Disabled American Veterans v. Commissioner

SWIFT, J.,

respectfully dissenting: The majority opinion summarily rejects and misinterprets substantial case authority of this and other courts that is contrary to the holding in this case. The Court of Claims in a case involving petitioner herein and this Court in three recent published opinions expressly have held that the exception provided in section 512(b)(2) encompasses only those royalties earned by tax-exempt organizations from traditional sources of passive investment income. The Court of Appeals for the Seventh Circuit has cited with approved the Court of Claims decision and affirmed one of our decisions on this same point.

The Court of Claims decision in Disabled American Veterans v. United States, 227 Ct. Cl. 474, 650 F.2d 1178 (1981) (DAV I), is discussed summarily in the majority opinion. That decision is precisely on point with all of the material facts and applicable law of this case. Therein, the Court of Claims expressly held, as follows:

section 512(b) excludes from taxation the conventional type of passive investment income traditionally earned by exempt organizations (dividends, interest, annuities, real property rents). * * * DAV’s list rentals are the product of extensive business activity by DAV and do not fit within the types of “passive” income set forth in section 512(b). * * * [650 F.2d at 1189. Citations omitted.]

In Fraternal Order of Police v. Commissioner, 87 T.C. 747 (1986), affd. 833 F.2d 717 (7th Cir. 1987), the tax-exempt organization, among other things, made essentially the same argument as petitioner herein (namely, that all royalties were exempt under section 512(b)(2) from treatment as unrelated business taxable income). In our opinion in that case, we expressly rejected that argument, and we expressly cited with approval and quoted from the Court of Claims opinion in DAV I. 87 T.C. at 757, 758. The ultimate holding of Fraternal Order of Police v. Commissioner, supra, makes it crystal clear that if the income in question does not represent passive income, it cannot qualify under the “royalty” exception of section 512(b)(2). We stated as follows:

We conclude, therefore, that petitioner’s role was not passive, the receipts from the listings did not constitute royalties, and such receipts are not excluded under section 512(b)(2) from petitioner’s unrelated business taxable income. [87 T.C. at 758.]

Our opinion in Fraternal Order of Police v. Commissioner, supra, was affirmed by the Seventh Circuit, and the Seventh Circuit also cited with approval the Court of Claims opinion in DAV I. See F.O.P., Ill. State Troopers, Lodge 41 v. Commissioner, 833 F.2d 717, 723 (7th Cir. 1987).

In National Water Well Association, Inc. v. Commissioner, 92 T.C. 75, 100 (1989), we again held, among other things, that the income in question did not constitute royalties within the meaning of section 512(b)(2) because the income was not passive income. After citing with approval on this point the Court of Claims opinion in DA VI and our earlier opinion in Fraternal Order of Police v. Commissioner, supra, we expressly made the nonpassive nature of the income the basis for our holding that the income did not qualify for the royalty exception of section 512(b)(2). 92 T.C. 100-101.

In NCAA v. Commissioner, 92 T.C. 456 (1989), we, among other things, addressed yet again the issue of whether the royalty exception of section 512(b)(2) included nonpassive income. Again citing with approval on this issue the holdings of DAV I and Fraternal Order of Police v. Commissioner, supra, as well as National Water Well Association, Inc. v. Commissioner, supra, we stated that where the income in question is not passive income to the tax-exempt organization, the royalty exception does not apply. 92 T.C. 468-470. See also the discussion in 6 Mertens, Law of Federal Income Taxation, sec. 34.14a, pp. 120-122 (1983 rev.), which explains some of the history of the passive-income requirement which underlies the section 512(b)(2) exception to unrelated-business-taxable-income treatment.

Petitioner herein concedes that the income in question arises from the active conduct of a trade or business and does not qualify as passive income. Unless we are prepared to overrule the controlling authority of this and other courts on this issue, the well-established principles of stare decisis and collateral estoppel are directly applicable and require us to follow the above-referenced substantial authority and to hold for respondent. With regard to stare decisis, the Supreme Court recently stated as follows:

the important doctrine of stare decisis [is] the means by which we ensure that the law will not merely change erratically, but will develop in a principled and intelligible fashion. * * * While stare decisis is not an inexorable command, the careful observer will discern that any detours from the straight path of stare decisis in our past have occurred for articulable reasons, and only when the Court has felt obliged “to bring its opinions into agreement with experience and with facts newly ascertained.” Burnet v. Coronado Oil & Gas Co., 285 U.S. 393, 412 (1932) (Brandeis J., dissenting).

Our history does not impose any rigid formula to constrain the Court in the disposition of cases. Rather, its lesson is that every successful proponent of overruling precedent has borne the heavy burden of persuading the Court that * * * the values served by stare decisis yield in favor of a greater objective. * * * [Vasquez v. Hillery, 474 U.S. 254, 265-266 (1986).]

With regard to the appropriate application of collateral estoppel to the resolution of the issue in this case based on the Court of Claims opinion in DAV I, see Montana v. United States, 440 U.S. 147, 155 (1979) and Meier v. Commissioner, 91 T.C. 273, 282-286 (1988) (Court reviewed).

In an attempt to avoid the collateral estoppel effect of DAV I, the majority opinion suggests that Rev. Rul. 81-178, 1981-2 C.B. 135, represents a change in the legal climate that existed when DAV I was decided. Rev. Rul. 81-178, however, was discussed in our opinion in NCAA v. Commissioner, supra, and nothing in the ruling was perceived by us at that time as being inconsistent with DAV I, 92 T.C. at 468-469; nor do I perceive anything in Rev. Rul. 81-178 inconsistent with DAVI.

For the reasons stated, I respectfully dissent.¹

Parker, Jacobs, and Gerber, JJ., agree with this dissent.

1 This dissent does not address further factual questions that could be raised about whether the majority opinion correctly treats as “royalties” income which the mailing-list industry and the parties herein generally refer to as “rental” income. Note that petitioner’s customers, prior to doing business with petitioner, already had the right to mail solicitations to anyone in the country. Mere “information” (namely, a list of names and addresses) was transferred by petitioner to its customers. The transactions before us look more like one-time rentals of information in exchange for fixed rental income than licenses over a period of time of intangible property rights in exchange for royalty income.