Affinity card income not UBTI.

The Tax Court has again held that icome received by an exempt organization from an affinity credit card program is a royalty excluded from unrelated business taxable income (UBTI) by Sec. 512(b)(2). Mississippi State University Alumni, Inc., TC Memo 1997-397, held that, as long as the exempt organization's involvement in the affinity credit card program was limited, income from the program was income from the use of valuable intangible property rights and was not income for services. The Mississippi State decision (which is appealable to the Fifth Circuit) closely followed Sierra Club, 86 F3d 1526 (9th Cir. 1996), as well as the Tax Court's prior decisions in Alumni Association of the Univ. of Ore., Inc., TC Memo 1996-63, and Oregon State Univ. Alumni Association Inc., TC Memo 1996-34.

The Mississippi State University (the University) alumni association communicates with alumni and conducts fundraising activities. The University maintains an alumni mailing list. In 1987, the alumni association and Peoples Bank & Trust (Peoples Bank) entered into an agreement under which the bank issued affinity credit cards featuring the University. Peoples Bank received permission to use the University's alumni mailing list, its marks and logos and letterhead and also received permission to use the signature of a University official for the endorsement and marketing materials it produced.

Under the affinity credit card program, the bank processed applications, produced credit cards, processed transactions, generated statements and processed payments; the alumni association did none of this work. The University official whose name the bank used for promotional purposes reviewed the endorsement and marketing materials for accuracy, quality, style and consistency with the University's position, spending three to five minutes on an endorsement letter. The alumni association did hire a marketing coordinator, who spent a negligible amount of time as the association's contact person for the affinity credit card program.

The alumni association did not mass mail any credit card applications or marketing materials, but kept application forms in its office and mailed the forms to the one or two alumni who requested them. Alumni association representatives took application forms to local alumni chapter meetings and put them in the lobby of the alumni center.

The bank paid the University for each cardhoder transaction and for each card membership. The 1987 agreement did not say whether the payments were intended to be royalties or business income, but a 1991 agreement specified that the payments were royalties. Additionally, the bank agreed to give the alumni associaton a certain amount of space on the credit card statements to cardholders to promote alumni activities.

The Tax Court held that Peoples Bank's payment to the alumni association under the affinity card contract were for the use of valuable intangible property rights, not for services. (The court did not address whether the affinity card program was regulary carried on or whether the credit card program was related to the organization's exempt purpose.) According to the Tax Court, the alumni association's activities were minimal and infrequent, were not conducted like a commercial business and were not services for which Peoples Bank paid. The message placed on the credit card statement advertised alumni activities, not the affinity card. Maintenance of the mailing list was done as part of the alumni association's exempt purpose of communicating to its members. The alumni association marketing coordinator was not hired to devote a substantial amount of time to the affinity credit card program; in fact, she spent very little time on the program. The University official's review of the promotional activities was reasonably related to protecting the University's name and did not disqualify the payments from being royalties.

The court distinguished this case from Texas Farm Bureau, 53 F3d 120 (5th Cir. 1995), in which an exempt organization provided clerical and administrative services, telephones, office supplies and other goods and services in addition to its logo, name and mailing list. The court also distinguished Louisiana Credit Union Legue, 693 F2d 525 (5th Cir. 1982), in which the Fifth Circuit described an exempt organization's activities as being "everything short of actually selling the insurance and collecting the debts itself...."