing educational activities and social

events. During the years at issue, petitioner had a staff of 12

or 13 employees. 

B. History of the University of Oregon Alumni Association

Affinity Credit Card Program

In 1986 and 1987, petitioner became aware of affinity

credit card programs through news articles and discussions with
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1 Philip Super was petitioner's executive director when

petitioner negotiated and implemented the affinity credit card

program. Dan Rodriguez (Rodriguez) became petitioner's executive

director starting in September 1988. Rodriguez was petitioner's

executive director during the years in issue. 

2 The Agreement was amended on Apr. 9, 1987. The parties

changed the word "fees" to "royalties" in par. 4 of the

Agreement. Neither party contends that the amendment affects any

issue in dispute. 

representatives from other organizations. Petitioner received

unsolicited proposals regarding the affinity credit card program

from the United States National Bank of Oregon (USNB) and another

financial institution. Petitioner's then executive director,

Philip Super (Super), rejected both proposals.1 Super contacted

Donald Wirth (Wirth), the executive director of the Oregon State

University Alumni Association (OSUAA), to discuss the affinity

credit card program. Wirth and Super wanted their organizations

to develop an affinity credit card program.

Petitioner and the OSUAA formed a committee to solicit

proposals from several banks and to select a plan. Petitioner

and the OSUAA formed the committee to increase their bargaining

power and to avoid duplication of effort. The committee was

headed by Wirth and Super. Its members were volunteers from both

organizations. After reviewing 8 to 10 plans, the committee

chose USNB's plan. After negotiations, the parties signed an

Affinity Credit Card Agreement2 (the Agreement) on June 23, 1987.
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On September 30, 1987, USNB held a press conference and

issued a news release announcing the affinity credit card

program. One of petitioner's representatives gave a brief speech

at the press conference. Petitioner did not otherwise inform the

news media of the affinity credit card program. 

USNB entered into the Agreement primarily to make money. 

Its objectives in signing the affinity credit card agreement

were to gain access to petitioner's mailing list and to obtain

petitioner's endorsement. USNB believed that it would be easier

to market credit cards through an affinity credit card program

than to market credit cards otherwise. 

Petitioner established the affinity credit card program to

keep alumni aware of their ties to the University of Oregon and

to keep the University of Oregon's name before the public, to

provide a low-cost credit card to alumni and other University of

Oregon supporters, and to provide revenue for its programs

without placing undue demands on its staff. 

C. The Affinity Credit Card Agreement

USNB agreed to prepare and mail, at its expense, promotional

materials and credit card applications to petitioner's members. 

USNB also agreed: (1) To announce petitioner's activities and

alumni news four times each year at USNB's expense on periodic

statements mailed to alumni credit card holders; and (2) to place

a full-page color advertisement in petitioner's publication at
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the standard rate at least twice annually during the term of the

Agreement. 

Petitioner agreed: (1) To give USNB the names, addresses,

and graduation dates of its members; (2) to license the use of

its name, logo, and official seal of the University of Oregon to

USNB; and (3) to inform its members of the affinity credit card

program, at its expense, at least once per year. The Agreement

did not require petitioner to mail any solicitation materials to

alumni. Petitioner could prepare, at its discretion, materials

containing announcements of its activities and alumni news four

times annually to accompany USNB's periodic statements. 

USNB agreed to pay petitioner $4 for each new account, $4.50

for renewal of a Classic Visa card, $7 for renewal of a Premier

Visa card, and 1 percent of all authorized cash purchases and

advances. The Agreement was for 5 years, and was automatically

renewable for 1-year periods unless terminated by either party. 

D. List of Alumni

USNB asked petitioner for the list of alumni about once a

year. USNB was to solicit credit card applications from those

members and issue a card to approved applicants. 

The data base of alumni was kept on a computer owned and

possessed by the University of Oregon Foundation. Petitioner

forwarded USNB's requests to the University of Oregon Foundation. 

The University of Oregon Foundation prepared a magnetic tape for

USNB's use. Employees of the University of Oregon Foundation
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spent no more than 1 hour preparing the tape. The University of

Oregon Foundation processed the information and delivered the

magnetic tape to petitioner at no charge. Petitioner sent the

tape to USNB. USNB returned the tape to petitioner after using

it for a particular mailing. 

The University of Oregon Foundation is not owned or financed

by petitioner. The data base was not available on the open

market. Petitioner updated this list and recorded pre- and postgraduation information about each alumnus. 

USNB gave petitioner a list of alumni cardholders each

quarter. Petitioner's employees spent about 2 hours each quarter

entering data regarding the cardholders. 

E. Postagreement Activities by USNB

1. USNB Mailings to Petitioner's Members

USNB hired and paid an advertising agency and direct mail

house to write, design, print, and mail solicitation materials to

petitioner's members. These mailings cost about $1.25 per item. 

Petitioner gave signatures of its president to USNB to duplicate

on promotional materials. An employee of petitioner spent about

1 hour reviewing the material for each mailing and occasionally

suggested minor changes or made corrections. Petitioner might

suggest that USNB "tone down" the pitch of the solicitation or

correct the spelling of a name. Petitioner had no authority to

finally approve USNB's materials. 

2. USNB's Advertising in Old Oregon and The Alumni
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 Insider

Petitioner's primary means of communicating with its alumni

is through Old Oregon and the Alumni Insider. Old Oregon is

published by the University of Oregon and is not connected with

or controlled by petitioner. Petitioner had no publication

before 1990. USNB advertised the affinity card program in Old

Oregon. Old Oregon accepted no other advertising. The record

does not show whether Old Oregon charged USNB to advertise. 

Petitioner began its own publication, the Alumni Insider,

in 1990. The Alumni Insider was published quarterly and had a

circulation of about 10,000. The Alumni Insider was mailed to

petitioner's dues-paying members. The Alumni Insider published

two advertisements each year about the affinity credit card

program. The advertisements were designed by a professional

advertising agency at USNB's request. USNB paid for the design

of all advertisements published in the Alumni Insider. 

Petitioner did not bill USNB for the advertisements until 1991. 

Petitioner charged USNB $800 per year to publish the two

advertisements beginning in late 1991. The $800 charge was an

estimate of petitioner's cost to produce the advertisements. 

Petitioner's employees do not know why USNB was not charged for

the first few advertisements. 

Petitioner occasionally published advertisements for the

affinity credit card program in the Alumni Insider when it had

space available. Petitioner used a camera-ready copy provided
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3 Petitioner's logo is a roof of a building with the letters

"U" and "O" on separate sides and the words "ALUMNI ASSOCIATION"

on the bottom half of the roof. Petitioner's logo is a

registered trademark. 

4 Petitioner, in its proposed findings of fact, asserts that

it sent out promotional materials twice. Petitioner stipulated

that it mailed promotional materials three times from 1987 to

June 30, 1991. Because there is no evidence that the stipulation

is wrong, we accept it as correct.

by USNB for prior advertisements. Petitioner did not charge USNB

for these advertisements. 

USNB gave petitioner a copy of each advertisement to review

and approve. It took one or two of petitioner's employees about

30 minutes to examine the advertisements. Petitioner's employees

examined the advertisements for typographical errors and content. 

3. Design of the Credit Cards

USNB designed the cards issued under the program. The

Classic Visa card had a photograph of a University of Oregon

building easily recognizable by University of Oregon alumni and

the words "UNIVERSITY OF OREGON ALUMNI ASSOCIATION" printed on

it.3 The premier card had the same written notation as the

classic card but had no photograph. 

F. Postagreement Activities by Petitioner

1. Petitioner's Solicitations of Alumni

The University of Oregon Printing Department printed and

mailed solicitation materials three times from 1987 to 1991.4

Two of these mailings preceded the years at issue, and one was
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during the years at issue. The University of Oregon Printing

Department: (a) Printed and mailed a letter and brochure

supplied by USNB to 63,451 alumni in 1988; (b) printed and mailed

a letter prepared and supplied by USNB to about 14,500 University

of Oregon students in 1988; and (c) printed and mailed a letter

and brochure supplied by USNB to 39,900 University of Oregon

alumni in 1990. USNB fully reimbursed petitioner for all costs

associated with these mailings. 

Petitioner was not obligated by the Agreement to print and

mail these materials but did so because it cost less than the

direct mail house USNB hired, USNB did not have enough in-house

printing and mailing capacity, and the University of Oregon

Printing Department was convenient to the parties. Both USNB

and petitioner hoped to benefit from the mailings. 

Petitioner's mailings were not as sophisticated as USNB's

because the cardholder's accounts were not preapproved, they did

not contain some material recommended by professional marketers,

they were not in full color, and they were of ordinary size. 

USNB received more positive responses from its mailings than it

did from petitioner's mailings. Ninety-five percent of the

cardholders became cardholders because of USNB's marketing

efforts. 

 Petitioner included information about the affinity credit

card program in its membership application materials. Petitioner

published information about the affinity credit card program in
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its annual report. The report went to petitioner's members. 

USNB did not expect or require petitioner to mail direct

solicitation materials to satisfy its duty to inform members

about the affinity credit card program. 

2. Petitioner's Occasional Assistance to Alumni

After the affinity credit card program began, petitioner

occasionally received requests from alumni for credit card

applications. In each case, petitioner sent a brochure to the

person making the request. 

Petitioner received a few complaints from alumni who had

been denied a credit card. Petitioner referred these complaints

to USNB and asked USNB to look into the problem. USNB decided

whether to issue a credit card. On each occasion, USNB told

petitioner that the alumni member was contacted and the matter

handled appropriately. 

Petitioner occasionally received requests for credit cards

from persons who were connected with the University of Oregon but

who were not alumni. Petitioner forwarded each request to USNB. 

3. USNB's 800 Number for Affinity Credit Card Holders

All advertisements and solicitations asked the recipient to

contact USNB directly. The promotional materials listed USNB's

800 number. It was expected that alumni would contact USNB.

Petitioner maintained a list of USNB employees and their areas of
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service. Petitioner kept this list so it could refer alumni who

contacted its office to the appropriate USNB employee. 

4. Involvement of Petitioner's Executive Director in the

 Affinity Credit Card Program

Petitioner allocated 10 percent of Super's salary to develop

and implement the affinity credit card program for fiscal years

1986 and 1987 and from July to October 1987. Petitioner

allocated 5 percent of Super's salary to the affinity credit card

program from November 1987 to April 1988. Petitioner did not

allocate any salary to the affinity credit card program for the

years in issue (1990 and 1991). Petitioner's executive director

from September 1988 to present, Dan Rodriguez (Rodriguez), met

with USNB and a representative from the OSUAA once a year to

review the performance of the affinity credit card program. 

These meetings lasted about 1-1⁄2 to 2 hours. Rodriguez worked

approximately 1 hour per month on the affinity credit card

program. 

G. Petitioner's Travel Program

Petitioner arranged trips for its members through two travel

agencies. Petitioner earned $16,908 in fiscal year 1990 and

$14,396 in fiscal year 1991 from its travel program. These

figures do not include costs for travel to bowl games. For bowl

games, petitioner incurred net losses of $15,892 for fiscal year

1990 and $7,334 for fiscal year 1991. 

H. Watches and Rings
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Petitioner entered into an agreement with Wayneco

Enterprises, Inc. (Wayneco). Wayneco agreed to provide class

rings and commemorative watches to alumni. Wayneco paid

petitioner $25 for each item purchased. 

I. Petitioner's Income From the Affinity Credit Card

Program

Petitioner grossed $223,566 in 1990 and $305,296 in 1991

from the affinity credit card program. 

OPINION

A. Taxation of Unrelated Business Income

Section 511(a)(1) imposes a tax on the unrelated business

taxable income (UBTI) of certain tax-exempt organizations. 

Petitioner is subject to tax on its unrelated business income

under section 511(a)(2)(A) because it is tax exempt under section

501(c). Income is UBTI if: (1) The income arises from a trade

or business; (2) the trade or business is regularly carried on;

and (3) the trade or business is not substantially related to the

organization's tax-exempt purpose. Sec. 512(a)(1); Veterans of

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

B. Royalty Income

Royalty income is excluded from UBTI. Sec. 512(b)(2). A

royalty is a payment to use valuable intangible property rights. 

Disabled Am. Veterans v. Commissioner, 94 T.C. 60, 70 (1990),

revd. on other grounds 942 F.2d 309 (6th Cir. 1991). Whether
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income is a royalty is decided based on the facts and

circumstances. Sec. 1.512(b)-1, Income Tax Regs.

Respondent contends that USNB's payments are not royalties

because: (1) USNB did not pay petitioner to use a valuable

intangible property right; (2) petitioner did not use its own

mailing list; (3) the payments to petitioner were for services

rendered by petitioner; and (4) the enactment of section 513(h)

precludes royalty treatment.

1. Whether USNB Paid Petitioner To Use a Valuable

Intangible Property Right

Respondent contends that USNB did not pay petitioner to use

valuable intangible property rights because USNB did not display

petitioner's logo on the cards. We disagree.

The classic Visa card bore a photograph of an easily

recognizable building on the University of Oregon's campus and

the words "UNIVERSITY OF OREGON ALUMNI ASSOCIATION". The premier

card also had those words but had no photograph. USNB's failure

to depict the building on the premier card does not show that

petitioner failed to exchange a valuable intangible right.

In the Agreement, petitioner gave USNB access to valuable

intangible property rights. The Agreement gave USNB permission

to use the University of Oregon seal with petitioner's logo. 

Petitioner's logo is a registered trademark. Petitioner

maintained all rights to the logo which it did not specifically

give to USNB. USNB could not use petitioner's name or logo after
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the Agreement terminated. USNB's objectives in signing the

Agreement were to gain access to petitioner's mailing list and to

obtain petitioner's endorsement. Those are valuable intangible

property rights. Sierra Club, Inc. v. Commissioner, 103 T.C.

307, 344 (1994). We find respondent's contention about how USNB

designed the credit cards unconvincing. We conclude that

petitioner's income from the affinity credit card program was

received in exchange for the use of valuable intangible property

rights.

2. Whether Petitioner's Use of Its Mailing List Is

Inconsistent With Royalty Treatment

Respondent contends that petitioner's income from its

mailing list is not a royalty because petitioner's use of its

mailing list was a trade or business. 

In Disabled Am. Veterans v. United States, 227 Ct. Cl. 474,

650 F.2d 1178, 1184 (1981), the Court of Claims held that the

Disabled American Veterans (DAV) conducted the trade or business

of renting its mailing list. From 1974 to 1979, DAV rented parts

of its donor list 451 times. Disabled Am. Veterans v.

Commissioner, 942 F.2d at 311. DAV continuously rented names on

its list during the years in issue. Disabled Am. Veterans v.

United States, 650 F.2d at 1184. In renting its donor list, DAV

followed the usual practice of the direct mail industry. Id.

DAV prepared rate cards showing the rates it charged to

customers. Id. It was widely known among list brokers that
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DAV's mailing list was available for rental. Id. at 1185. DAV

employed two full-time employees to administer its list rentals. 

Disabled Am. Veterans v. Commissioner, 942 F.2d at 311.

Petitioner's mailing list rental activity is unlike DAV's

rental activity. Petitioner received income from the use of

its mailing list only for: (a) Alumni trips in 1990 and 1991;

(b) alumni class rings and commemorative watches; and (c) the

affinity credit card program at issue here.

Unlike DAV, petitioner did not regularly rent its mailing

list. Petitioner was not involved in the direct mail industry. 

Petitioner did not issue rate cards. Petitioner used minimal

staff time to administer its rentals. Petitioner allocated 10

percent of Super's salary to develop and implement the affinity

credit card program for fiscal year 1986-87 and from July 1987 to

October 1987. Petitioner allocated 5 percent of Super's salary

to the affinity credit card program from November 1987 to April

1988. The record does not indicate that petitioner allocated

any salary to the affinity credit card program for the years in

issue. We conclude that petitioner's use of its mailing list is

entirely consistent with classifying the resulting income as a

royalty.

3. Whether USNB's Payments Were for Services: Extent

of Petitioner's Role

Respondent contends that USNB paid to obtain petitioner's

cooperation and assistance.
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a. Petitioner's Solicitation of Its Members

Respondent contends that petitioner's solicitation of its

members for the credit card program precludes royalty treatment

for the resulting income because petitioner mailed some

solicitation materials once during the years in issue (1990 and

1991) and twice during prior years.

We disagree. Petitioner's activities were de minimis and

intended to bolster petitioner's relationship with University of

Oregon alumni. Petitioner agreed to inform its members of the

existence of the affinity credit card program at least once per

year, but was not required to mail any solicitation materials to

alumni. USNB developed all marketing materials. Petitioner

reviewed those materials, but USNB retained final decision-making

authority. Petitioner might have asked USNB to "tone down" the

solicitation materials or to correct the spelling of a name. 

USNB agreed to prepare and mail promotional materials. 

Petitioner's one mailing during the years at issue (1990 and

1991) included a letter and brochure designed by USNB. Ninetyfive percent of the cardholders became cardholders due to USNB's

marketing efforts. Petitioner included information about the

program in its application materials. Petitioner apparently was

using the credit card program in part to encourage alumni to join

the Alumni Association of the University of Oregon.

In Sierra Club, Inc. v. Commissioner, 103 T.C. at 335, a

provider of financial services, American Bankcard Services, Inc.
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(ABS), and not the Sierra Club, was responsible for developing

promotional materials. ABS submitted a proposed marketing plan

which the Sierra Club reviewed. Id. at 336. ABS placed

advertisements in the Sierra Club's magazine and paid for them on

the same terms that applied to unrelated advertisers. Id. The

Sierra Club could pay for direct mail or other solicitations. 

Id. at 313. If the Sierra Club did so, any royalties payable by

ABS were adjusted. Id. ABS was responsible for soliciting

members. Id. at 337. ABS was obligated to develop all

promotional materials. If the Sierra Club paid production and

mailing costs, ABS would compensate it for those costs. Id. at

312. The agreement in Sierra Club required that the Sierra Club

fully cooperate with ABS by encouraging its members to acquire

and use the services. Id. at 313. Petitioner's activities are

substantially similar to those of the Sierra Club. Petitioner's

solicitation activities were de minimis and were intended

primarily to protect petitioner's relationship with its members

and to keep its alumni aware of their ties to the University of

Oregon.

b. Petitioner's Providing of Services To Promote

the Affinity Credit Card Program

Respondent contends that petitioner's income from the credit

card activity was not a royalty because petitioner assisted USNB

in making solicitations, made its own solicitations, and provided

personal services to cardholders and prospective cardholders. We
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disagree. Petitioner's activities were de minimis and were done

to protect petitioner's goodwill with its members.

In Sierra Club, Inc. v. Commissioner, supra, ABS promised

the cardholders that they would receive a rebate of the annual

fee if they participated in the program for a second year. Id.

at 343. ABS breached that agreement. Id. The Sierra Club

helped arrange refunds to members. Id. We found that the Sierra

Club's actions were done to protect its good name. Id.

Similarly, petitioner was acting to preserve its good name with

alumni.

In Oregon State Univ. Alumni Association, Inc. v.

Commissioner, T.C. Memo. 1996-34, we held that the taxpayer

engaged in de minimis activity where it referred occasional

requests for credit card applications or complaints about the

denial of a credit card application, told about 14 alumni to

contact its offices if they needed further assistance, and

requested that USNB send preapproved applications to certain

alumni, expedite about eight applications, and establish some

credit limits above the standard. Here, petitioner has engaged

in less activity than the taxpayer in Oregon State. We hold that

USNB's payments to petitioner were not compensation for services

rendered and that petitioner's activities are compatible with the

treatment of those payments as royalty income.

4. Petitioner's Financial Risks and Rewards
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In deciding whether income a taxpayer receives is royalty

income, we may consider the taxpayer's financial risks and

rewards, including whether the taxpayer has a net profits and

gross profits interest. See Sierra Club, Inc. v. Commissioner,

supra at 333.

In Sierra Club, the taxpayer did not have a net profits

interest in the royalty payments because its income was based on

a percentage of the total charges. Id. at 333. Instead, it had

a gross profits interest. A gross profits interest is the right

to share in the gross profits without bearing the risk of loss. 

Id. Gross profits are the difference between sales and the cost

of goods sold. Black's Law Dictionary 703 (6th ed. 1990).

Petitioner had a gross profits interest in the credit card

program, not a net profits interest. Petitioner received a fixed

percentage of all of the authorized cash purchases and advances,

and a fixed amount for new accounts, regardless of whether USNB

had losses from the affinity credit card program. Here, as in

Sierra Club, no provision was made to periodically compute net

income or loss from the credit card program. The fact that

petitioner did not have a net profits interest supports

petitioner's contention that its income from the program was a

royalty.

5. Petitioner's Desire To Make Money From the Affinity

Credit Card Program
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Respondent points out that petitioner entered into the

affinity credit card agreement in part to make money. This,

however, is not a basis for us to conclude that petitioner's

income from the affinity credit card program was not a royalty. 

Nor does a desire to make money, standing alone, establish that

petitioner is engaged in a trade or business. See Commissioner

v. Groetzinger, 480 U.S. 23, 35 (1987) (not every incomeproducing endeavor is a trade or business); Whipple v.

Commissioner, 373 U.S. 193, 197 (1963) (the income tax law

distinguishes between a trade or business and transactions

entered into for profit but not connected with a trade or

business). Not all activity conducted with the expectation of

gain is a trade or business for purposes of UBTI. Disabled Am.

Veterans v. United States, 650 F.2d at 1185. To be engaged in a

trade or business, petitioner must be involved in the activity

with continuity and regularity and the primary purpose for

engaging in the activity must be for profit. Commissioner v.

Groetzinger, supra at 35.

6. Whether the Enactment of Section 513(h) Prevents

Treatment of USNB's Payments to Petitioner as

Royalties

Respondent argues that the enactment of section 513(h)

shows that Congress intended to treat income earned from mailing

list rentals as income from a trade or business. Section 513(h)

exempts from tax amounts earned by certain tax-exempt
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5 Sec. 513(h) provides:

(1) In general.--In the case of an organization

which is described in section 501 and contributions to

which are deductible under paragraph (2) or (3) of

section 170(c), the term "unrelated trade or business"

does not include--

 * * * * * * *

(B) any trade or business which consists of--

(i) exchanging with another such

organization, names and addresses of donors

to (or members of) such organization, or

(ii) renting such names and addresses to

another such organization.

Tax Reform Act of 1986, Pub. L. 99-514, sec. 1601(a), 100 Stat.

2085, 2766.

organizations from the trade or business of exchanging or renting

mailing lists to other tax-exempt organizations.5 Section 513(h)

is effective for exchanges and rentals of member lists after

October 22, 1986. Respondent contends that the enactment of

section 513(h) implies that renting mailing lists is generally

a trade or business. As in Sierra Club, Inc. v. Commissioner,

103 T.C. 307 (1994), respondent asks us to infer from the

enactment of section 513(h) that Congress generally views gross

income from the licensing of mailing lists as UBTI, unless

excepted by section 513(h). We do not draw that inference.

It is at best hazardous to infer the intent of an earlier

Congress from a later one. See Firestone Tire & Rubber Co. v.

Bruch, 489 U.S. 101, 114 (1989); United States v. Price, 361
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U.S. 304, 313 (1960). The inference asserted by respondent is

rejected in the legislative history of section 513(h).

A colloquy between Congressmen Daniel Rostenkowski 

(D-Ill.), Chairman of the Ways and Means Committee, and John

Duncan (R-Tenn.), Ranking Republican Member of the Ways and Means

Committee, occurred in the House of Representatives on the day

that the conference report which included section 513(h) was

passed. Congressman Rostenkowski’s comments were as follows: 

I also have discussed with Congressman Duncan the issue

of whether the provision of the bill which excludes

certain income from unrelated trade or business income

creates any inference under present law. We have

reached a common understanding regarding the following

specific issue:

The question relates to section 1601 of the bill which

excludes from unrelated trade or business income

revenues from the use of a tax-exempt organization's

mailing list by another such organization. Section

1601 of the bill, which specifically exempts certain

such revenues from the tax on unrelated business income

in the future, carries no inference whatever that

mailing list revenues beyond its scope or prior to its

effective date should be considered taxable to an

exempt organization.

132 Cong. Rec. 26208 (Sept. 25, 1986).

We conclude that section 513(h) does not apply here. See

Sierra Club, Inc. v. Commissioner, T.C. Memo. 1993-199.

7. Whether Royalty Treatment Is Consistent With the

Role of the Tax on Unrelated Business Income

The unrelated business income tax (UBIT) was enacted to

prevent tax-exempt organizations from unfairly using their taxexempt status to compete with commercial businesses. United
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States v. American College of Physicians, 475 U.S. 834, 837-838

(1986). Respondent contends that petitioner's participation

in the affinity credit card program is the type of unfair

competition between tax-exempt organizations and taxable

businesses that Congress intended to subject to the UBIT. We

disagree. Petitioner's activity was de minimis. USNB was

competing with other credit card issuers, but petitioner was not.

 Respondent cites United States v. American Bar Endowment,

477 U.S. 105 (1986). In American Bar Endowment, the Supreme

Court found that the taxpayer's activity created the kind of

unfair competition that led to the enactment of section 512. 

Id. at 114. The American Bar Endowment (ABE) raised money by

providing group insurance policies to its members. Id. at 107. 

ABE bought a group policy for its members and paid a negotiated

premium to the insurance company. Id. at 107-108. If the

insurance company's cost of providing insurance to the group was

lower than the premium, the company refunded the excess. Id.

at 108. The excess amounts were called dividends. Id. ABE

required all members to agree, as a condition of participating

in the group insurance program, that ABE and not the members

would keep the dividends. Id. ABE told its members that the

members' share of the dividends, less ABE's administrative costs,

was a tax-deductible contribution from the members to ABE. Id.

ABE actively administered the group insurance program. Id.

ABE's activities included choosing insurers, negotiating premium
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rates with insurers, compiling lists of its members, soliciting

and collecting premiums from its members, sending premiums to the

insurer, keeping files on each policyholder, answering members'

questions about insurance policies, and screening claims for

benefits. Id. The Court held that ABE was engaged in a trade or

business. Id. at 114.

The Court found that this arrangement created unfair

competition because ABE's members could deduct part of their

premium payment as a charitable contribution. This deduction

lowered the cost of ABE's insurance to its members. Id. at 

114-115. Nonexempt businesses would be disadvantaged if ABE were

not taxed on its earnings from the insurance program because ABE

would not need to be as profitable to receive the same return on

its investment. Id. at 115.

This case is not like American Bar Endowment. ABE paid

premiums to insurance carriers; petitioner did not make payments

to USNB. ABE required members to assign any amounts paid in

excess of the cost of the insurance to ABE. Petitioner imposed

no similar obligation on its members. ABE members could deduct

excess payments assigned to ABE as charitable contributions. 

Petitioner's members could not deduct their payments to USNB. 

ABE collected premiums and screened claims for benefits. 

Petitioner did not bill cardholders, collect payments, or decide

who was eligible to receive a credit card.
- 25 -

We disagree with respondent's contention that petitioner was

unfairly competing with taxed businesses.

C. Conclusion

For the foregoing reasons, we hold that petitioner's income

from the affinity credit card program is a royalty for purposes

of section 511.

To reflect the foregoing,

 Decision will be entered

 under Rule 155.