T.C. Memo. 1996-407

UNITED STATES TAX COURT

STATE POLICE ASSOCIATION OF MASSACHUSETTS, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 15443-93. Filed September 4, 1996.

Alfred J. O'Donovan III, for petitioner.

Catherine R. Chastanet and Christopher W. Schoen, for

respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WELLS, Judge: Respondent determined deficiencies in

petitioners' Federal income taxes, additions to tax, and

penalties for the taxable years as follows:
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 Additions to Tax 

 Secs. Secs. 

 TYE Sec. 6653(a)(1)/ 6653(a)(2)/ Sec.

April 30 Deficiency 6651(a)(1) 6653(a)(1)(A) 6653(a)(1)(B) 6661

 1986 $214,988 $53,747 $10,749 1 $53,747

 1987 238,492 59,623 11,925 1 59,623

 1988 266,342 66,585 13,317 1 66,585

 1989 239,264 59,816 11,963 1 59,816

 Additions to Tax and Penalties 

 TYE Sec. Sec. Sec. Secs.

July 31 Deficiency 6651(a)(1) 6653(a)(1)(A) 6653(a)(1)(B) 6661/6662

 1989 $57,636 $14,409 $2,882 1 $14,409

 1990 180,366 45,901 - - 36,073

 1991 155,345 38,836 - - 31,069

1 50 percent of the interest due on the deficiency.

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

The issues to be decided are:

1. Whether the period of limitations on assessment and

collection had expired with respect to certain of the taxable

periods in issue at the time respondent sent to petitioner the

statutory notice of deficiency in issue in the instant case; 

2. whether income generated by petitioner's solicitation

program for its yearbook is unrelated business income subject to

tax pursuant to section 511 for the taxable periods in issue; and

3. whether petitioner is liable for additions to tax

pursuant to sections 6651(a)(1), 6653(a)(1) and (2),

6653(a)(1)(A) and (B), and 6661(a), and penalties pursuant to

section 6662(a) for certain of the taxable periods in issue.
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FINDINGS OF FACT

Some of the facts have been stipulated for trial pursuant to

Rule 91 and are incorporated herein by reference. We find as

facts the parties' stipulations of fact. 

Petitioner is a labor organization exempt from taxation

pursuant to section 501(c)(5). Petitioner’s principal office, at

the time of the filing of the petition in the instant case, was

388 Hillside Avenue, Needham, Massachusetts. 

The purpose of petitioner is: (1) To represent and act as

bargaining agent in matters of policy, wages, hours, and other

conditions of employment, and to engage in other concerted

activities for the purpose of collective bargaining or other

mutual aid or protection, of and for the members of the Uniformed

Branch of the Division of State Police, Department of Public

Safety, of the Commonwealth of Massachusetts, and (2) to promote

and develop a friendly and fraternal spirit among all of the

members of the Uniformed Branch of the Division of State Police. 

Approximately 1,100 to 1,300 State troopers were eligible to

join petitioner during each of the taxable years in issue. 

Nearly all those who were eligible to be members were members. 

The Constabulary was the official publication of petitioner and

was intended for both internal and external use. The

Constabulary was characterized as petitioner’s "yearbook" or "adbook".
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Agreements

Petitioner entered into a contract with Brent-Wyatt East

(BWE), on January 22, 1982 (1982 Agreement), in which BWE agreed

to conduct an "earnings" program (the Program) for petitioner. 

The 1982 Agreement provided that:

(i) Its term would be for 3 years from January 1, 1982, but

would terminate upon written notice by one party to the other of

breach and the failure of the defaulting party to cure the breach

within 15 days of receipt of the notice;

(ii) BWE agreed to conduct the Program by "marketing

advertising" on behalf of petitioner through a telephone

solicitation and to produce, publish, and lay out at least 1,000

yearbooks;

(iii) petitioner would receive 41 percent of gross weekly

collections and any amounts left after all Program obligations

have been met but not less than $100,000 for each solicitation,

which was to occur annually;

(iv) BWE would receive 7 percent of gross weekly

collections;

(v) telephone salesmen, field representatives, and office

managers, who worked for both petitioner and BWE, would receive

31.5 percent of gross weekly collections;

(vi) the parties would receive amounts due them at weekly

settlement meetings;
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(vii) all checks received as a result of the solicitation

would be made payable to petitioner and turned over to the office

manager or trooper monitor on duty; any check received that was

not made payable to petitioner would be returned to its maker; 

(viii) daily reports of collected funds would be maintained

and submitted weekly to petitioner’s treasurer;

(ix) petitioner would maintain a separate checking account,

and all expenses incurred directly from the solicitation and

approved by petitioner and BWE would be paid from that account;

(x) BWE would be an independent contractor and not the

agent of petitioner; petitioner would have no direction or

control over BWE’s personnel or business activities, and BWE

would save petitioner harmless from any liability resulting from

BWE’s business activities; BWE could not incur indebtedness or

expenses in the name of petitioner;

(xi) petitioner would provide a monitor (Trooper Monitor)

who would be present at all times during the telephone

solicitation;

(xii) petitioner would provide an editing staff for the

yearbook;

(xiii) BWE would supply the marketing personnel, but

petitioner had the right to terminate the employment of any

employee or subcontractor found to be using pressure or

misrepresentation;
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(xiv) during the Program, BWE had authority to use

petitioner’s name, and petitioner insured the cooperation of

itself and its members; 

(xv) petitioner had the right at any time to exempt any

subscriber, prospective subscriber or advertiser for any reason

whatsoever;

(xvi) petitioner had the right to inspect any field office

from which the solicitation took place at any time without prior

notice to determine whether BWE was fulfilling its obligation

under the Agreement;

(xvii) petitioner had the right to demand that written

notices be placed in a conspicuous place at BWE’s offices, and no

office could operate without such notices;

(xviii) BWE would keep daily logs which contained specific

information and would advise all police departments in the area

of an ongoing solicitation;

(xix) petitioner’s trooper representatives had the right to

accept or reject the office space to be used by BWE for the

solicitation;

(xx) solicitations for the earnings program could be made

only by telephone.

By Memorandum of Agreement dated October 17, 1984,

petitioner and BWE agreed that there would be no termination date
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for the 1982 Agreement, and that the Agreement would run until

voluntarily terminated by one of the parties.

Petitioner entered into a contract with BWE on January 1,

1988, (1988 Agreement) which had terms similar to the 1982

Agreement, as amended, except that:

(i) the 1988 Agreement would continue indefinitely but

would terminate upon written notice by one party to the other of

breach and the failure of the defaulting party to cure the breach

within 15 days of receipt of the notice;

(ii) petitioner would receive 42 percent of gross weekly

collections and any amounts left after all Program obligations

have been met but not less than $100,000 for each solicitation,

which was to occur annually;

(iii) telephone salesmen, field representatives, and office

managers would receive 30.5 percent of gross weekly collections; 

(iv) the 1988 Agreement would terminate upon an uncured

breach by one party. 

Petitioner entered into a contract with R.H. McKnight Co.,

Inc. (McKnight), on June 20, 1990 (1990 Agreement), which had

terms similar to the 1982 Agreement, as amended, and the 1988

Agreement, except that:

(i) McKnight replaced BWE;

(ii) reference to yearbooks was deleted, and terms

referring to a program guide which was to be distributed in
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connection with an annual road race known as the "State Police

Chase" were inserted;

(iii) reference to telephone salesmen, field

representatives, and office managers was deleted, and a provision

was inserted which provided that persons employed by McKnight for

the purposes of soliciting funds would be paid 27.5 percent of

funds resulting from such persons’ solicitations.

Telephone Solicitations

BWE and McKnight described their business as publishing and

sales. BWE or McKnight employed a subcontractor to conduct a

solicitation campaign during each of the years in issue pursuant

to the Agreements. 

Each campaign consisted of telephone solicitations in which

8 to 12 callers called businesses located in the Commonwealth of

Massachusetts. Individual residences were not solicited.

Telephone solicitors used a stock solicitation format that

prompted the solicitor to tell the person called that the

solicitor was calling on behalf of the State Police Association

of Massachusetts; that the Troopers were putting together their

annual business to business directory; that the caller was

calling local businesses to show support for the State Police

Association by purchasing a sponsorship in a book; and that money

derived from the solicitation is used to improve working

conditions for the membership.
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Telephone solicitations were conducted during normal

business hours 5 days per week, except on those days on which an

evening solicitation was conducted, when solicitations began at

12 noon. Telephone solicitations were conducted approximately 46

weeks per year. Telephone solicitations were monitored by a

member of petitioner (the Trooper Monitor) to answer questions,

if necessary, and to ensure that the solicitation did not involve

coercion, fraud, or duress. Businesses which were solicited by

telemarketers could have made a contribution to petitioner

without having their name or any other identifying statement

appear in print in The Constabulary. Each year, only five or six

businesses that were solicited pursuant to the earnings program

contributed money to The Constabulary without being recognized by

name in The Constabulary. 

In operation, petitioner exercised substantial control over

BWE and McKnight. Petitioner set the office hours for

advertisement solicitations for The Constabulary; set rules for

depositing gross receipts and returning bad checks; monitored the

use of telephones for personal calls by ad sellers; required BWE

and McKnight office managers to be present at weekly

reconciliation meetings; demanded to be advised of any problems;

demanded the names of all telephone solicitors; required BWE and

McKnight to maintain personal data files on all employees; and

geographically limited the areas to which advertisement

solicitations could be made.
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BWE and McKnight are considered professional fund raisers

under the Massachusetts Charitable Solicitation Act.

Collection and Accounting for Funds

When a business agreed to make a "payment" to petitioner,

the telephone solicitor made a notation on an envelope itemizing

the business, its address, the person he spoke with, and the

amount of the payment. The envelope was delivered by a delivery

service, such as United Parcel Service (UPS), to the business,

which delivered a check to the UPS messenger, who returned it to

the solicitation office.

Checks received by the solicitation office were made payable

to petitioner and were deposited in a bank account owned by 

petitioner. When checks came into The Constabulary office, they

were counted and deposited in petitioner’s bank account by the

office manager and a trooper. BWE and McKnight or its

subcontractor, Mr. Norman Berube, accounted for all receipts

directly to petitioner.

Amounts collected were distributed at the weekly meetings

according to the Agreements between petitioner and BWE or

McKnight and the weekly settlement reports.

Publication of The Constabulary

Pursuant to the Agreements, BWE and McKnight published The

Constabulary once in each year in issue. The Constabulary was

published in five editions: Troop A, Troop A Greater Boston,

Troop B, Troop C, and Troop D.
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In each year, the following numbers of copies of The

Constabulary were printed:

 Troop Troop A Troop Troop Troop

 Year A Boston B C D 

 1986 1,000 800 900 1,150 1,350

 1987 1,100 800 1,100 1,250 1,350

 1988 1,500 800 1,300 1,400 1,500

 1989 2,000 600 1,400 1,500 1,500

 1990 2,000 600 1,400 1,500 1,500

 1991 2,000 600 1,400 1,500 1,500

The Constabulary was printed in two sections, the common

section and the Display Ad section. The common section

contained, during each year in issue, articles and editorials

that were identical in each of the five editions. Additional

material, other than articles and editorials, was common to every

edition. The material other than articles and editorials that

was not common to every edition related to businesses which were

located within the geographic location of the troop.

The Display Ad section contained display ads and listings. 

The display ads (displays), which are indexed in alphabetical

order in an "Advertiser’s Index" or "Index to Display Ads" in the

back of each edition of The Constabulary, consisted of messages

covering from one-sixth of one page to a full page. The display

ads contained blocking, illustrations, signatures, trademarks,

and emblems. The display ads included such well-known companies

or products as McDonald's, AT&T Corp., John Hancock, Sheraton

Hotels, Mobil Oil Corp., Kentucky Fried Chicken, Rockport, and

AAMCO Transmissions. Some of the display ads contained well-
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known slogans that sponsors also used in their national

advertising. 

The listings were placed after the displays in a section

entitled "Business Directory". The Business Directory in The

Constabulary for the 1986 through 1991 editions consisted of twoor three-line listings of various businesses by name, telephone

number (except for 1991), and address (city and State only),

arranged alphabetically by type of business. 

The beginning of each business directory in each edition of

The Constabulary published for the years 1986 through 1991

states:

ON THE FOLLOWING PAGES, listed by category of

service or product, are advertisers who

support the State Police Association of

Massachusetts. We urge you to consider these

fine companies when making purchases for

yourself or your family.

Each 1986 and 1987 edition of The Constabulary contains "A

Message from the President..." of petitioner which states:

As president of the State Police

Association of Massachusetts, I am proud to

announce this year’s edition of The

Constabulary. This book is an attempt to

showcase what the functions of the

Massachusetts State Police are all about, and

I hope that the readers will find it

enjoyable.

As in the past, this book is made

possible by the generous contributions of

those who advertise in it. It is our hope

that the reader will make use of such

advertisements and solicit the establishments

herein. 
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The content of editorials and articles published in The

Constabulary was determined by the editorial staff of troopers. 

Most of the articles in The Constabulary were written by troopers

who were editors. Trooper editors reviewed every article and

editorial before it was published. 

Distribution of The Constabulary

In each year, approximately 300 to 400 copies of The

Constabulary were distributed to attendees of the State Police

Chase, an annual picnic and sports day, and approximately 1,000

copies were hand-carried to trooper barracks over the course of a

couple of weeks for distribution to members of petitioner. Each

year the remaining copies of The Constabulary were delivered to

businesses. In some, but not all instances, copies of The

Constabulary were sent to particular businesses to verify that

petitioner, and not some other organization, published the book. 

During the years in issue, The Constabulary, however, was

not arranged as a program guide for the annual State Police Chase

sporting event. The 1986, 1987, and 1988 editions of The

Constabulary do not mention the State Police Chase, and in the

1989, 1990, and 1991 editions, the two- or three-page articles on

the State Police Chase relate to the previous year's event. The

Constabulary was never sold to anyone for a charge. 
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1 The Constabulary income amounts, which are reported on a

fiscal year basis, differ from the gross amounts from displays

and listings, which are compiled on a calendar year basis.

Revenues

Petitioner received approximately the following gross

amounts from displays:

Year Amount

1986 $265,400

1987 565,700

1988 529,000

1989 440,000

1990 339,300

1991 370,500

Petitioner received approximately the following gross

amounts from listings:

Year Amount

1986 $1,085,300

1987 1,043,300

1988 1,070,400

1989 1,009,600

1990 805,700

1991 790,800

Operations

Petitioner had total income and expenses relating to The

Constabulary for the taxable periods in issue as follows:1

 Year Ending Constabulary Income Constabulary Expenses

 Apr. 30, 1986 $1,244,241 $731,854

 Apr. 30, 1987 1,344,752 781,270

 Apr. 30, 1988 1,693,025 942,884

 Apr. 30, 1989 1,589,793 885,075

 July 31, 1989 408,176 216,442

 July 31, 1990 1,312,635 740,706

 July 31, 1991 1,195,589 737,692

 Total 8,788,211 5,035,923
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Petitioner used a price list in its solicitation program for

The Constabulary. BWE and McKnight set the prices for the

various sized displays and listings with petitioner's approval. 

Petitioner's president, Kevin W. Regan, sent letters advising

recipients that petitioner was "selling advertising in the next

edition of The Constabulary yearbook". In its letter, petitioner

set forth its price list for different sizes of "advertisements." 

Petitioner advised prospective advertisers that the "prices" for

advertisements in The Constabulary were as follows:

 Display Advertisements

 Full page $995

 3/4 page 850

 l/2 page 595

 1/3 page 450

 l/4 page 395 

 l/6 page 295

 Directory Advertisements

 Large bordered $195

 Small bordered 135

 3-line listing 95

 2-line listing 55

Period of Limitations

By letter dated May 21, 1992, petitioner's representative

agreed to execute on behalf of petitioner a Consent to Extend the

Time to Assess Tax (Form 872) to allow the assessment of

additional Federal income tax to occur on or before December 31,

1992, for the periods ended April 30, 1986 through 1989, and July

31, 1989. 
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2 Petitioner's representative modified the executed Form 872

by deleting the reference to excise tax. A group manager in the

exempt organizations portion of the EPEO division of the Brooklyn

District executed petitioner's modified Form 872 on behalf of

respondent on Aug. 3, 1992. 

Petitioner and respondent by their authorized

representatives executed a Consent to Extend the Time to Assess

Tax (Form 872) on August 3, 1992. The first page of the Form 

872 stated, in pertinent part, as follows:

 State Police Assoc. of Massachusetts 

 (Name(s))

taxpayer(s) of 388 Hillside Ave. Needham, Ma. 02194 

 (Number, Street, City or Town, State, ZIP Code)

and the District Director of Internal Revenue or Regional Director of Appeals 

consent and agree to the following:

(1) The amount of any Federal Income Excise[2] tax due on any

 (Kind of Tax)

return(s) made by or for the above taxpayer(s) for the period(s) ended

 April 30, 1986, 1987, 1988, 1989 and July 31, 1989 

may be assessed at any time on or before April 30, 1993 . However, if

 (Expiration Date)

a notice of deficiency in tax for any such period(s) is sent to the

taxpayer(s) on or before that date, then the time for assessing the tax will

be further extended by the number of days the assessment was previously

prohibited, plus 60 days.

The only returns filed by petitioner for the periods ended

April 30, 1986 through 1989, and July 31, 1989, were Returns of

Organization Exempt from Income Tax (Form 990).

OPINION

Jurisdiction

The first issue we must decide is whether the period of

limitations on assessment had expired with respect to certain of
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3 Sec. 6501(g)(2) provides:

If a taxpayer determines in good faith that it is an

exempt organization and files a return as such under

section 6033, and if such taxpayer is thereafter held

to be a taxable organization for the taxable year for

which the return is filed, such return shall be deemed

the return of the organization for purposes of this

section.

the taxable periods in issue prior to the date respondent sent

the notice of deficiency in issue in the instant case to

petitioner. Pursuant to section 6501(g)(2),3 the good faith

filing of a Form 990 by an exempt organization commences the

running of the period of limitations against assessment of tax on

unrelated business income if the organization is later held to be

a taxable organization. California Thoroughbred Breeders

Association v. Commissioner, 47 T.C. 335, 339 (1966). Because

petitioner pled the bar of the statute of limitations, petitioner

must show that the statutory notice was issued beyond the

normally applicable period of limitations. In Adler v.

Commissioner, 85 T.C. 535, 540 (1985), we stated:

The bar of the statute of limitations is an

affirmative defense, and the party raising it must

specifically plead it and carry the burden of proof

with respect thereto. Rules 39, 142(a). Where the

party pleading such issue makes a showing that the

statutory notice was issued beyond the normally

applicable statute of limitations, however, such party

has established a prima facie case. At that point, the

burden of going forward with the evidence shifts to the

other side, and the other party has the burden of

introducing evidence to show that the bar of the

statute is not applicable. Where the other party makes

such a showing, the burden of going forward with the

evidence then shifts back to the party pleading the
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statute, to show that the alleged exception is invalid

or otherwise not applicable. The burden of proof,

i.e., the burden of ultimate persuasion, however, never

shifts from the party who pleads the bar of the statute

of limitations. [Citations omitted.]

In the instant case, on November 13, 1989, petitioner filed

Returns of Organization Exempt from Income Tax (Forms 990) for

the periods ended April 30, 1986 through 1989, and July 31, 1989. 

Petitioner did not file Forms 990-T for unrelated business income

tax for those periods. Respondent's statutory notice was issued

on April 22, 1993. 

Petitioner contends that it determined in good faith that it

was an exempt organization, had no taxable income, and therefore

was not required to file any return other than Form 990.

Accordingly, petitioner argues that section 6501(g) applies to

commence the running of the period of limitations for the

purposes of the Form 990-T and that, because the Form 872 that

petitioner signed referred only to "return(s) made", the Form 872

did not extend the period of limitations. 

In the instant case, we need not decide whether petitioner's

filing of a Form 990 commenced the running of the period of

limitations against assessment of the unrelated business income

tax determined by respondent because, even if we were to so hold,

we conclude that the Form 872 signed by the parties effectively

extended that period of limitations. Petitioner argues that,

because the Form 872 applies only to "return(s) made" by
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4 Even if the language could not be construed to include a

deemed return, we would conclude that the Form 872 could be

reformed. Where a written agreement does not conform with the

actual agreement between the parties, the Court may reform the

writing to conform with the parties' intentions. Woods v.

Commissioner, 92 T.C. 776, 782 (1989). In light of petitioner's

concession concerning its intent to extend the period of

limitations, the Form 872 may properly be reformed to conform to

the agreement and intent of the parties. The evidence is clear

and convincing that the parties intended to extend the period of

limitations with respect to returns made as well as those "deemed

made" by reason of sec. 6501(g)(2). 

petitioner and because "No tax was due or could be due on the

returns filed by the Petitioner for the applicable periods", the

Form 872 does not extend the period of limitations to assess tax. 

Petitioner, however, concedes:

it intended to extend the period in which the

Respondent was required to assess a tax for unrelated

business income for the periods ended April 30, 1986,

April 30, 1987, April 30, 1988, April 30, 1989 and the

three-month period ended July 31, 1989 (the "applicable

periods") or issue a notice of deficiency to the

Petitioner. 

As we construe the parties' use of the language "income tax

due on any return(s) made by or for the above taxpayer(s)", we

think it is broad enough to include a return deemed made pursuant

to section 6501(g)(2); i.e., a Form 990-T.4 We therefore hold

that the parties duly extended until April 30, 1993, the period

of limitations within which respondent could assess deficiencies

in petitioner’s unrelated business income tax for the periods in

issue. The notice of deficiency was mailed to petitioner before

that date, and consequently the limitations period remains open.
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Unrelated Business Income

The next issue we must decide is whether the income

generated from petitioner's solicitation program for The

Constabulary is unrelated business income subject to tax pursuant

to section 511. Petitioner argues that it merely solicited

contributions and did not engage in the business of selling

advertising. Respondent contends that petitioner’s solicitation

of displays and listings in The Constabulary constituted the sale

of advertising as a trade or business. 

We first examine whether petitioner sold "advertising". The

Code and the regulations do not provide a definition of the term

"advertising" or "advertisement". In Fraternal Order of Police

v. Commissioner, 87 T.C. 747 (1986), affd. 833 F.2d 717 (7th Cir.

1987), we examined whether listings similar to those in the

instant case constituted "advertising". In Fraternal Order of

Police, an organization exempt from tax pursuant to section

501(c)(8) published The Trooper magazine, which contained

articles relating primarily to the duties of police officers, and

two types of listings: (1) "large listings", which contained the

usual elements associated with advertisements, such as blocking,

illustrations, signatures, trademarks, and emblems, and (2) a

business directory, which classified and arranged the listers in

the same manner as the yellow pages of a telephone directory. 

Id. at 750. The Trooper also had an "Advertisers’ Index"
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containing the name of the sponsor of each large listing and the

page upon which its listing was located. Those sponsors included

well-known companies such as American Airlines and Midas

Mufflers. 

In Fraternal Order of Police, after examining the record and

copies of The Trooper magazine, we were "convinced that both the

larger listings and the business listings constitute

'advertising.'" Id. at 754. We stated:

To conclude otherwise we would have to ignore the fact that

the vast majority of the listings in The Trooper are

composed of slogans, logos, trademarks, and other

information which is similar, if not identical in content,

composition, and message to the listings found in other

professional journals, newspapers, and the "yellow pages" of

telephone directories. We also note that the contracts with

OSC, FOP’s business forms, and the magazine itself

repeatedly use such words and phrases as "advertising

revenues," "advertisers," "prospective advertisers,"

"advertising marketing program," and "advertising," to

describe the listings and related activities. [Id.]

Petitioner argues that Fraternal Order of Police is

distinguishable from the instant case because no expert testified

in that case that the listings were not advertising. In the

instant case, petitioner’s expert concluded that, under

"generally accepted marketing theory", only 10 percent of the

messages in The Constabulary were advertising. At trial,

however, petitioner's expert was asked whether she knew that

there was a relationship between the amount of space that a

contributor’s message received and the amount that was

contributed. Petitioner's expert testified: 
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it has just never been made specific and clear. I

would assume that * * * because they * * * [petitioner]

are doing things in gratitude for contributions and I

would think you would be more grateful for large

contributions than you would be for small

contributions. But I think it really goes to a price

list and I have never seen one and never heard of one

and never been told that X amount buys you X space,

because that would imply advertising. 

When presented with an exhibit containing prices for various

sized spaces in The Constabulary, petitioner's expert testified: 

"It looks like a price list to me."

We weigh expert testimony in light of the expert’s

qualifications as well as all the other credible evidence in the

record. Seagate Tech., Inc. & Consol. Subs. v. Commissioner, 102

T.C. 149, 186 (1994). We are not bound by the opinion of any

expert witness, and we will accept or reject that expert

testimony when, in our best judgment, based on the record, it is

appropriate to do so. Id., and the cases cited therein. While

we may choose to accept in its entirety the opinion of one

expert, we may also be selective in the use of any portion of

that opinion. Id.

We believe that the existence of a quid pro quo arrangement

is important to an analysis of whether the displays and listings

in The Constabulary constitute advertising. Because petitioner's

expert testified that she did not know that petitioner's

contributors were told that there was a relationship between the

amount of space a contributor's message received and the amount
- 23 -

that was contributed, we believe that the conclusions of

petitioner's expert are based upon incomplete information. 

Accordingly, we discount the testimony of petitioner's expert. 

Petitioner next argues that one factor to be used in

determining the existence of "advertising" is the contributor's

intent in making a payment to the organization. Petitioner

argues that contributors to The Constabulary expected no

commercial benefit from their payment but merely intended to

benefit petitioner. In its affirmance of our decision in

Fraternal Order of Police v. Commissioner, supra, the Seventh

Circuit Court of Appeals stated that the sponsor's

motivation [to help support the families of officers

killed in the line of duty] does not define * * * [the

Fraternal Order of Police's] activities. To place a

listing in The Trooper, each sponsor had to purchase a

space and pay a prescribed rate which corresponded to

the desired size of the listing. Moreover, each issue

of The Trooper included the request by the editors that

its readers patronize those who had paid for the

listings. [Fraternal Order of Police v. Commissioner,

833 F.2d at 721.]

Accordingly, in the instant case, we conclude that an inquiry

into the contributor's intent in making a payment to petitioner

is not helpful in light of the fact that the contributors

received the displays and listings in consideration of their

contribution; i.e., they purchased the display or listing, and

the size of the space allotted to the contributor's message was

linked to the amount paid. In any event, petitioner has not

established in the instant case that the display or listing
- 24 -

received by the contributor had a value less than the amount of

the contribution given in exchange for the display or listing. 

Consequently, we will apply an analysis of the displays and

listings similar to the one we used in Fraternal Order of Police

v. Commissioner, 87 T.C. 747 (1986), to decide whether

petitioner's displays and listings in The Constabulary constitute

"advertising".

As in Fraternal Order of Police, the displays in The

Constabulary contained the usual elements associated with

advertisements such as blocking, illustrations, signatures,

trademarks, and emblems. An "Advertisers’ Index" contained the

name of the sponsor of each display, including McDonald's, AT&T

Corp., John Hancock, Sheraton Hotels, and Mobil Oil Corp., among

other well-known companies, and specified the page upon which the

display was located. Between the displays and the "Advertiser’s

Index" appeared a section of listings called the Business

Directory wherein various businesses were identified by name and

classified by type of business, as in the yellow pages of a

telephone directory. 

We have examined the record and copies of The Constabulary,

and we are convinced that both the displays and the listings

constitute "advertising". Many of the displays are composed of

slogans, logos, trademarks, and other information which is

similar if not identical in content, composition, and message to
- 25 -

the listings found in other professional journals, newspapers,

and the yellow pages of telephone directories. Additionally, the

contracts with BWE and McKnight, petitioner's correspondence, and

The Constabulary itself repeatedly use such words and phrases as

"advertising", "advertisements", "advertisers", "ad book", and

"marketing advertising" to describe the displays and listings and

related activities. Consequently, we conclude that the displays

and listings in The Constabulary constitute "advertising". 

Petitioner next argues that section 1.513-1(b), Income Tax

Regs., exempts its solicitation activity from being characterized

as a trade or business because its "advertising" is a low-cost

article. That regulation addresses charitable fundraising

programs where low-cost goods are sent out by organizations along

with a solicitation to contribute money. In its sales of

advertising, however, petitioner did not follow such a procedure. 

Additionally, the lowest charge for any of petitioner’s displays

or listings was, during some of the periods in issue, $55 for a

two-line listing in the business directory, a cost that cannot be

properly described as "low". Accordingly, we conclude that

petitioner is not eligible for the low-cost article exemption. 

We next examine whether petitioner's selling of advertising

space constitutes an "unrelated trade or business" for purposes

of section 512. Generally, the selling of advertising space is

an "activity which is carried on for the production of income
- 26 -

from the sale of goods" and is therefore a "trade or business"

within the meaning of section 513(c). The Supreme Court has

interpreted section 1.513-1(b), Income Tax Regs., as

“‘fragmenting’ the enterprise of publishing into its component

parts”, segregating "the 'trade or business' of selling

advertising space from the 'trade or business' of publishing a

journal". United States v. American College of Physicians, 475

U.S. 834, 839 (1986). The trade or business of soliciting,

selling, and publishing advertising does not lose identity as a

trade or business when the advertising appears in an exempt

organization's periodical that contains editorial matter related

to the exempt purposes of the organization. Id. (citing sec.

1.513-1(b), Income Tax Regs.). 

Accordingly, we segregate the publishing of the editorial

matter in The Constabulary from the soliciting, selling, and

publishing of advertising space in The Constabulary. Petitioner

concedes that the advertising activity is not substantially

related to petitioner’s exempt purpose. Consequently, we hold

that petitioner was engaged in an unrelated trade or business of

soliciting, selling, and publishing advertising space. 

We next examine whether petitioner's unrelated trade or

business was "regularly carried on" within the meaning of section

512. Petitioner argues that its advertising activity was not
- 27 -

regularly carried on. The regulations provide the general

requirement:

In determining whether trade or business from which a

particular amount of gross income derives is "regularly

carried on," within the meaning of section 512, regard

must be had to the frequency and continuity with which

the activities productive of the income are conducted

and the manner in which they are pursued. * * * [Sec.

1.513-1(c)(1), Income Tax Regs.]

The regulations also provide that "This requirement must be

applied 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.

After stating the general principles, the regulations next

categorize an exempt organization’s business on the basis of its

nonexempt counterparts’ "Normal time span of activities." Sec.

1.513-1(c)(2)(i), Income Tax Regs. The regulations inquire

whether the exempt organization’s income-producing activities are

of a kind normally conducted by nonexempt commercial

organizations on (1) a year-round basis or (2) only a seasonal

basis. Id. For "year-round" activities, the regulations provide

that "the conduct of such activities by an exempt organization

over a period of only a few weeks does not constitute the regular

carrying on of trade or business", but that the conduct of such

activities "for one day each week would constitute the regular

carrying on of trade or business." Id. For "seasonal"
- 28 -

activities, the regulations provide that "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.

The regulations provide special rules for "intermittent

activities". Sec. 1.513-1(c)(2)(ii) and (iii), Income Tax Regs. 

We have previously noted: 

The regulation does not, in terms, define

"intermittent". We gather from the context that an

activity is to be regarded as intermittent if it is not

conducted by the tax-exempt organization on a yearround basis (or, with regard to an activity that is

normally conducted by nonexempt organizations only on a

seasonal basis, the activity is intermittent if it is

not conducted by the tax-exempt organization for

substantially the full season). * * * [Veterans of

Foreign Wars, Mich. v. Commissioner, 89 T.C. 7, 32

(1987).] 

The regulations, apparently equating "intermittent" with

"discontinuous" and "periodical", provide that 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." Sec.

1.513-1(c)(2)(ii), Income Tax Regs. For example, "the

publication of advertising in programs for sports events or music

or drama performances will not ordinarily be deemed to be the

regular carrying on of business." Id. 
- 29 -

Additionally, the regulations provide that "Certain

intermittent income producing activities occur so infrequently

that neither their recurrence nor the manner of their conduct

will cause them to be regarded as trade or business regularly

carried on." Sec. 1.513-1(c)(2)(iii), Income Tax Regs. The

regulations add that "such activities will not be regarded as

regularly carried on merely because they are conducted on an

annually recurrent basis." Id.

In the instant case, petitioner advances two arguments that

its advertising activity is not "regularly carried on" within the

meaning of section 1.513-1(c)(1), Income Tax Regs. Petitioner's

first argument is that BWE’s and McKnight’s activities should not

be attributed to petitioner for purposes of determining whether

petitioner regularly carried on its trade or business of selling

and publishing advertising. Petitioner relies on NCAA v.

Commissioner, 914 F.2d 1417 (10th Cir. 1991), revg. 92 T.C. 456

(1989). In NCAA, this Court concluded that the publisher’s

activities should be attributed to the National Collegiate

Athletic Association (NCAA) because the NCAA failed to provide

evidence regarding the extent and manner of the publisher’s

conduct in connection with the solicitation, sale, and

publication of advertising in the tournament programs. NCAA v.

Commissioner, 92 T.C. at 468. On appeal, however, the Tenth

Circuit Court of Appeals focused instead on the fact that the
- 30 -

programs were distributed over less than a 3-week span at an

event occurring only once a year. NCAA v. Commissioner, 914 F.2d

at 1421-1424.

In the instant case, petitioner argues that the activities

of BWE and McKnight should not be attributed to petitioner.

Petitioner argues that its contracts with each publisher

provided: (1) That the publisher was an independent contractor

and not the agent of petitioner, (2) that petitioner had no

direction or control over BWE’s personnel or business activities,

and (3) that the publisher agreed to "save" petitioner harmless

from any liability resulting from the publisher’s activities. 

Petitioner points to the additional fact that the telephone

callers were employed by a subcontractor of BWE and McKnight, and

petitioner asserts that the subcontractor had complete control

over the callers.

In NCAA, this Court found an agency relationship because the

contract between the NCAA and the publisher expressly designated

the publisher as the NCAA’s "exclusive agent" for the sale of

advertising in the program, and because the contract manifested

an intent (1) that the publisher would act on behalf of the NCAA

in conducting the sale of advertising, and (2) that NCAA could

control the publisher’s activities. NCAA v. Commissioner, 92

T.C. at 467. In the instant case, petitioner’s agreements with

BWE and McKnight provide that each of the latter 
- 31 -

is an independent contractor and as such * * *

[petitioner] has no direction and control over the

personnel or business activities of * * * [publisher].

* * * [publisher] is not the agent of * * *

[petitioner] and shall not incur any expenses, bills,

indebtedness or obligations for or in the name of * * *

[petitioner] and shall save * * * [petitioner] harmless

from any liability whatsoever as a result of * * *

[publisher’s] business activities.

The manner in which the parties to an agreement designate

their relationship is not controlling. Board of Trade v. Hammond

Elevator Co., 198 U.S. 424, 437 (1905). A true agency

relationship may be established despite the parties' designation

to the contrary. See id. at 438 (quoting Connecticut Mutual Life

Insurance Co. v. Spratley, 172 U.S. 602, 615 (1899)).

In the instant case, we conclude that the agreements

manifested an intent that BWE and McKnight would act on behalf of

petitioner in conducting the sale of advertising. The agreements

provided that BWE or McKnight (as the case might be) "has full

authority to use the good name of * * * [petitioner] during the

course of the earnings program." Additionally, the agreements

provided a payment collection procedure in which "All checks or

money orders received as a result of the solicitation shall only

be made payable to * * * [petitioner]." By providing BWE and

McKnight with the authority to use petitioner's name and to

collect petitioner's solicitation payments, the agreements

authorized those companies to act on behalf of petitioner in

conducting the sale of advertising.
- 32 -

5 Compare Fraternal Order of Police v. Commissioner, 87 T.C.

747 (1986), affd. 883 F.2d 717 (7th Cir. 1987), where an exempt

organization, having contracted with another entity to publish a

(continued...)

Additionally, we conclude that petitioner could control

BWE's and McKnight's activities. The agreements provided: 

[petitioner] shall have the right to inspect any field

offices or other offices from which the solicitation

program is taking place without prior notice and at any

time so as to determine whether or not * * * [BWE or

McKnight] is fulfilling its obligations under this

AGREEMENT.

Petitioner reserved the right "to exempt at any time any

subscriber or any prospective subscriber or advertiser for any

reason whatsoever." BWE or McKnight had a duty to provide each

Monday a copy of the daily reports for the previous week of all

collected funds. Accordingly, we conclude that petitioner could

and did control BWE's and McKnight's activities. In the instant

case, we are convinced that neither the compensation structure,

which shifted part of the risk of loss to BWE and McKnight, nor

the presence of the indemnification clause in favor of petitioner

negates the agency relationship. Accordingly, we conclude that

petitioner had an agency relationship with BWE and with McKnight,

and that BWE's and McKnight's activities, as well as those of

their subcontractors, are to be attributed to petitioner for

purposes of determining whether petitioner's trade or business of

soliciting, selling, and publishing advertising space was

"regularly carried on" within the meaning of section 512.5 
- 33 -

5(...continued)

magazine and to sell advertising space therein on its behalf, was

found to be an active participant in the publication of the

magazine because it could appoint the executive editor, prepare

editorials and feature articles, oversee and control

solicitations of business listings, and control the bank account

and the reprint of articles.

Citing Suffolk County Patrolmen’s Association v.

Commissioner, 77 T.C. 1314 (1981), petitioner next argues that

the time and effort spent in the solicitation of advertising for

The Constabulary should not be considered in deciding whether its

trade or business is regularly carried on. Petitioner points to

our conclusion in that case 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." Id. at 1323. Petitioner also points to the opinion of

the Tenth Circuit Court of Appeals in NCAA that the basketball

tournament "must be considered the actual time span of the

business activity sought to be taxed here". NCAA v.

Commissioner, 914 F.2d at 1423. 

Petitioner argues that, even if BWE’s and McKnight’s

activities are attributed to petitioner, the mere employment of

an independent commercial firm does not itself render the trade

or business "regularly carried on" within the meaning of section

1.513-1(c)(1), Income Tax Regs. Finally, petitioner argues that

its intermittent activities were not conducted with the
- 34 -

6 See Suffolk County Patrolmen’s Association v. Commissioner,

77 T.C. 1314, 1319 (1981) ("Although petitioner does dispute that

the annual vaudeville show constituted a trade or business, its

primary argument herein is that even if the show was a trade or

business it was not 'regularly carried on.'"); id. at 1322 n.10

("Respondent maintains, and we agree, that the actual performance

of the vaudeville show and the solicitation of advertising for

the program guide are a single inseparable activity.").

competitive or promotional efforts typical of commercial

endeavors. 

We conclude that the facts of Suffolk County and NCAA are

distinguishable from those of the instant case. In Suffolk

County, although a large percentage of the organization's annual

vaudeville shows' gross receipts derived from the sale of

advertising for the shows' program guides, we defined the

taxpayer's trade or business for purposes of section 513 as the

annual vaudeville shows.6 Suffolk County antedated United States

v. American College of Physicians, 475 U.S. 834 (1986). In

Suffolk County, we did not segregate the business of the annual

vaudeville shows from the publishing of the shows' program

guides, nor did we segregate the publishing of material relating

to the shows from the business of selling and publishing

advertising space in the program guides. Accordingly, we

conclude that Suffolk County is not dispositive of the instant

case.

In NCAA, the Tenth Circuit Court of Appeals defined the

taxpayer's trade or business for purposes of section 513 as "the
- 35 -

7 As we have stated, supra p. 28, sec. 1.513-1(c)(2)(ii),

Income Tax Regs., provides that "the publication of advertising

in programs for sports events or music or drama performances will

not ordinarily be deemed to be the regular carrying on of

business." 

publication of advertisements in programs" during the time span

of the basketball tournament. NCAA v. Commissioner, 914 F.2d at

1423. In contrast, the facts in the instant case show that

petitioner’s solicitation, sale, and publishing of advertising

space was undertaken apart from any discrete event or show with a

limited, specified duration.

Although petitioner argues that publication of The

Constabulary was tied to the State Police Chase, an annual, 1-day

sports event,7 it did not object to respondent’s proposed finding

of fact that "During the years in issue, The Constabulary was not

arranged as a program guide for the annual 'State Police Chase'

sporting event." Additionally, based upon our own review of The

Constabulary, we conclude that it was not a program for the State

Police Chase, which was mentioned in only the 1989, 1990, and

1991 editions. In The Constabulary for each of those years, the

State Police Chase of the prior year was profiled in a two- or

three-page article. Accordingly, we conclude that The

Constabulary was not tied to a sports event and that section

1.513-1(c)(2)(ii), Income Tax Regs., therefore does not apply to

the instant case. Consequently, NCAA is distinguishable from the

facts of the instant case. 
- 36 -

In the instant case, we have held, supra p. 26, that

petitioner’s unrelated trade or business for purposes of section

513 was soliciting, selling, and publishing advertising space. 

The advertising business is an income-producing activity "of a

kind normally conducted by nonexempt commercial organizations on

a year-round basis". Sec. 1.513-1(c)(2)(i), Income Tax Regs. In

deciding whether petitioner’s business was "regularly carried on"

within the meaning of section 512 and the regulations thereunder,

we examine all activities of petitioner's advertising "trade or

business", which include soliciting, selling, and publishing

commercial advertising. United States v. American College of

Physicians, supra at 839 (citing sec. 1.513-1(b), Income Tax

Regs.). 

We have concluded, supra pp. 30-31, that the activities of

BWE and McKnight and their subcontractors are to be attributed to

petitioner for purposes of determining whether petitioner's

business was "regularly carried on". Through those entities,

petitioner conducted a solicitation program 8 hours a day for

approximately 46 weeks a year. Petitioner distributed The

Constabulary once each year at the State Police Chase, handcarried approximately 1,000 copies to troopers' barracks over the

span of a couple of weeks, and delivered the remaining copies to

businesses. We conclude that such activities are sufficiently

frequent and continuous to be characterized as "regularly carried
- 37 -

on" within the meaning of section 1.513-1(c)(2)(i), Income Tax

Regs. 

We have considered all remaining arguments of petitioner

concerning the unrelated business income issue and find them to

be without merit. Based on the record in the instant case, we

conclude that all the elements of sections 512 and 513 and

section 1.513-1(a), Income Tax Regs., have been met. 

Consequently, we hold that petitioner is liable for unrelated

business income tax on its advertising income.

Additions to Tax

Respondent determined in the notice of deficiency that

petitioner is liable for additions to tax pursuant to sections

6651(a)(1), 6653(a)(1) and (2), 6653(a)(1)(A) and (B), and

6661(a), and penalties pursuant to section 6662(a), for certain

taxable periods in issue. The instant case involves a complex

and close question of law. See Metra Chem. Corp. v.

Commissioner, 88 T.C. 654, 661 (1987); Belz Inv. Co. v.

Commissioner, 72 T.C. 1209, 1233 (1979), affd. 661 F.2d 76 (6th

Cir. 1981). Although we have distinguished Suffolk County

Patrolmen’s Association v. Commissioner, 77 T.C. 1314 (1981), we

conclude that the case provided petitioner with substantial

authority for its tax treatment of income from The Constabulary

and that petitioner's reliance on the case was reasonable under

the circumstances, considering the fact that this area of the law
- 38 -

was developing during the periods in issue. Additionally, we

conclude that petitioner reasonably relied on the advice of its

counsel that it need not file Forms 990-T for the periods in

issue. Accordingly, we hold that petitioner is not subject to

the additions to tax or penalties for any of the taxable periods

in issue. 

To reflect the foregoing,

Decision will be entered

under Rule 155.