Intangible Property and the Ubit

• Publication year: 1997
• Pages: 61
• Citation: Vol. 26 No. 5 Pg. 61

26 Colo.Law. 61 Colorado Lawyer 1997.

1997, May, Pg. 61. Intangible Property and the UBIT

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61

Vol. 26, No. 5, Pg. 61

The Colorado Lawyer
May 1997
Vol. 26, No. 5 [Page 61]

Specialty Law Columns
Advising Nonprofit Organizations
Intangible Property and the UBIT
by James R. Walker

Column Ed.: Donald J. Hopkins of Holme Roberts & Owen LLC, Denver - (303) 861-7000

This column is published quarterly to apprise members of the Bar, in particular those who volunteer their time and service to the community, about legal issues that pertain to the operations, fundraising, and governance of nonprofit organizations. This month's article was written by James R. Walker, Denver, a partner of Rothgerber, Appel, Powers & Johnson LLP, (303) 623-9000

The previous article in this column, which was published in the February issue of The Colorado Lawyer at page 37,1 introduced the unrelated business income tax ("UBIT") and described its basic underpinnings Congress created the unrelated business income tax in order to prevent unfair competition by tax-exempt organizations and estop an increasing loss of tax revenue.2 Notwithstanding this clarity of purpose, many of the UBIT provisions remain vague, allowing nonprofit organizations to assert broad exemptions and the Internal Revenue Service ("Service") to argue for an expansive tax base

This article discusses the most important and developing UBIT issues arising from a nonprofit organization's use of intangible property. The topics discussed include the sale and rental of mailing lists, affinity card arrangements, corporate sponsorship and other promotional devices involving an organization's goodwill.3

Mailing List Sales or Rentals

Nearly every nonprofit organization creates valuable intangible property rights. In this information age, most nonprofit organizations maintain a database or list of patrons, supporters, members, and contributors. For most nonprofits, this list becomes a valuable asset. A nonprofit organization can use the list to rally grassroot support as well as financial support, and thereby fulfill its educational or other exempt purposes.4

Third parties also find value in a mailing list. As a source that matches individuals to specific affiliations or interests, a mailing list may be a desirable marketing tool. Thus, many nonprofit organizations are approached by marketing groups, for-profit businesses, and other nonprofit groups seeking to market products or services to the persons listed on the mailing lists.

Do the funds received from the sale or rental of a mailing list constitute UBIT? The Service's longstanding position is that proceeds received through the regular rental or sale of mailing lists constitute unrelated trade or business income.5 To counter this assertion, nonprofit organizations maintain that the amounts received from the sale or rental of a mailing list actually represent "royalty payments" excluded from UBIT classification.

The most recent judicial view sides with nonprofit organizations supporting royalty treatment for mailing list rentals.6 Notwithstanding this favorable view, judicial support for royalty exemption may be withdrawn if the nonprofit organization provides any services to the mailing list user or markets the mailing list.7 For example, if the nonprofit organization provides either office or clerical help, provides supplies, or agrees to promote the third party's products or services, the amounts received from mailing list rentals most likely will constitute UBIT.8

In order to maximize the likelihood of royalty exemption, a nonprofit organization should document the mailing list rental or sale as a license in a written agreement.9 The agreement should label the third-party payments as royalty payments. The agreement should not address other arrangements between the third party and the nonprofit organization and should prohibit the nonprofit organization from providing any services to the third party.

In addition, the license agreement should state that the nonprofit organization will not bear any expense or burden with respect to the use of the mailing list and should disclaim any intention to create a joint venture or principal-agent relationship. The license agreement could, however, allow the nonprofit organization to review the promotional materials prior to their use in order to protect its reputation or otherwise control the quality of the promotional efforts.

In evaluating a proposed rental or sale of its mailing list a nonprofit organization also should review the special statutory exemption rule. In 1986, Congress concluded that the unrelated trade or business income tax should not be imposed on income earned from exchanges or rentals of donor or member lists among tax-exempt organizations eligible to receive charitable contributions.10 Thus, Congress created a special rule exempting certain amounts derived from rentals or exchanges of donor or member lists with other exempt organizations.11 The rule does not expressly apply to rentals to for-profit organizations.12 In fact, Congress stated that no inference could be drawn regarding whether rentals to...