Page 1098
193 F.3d 1098 (9th Cir. 1999)
OREGON STATE UNIVERSITY ALUMNI ASSOCIATION, INC., Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE SERVICE, Respondent-Appellant.
ALUMNI ASSOCIATION OF THE UNIVERSITY OF OREGON, INC., Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE SERVICE, Respondent-Appellant.
No. 96-70565, No. 96-70593
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
Argued and Submitted September 11, 1997--Portland, Oregon
Filed October 4, 1999
Steven W. Parks, Tax Division, United States Department of Justice, Washington, D.C., for the respondent-appellant.
Phillip N. Jones (briefed and argued), Carolyn W. Miller (briefed), and Stephen
J. Klarquist (briefed), Duffy, Kekel, Jones & Bernard, Portland, Oregon, for the Petitioners appellees.
Appeals from a decision of the United States Tax Court; John O. Colvin, Tax Court Judge, Presiding. Tax Ct. No. 2133-94, Tax Ct. No. 2132-94
Before: William C. Canby, Jr., Thomas G. Nelson, and Andrew J. Kleinfeld, Circuit Judges.
KLEINFELD, Circuit Judge:
This case involves the tax treatment of affinity credit card programs conducted by university alumni organizations.
Facts.
These two cases went to trial in the Tax Court on stipulated facts, which are substantially the same in both cases (the two schools' alumni associations conducted their affinity credit card programs together). Basically, the alumni associations raised money for their schools by letting a bank offer credit cards using their names. The credit card customers and vendors did business with the bank in the ordinary way, and the bank paid money to the alumni associations. The alumni associations did not do much work for the money, but they did a little. The question is whether they did little enough work for the money they received to be royalties, nontaxable because of their exempt status, or whether they did too much, so that the money was taxable as unrelated business income.
Because the cases were tried, and there are no challenges to the findings of fact, we take our facts from the findings. The bank went into the deal to get access to the alumni associations' mailing lists and to use the schools' names, seals, colors and logos on the promotional material and cards, in order to facilitate marketing of credit cards. The alumni associations sought to raise money for the schools without much work for their staffs, to stimulate alumni to think about their schools when they paid for things with their credit cards, and to provide low cost credit cards to alumni.
The agreement required the alumni associations to provide accurate mailing lists and to provide materials the bank could reproduce and distribute to alumni advertising the program at least once a year. The bank paid the alumni associations one percent of what members recruited through the program spent on their credit cards, plus between $4 and $7 for each new member and each annual renewal. The alumni associations provided the mailing lists on magnetic tape. They spent perhaps twelve hours a year of clerical staff time on matters relating to the cards, such as preparing the tapes for the bank. The alumni associations did a little more promotion than they were required to do, such as a few printings and mailings, for which the bank reimbursed most of their expense, and meetings with the bank by each association's executive director once a year for an hour or two. Occasionally the alumni associations would pass on information about an alumnus who called about some credit card problem.
For this very few hours work and negligible expense, Oregon State grossed $254,252 and $357,998 for the two tax years at issue, University of Oregon $223,566 and $305,296. But the taste of free money was tainted by demands by the IRS for taxes of $89,590 and $120,288 from Oregon State, $75,588 and $105,183 from University of Oregon. The alumni associations went to trial, and won. The Tax Court rejected the Commissioner's argument that the money was unrelated business income1 and held that it was royalty income.2 The Commissioner appeals.
Analysis.
Both alumni associations are tax exempt3. Such charitable corporations are taxable on "unrelated business taxable income."4 That term basically means income from a business regularly carried on, the conduct of which is not, except for the money it produces, substantially related to performance of the corporation's charitable purpose.5 But the tax code expressly excludes "all royalties" from the definition of "unrelated business taxable income."6
The Commissioner argues that the money the alumni associations made from the affinity credit card program was unrelated business income, but the Tax Court held that it was royalties. On appeal, the Commissioner argues that the Tax Court misunderstood the statutory definition of royalties, and that the alumni associations did too much work for the money to be royalties. We review the Tax Court's factual findings regarding the services the alumni associations rendered to the bank for clear error.7 We review its determinations of law de novo.8
The Tax Court stated that a "royalty is a payment to use valuable intangible property rights." The Commissioner argues that this definition is mistaken under our decision in Sierra Club, Inc. v. Commissioner.9 The Commissioner urges us to read Sierra Club to exclude from royalty income any money received from the performance of services, and to treat money as received from services if the recipient performed any services to get it. The Commissioner has not argued for allocation -so much of the $1.1 million in revenue as unrelated business income allocated to the fifty hours or so of services the two associations spent during the two tax years, and the remainder as royalties. The Commissioner argues for all or nothing.
Although Sierra Club also involved an affinity credit card program, the Commissioner's argument that that case controls this one and compels reversal is mistaken. For one thing, Sierra Club reversed a summary judgment because there was a genuine issue of fact as to whether the payments the association received were for services. The agreements between the parties were unclear, and permitted a fact finder to conclude that the association was not simply licensing its name and mailing lists, but also agreeing to perform active endorsem*nt services. The agreement stated that Sierra Club" `agrees to cooperate with ABS on a continuing basis in the solicitation and encouragement of [Sierra Club] members to utilize the Services provided by ABS.' "10 By contrast, the case at bar went to trial, and the facts have been found. Therefore, there is no occasion to remand it for trial to resolve issues of fact as there was in Sierra Club.
Also, the Commissioner takes our words in Sierra Club, that royalties "cannot include compensation for services rendered,"11 out of context. A court decides a case. It does not write a statute. In a case, words have to be read in the context of the issue being decided. We were there rejecting the association's all-or-nothing argument, that royalty income was excludible regardless of how actively it was generated by services. Sierra Club is consistent with how the Tax Court defined royalties. We held that royalties, for purposes of the exclusion from unrelated business income, are "payments received for the right to use intangible property rights and that such definition does not include payments for services."12
Because we are construing words in a statute, we have to read the statute as a means of accomplishing a purpose, not merely a collection of arbitrary commands whose meanings come solely from the dictionary. "We must examine the meaning of the words to see whether one construction makes more sense than the other as a means of attributing a rational purpose to Congress."13 Congress had a reason for making "unrelated business taxable income" of charities taxable, but excluding from tax their "royalties." The purpose of taxing charities' unrelated business taxable income was to end what Congress saw as abuse of the exemption, by charities "able to carry on full-fledged commercial enterprises in competition with...
