Rental of mailing lists to other entities may be an unrelated trade or business. Mailing list rentals between two or more exempt organizations eligible to receive tax deductible contributions under IRC Section 170(c)(2) or (3), however, is not an unrelated trade or business. Income from mailing list rental is excluded from unrelated business taxable income if it is a royalty. IRC Section and Treas. Regulation: IRC Section 511 imposes a tax on the unrelated business taxable income of exempt organizations. IRC Section 512(b)(2) excludes royalty income from “unrelated business taxable income. IRC Section 513(h)(1)(B) provides that the term "unrelated trade or business" does not include rental or exchange of names and addresses of donors or members between tax-exempt organizations that are eligible to receive deductible contributions under IRC Section 170(c)(2) or (3). Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources): Disabled Am. Veterans v. United States, 650 F.2d 1178 (1981). The court found that, because the organization performed substantial business activity in preparing and mailing the lists, royalty treatment was precluded. Sierra Club, Inc. v. C.I.R., 86 F 3d 1526 (1996). The 9th Circuit held that royalties are payments for the right to use intangible property, but royalty income does not include payments for the provision of personal services. The Court upheld the Tax Court’s decision that payment received for the right to use a mailing list constituted a royalty because the exempt organization did not itself provide any services to the mailer. Common Cause v. Commissioner, 112 T.C. 332 (1999). The Tax Court had previously held that activities by the owner of an intangible to exploit and protect the intangible, such as the taxpayer’s approval of mailing list rentals proposed by a third-party list manager, do not change a payment’s nature as a royalty excluded from unrelated business taxable income under section 512(b)(2). Monies included in the mailing list rental payments for list brokerage activities provided solely to the mailers for their convenience were not royalties, however, the court concluded that the list broker was not an agent of the exempt organization such that the income could be attributed to the organization for unrelated business taxable income purposes. See also Planned Parenthood Federation of America, Inc. V. commissioner, T.C. Memo. 1999-206 (the companion case to Common Cause). Rev. Rul. 72-431, 1972-2, C.B. 281 The regular sale of membership mailing lists constitutes unrelated trade or business because it constitutes the exploitation of an intangible resulting from the group’s exempt function under Treas. Reg. Section 1.513-1(d)(4)(iv). Rev. Rul. 81-178, 1981-2 Payment for the use of intangibles, such as trademarks and trade names, is a royalty and excludable from UBTI under section 512(b)(2). However, payment for personal services is not a royalty. Administrative Materials: IRM 18.104.22.168.3 (02-23-1999) Royalties Analysis: An exempt organization selling its membership list and substantially involved in the activity of preparing and mailing is engaged in an unrelated trade or business. See Rev. Rul. 72-431and Disabled Am. Veterans. The rental or exchange of mailing lists between tax-exempt organizations that are eligible to receive deductible contributions under IRC Section 170(c)(2) or (3) is not an unrelated trade or business under IRC Section 513(h)(1)(B). IRC Section 512(b)(2) excludes royalties from the computation of unrelated business taxable income. The term “royalty” is not defined in the Code or the regulations; however, courts have generally adopted the definition of royalty in Revenue Ruling 81-178. Revenue Ruling 81-178 defines a royalty as a payment that relates to the use of a valuable right. Payments for the use of trademarks, trade names, service marks, or copyrights, whether or not payment is based on the use of such property, are ordinarily classified as royalties for federal tax purposes. Royalties do not include payments for personal services. Income from the rental of a mailing list could be considered a royalty, because it is a payment for the use of members’ names and addresses, which is an intangible asset. However, if there are personal services involved – such as endorsing or marketing of the renting organization’s products – the portion of the payment received as compensation for the personal services is not a royalty within the meaning of Section 512(b)(2) and may constitute unrelated business taxable income. The same analysis applies regardless of the form - i.e. paper, electronic, or computerized – that the mailing list is maintained in. Issue Indicators or Audit Tips: Issue Indicators Carefully develop issues involving rental of mailing list to determine whether the organization provides services in connection with the mailing list rental. Audit Tips Retrieve copies of contracts and agreements between all parties. Determine if the rental of the mailing list is regularly carried on or a one-time usage. Determine if the organization exchanges mailing lists with selected organizations of similar or compatible purposes. Determine if the sale or exchange of the mailing list is between organizations that are eligible to receive deductible contributions under sections 170(c)(2) or (3). If the agreements contain services to be provided, contact Division Counsel.