## Facts

- Sierra Club, Inc. was a tax-exempt social-welfare organization under I.R.C. § 501(c)(4).
- The IRS determined that Sierra Club had unrelated business taxable income (UBTI) from (1) mailing-list rentals and (2) an affinity credit-card program under I.R.C. §§ 511–513.
- Sierra Club owned and maintained mailing lists of members, donors, supporters, and catalog purchasers, and retained exclusive rights to income derived from the lists.
- Sierra Club used third parties to maintain and update the lists, and inserted “seed names” to detect unauthorized use.
- Sierra Club hired outside list managers to solicit rentals, handle orders, and arrange list fulfillment; Sierra Club set rental rates and retained approval rights over renters, mailing content, and schedules.
- Sierra Club entered agreements with credit-card providers permitting use of Sierra Club’s name and logo on an affinity credit card and received income tied to program performance.
- The credit-card agreements included obligations for Sierra Club to endorse the program, encourage member participation, include program information in member mailings, and advertise in its magazine at its own expense.
- Sierra Club argued both revenue streams were excluded from UBTI as “royalties” under I.R.C. § 512(b)(2); the Tax Court granted partial summary judgment for Sierra Club on both items.

## Issues

1. Whether Sierra Club’s mailing-list rental receipts were “royalties” excludable from UBTI under I.R.C. § 512(b)(2).
2. Whether Sierra Club’s affinity credit-card receipts were “royalties” excludable under I.R.C. § 512(b)(2), or taxable UBTI as compensation for services.

## Decision

- The Ninth Circuit affirmed summary judgment that mailing-list rental income was excludable royalty income under § 512(b)(2).
- The Ninth Circuit reversed summary judgment on the affinity credit-card income and remanded for fact-finding on whether the payments were royalties or compensation for services.
- The court affirmed in part, reversed in part, and remanded.

## Legal Principles

- For purposes of I.R.C. § 512(b)(2), “royalties” are payments for the right to use intangible property and are treated as passive income.
- Income characterized as compensation for services (including promotional or operational participation) is not a royalty exclusion and may constitute UBTI.
- In assessing whether a payment is a royalty, courts examine the substance of the arrangement, including the exempt organization’s level of activity and whether third parties perform marketing, administration, and fulfillment.
- Summary judgment is improper where contract terms and the record leave material factual disputes about whether payments are for licensing intangible property or for services.

## Conclusion

The Ninth Circuit held that Sierra Club’s mailing-list rentals were passive payments for use of intangible property and therefore excludable royalties, but required further factual development to determine whether affinity credit-card payments were royalties or taxable service-related UBTI.


Sierra Club, Inc. v. Commissioner, 86 F.3d 1526 (9th Cir. 1996)