October 21, 1999 | Read Time: 2 minutes
A federal appellate court has dealt a blow to the Internal Revenue Service’s long-standing effort to make non-profit organizations pay income tax on revenue from “affinity” credit-card programs.
The U.S. Court of Appeals for the Ninth Circuit, in San Francisco, rejected the I.R.S.’s argument that revenue received by alumni associations at Oregon State University and the University of Oregon from credit-card arrangements should be counted as compensation for services and thus be subject to unrelated-business income tax. Non-profit organizations must pay the tax, known as UBIT, on money-making activities that are unrelated to their missions.
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 percentage of the total sales made through the use of the credit cards.
The Ninth Circuit’s decision supported an earlier U.S. Tax Court ruling that the revenue received by the Oregon non-profit organizations amounted to a tax-exempt royalty rather than taxable income.
James J. McGovern, a former top charity regulator at the I.R.S., noted that the ruling follows other court decisions against the tax agency on the topic of credit-card arrangements.
“The show may be almost over” for the I.R.S. on this matter, said Mr. McGovern, who now works for the accounting firm KPMG, because government lawyers may choose not to fight what could be a losing battle in appellate court.
“The bottom line,” said Mr. McGovern, “is that the I.R.S. does not have a blank check to continue its controversy with exempts over this issue.”
The Ninth Circuit’s opinion may be found on the court’s Web site at http://www.ca9.uscourts.gov (Oregon State University Alumni Association and Alumni Association of the University of Oregon v. Commissioner of Internal Revenue, 96-70565).
