AR State Police v. CIR ( 2002 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 01-2255
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Arkansas State Police *
Association, Inc., *
*
Appellant, *
* Appeal from the
v. * United States Tax Court.
*
Commissioner of Internal Revenue, *
*
Appellee. *
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Submitted: December 12, 2001
Filed: March 6, 2002
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Before LOKEN and BYE, Circuit Judges, and BOGUE,1 District Judge.
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BYE, Circuit Judge.
The Arkansas State Police Association (ASPA) challenges the Tax Court's2
decision that money ASPA received from the publication of "The Arkansas Trooper"
magazine should be taxed as unrelated business income, rather than treated as
nontaxable royalty income. We affirm.
1
The Honorable Andrew W. Bogue, United States District Judge for the District
of South Dakota, sitting by designation.
2
The Honorable Stephen J. Swift, United States Tax Court.
I
ASPA is a non-profit corporation generally recognized as exempt from federal
income tax under 26 U.S.C. § 501(c)(5) (labor organization). From 1993 through
1996, ASPA entered into an agreement with Brent-Wyatt West (BWW), an Arizona
publishing company, to publish "The Arkansas Trooper" magazine three times a year.
Two separate agreements (two years each) covered the four years. Both agreements
were entitled "Royalties and Licensing Agreement." BWW paid ASPA $25,200 each
year to publish the magazine, as well as a percentage (26% under one of the two-year
agreements, and 27% under the other) of the money received from the advertising
published in the magazine. Over the course of the four years, ASPA received a total
of $876,697 from the publication of the magazine.
BWW bore all the costs of producing and distributing the magazine and
solicited all the advertising, but BWW's solicitors indicated they were calling "on
behalf of the Arkansas Police Association." BWW controlled the funds received from
the advertisers, but the checks were made payable to ASPA. The front cover of the
magazine bore the enscription "The Official Publication of the Arkansas State Police
Association." A "President's Message" written by ASPA's elected president appeared
in each issue of the magazine. ASPA provided its membership list to BWW, and
BWW distributed copies of the magazine free of charge to ASPA members, to
advertisers who paid at least $100 for ads, and to each Arkansas state legislator.
ASPA's Vice President of Public Relations (a part-time, voluntary position)
devoted approximately 250 to 300 hours a year to a variety of projects sponsored by
ASPA, including magazine-related activities. The Vice President reviewed BWW's
sales presentations, and reviewed the pre-publication copy of the magazine for
accuracy and suitability of the use of ASPA's name. The Vice President also wrote
to ASPA's members, encouraging them to take photographs and write articles about
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ASPA activities, and to submit them to ASPA for inclusion in the magazine. The
Vice President spent about 15-20 hours each year on magazine-related activities.
In its tax forms for the years 1993 to 1996, ASPA treated money received from
the publication of "The Arkansas Trooper" as non-taxable royalty income. The
Commissioner of Internal Revenue determined ASPA should have reported the
income as taxable unrelated business income. The Commissioner filed notices of
deficiency against ASPA for the four years in the amounts of $63,004, $63,730,
$71,158, and $80,289, respectively. ASPA challenged the notice of deficiencies in
tax court. Based on a stipulated record, the tax court held money ASPA received
from publication of the magazine was unrelated business income because ASPA
participated in and maintained control over significant aspects of the magazine's
publication. ASPA appeals, contending the money should be considered nontaxable
royalty income because ASPA's participation in the publication of "The Arkansas
Trooper" was passive, de minimis, and related only to the protection of its name.
II
Because the tax court decided this case on a stipulated record without trial, we
review de novo the tax court's application of tax law principles, Spiritual Outreach
Soc. v. Comm'r, 927 F.2d 335, 338 (8th Cir. 1991), keeping in mind that the clearly
erroneous standard applies to any reasonable inferences drawn by the tax court from
the stipulated or undisputed facts, Salomon v. Crown Life Ins. Co., 536 F.2d 1233,
1238 (8th Cir. 1976).
The tax code provides that an otherwise tax-exempt organization will be taxed
on business income generated from conducting business unrelated to "the exercise or
performance of its charitable, educational, or other purpose." 26 U.S.C. § 513(a).
"The purpose of taxing charities' unrelated business taxable income was to end what
Congress saw as abuse of the exemption, by charities able to carry on full-fledged
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commercial enterprises in competition with corporations whose profits were fully
taxable." Or. State Univ. Alumni Ass'n v. Comm'r, 193 F.3d 1098, 1101 (9th Cir.
1999) (internal citations and quotations omitted). Royalty income, however, is non-
taxable, see 26 U.S.C. § 512(b), because that kind of unrelated business income is
generated "passively" rather than in active competition with taxable corporations.
E.g., Portland Golf Club v. Comm'r, 497 U.S. 154, 161 (1990) ("Since Congress
concluded that investors reaping tax-exempt income from passive sources would not
be in competition with commercial businesses, it excluded from tax the investment
income realized by exempt organizations.").
ASPA contends the payments it received from BWW should be considered
nontaxable royalty payments. ASPA relies heavily upon what the parties refer to as
the "affinity" credit card cases. Those cases involve a credit card company's use of
a tax-exempt organization's name to promote the credit card company's own business
of extending credit, and hold that a tax-exempt organization's de minimis participation
in the sale of credit cards, limited to supervising or controlling the manner in which
its name is used, does not disqualify the monies received from being considered
nontaxable royalties. See Or. State, 193 F.3d at 1101-02; Miss. State Univ. Alumni,
Inc. v. Comm'r, 74 T.C.M. 458 (1997) (1997 WL 529003); see also Sierra
Club, Inc. v. Comm'r, 86 F.3d 1526, 1535-35 (9th Cir. 1996) (involving the rental of
a tax-exempt organization's mailing list for use in an affinity credit card program).
ASPA also relies upon Rev. Rul. 81-178, 1981-2 C.B. 135, which distinguishes
between payments for personal services performed by a tax-exempt organization, and
payments solely for use of the tax-exempt organization's name. The revenue ruling
describes two tax-exempt organizations, both of which license other businesses to use
their trademarks to sell products. Both tax-exempt organizations have the right to
approve the quality of style of the licensed products, but only one organization
requires its members to perform personal services to endorse the products. The
revenue ruling indicates that payments to the former organization are nontaxable
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royalties, but payments to the latter are considered compensation for personal services
and are therefore taxable as unrelated business income. ASPA contends the services
it performed for BWW all related to protecting the use of ASPA's name.
Relying principally upon State Police Ass'n of Mass. v. Comm'r, 125 F.3d 1
(1st Cir. 1997), and Fraternal Order of Police v. Comm'r, 833 F.2d 717 (7th Cir.
1987), the tax court found the payments ASPA received from BWW were not passive
royalty income because ASPA took a significant and active role in publishing "The
Arkansas Trooper." The Seventh and First Circuit cases both involve publications
similar to "The Arkansas Trooper," and hold that income received by a fraternal
police organization for advertisements in its own publication is taxable. Fraternal
Order, 833 F.2d at 723 (holding the income taxable and addressing the royalty
exception); State Police Ass'n, 125 F.3d at 7 (holding the income taxable without
addressing the royalty exception). The tax court also distinguished the "affinity"
credit card cases. In those cases, the credit card company promoted its own product
using the tax-exempt organization's name. The tax court noted that "The Arkansas
Trooper" "represented not the magazine of BWW but the magazine of petitioner
[ASPA] through which petitioner promoted [itself]."
We agree with the tax court. The payments at issue should not be considered
passive royalty income even if ASPA spent very little time working on the magazine.
A royalty exists when A uses B's name to promote A's products. The affinity credit
card cases involved royalties because the credit card company used the tax-exempt
organization's name to promote the credit card company's product. But here, BWW
used ASPA's name to promote ASPA, not BWW. The fact the parties labeled their
agreement a "Royalties and Licensing Agreement" is of no consequence because the
agreement was really an agency relationship. See State Police Ass'n, 125 F.3d at 7
(finding an agency relationship between police organization and publisher and stating
"the label which contracting parties place on their relationship is not decisive of their
status vis-a-vis third parties.").
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We believe the most applicable case is Nat'l Collegiate Athletic Ass'n v.
Comm'r, 92 T.C. 456 (1989), rev'd on other grounds, 914 F.2d 1417 (10th Cir. 1991).
That case involved the publication of programs for the Final Four games of the 1982
NCAA Division I Basketball Tournament. The NCAA contracted with a publisher
to solicit advertisements for inclusion in the program, and the issue was whether the
NCAA's share of the proceeds was exempt from taxation as royalty income, or
taxable as unrelated business income. The tax court concluded the publisher was
acting on behalf of the NCAA to promote the NCAA, rather than the NCAA allowing
the use of its name to promote the publisher's separate product. NCAA v. Comm'r,
92 T.C. 469-70. Similarly, in this case, the essence of the agreement between
BWW and ASPA was to impose a duty upon BWW to perform publishing services
on ASPA's behalf and under ASPA's control. By publishing "The Arkansas Trooper,"
BWW acted on ASPA's behalf to promote ASPA, and did not pay for the use of
ASPA's name to promote BWW's separate product.
We affirm the decision of the tax court.
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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