Court Opinion

ID: 4332312
Source: CourtListenerOpinion
Date Created: 2018-11-14 00:38:30.659423+00
Date Added: 2024-06-11T14:47:51.822658
License: Public Domain

112 T.C. No. 23

                    UNITED STATES TAX COURT

                   COMMON CAUSE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent1

    Docket No. 13921-97.                 Filed June 22, 1999.

              P, an organization exempt from Federal
         income tax, receives payments from the rental
         of its mailing list. In each of P's list
         rental transactions, the mailer's rental
         payment compensates P for the mailer's use of
         P's list and, also, compensates a list
         broker, a list manager, and a computer house
         for their participation in the transaction.
         R determined that P's mailing list rental
         activities constitute an unrelated trade or
         business and that the list broker, the list
         manager, and the computer house are P's
         agents for the purpose of carrying on that
         business. R further determined that P's
         income from the rental of its mailing list is

1
     This case was consolidated, for trial purposes only, with
Planned Parenthood Fedn. of Am., Inc. v. Commissioner, T.C. Memo.
1999-206, in which an opinion is also being issued today.
                               - 2 -

          unrelated business taxable income pursuant to
          sec. 512(a)(1), I.R.C. P contends that it is
          not engaged in such a business and that, in
          any event, such payments are royalties that
          are excluded from unrelated business taxable
          income pursuant to sec. 512(b)(2), I.R.C.
             Held: Excepting the portion of the list
          rental payment that compensates the list
          broker, or the list manager in its capacity
          as list broker, the mailer's list rental
          payment in each list rental transaction is a
          royalty that is excluded from unrelated
          business taxable income pursuant to sec.
          512(b)(2), I.R.C. Held, further, the list
          brokerage activities are not royalty-related
          activities. Held, further, the list brokers
          and the list manager, in its capacity as list
          broker, do not act as P's agents.
          Consequently, the list brokerage activities
          and any compensation received by the list
          brokers or the list manager, in its capacity
          as list broker, are not attributable to P.

     Albert G. Lauber, Jr., Milton Cerny, Lloyd H. Mayer,

Julie W. Davis, and Carl S. Kravitz, for petitioner.

     Dianne I. Crosby and Bettie N. Ricca, for respondent.

     WELLS, Judge:   Respondent determined deficiencies in

petitioner's Federal income taxes as follows:

                     Year       Deficiency

                     1991        $17,905
                     1992         55,009
                     1993        133,542

     Unless otherwise indicated all section references are to the

Internal Revenue Code in effect for the years in issue, and all
                                 - 3 -

Rule references are to the Tax Court Rules of Practice and

Procedure.

     The issues presented by the parties include:   (1) Whether,

for purposes of the unrelated business income tax provisions of

section 511, petitioner is carrying on a list rental business

that is not substantially related to its exempt purpose; (2) if

so, whether the list brokers, list manager, and computer house

used by petitioner are agents of petitioner for the purpose of

carrying on such a business; and (3) whether the mailer's list

rental payments are royalties that are excluded from unrelated

business taxable income pursuant to section 512(b)(2).

                        FINDINGS OF FACT

     Some of the facts and certain exhibits have been stipulated

for trial pursuant to Rule 91.    The parties' stipulations of fact

are incorporated herein by reference and are found as facts in

the instant case.

     Petitioner is a corporation with its principal office in

Washington, District of Columbia.

     Petitioner is exempt from Federal income tax as an

organization described in section 501(c)(4).   Petitioner was

formed for the purpose of improving governmental institutions,

processes, and policies by making them more responsive to the

needs of the Nation and the will of its citizens.   Petitioner

maintains a list of names and addresses of its members, donors,
                               - 4 -

and other supporters (collectively supporters) to whom it

regularly sends mail (master list).    The master list also

contains other information about the supporters, including their

gender and the frequency, recency, and amount of contributions

that each supporter has made to petitioner.    Petitioner

communicates by direct mail with its supporters.

     The master list is kept on large computerized databases that

petitioner regularly maintains and updates.    Because it is very

valuable, petitioner builds its master list by acquiring new

names and addresses and guards its master list against misuse.

     From the master list, petitioner creates another list that

contains names, addresses, and other limited information about a

segment of petitioner's supporters (rental list).    Petitioner's

master and rental lists are intangibles in which petitioner has

ownership rights.   Petitioner's master and rental lists are

valuable because they are collections of names and addresses of

people with similar characteristics such as willingness to

respond to solicitations received by mail and interest in

supporting certain types of tax-exempt organizations.       Petitioner

makes its rental list available for rent or exchange with other

organizations.

     The direct mail and mailing list industry has its own

industry standards and trade practices.    In structuring its list

rental transactions, petitioner abides by the trade practices of
                               - 5 -

the mailing list industry and arranges its transactions roughly

on the same terms and conditions that are standard in the

industry.

     In a list rental transaction, the party (mailer) seeking to

send mail to the individuals or entities named on a list (mailing

list) pays the owner of the mailing list (list owner or owner)

for the one-time right to send mail to the named individuals or

entities.   If any of the named individuals or entities to which

the mailer has mailed responds to the mailing, the mailer then

"owns" that name and can continue to send that named individual

or entity additional mail.   If the named individual or entity

does not respond to the one-time mailing, the mailer may not

directly send mail to that named individual or entity again.

List owners "seed" their mailing lists with names and addresses

of their employees or of the employees of their list managers to

make sure that such unauthorized mailings do not occur.

     Petitioner's rental list is stored at Triplex Direct

Marketing Corp. (Triplex), a professional computer service

business that stores and maintains computer databases for mailing

lists.   From petitioner's rental list, Triplex produces a copy on

labels or magnetic tape for mailers.   Although petitioner has

used Triplex's services since the early 1980's, a written

contract between petitioner and Triplex does not exist.   Triplex

corresponds with petitioner regarding the fees it charges for
                               - 6 -

computer services.   Triplex provides similar services to both

nonprofit and commercial entities on the same terms.

     Petitioner retains the services of Names in the News

(Names), a professional list manager and list broker that

regularly handles both nonprofit and commercial mailing lists.

As petitioner's list manager, Names promotes list rental

transactions involving petitioner's rental list via distribution

of data cards (printed cards providing basic information as to

price per thousand and all other list rental information for a

given list), solicitations, and personal sales calls directed at

list brokers and potential customers.   Names pays all costs of

promoting and marketing petitioner's rental list and does not

charge petitioner additional fees for such services.   Petitioner

reviews all data cards containing significant new information.

In addition to promoting and marketing petitioner's rental list,

Names coordinates any rental transactions involving petitioner's

rental list.

     No written contract exists between petitioner and Names.

However, the form language on Names' list orders during 1991 and

1992 states:   "We will bill mailer on behalf of list owner;

payment (less commission) will be made upon receipt of payment

from the mailer.   We act only as agent for the list owner in

these transactions."   During 1993, Names changed that language to

state:   "We will bill mailer on behalf of list owner; payment
                                - 7 -

(less commission) will be made upon receipt of payment from the

mailer.    We act only as agent for the list owner or the mailer in

these transactions."

     Names can also act for the mailer as a list broker.    The

activities of a list broker include:    (1) Searching

advertisements and databases for appropriate list offerings for

the mailer to rent, (2) coordinating the rental transaction on

behalf of the mailer, (3) collecting payment from the mailer to

remit to the list manager or list owner, and (4) analyzing the

results of the mailing to determine whether it was successful.

The same list broker does not participate in every transaction.

Rather, each mailer chooses its own list broker to act on its

behalf.

     In a typical list rental transaction involving petitioner's

rental list, the mailer contacts Names either directly or through

a list broker and submits a proposed list rental order.    If a

mailer contacts petitioner directly, petitioner refers that

mailer to Names.    Along with the list order, the mailer indicates

the time of the mailing and encloses a copy of the materials to

be sent.    Names either disapproves the order because it is

inconsistent with the standing instructions provided by

petitioner or forwards the order to petitioner for final

approval.
                               - 8 -

     Upon receiving approval, Names arranges with Triplex to fill

the order.   Triplex produces a copy of the rental list according

to the mailer's specifications and sends it to the mailer's mail

house.

     Petitioner divides its rental list into three specific

segments and, on Names' recommendation, charges a different base

price for each segment.   A mailer rents the names of:   (1)

Current members and donors for $70 per 1,000 names, (2) former

members and donors for $60 per 1,000 names, or (3) nonmember

donors for $55 per 1,000 names.   The base price includes a 10-

percent list management commission retained by Names and a 10-

percent list brokerage commission retained by either the

independent list broker or by Names (if the mailer is not using

an independent list broker).   The base price also includes a fee

of $3.90 (running fee) remitted by Names to Triplex to pay for

the computer charges incurred in producing the copy of

petitioner's rental list.

     It is standard in the mailing list industry to include the

management commission, brokerage commission, and running fees in

the base price.   The commissions paid to Names and the list

brokers are within the range of usual and customary amounts paid

for such services.

     For an additional cost, a mailer can further customize its

order.   For an extra fee per 1,000 names, a mailer can request
                                - 9 -

that the names it rents be selected by certain other criteria.

Selection criteria (special selections) include:      Gender,

ethnicity, State, and ZIP code.    Petitioner includes the special

selection information on its data cards.      Triplex actually

performs the special selections.    Triplex charges different fees

for performing different special selections and regularly

notifies petitioner of the fees for such selections.      Petitioner

offers the special selections to mailers at the same price that

Triplex charges petitioner.

     The mailer also determines the type of media on which it

receives petitioner's rental list.      For the base price, the

mailer receives the rental list printed on Cheshire labels

(ungummed labels that are affixed by machine).      For an extra fee,

the mailer can receive the rental list on pressure-sensitive

labels or on magnetic tape.    Triplex charges petitioner extra

fees for the provision of the rental list on the different media.

Petitioner offers such media options to the mailer and charges

the mailer, as media fees, the same amount which Triplex charges

petitioner.   A mailer determines the way the rental list is

shipped, and, depending on the mailer's choice, Triplex charges

petitioner a shipping fee.    Petitioner charges the mailer a

shipping fee equal to the amount that Triplex charges petitioner.

     As is standard in the industry, the mailer is billed and

payment is collected by the following process.      After filling an
                               - 10 -

order, Triplex bills Names for the fees associated with filling

the order, including running, special selection, media, and

shipping fees.   Names then bills the mailer or the mailer's list

broker.   If the mailer uses an independent list broker, the bill

is for the listed base price, plus any special selection, media,

and shipping fees, less the 10-percent list brokerage commission

(which was included in the base price).   Before it sends the bill

to the mailer, the list broker adds its commission to the bill.

The mailer pays the list broker the full price reflected on the

bill that the mailer receives.   The list broker deducts its

commission and remits the remaining payment to Names.   If Names

acts as the list broker in the transaction, the bill sent to the

mailer includes the full base price (including the 10-percent

list brokerage commission), plus any special selection, media,

and shipping fees, and the mailer remits the full payment

directly to Names.

     After receiving payment from the mailer or its list broker,

Names deducts its commission, pays Triplex its fees, and remits

the remainder to petitioner.   If a mailer cancels its order, it

is required to pay a "processing fee" of $50.   The fee is

retained by Names.

     List rental transactions are carried on continuously.

During 1991 and 1992, petitioner's gross receipts (base price

less commissions, Triplex's running fees, and other miscellaneous
                                - 11 -

fees) from its list rental transactions were $188,171 and

$243,959, respectively.     For 1991 and 1992, petitioner timely

filed Forms 990, Return of Organization Exempt from Income Tax,

and Forms 990-T, Exempt Organization Business Income Tax Return.

Petitioner did not report on either return the income it received

from its mailing list transactions.       Rather, petitioner reported

such income as nontaxable royalty and/or related non-trade-or-

business income on Forms 8275, Disclosure Statement, filed as

attachments to its 1991 and 1992 Forms 990-T.

     For 1993, petitioner's gross receipts (base price less

commissions, Triplex's running fees, and other miscellaneous

fees) from its list rental transactions were $219,272.      For 1993,

petitioner timely filed a Form 990 but did not file a Form 990-T.

                                OPINION

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

(UBIT) on the unrelated business taxable income (UBTI) of certain

tax-exempt organizations.    Section 512 defines UBTI as follows:

     SEC. 512. UNRELATED BUSINESS TAXABLE INCOME.

         (a) Definition.--For purposes of this title--

             (1) General Rule.--Except as otherwise
          provided in this subsection, the term "unrelated
          business taxable income" means the gross income
          derived by any organization from any unrelated
          trade or business (as defined in section 513)
          regularly carried on by it, less the deductions
          allowed by this chapter which are directly
          connected with the carrying on of such trade or
                                 - 12 -

           business, both computed with the modifications
           provided in subsection (b).

Accordingly, income is UBTI if it arises from a regularly

carried-on trade or business that is not substantially related to

the organization's tax-exempt purpose.     See sec. 1.513-1(a),

Income Tax Regs.   Royalties, however, are excluded from UBTI

pursuant to section 512(b)(2).2     See Sierra Club, Inc. v.

Commissioner, 86 F.3d 1526, 1531 (9th Cir. 1996), affg. T.C.

Memo. 1993-199 and revg. on another issue 103 T.C. 307 (1994);

Disabled Am. Veterans v. Commissioner, 94 T.C. 60, 76 (1990) (DAV

II), revd. on other grounds 942 F.2d 309 (6th Cir. 1991).

     Neither the Code nor the regulations define the term

"royalty" for UBTI purposes.     Instead, section 1.512(b)-1, Income

Tax Regs., provides that "Whether a particular item of income

falls within any of the modifications provided in section 512(b)

shall be determined by all the facts and circumstances of each

2
     Sec. 512(b) provides:

          SEC. 512(b). Modifications.--The modifications
     referred to in subsection (a) are the following:

       *       *      *      *        *      *      *

              (2) There shall be excluded all
           royalties (including overriding
           royalties) whether measured by
           production or by gross or taxable
           income from the property, and all
           deductions directly connected with
           such income.
                              - 13 -

case."   Petitioner bears the burden of proving that the list

rental payments are royalties that are excluded from UBTI

pursuant to section 512(b)(2).   See Rule 142(a).

     In the instant case, respondent contends that, in each of

the list rental transactions, the mailer's entire payment

(including the amounts paid to the list brokers, Names and

Triplex) constitutes UBTI to petitioner because petitioner

regularly carries on a list rental business that is not

substantially related to its exempt purpose.   In that regard,

respondent contends that the list brokers, Names, and Triplex are

petitioner's agents for the purpose of carrying on the list

rental business.   Petitioner disputes respondent's contentions

and, additionally, contends that the mailers' payments are

excluded from UBTI as royalties pursuant to section 512(b)(2).

Before addressing respondent's trade or business and agency

arguments, we address the royalty issue.

     In the instant case, the parties accept the definition of a

royalty found in Rev. Rul. 81-178, 1981-2 C.B. 135.3

3
     In Rev. Rul. 81-178, 1981-2 C.B. 135, the Internal Revenue
Service sought to clarify the definition of royalty for purposes
of sec. 512(b)(2). The ruling deals with two different factual
situations. In the first situation, various businesses pay the
taxpayer, an exempt organization, for the right to use the
taxpayer's symbols and the signatures and likenesses of its
members in promoting their products. See id. In the second
situation, the businesses pay the taxpayer in return for its
members' making appearances in endorsement of the businesses'
                                                   (continued...)
                              - 14 -

Additionally, the parties agree that petitioner's rental list is

a valuable intangible.   However, the parties disagree as to

whether any portion of the list rental transaction constitutes

compensation for goods and services.   The parties further

disagree as to whether the presence of any compensation for goods

and services in the list rental payment precludes royalty

treatment, pursuant to section 512(b)(2), for any portion of the

list rental payment.   The issue has been the subject of much

litigation.   See Disabled Am. Veterans v. United States, 227 Ct.

Cl. 474, 650 F.2d 1178 (1981) (DAV I), affd. after remand 704
F.2d 1570 (Fed. Cir. 1983); Disabled Am. Veterans v.

Commissioner, supra; Sierra Club, Inc. v. Commissioner, T.C.

3
 (...continued)
products. See id., 1981-2 C.B. at 136.    The ruling provides, in
pertinent part:

          To be a royalty, a payment must relate to the use
     of a valuable right. Payments for the use of
     trademarks, trade names, service marks, or copyrights,
     whether or not payment is based on the use made of such
     property, are ordinarily classified as royalties for
     federal tax purposes. * * * On the other hand,
     royalties do not include payments for personal
     services. [Id.; citations omitted.]

In the first situation, the ruling concludes that, because the
exempt organization receives payment solely for the use of its
intangibles, the payment is a royalty. See id. In the second
situation, the ruling concludes that, because the organization
receives payment for the services of its members in endorsing
products, the payment is not a royalty. See id.
                                - 15 -

Memo. 1993-199.    We discuss each of those cases in more detail

below.

Earlier Cases

     Disabled American Veterans

     In DAV I, the exempt organization engaged in the rental of

its mailing list, but, unlike petitioner, the organization itself

performed all of the list management and list fulfillment

functions.   On the question of whether the list rental payments

were royalties, the Court of Claims concluded that the list

rentals "[were] the product of extensive business activity by DAV

and [did] not fit within the types of 'passive' income set forth

in section 512(b)."     Disabled Am. Veterans v. United States, 650
F.2d at 1189.     The court found that the payments were more akin

to rent from the use of personal property than to royalties, and

held that the income from the transaction was not excluded from

UBTI under section 512(b).     See id. at 1189-1190.

     In DAV II, the same exempt organization that appeared before

the Court of Claims in DAV I appeared before this Court; however,

a different taxable year was in issue.    Although DAV II involved

the same parties and legal issues as DAV I, we concluded that the

issuance of Rev. Rul. 81-178, supra, had changed the legal

climate.   Consequently, we held that collateral estoppel did not

apply.   See Disabled Am. Veterans v. Commissioner, supra at 69.

Relying on the definition of royalty contained in Rev. Rul. 81-
                                 - 16 -

178, supra, we concluded that there is no distinction between

active and passive royalties for section 512(b)(2) purposes.      See

Disabled Am. Veterans v. Commissioner, supra at 75.       We also made

it clear that we could distinguish payments for the use of an

intangible, which constitute a royalty, from payments for

advertising, compensation for services, or other profits

masquerading as royalties.     See id. at 77.    The Court of Appeals

for the Sixth Circuit, reversing the decision of this Court, held

that the issuance of Rev. Rul. 81-178, supra, was not a

sufficient change of legal climate to preclude collateral

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

314.

       Sierra Club

       The issue of whether income from a mailing list transaction

is UBTI arose again in Sierra Club, Inc. v. Commissioner, T.C.

Memo. 1993-199.      Unlike the exempt organization in DAV I and DAV

II, the exempt organization in Sierra Club did not itself perform

any of the list management or list fulfillment functions.

Rather, as in the instant case, a professional list manager

performed all list management functions, and a computer house

performed all list fulfillment functions.       On cross-motions for

summary judgment, we held that the payment received by the exempt

organization was, at least in part, a royalty.      We rejected the

Commissioner's argument that royalties, in the context of section
                               - 17 -

512(b)(2), meant only those earned passively.      We also held,

however, that an issue of fact existed regarding whether any part

of the list rental transaction price, specifically the fees for

special selections, media, and shipping, was payment for goods

and services.

       Before appeal, the parties in Sierra Club settled the issue

of whether any part of the list rental payment was for goods or

substantial services provided in connection with the rental

transactions.    See Sierra Club, Inc. v. Commissioner, 103 T.C.
310.    In affirming our decision as to the royalty issue, the

Court of Appeals for the Ninth Circuit held that the term

"royalty", as it is used in section 512(b)(2), "is by definition

'passive' and thus cannot include compensation for services

rendered by the owner of property."      Sierra Club Inc. v.

Commissioner, 86 F.3d at 1532.     Additionally, the court reasoned

that, because the exempt organization did not itself provide any

services to the mailer, the entire amount it actually received

was a royalty for UBIT purposes.     See id. at 1535-1536.

Royalty-Related Activity or Services

       In the instant case, we must decide whether any part of the

mailing list rental payments constitutes compensation to

petitioner for goods or services.4      In each mailing list rental

4
       This is the same issue that the parties settled in DAV II
                                                     (continued...)
                               - 18 -

transaction, the mailer's rental payment compensates petitioner

for the mailer's use of petitioner's list and, also, compensates

Names, Triplex, and the list brokers for their participation in

the transaction.    Certain of these activities exploit and protect

the intangible (i.e., the list).   We have held that the owner of

an intangible may engage in certain activities to exploit and

protect the intangible which do not change the nature of the

payment received.   See Wm. J. Lemp Brewing Co. v. Commissioner,

18 T.C. 586, 596 (1952) (payment to the owner of the intangible

was a royalty even though the owner reserved the right to

supervise the advertising, marketing, and quality of the product

which was to bear the trademarked name); see also Mississippi

State Univ. Alumni, Inc. v. Commissioner, T.C. Memo. 1997-397

(review of marketing material and endorsement of an affinity

credit card program bearing the name of an exempt organization

were not services provided to the card issuing company).    To hold

otherwise, it seems to us, "would require us to hold that any

activity on the part of the owner of intangible property to

obtain a royalty, renders the payment for the use of that right

UBTI and not a royalty."    Sierra Club, Inc. v. Commissioner, 86
F.3d at 1536.   Accordingly, in the instant case, we carefully

4
 (...continued)
and Sierra Club and that the courts therefore did not have before
them.
                              - 19 -

scrutinize the activities of each of the parties compensated in

the list rental transaction to ascertain whether they are

undertaken to exploit or protect petitioner's list.   Hereinafter,

we refer to activities which are undertaken to exploit or protect

the list as royalty-related activities.

     Names

     In a list rental transaction, Names' activities as list

manager include:   (1) Promoting list rental transactions

involving petitioner's rental list via distribution of data

cards, solicitations, and personal sales calls directed at list

brokers and potential customers; (2) approving or disapproving

all list rental orders from mailers by applying petitioner's

standing instructions or forwarding the order to petitioner for

final approval; (3) arranging with Triplex to fill the order; (4)

billing the mailer or the mailer's list broker; (5) paying

Triplex the amounts it is owed; and (6) remitting payment to

petitioner.

     In the context of the list rental transaction, a list owner

has certain intangible information regarding the individuals and

entities whose names and addresses appear on its list.

Specifically, the list owner knows that such individuals and

entities are responsive to direct mail and willing to support

certain tax-exempt organizations.   To exploit that knowledge, the

list owner must first let others know that the list is available.
                              - 20 -

In the instant case, that is accomplished through the promotional

efforts of Names.   Accordingly, we conclude that Names'

activities in distributing data cards and other forms of

advertising directed to list brokers and potential mailers on

petitioner's behalf are royalty-related activities.

     Additionally, to protect the value of its mailing list, a

list owner will not allow the individuals and entities whose

names appear on the list to receive mail that the list owner

considers objectionable.   Accordingly, the list owner must engage

in activities to ensure that the list is rented only to

appropriate mailers.   Consequently, we conclude that Names'

activities in clearing with petitioner all list orders, either by

applying petitioner's standing instructions or by directly

communicating with petitioner, are royalty-related activities.

     To exploit its intangible and convey it to the user, the

list owner must also render it in tangible form.   In the list

rental context, that is accomplished by producing a copy of the

list for the mailer.   Consequently, we conclude that Names'

activities in forwarding the order to Triplex for fulfillment and

obtaining from Triplex a copy of the rental list are royalty-

related activities.

     Finally, the owner of the intangible is entitled to be paid

for its use.   Accordingly, we conclude that Names' activities in

billing the mailer, paying Triplex, and remitting payment to
                             - 21 -

petitioner are royalty-related activities.    On the basis of the

foregoing, we conclude that all of the activities in which Names

engages are royalty-related activities.

     Petitioner

     Petitioner does not directly engage in any significant

activities with regard to a rental list transaction.    The only

activities in which petitioner directly engages are review of the

data cards and approval of list rental transactions.    As we

discussed above, the data cards are the means by which Names

promotes and advertises petitioner's rental list.   Review of

promotional and advertising material by the owner of an

intangible is not inconsistent with royalty treatment.    See Wm.

J. Lemp Brewing Co. v. Commissioner, supra; Mississippi State

Univ. Alumni, Inc. v. Commissioner, supra.    Similarly, as we

discussed above, petitioner's review of all list rental

transactions is part of the protection of the list.

Consequently, we conclude that all of the activities in which

petitioner directly engages are royalty-related activities.

     Triplex

     Triplex's activities include:    (1) Printing a copy of

petitioner's list on the medium chosen by the mailer; (2)

performing the special selections chosen by the mailer; and (3)

shipping the completed order to the mailer.
                              - 22 -

     As we discussed above, producing an intangible in tangible

form is necessary for the exploitation of the intangible.

Mailers that order petitioner's list on magnetic tape, instead

of, for example, on Cheshire labels, still receive only the one-

time right to mail to the names and addresses on the rental list.

It appears to us that the medium itself is of little or no value

to the mailer without the information it contains.    Moreover, the

provision of the list on various media is also customary within

the mailing list industry and consistent with the rental of a

mailing list for one-time use only.    Accordingly, we conclude

that Triplex's activities in printing a copy of petitioner's list

on the medium chosen by the mailer are royalty-related

activities.

     Special selections are the means by which a mailer further

narrows the types of individuals and entities whose names will

appear on the list that the mailer orders.    Certain mailers may

prefer a list consisting of only the names of female donors,

while others may prefer only the names of individuals or entities

within a specific State or ZIP code.    The essence of a mailer's

order is the one-time right to use a portion of petitioner's

mailing list.   We conclude that there is no significant

difference between, on the one hand, the rental of a list

consisting of all of the names of petitioner's supporters and, on

the other hand, the rental of a list consisting of only
                              - 23 -

petitioner's female supporters or, for example,5 the rental of a

list consisting of only the names of petitioner's male supporters

between the ages of 20 and 25 who reside in a particular ZIP

code.   The culling out or special selection of certain names is

ancillary to the maintenance and exploitation of the list.     Cf.

Glen O'Brien Movable Partition Co. v. Commissioner, 70 T.C. 492,

502 (1978) ("Where services are performed subsidiary and

ancillary to the transfer of patent rights and proprietary know-

how, they take on the nature of the patent rights and know-how as

'property'."); Ruge v. Commissioner, 26 T.C. 138, 143 (1956)

("The consulting services * * * were ancillary and subsidiary to

the assignments of the inventions").   In other words, payment for

the one-time right to mail to names on a list, no matter how

specialized that list is, is a royalty.

     As to the shipping, in order to exploit the intangible, the

owner ordinarily will need to send the information contained in

the intangible to the user.   Consequently, we conclude that

Triplex's activities in shipping the list to the mailer are

royalty-related activities.   In sum, we conclude that, in the

course of the list rental transaction, all of the activities in

which Triplex engages are royalty-related activities.

5
     Petitioner does not offer age as a special selection.
                                - 24 -

     List Brokers

     The activities of the list brokers include:    (1) Searching

advertisements and databases for appropriate list offerings for

the mailer to rent; (2) coordinating the rental transaction on

behalf of the mailer; (3) collecting payment from the mailer to

remit to the list manager or list owner; and (4) analyzing the

results of the mailing to determine whether it was successful.

We conclude that the list brokers' activities are not royalty-

related activities.    Rather, the list brokers' activities are

provided solely to the mailers and solely for the mailers'

convenience.6    Accordingly, we conclude that the list brokers'

activities are services and are not part of the royalty-related

activities.     Consequently, any portion of the mailers' payments

that is to compensate the list brokers for their activities in

the mailing list transaction is not a royalty.

     Our inquiry as to the list brokers' services, however, does

not end there.    Because we hold that the portion of the mailers'

payments that is related to the list brokers' activities is not a

royalty, we must address respondent's other arguments that the

list brokers are petitioner's agents for carrying on a list

6
     As discussed below, this factor is also important in
deciding whether the list brokers are petitioner's agents.
                                - 25 -

rental business and that any services they provide and any

portion of the list rental payment received by them for the

rental of petitioner's list should be attributed to petitioner

for purposes of calculating petitioner's UBTI.    Petitioner argues

that the list brokers are independent contractors and that the

services they provide, and any compensation they receive for such

services, should not be attributed to petitioner.

     As to whether an agency relationship exists, the manner in

which the parties to an agreement designate their relationship is

not controlling.   See Board of Trade v. Hammond Elevator Co., 198
U.S. 424, 437 (1905).    Rather, the question of agency is based on

the surrounding facts and circumstances of each case.    See id.

(citing Connecticut Mut. Life Ins. Co. v. Spratley, 172 U.S. 602,

617 (1899)).    "An essential characteristic of an agency

relationship is that the agent acts subject to the principal's

direction and control."    In re Shulman Trans. Enters., Inc., 744
F.2d 293, 295 (2d Cir. 1984).    "[A]n independent contractor can

be an agent if, and to the extent that, the contractor acts for

the benefit of another and under its control in a particular

transaction."    State Police Association v. Commissioner, 125 F.3d
1, 7 (1st Cir. 1997), affg. T.C. Memo. 1996-407; see also

National Collegiate Athletic Association v. Commissioner, 92 T.C.
                               - 26 -

456, 467 (1989), revd. on other grounds 914 F.2d 1417 (10th Cir.

1990).

     As we stated above, the list brokers act solely on behalf of

the mailers.   The same list broker does not participate in every

transaction.   Rather, each mailer chooses its own list broker to

act on its behalf.    Additionally, petitioner does not exercise

any control over the list brokers or over Names when it acts in

its capacity as list broker.    Petitioner directs all rental

inquiries to Names.    Consequently, even if a mailer or broker

contacts petitioner directly, petitioner has no dealing with that

mailer or broker.    Moreover, although the list broker's

commission is factored into the base price that is listed on the

data cards describing petitioner's rental list, the bill sent by

Names includes a list broker's commission only where Names acts

as the list broker.    If the mailer uses an independent list

broker, Names sends that list broker a bill that does not include

a list broker's commission.    Accordingly, it remains the list

broker's choice whether to charge the mailer any list brokerage

commission.    On the basis of the foregoing, we conclude that the

list brokers and Names, when it is acting in its capacity as list

broker, are not agents of petitioner, and, therefore, neither

their activities nor the compensation that they receive for those

activities can be attributed to petitioner.    Consequently, the
                             - 27 -

list brokerage activities do not change the character of the

remainder of the mailers' list rental payments.

     In sum, we hold that with the exception of the list

brokerage activities (which are not attributable to petitioner),

all of the activities in which the parties to the list rental

transaction engage are royalty-related activities.   Consequently,

with the exception of the list brokerage commissions (which are

not attributable to petitioner), the mailer's list rental payment

in each list rental transaction is a royalty which is excluded

from UBTI under section 512(b)(2).    Our holdings obviate the need

to address respondent's trade or business arguments.

Respondent's Remaining Arguments

     No Written Licensing Agreement

     Respondent contends that the list rental payments are not

royalties because there is no written licensing agreement between

petitioner and Names or Triplex.   We conclude that, even though

there is no written agreement termed a "licensing agreement", the

terms and conditions of the transaction between the mailer and

petitioner require the mailer to receive only a one-time right to

use the information contained on petitioner's rental list.

Accordingly, we conclude that each mailing list transaction

represents a separate licensing of petitioner's list by the

mailer and that the absence of a written "licensing agreement"
                                 - 28 -

does not prevent the mailer's list rental payment from being a

royalty.

     Section 513(h)

     Finally, respondent argues that the enactment of section

513(h) precludes a conclusion that the list rental payment is a

royalty.     The relevant parts of section 513(h) provide:

          SEC. 513(h). Certain Distributions of Low Cost
     Articles Without Obligation to Purchase and Exchanges
     and Rentals of Member Lists.--

                  (1) In general.--In 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.

Section 513(h) provides a safe harbor for the rental and exchange

of mailing lists between certain charities.     Section 513(h) was

enacted during 1986, after the decision of the Court of Claims in

DAV I.     Respondent argues that, in enacting section 513(h) and
                              - 29 -

specifically excluding the income from mailing list transactions

between charities, Congress has agreed with the holding of the

Court of Claims in DAV I that the mailer's list rental payment in

a mailing list transaction is not a royalty that is excludable

from UBTI under section 512(b)(2).

     We do not agree.   On the day of the adoption of the

conference report accompanying the bill which included section

513(h), Representative Daniel Rostenkowski (D-Ill.), Chairman of

the Ways and Means Committee, commented:

          I also have discussed with Congressman Duncan [(R-
     Tenn.) Ranking Republican Member of the Ways and Means
     Committee] 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).]

Additionally, the General Explanation provided by the Staff of

the Joint Committee on Taxation explains:   "No inference is

intended as to whether or not revenues from mailing list

activities other than those described in the provision, or from
                               - 30 -

mailing list activities described in the provision, but occurring

prior to the effective date, constitute unrelated business

income."    Staff of Joint Comm. on Taxation, General Explanation

of the Tax Reform Act of 1986, at 1325 (J. Comm. Print 1987).    We

conclude that the enactment of section 513(h) does not require

that we hold that the revenues from the rental of petitioner's

mailing list during the years in issue are UBTI and thus subject

to UBIT.7

     We have considered the parties' remaining arguments and

conclude that they are without merit, irrelevant, or unnecessary

to reach.

     To reflect the foregoing,

                                          Decision will be entered

                                     for petitioner.

7
     Respondent also contends that the list rental payments
cannot be royalties because petitioner paid "development" or
"production" costs. Respondent borrows those terms from the
mineral royalty context, and we conclude that they are not
helpful to our inquiry.