1

The Honorable Andrew W. Bogue, United States District Judge for the District

of South Dakota, sitting by designation.

2

The Honorable Stephen J. Swift, United States Tax Court.

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 01-2255

___________

Arkansas State Police *

Association, Inc., *

*

Appellant, *

* Appeal from the

v. * United States Tax Court.

*

Commissioner of Internal Revenue, *

*

Appellee. *

___________

Submitted: December 12, 2001

Filed: March 6, 2002

___________

Before LOKEN and BYE, Circuit Judges, and BOGUE,1

 District Judge.

___________

BYE, Circuit Judge.

The Arkansas State Police Association (ASPA) challenges the Tax Court's2

decision that money ASPA received from the publication of "The Arkansas Trooper"

magazine should be taxed as unrelated business income, rather than treated as

nontaxable royalty income. We affirm.
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I

ASPA is a non-profit corporation generally recognized as exempt from federal

income tax under 26 U.S.C. § 501(c)(5) (labor organization). From 1993 through

1996, ASPA entered into an agreement with Brent-Wyatt West (BWW), an Arizona

publishing company, to publish "The Arkansas Trooper" magazine three times a year.

Two separate agreements (two years each) covered the four years. Both agreements

were entitled "Royalties and Licensing Agreement." BWW paid ASPA $25,200 each

year to publish the magazine, as well as a percentage (26% under one of the two-year

agreements, and 27% under the other) of the money received from the advertising

published in the magazine. Over the course of the four years, ASPA received a total

of $876,697 from the publication of the magazine.

BWW bore all the costs of producing and distributing the magazine and

solicited all the advertising, but BWW's solicitors indicated they were calling "on

behalf of the Arkansas Police Association." BWW controlled the funds received from

the advertisers, but the checks were made payable to ASPA. The front cover of the

magazine bore the enscription "The Official Publication of the Arkansas State Police

Association." A "President's Message" written by ASPA's elected president appeared

in each issue of the magazine. ASPA provided its membership list to BWW, and

BWW distributed copies of the magazine free of charge to ASPA members, to

advertisers who paid at least $100 for ads, and to each Arkansas state legislator.

ASPA's Vice President of Public Relations (a part-time, voluntary position)

devoted approximately 250 to 300 hours a year to a variety of projects sponsored by

ASPA, including magazine-related activities. The Vice President reviewed BWW's

sales presentations, and reviewed the pre-publication copy of the magazine for

accuracy and suitability of the use of ASPA's name. The Vice President also wrote

to ASPA's members, encouraging them to take photographs and write articles about
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ASPA activities, and to submit them to ASPA for inclusion in the magazine. The

Vice President spent about 15-20 hours each year on magazine-related activities.

In its tax forms for the years 1993 to 1996, ASPA treated money received from

the publication of "The Arkansas Trooper" as non-taxable royalty income. The

Commissioner of Internal Revenue determined ASPA should have reported the

income as taxable unrelated business income. The Commissioner filed notices of

deficiency against ASPA for the four years in the amounts of $63,004, $63,730,

$71,158, and $80,289, respectively. ASPA challenged the notice of deficiencies in

tax court. Based on a stipulated record, the tax court held money ASPA received

from publication of the magazine was unrelated business income because ASPA

participated in and maintained control over significant aspects of the magazine's

publication. ASPA appeals, contending the money should be considered nontaxable

royalty income because ASPA's participation in the publication of "The Arkansas

Trooper" was passive, de minimis, and related only to the protection of its name.

II

Because the tax court decided this case on a stipulated record without trial, we

review de novo the tax court's application of tax law principles, Spiritual Outreach

Soc. v. Comm'r, 927 F.2d 335, 338 (8th Cir. 1991), keeping in mind that the clearly

erroneous standard applies to any reasonable inferences drawn by the tax court from

the stipulated or undisputed facts, Salomon v. Crown Life Ins. Co., 536 F.2d 1233,

1238 (8th Cir. 1976).

The tax code provides that an otherwise tax-exempt organization will be taxed

on business income generated from conducting business unrelated to "the exercise or

performance of its charitable, educational, or other purpose." 26 U.S.C. § 513(a).

"The purpose of taxing charities' unrelated business taxable income was to end what

Congress saw as abuse of the exemption, by charities able to carry on full-fledged
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commercial enterprises in competition with corporations whose profits were fully

taxable." Or. State Univ. Alumni Ass'n v. Comm'r, 193 F.3d 1098, 1101 (9th Cir.

1999) (internal citations and quotations omitted). Royalty income, however, is nontaxable, see 26 U.S.C. § 512(b), because that kind of unrelated business income is

generated "passively" rather than in active competition with taxable corporations.

E.g., Portland Golf Club v. Comm'r, 497 U.S. 154, 161 (1990) ("Since Congress

concluded that investors reaping tax-exempt income from passive sources would not

be in competition with commercial businesses, it excluded from tax the investment

income realized by exempt organizations.").

ASPA contends the payments it received from BWW should be considered

nontaxable royalty payments. ASPA relies heavily upon what the parties refer to as

the "affinity" credit card cases. Those cases involve a credit card company's use of

a tax-exempt organization's name to promote the credit card company's own business

of extending credit, and hold that a tax-exempt organization's de minimis participation

in the sale of credit cards, limited to supervising or controlling the manner in which

its name is used, does not disqualify the monies received from being considered

nontaxable royalties. See Or. State, 193 F.3d at 1101-02; Miss. State Univ. Alumni,

Inc. v. Comm'r, 74 T.C.M. (CCH) 458 (1997) (1997 WL 529003); see also Sierra

Club, Inc. v. Comm'r, 86 F.3d 1526, 1535-35 (9th Cir. 1996) (involving the rental of

a tax-exempt organization's mailing list for use in an affinity credit card program). 

ASPA also relies upon Rev. Rul. 81-178, 1981-2 C.B. 135, which distinguishes

between payments for personal services performed by a tax-exempt organization, and

payments solely for use of the tax-exempt organization's name. The revenue ruling

describes two tax-exempt organizations, both of which license other businesses to use

their trademarks to sell products. Both tax-exempt organizations have the right to

approve the quality of style of the licensed products, but only one organization

requires its members to perform personal services to endorse the products. The

revenue ruling indicates that payments to the former organization are nontaxable
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royalties, but payments to the latter are considered compensation for personal services

and are therefore taxable as unrelated business income. ASPA contends the services

it performed for BWW all related to protecting the use of ASPA's name. 

Relying principally upon State Police Ass'n of Mass. v. Comm'r, 125 F.3d 1

(1st Cir. 1997), and Fraternal Order of Police v. Comm'r, 833 F.2d 717 (7th Cir.

1987), the tax court found the payments ASPA received from BWW were not passive

royalty income because ASPA took a significant and active role in publishing "The

Arkansas Trooper." The Seventh and First Circuit cases both involve publications

similar to "The Arkansas Trooper," and hold that income received by a fraternal

police organization for advertisements in its own publication is taxable. Fraternal

Order, 833 F.2d at 723 (holding the income taxable and addressing the royalty

exception); State Police Ass'n, 125 F.3d at 7 (holding the income taxable without

addressing the royalty exception). The tax court also distinguished the "affinity"

credit card cases. In those cases, the credit card company promoted its own product

using the tax-exempt organization's name. The tax court noted that "The Arkansas

Trooper" "represented not the magazine of BWW but the magazine of petitioner

[ASPA] through which petitioner promoted [itself]."

We agree with the tax court. The payments at issue should not be considered

passive royalty income even if ASPA spent very little time working on the magazine.

A royalty exists when A uses B's name to promote A's products. The affinity credit

card cases involved royalties because the credit card company used the tax-exempt

organization's name to promote the credit card company's product. But here, BWW

used ASPA's name to promote ASPA, not BWW. The fact the parties labeled their

agreement a "Royalties and Licensing Agreement" is of no consequence because the

agreement was really an agency relationship. See State Police Ass'n, 125 F.3d at 7

(finding an agency relationship between police organization and publisher and stating

"the label which contracting parties place on their relationship is not decisive of their

status vis-a-vis third parties.").
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We believe the most applicable case is Nat'l Collegiate Athletic Ass'n v.

Comm'r, 92 T.C. 456 (1989), rev'd on other grounds, 914 F.2d 1417 (10th Cir. 1991).

That case involved the publication of programs for the Final Four games of the 1982

NCAA Division I Basketball Tournament. The NCAA contracted with a publisher

to solicit advertisements for inclusion in the program, and the issue was whether the

NCAA's share of the proceeds was exempt from taxation as royalty income, or

taxable as unrelated business income. The tax court concluded the publisher was

acting on behalf of the NCAA to promote the NCAA, rather than the NCAA allowing

the use of its name to promote the publisher's separate product. NCAA v. Comm'r,

92 T.C. at 469-70. Similarly, in this case, the essence of the agreement between

BWW and ASPA was to impose a duty upon BWW to perform publishing services

on ASPA's behalf and under ASPA's control. By publishing "The Arkansas Trooper,"

BWW acted on ASPA's behalf to promote ASPA, and did not pay for the use of

ASPA's name to promote BWW's separate product.

We affirm the decision of the tax court.

A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.