Sierra Club Inc. v. Commissioner Internal Revenue Service

Sierra Club, Inc., a tax-exempt organization under I.R.C. § 501(c)(4), must pay taxes on “unrelated business taxable income” (“UBTI”) under I.R.C. §§ 511-13. I.R.C. § 512(b)(2), however, excludes “all royalties” from UBTI, thus rendering the royalty income of a tax-exempt organization non-taxable. The Commissioner of Internal Revenue (“Commissioner”) contends that the Tax Court erred in determining on summary judgment that Sierra Club’s income from the rental of its mailing lists and from participation in an affinity credit card program constituted “royalties” and therefore was not taxable for the years 1985, 1986, and 1987. We have jurisdiction under 26 U.S.C. § 7482 and we AFFIRM in part, REVERSE in part, and REMAND.

I.

The income Sierra Club received from the following two business arrangements is at the center of this dispute.

A. Mailing List Rentals

In order to communicate with its members in furtherance of its exempt purpose, Sierra Club developed and maintained a list of its members, donors, and other supporters; it also maintained a list of its catalog purchasers. Sierra Club had exclusive ownership rights in these mailing lists, including the right to all net income…