DocketNumber: No. 13425-98
Citation Numbers: 2001 T.C. Memo. 38, 81 T.C.M. 1172, 2001 Tax Ct. Memo LEXIS 48
Filed Date: 2/20/2001
Status: Non-Precedential
Modified Date: 11/20/2020
*48 Decision will be entered for respondent as to the deficiency amounts and for petitioner as to the additions to tax.
MEMORANDUM OPINION
SWIFT, JUDGE: Respondent determined deficiencies in petitioner's Federal income taxes and additions to tax as follows:
Addition to Tax
Year Deficiency
____ __________ _______________
1993 $ 60,004 $ 15,001
1994 63,730 15,933
1995 71,158 --
1996 80,289 20,072
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.
After settlement of some issues, the issue for decision involves whether payments petitioner received in connection*49 with advertising in a law-enforcement trade publication should be treated under
BACKGROUND
This case was submitted fully stipulated under Rule 122, and the facts are not in dispute.
Petitioner constitutes a not-for-profit corporation, organized under the laws of Arkansas and recognized under section 501(c)(5) as generally exempt from Federal income tax.
Petitioner was formed for the purpose of, among other things, promoting impartial enforcement of law and order, increasing efficiency in the police profession, and cultivating a spirit of fraternity and mutual helpfulness among and between the Arkansas law enforcement community and the people of Arkansas.
During the years 1993 through 1996, under an agreement entitled "Royalties and Licensing Agreement" (the Agreement) between petitioner and Brent-Wyatt West (BWW), an Arizona publishing company, three editions of The Arkansas Trooper (TAT), petitioner's official magazine, were produced each year. In preparation for publication of each edition of TAT, articles, photographs, letters, and publicity regarding Arkansas law enforcement*50 activities were collected through an officer of petitioner, reviewed by the officer of petitioner, and submitted by the officer of petitioner to BWW.
Each edition of TAT also contained numerous advertisements from a wide variety of Arkansas businesses, all directed at petitioner's members. The advertisements were solicited from Arkansas businesses over the telephone by employees of BWW. The advertisements generally promoted Arkansas businesses and/or commended Arkansas law enforcement activities. BWW employees developed the presentations to be used in soliciting the advertisements, but the advertising presentations and the advertising copy were subject to review and approval by petitioner.
BWW designed the layout of each edition of TAT, printed copies of TAT, and distributed the copies free of charge to each member of petitioner, to advertisers who purchased advertisements in TAT at a cost of at least $ 100, and to each Arkansas State Legislator.
Each edition of TAT expressly stated that all "editorial contributions" (namely, articles, photographs, letters, and publicity) from petitioner's members, from readers of TAT, and from others should be submitted to petitioner for review*51 and submission to BWW, that no part of TAT could be reproduced without written permission from petitioner and from BWW, and that any problems with regard to the solicitation of advertisements should be directed to petitioner.
Under the Agreement, BWW was authorized to use petitioner's name and logo in connection with the publication of TAT and the solicitation of advertisements in TAT. The substantial proceeds received during the years in issue relating to the paid advertisements appearing in each edition of TAT were divided between petitioner and BWW as follows:
Percentage
__________
Petitioner 27
BWW 73
In addition, under the Agreement between petitioner and BWW, BWW was required to pay petitioner an annual fee of $ 25,200.
Each edition of TAT generally contained a message from petitioner's president, articles regarding law enforcement activities and conferences, and anecdotal stories involving individual law enforcement officers. The text of a typical letter published in the*52 Fall-1995 edition of TAT is set forth below:
Dear Association Members: Thank you for the contribution to the
Pine Bluff Youth Council (PBYC) Awards Program. The $ 400 check
will enable us to acknowledge area high school students who
would not ordinarily receive recognition.
The text of one of the many brief advertisements appearing in the Fall-1995 edition of TAT is set forth below:
Standing behind the ASPA from . . . Pine Bluff Radiologists
Under the Agreement, BWW, as publisher, bore all costs associated with production of each edition of TAT. Checks in payment of advertising in TAT were made to the order of petitioner and were deposited into a bank account controlled by BWW. BWW was required to allow petitioner to review the records relating to the bank account into which the advertising proceeds were deposited.
As indicated, the written materials relating to TAT were subject to the approval of petitioner. Prior to publication, an officer of petitioner reviewed draft copies of each edition of TAT.
An officer of petitioner also reviewed the language of promotional and advertising sales materials relating to petitioner. Petitioner's officer, *53 however, did not otherwise monitor BWW's employees in the solicitation of advertisements for TAT.
Petitioner maintained a membership list and made it available to BWW in connection with the distribution of TAT.
Under the Agreement, BWW was identified as an independent contractor, not as an employee of petitioner. If petitioner believed that either BWW or its employees "damaged, infringed, tarnished, or otherwise degraded" petitioner's name, petitioner could, at its discretion, terminate the Agreement and its relationship with BWW.
BWW was required to and did publish at least 2,250 copies of each edition of TAT. For the 4 years in issue, in connection with the publication of TAT, petitioner received from BWW a total of $ 876,697, consisting of the 4 annual $ 25,200 payments due from BWW and petitioner's share of the advertising proceeds relating to TAT.
For 1993 through 1996, petitioner timely filed Form 990, Return of Organization Exempt From Income Tax. Petitioner treated the above $ 876,697 as royalty income and excluded it from its unrelated business taxable income. For 1993, 1994, and 1996, petitioner did not file Form 990-T, Exempt Organization Business Income Tax Return.
*54 DISCUSSION
There shall be excluded [from unrelated business taxable income]
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.
Royalties reflect payment for the use of valuable intangible property rights, such as trademarks, trade names, and copyrights. See, e.g.,
Royalties, however, do not include payment for personal services. See
De minimis personal participation in an unrelated business will not necessarily disqualify royalty treatment for payments received by a tax-exempt organization. See
The parties herein agree that the publication of TAT was not substantially related to petitioner's tax-exempt purpose, and (absent qualification of the payments petitioner received as royalties) petitioner concedes that the $ 876,697 received from BWW during the years in issue is to be treated as unrelated business taxable income.
Whether payments are to be treated as royalties is to be determined from all of the facts and circumstances of each case. See
In
This Court and the Court of Appeals for the Seventh Circuit concluded that the organization took an active role in the publication of the magazine and that the payments received from the publishing company did not qualify as excludable royalties under
In
Petitioner relies on
Like the tax-exempt organizations in
This case is dissimilar from the so-called affinity credit card cases and mailing list cases in which tax-exempt organizations license their names to be used in the sale or promotion of another business' unrelated products (e.g., a credit card company's credit) and in which it has been held that the fees received by the tax- exempt organization qualified as exempt royalty income. See
Petitioner's participation in the publication of its own official magazine was not passive or de minimis. TAT represented not the magazine of BWW but the magazine of petitioner through which petitioner promoted and actively sought not just to capitalize on the value of its name but to carry out its organizational purposes and objectives, which were stated in the Fall-1995 edition of TAT as follows:
to more effectively communicate between members of this
department so as to encourage collective input and participation
in short-term and long range goals of the Arkansas State Police.
The $ 876,697 petitioner received from BWW as petitioner's share of TAT advertising proceeds does not reflect royalty income. The payments are to be treated as unrelated business taxable income.
When tax-exempt organizations such as petitioner receive income from an unrelated trade or business of $ 1,000 or more, they are required to file Form 990-T, Exempt Organization Business Income Tax Return. See
To reflect the foregoing,
Decision will be entered for respondent as to the deficiency amounts and for petitioner as to the additions to tax.
State Police Association of Massachusetts v. Commissioner ... , 125 F.3d 1 ( 1997 )
Fraternal Order of Police, Illinois State Troopers, Lodge ... , 833 F.2d 717 ( 1987 )
Sierra Club Inc. v. Commissioner Internal Revenue Service , 86 F.3d 1526 ( 1996 )
oregon-state-university-alumni-association-inc-v-commissioner-of , 193 F.3d 1098 ( 1999 )