April 8, 1999 | Read Time: 3 minutes
In a closely watched case that could affect thousands of non-profit organizations that receive money from royalty agreements, the U.S. Tax Court has ruled for a second time that the Sierra Club does not owe tax on revenue from an “affinity” credit-card program.
The Tax Court rejected Internal Revenue Service arguments that income from the credit-card arrangements should be counted as compensation for services and thus taxed as income that is unrelated to the environmental charity’s mission.
Under an affinity arrangement, a bank offers a credit card bearing a non-profit group’s name and logo and then promotes the card to the organization’s members. The organization, in turn, receives a small percentage of the total sales made through the use of the credit cards. Thousands of non-profit groups, from universities to small advocacy groups, have established affinity-card programs in recent years.
The Sierra Club argued that money generated by the cards is a tax-exempt royalty received in exchange for licensing the use of intangible assets — the group’s name and logo. The I.R.S. argued that income from the cards is a fee for services that is subject to the unrelated-business income tax, or UBIT.
The affinity-card issue originally came before the Tax Court as part of a broader dispute between the Sierra Club and the I.R.S. The service had also sought to tax the charity on income it received from renting its donor list to other organizations.
The Tax Court rebuffed both I.R.S. efforts, and the service appealed the decision in the U.S. Court of Appeals for the Ninth Circuit, in San Francisco. In 1996, that court ruled that the Sierra Club did not owe tax on income from its donor list. But the court instructed the U.S. Tax Court to hold a new trial on the affinity-card question. That trial resulted in the latest ruling.
The Tax Court has made similar rulings in several other cases, including ones involving alumni associations at Mississippi State University, Oregon State University, and the University of Oregon. The I.R.S. is appealing the Oregon cases, which have been combined, to the Ninth Circuit Court. Planned Parenthood and Common Cause also are involved in affinity-card cases pending in the Tax Court.
At issue in the Sierra Club case was affinity-card revenue from 1986 and 1987 totaling about $309,000. Despite the ruling’s limited focus, however, many legal observers say the Tax Court’s decision bodes well for many other charities with affinity-card programs.
“This is a program that generates hundreds of thousands of dollars for lots of non-profit organizations,” said B. Holly Schadler, a Washington lawyer who represented the Sierra Club in the credit-card case.
What’s more, she said, the decision could affect other types of royalty arrangements between charities and businesses that sell insurance, telephone calling cards, and other products.
“This case is extraordinarily significant to the non-profit community,” Ms. Schadler declared.
The I.R.S. has not yet decided whether to appeal the ruling (Sierra Club, Inc. v. Commissioner of Internal Revenue, T.C. Memo. 1999-86).
