                                       NATIONAL EDUCATION ASSOCIATION OF THE UNITED STATES,
                                              PETITIONER v. COMMISSIONER OF INTERNAL
                                                       REVENUE, RESPONDENT
                                                        Docket No. 22838–09.               Filed September 28, 2011.

                                                  P is a tax-exempt labor organization described in I.R.C. sec.
                                               501(c)(5). In its FYE Aug. 31, 2001, 2002, and 2003, P pub-
                                               lished two magazines at an expense of about $7 million, and
                                               it distributed those magazines to dues-paying members and to
                                               a very few non-member paying subscribers. P’s literature and
                                               that of its State and local affiliates stated that members
                                               received the magazines as a benefit of membership and stated
                                               an amount of dues that paid for the magazines. Members who
                                               declined the magazines did not pay a smaller amount of dues.
                                               P made most but not all of the content of the magazines avail-

                                      100




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                                      (100)                                 NEA v. COMMISSIONER                                             101


                                               able for free over the Internet to the general public. P pub-
                                               lished paid advertising in the magazines, by which it earned
                                               approximately $1 million in net profit each year. On its
                                               returns P reported negligible circulation income, resulting in
                                               a substantial claimed loss on its circulation activity. P used
                                               that loss to fully offset its taxable advertising profit. There-
                                               fore, P reported that it owed no unrelated business income tax
                                               (UBIT). Held: Under 26 C.F.R. sec. 1.512(a)–1(f)(3)(iii), Income
                                               Tax Regs., which requires an allocation of membership dues
                                               to circulation income ‘‘[w]here the right to receive an exempt
                                               organization periodical is associated with membership or
                                               similar status in the organization’’, the ‘‘right to receive’’ must
                                               be a legal right. Under this regulation, P was required to allo-
                                               cate a portion of members’ dues to circulation income.

                                        Miriam L. Fisher and Theodore J. Wu, for petitioner.
                                        Robin W. Denick and Catherine R. Chastanet,                                                         for
                                      respondent.
                                         GUSTAFSON, Judge: Petitioner National Education Associa-
                                      tion of the United States (‘‘NEA’’) is a labor organization
                                      described in section 501(c)(5). 1 It is therefore generally
                                      exempt from Federal income tax under section 501(a); but to
                                      the extent it engages in income-generating activity unrelated
                                      to its tax-exempt purposes, it is potentially liable under sec-
                                      tions 511 through 513 for unrelated business income tax
                                      (‘‘UBIT’’). NEA publishes magazines mainly for its members
                                      (an activity ‘‘related’’ to its exempt purposes and not subject
                                      to UBIT) and sells advertising in those magazines (an ‘‘unre-
                                      lated’’ activity that is subject to UBIT). By a notice of defi-
                                      ciency dated June 25, 2009, the Internal Revenue Service
                                      (IRS) determined deficiencies in NEA’s UBIT in the following
                                      amounts:

                                                                                                                                 UBIT
                                                TYE Aug. 31                                                                    deficiency

                                                        2001 ...............................................................   $319,094
                                                        2002 ...............................................................    444,554
                                                        2003 ...............................................................    342,371

                                      NEA brought this case pursuant to section 6213(a), asking
                                      this Court to redetermine those deficiencies.
                                        1 Section references are to the Internal Revenue Code of 1986 (26 U.S.C.), as in effect for the

                                      relevant years at issue. Rule references are to the Tax Court Rules of Practice and Procedure.




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                                      102                137 UNITED STATES TAX COURT REPORTS                                      (100)


                                         The issue for decision is whether NEA must allocate a por-
                                      tion of its members’ dues to the circulation income of those
                                      magazines. The parties agree that the outcome of this dis-
                                      pute depends on whether, for purposes of 26 C.F.R. section
                                      1.512(a)–1(f)(3)(iii), Income Tax Regs., membership in NEA
                                      gave members ‘‘the right to receive’’ NEA periodicals. If the
                                      members had a ‘‘right to receive’’ the magazines, then: (a) a
                                      portion of the members’ dues was circulation income; (b) as
                                      a result of that income, NEA did not have a loss from circula-
                                      tion activity; (c) NEA’s income from advertising (an ‘‘unre-
                                      lated’’ activity subject to UBIT) was therefore not offset by
                                      any circulation losses; and (d) NEA owes tax on the adver-
                                      tising income. NEA concedes that if the IRS prevails on this
                                      issue, then the IRS’s computations are correct with respect to
                                      the amounts of membership dues allocable to circulation
                                      income for the years at issue.
                                         For the reasons explained below, we find that membership
                                      in NEA did give members ‘‘the right to receive’’ the NEA maga-
                                      zines. Consequently, NEA must allocate a portion of its mem-
                                      bers’ dues to circulation income.

                                                                          FINDINGS OF FACT

                                        The parties submitted this case fully stipulated pursuant
                                      to Rule 122. The stipulation of facts filed November 26, 2010,
                                      and the attached exhibits are incorporated herein by this ref-
                                      erence. At the time that NEA filed its petition, NEA main-
                                      tained its principal place of business in Washington, D.C.
                                      NEA and its affiliates
                                         NEA originated in 1857 as the National Teacher’s Associa-
                                      tion. In 1906 a special act of Congress incorporated the entity
                                      under its current name. NEA operates under a charter, a con-
                                      stitution, bylaws, and standing rules; and its stated goals
                                      include serving as a national voice for education, promoting
                                      the health and welfare of children and/or students, and pro-
                                      tecting the rights of educational employees and advancing
                                      their interests and welfare.
                                         NEA charters State and local affiliates that meet standards
                                      set in NEA’s bylaws. The IRS recognizes both NEA and the
                                      affiliates as exempt from tax under section 501(a) as section
                                      501(c)(5) labor organizations. Individuals become members of




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                                      NEA only by becoming members of one of the State or local
                                      affiliates. The affiliates are responsible for enrolling mem-
                                      bers, collecting and remitting dues, and a variety of other
                                      activities.
                                        In the years at issue NEA had 54 main affiliates and more
                                      than 21⁄2 million members (of whom more than 160,000 were
                                      retired members). Each NEA member paid dues of $123 for
                                      the 2000–2001 school year and slightly more in subsequent
                                      years. NEA therefore received well over $300 million in dues
                                      in each of the years at issue.
                                      NEA’s magazines
                                         NEA produced numerous books, pamphlets, booklets, and
                                      other publications. Only two of NEA’s publications are perti-
                                      nent here—NEA Today for active members and This Active
                                      Life for retired members. (We refer to these two publications
                                      collectively as the ‘‘magazines’’.) NEA began publishing NEA
                                      Today in 1982 and This Active Life in 1999.
                                         Since 1982 NEA has published NEA Today. In the years at
                                      issue NEA published eight monthly issues of NEA Today over
                                      the course of a school year. As the magazine explained to its
                                      readers, its ‘‘press schedule * * * is set a year in advance’’.
                                      Each issue consisted of 52 pages in a 10-inch by 14-inch
                                      newspaper tabloid format. NEA distributed more than 2.4 mil-
                                      lion printed copies per issue to dues-paying members by
                                      mail. About 40,000 NEA members (i.e., less than two percent)
                                      declined the subscription, but they did not receive a reduc-
                                      tion in their dues for doing so. NEA did not actively promote
                                      outside subscriptions and sold fewer than 200 hard copy
                                      subscriptions to nonmembers. NEA distributed complimentary
                                      copies to NEA employees, employees of NEA affiliates,
                                      attendees at NEA hosted meetings, school officials, media rep-
                                      resentatives, government officials, and members of the public
                                      who requested individual issues.
                                         The masthead on the inside of the cover of each NEA Today
                                      issue included the following statements:
                                      NEA Today is published eight times a year, monthly, in September,
                                      October, November, January, February, March, April, and May by the
                                      National Education Association * * *.

                                                                      *        *      *       *   *       *   *




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                                      104                137 UNITED STATES TAX COURT REPORTS                                      (100)


                                      NEA Today is mailed to all NEA members as a benefit of membership.
                                      Nonmember subscription price: $45 institutional, $80 domestic and foreign.
                                      For members, subscriptions represent $4 of annual dues.[2]

                                         In the years at issue and thereafter, NEA also made articles
                                      from NEA Today available free on the Internet to the general
                                      public. The Internet version did not contain letters to the
                                      editor and excluded the advertising. Despite the availability
                                      of articles on the Internet, NEA continued to mail hard copies
                                      of NEA Today to members, even to two members in the same
                                      household.
                                         Since 1999 NEA has published This Active Life. In the
                                      years at issue NEA annually published six bi-monthly issues
                                      of This Active Life in standard 8.5-inch by 11-inch magazine
                                      format. NEA individually addressed and mailed This Active
                                      Life to retired dues-paying members, with per-issue circula-
                                      tions of 175,400, 195,516, and 215,633 for its fiscal years
                                      ending August 31, 2001, 2002, and 2003. As with NEA Today,
                                      recipients could decline the subscription to This Active Life,
                                      though only a small percentage chose to do so. Members who
                                      declined delivery did not receive a reduction in their mem-
                                      bership dues. NEA did not make available hard copies of This
                                      Active Life for purchase or as courtesy copies. As it did with
                                      NEA Today, NEA made This Active Life available free on the
                                      Internet to the general public.
                                         The masthead on page three of each This Active Life issue
                                      included the following statement:
                                      This Active Life * * * is published bimonthly by the National Education
                                      Association * * *. * * * Annual subscription price: $2.30 (included in
                                      membership dues and available only as a part of membership).[3]

                                      Advertising
                                        NEA sells advertising space to help defray the expenses of
                                      creating, producing, and mailing the magazines. As a result
                                      of the advertising revenue, the net cost per member for a
                                      year’s delivery of NEA Today was $4.10 in the years at issue.
                                        One of the reasons that NEA sent separate issues of the
                                      magazines to NEA members in the same household was to
                                        2 The 2001 and 2002 editions listed $4 as the portion of annual dues paid for NEA Today;

                                      the 2003 editions listed $4.25. The 2001 and 2002 editions listed $45 as the institutional sub-
                                      scription price; the 2003 editions listed $55.
                                        3 The portion of annual dues that was stated as paid for This Active Life was increased to

                                      $2.35 in the March 2002 publication and to $2.40 in the September 2002 publication.




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                                      (100)                            NEA v. COMMISSIONER                                        105


                                      fulfill circulation volume commitments that                               NEA      made in its
                                      advertising contracts.
                                      References in NEA documents to members’ receipt of maga-
                                      zines
                                           NEA’sgoverning documents contained statements related to
                                      NEA   publications, as follows:
                                         Article IX, sections 2(b) and 3(b), of NEA’s constitution pro-
                                      vided that, with respect to amending the NEA constitution
                                      and bylaws, ‘‘The text of the proposed amendment shall be
                                      printed in an official publication sent to all members at least
                                      sixty (60) days prior to its consideration.’’
                                         Section 2–3(c) of NEA’s bylaws provided that ‘‘[a]ll members
                                      shall be eligible to receive * * * reports and publications of
                                      the Association in accordance with the policies and proce-
                                      dures of the Association.’’
                                         NEA’s standing rule 9C, sections 1(b) and 2(b), required
                                      that proposed amendments to NEA’s constitution and bylaws,
                                      respectively, ‘‘shall be printed in an official publication sent
                                      to all members at least sixty (60) days prior to its consider-
                                      ation.’’ Standing rule 10D required further that, with respect
                                      to candidates for executive office or membership on the
                                      executive committee, ‘‘The Executive Director of NEA shall
                                      publish in an NEA publication sent to Active members the
                                      picture and candidate statement of each candidate’’.
                                         The May 2001 and May 2002 issues of NEA Today both con-
                                      tained: (1) one and one-third pages of proposed amendments
                                      to NEA standing rules, constitution, and bylaws due for vote
                                      at the respective upcoming representative assemblies; (2)
                                      two-thirds of a page showing the picture and candidate state-
                                      ment of individuals running for NEA executive offices or for
                                      membership on the executive committee; and (3) the annual
                                      secretary-treasurer’s report noted above.
                                         The 2000–2001 NEA Handbook, in a section entitled Bene-
                                      fits of Membership, stated that ‘‘NEA members receive a
                                      variety of timely and informative periodicals, including NEA
                                      Today, a tabloid newspaper’’.
                                         Consistent with the language on the mastheads of the
                                      magazines, the enrollment forms by which a person joined an
                                      affiliate and thereby joined NEA include language to the




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                                      106                137 UNITED STATES TAX COURT REPORTS                                            (100)


                                      effect that a portion of members’ dues pays for the maga-
                                      zines. 4
                                      NEA’s tax returns
                                        To report its unrelated business taxable income (UBTI) from
                                      the sale of advertising space in its magazines, NEA submitted
                                      each year to the IRS a Form 990–T, Exempt Organization
                                      Business Income Tax Return, prepared by its outside
                                      accountants. The following table summarizes the figures that
                                      NEA reported on the Forms 990–T:
                                                                                                                  FYE Aug. 31

                                                                                                      2001           2002            2003

                                       Advertising income:
                                        Advertising and royalty revenue                          $2,904,990        $3,109,157    $3,453,075
                                        Less direct advertising costs                             2,055,802         1,838,023     2,473,046

                                         Net advertising income                                       849,188       1,271,134        980,029
                                       Circulation income:
                                         Circulation revenue                                           -0-             80,622        76,044
                                         Less readership costs1                                   6,701,587         7,557,196     7,673,271

                                        Excess exempt expenses (a.k.a. excess readership
                                          costs) (limited to net advertising income)                  849,188       1,271,134        980,029
                                       Unrelated business taxable income:
                                        Net profit from advertising (= advertising income
                                          less excess readership costs)                                  -0-            -0-             -0-
                                        Less other allowable deductions = taxes, licenses,
                                          and other                                                       100             100            100

                                           UBTI before net operating loss carryforward                    (100)          (100)           (100)
                                           Net operating loss carryforward                            (339,385)      (339,485)       (339,585)

                                         UBTI                                                         (339,485)      (339,585)       (339,685)
                                       Tax:
                                         UBIT—rate                                                         35%            35%             35%
                                         UBIT—tax                                                        -0-            -0-             -0-
                                         1Readership costs included payroll for writers and editors, printing expenses, and postage
                                       from mailing the periodicals to members. NEA allocated expenses between advertising and
                                       readership using a ratio representing the number of pages of advertising over the total num-
                                       ber of pages in the periodicals for each year.

                                        As the above table shows, the circulation revenue that NEA
                                      reported was zero for fiscal year 2001 and was minimal for
                                        4 The Alabama enrollment form states, ‘‘I understand that of the total NEA dues, $4.50 [is]

                                      for a subscription for one year to NEA TODAY, $2.45 for NEA–Retired and/or $16.00 for the
                                      Higher Education Publication.’’ The Oklahoma form states, ‘‘Subscriptions to OEA publications
                                      ($4.11) and NEA today ($4.50) are included.’’ The Oregon form states, ‘‘Annual Membership dues
                                      to NEA includes $4.50 for NEA Today, and/or $16.00 for the Higher Education publications.’’
                                      The Pennsylvania form states, ‘‘I understand * * * of the total NEA dues $4.50 is for a one
                                      year subscription to NEA Today.’’ To similar effect, NEA secretary-treasurer’s reports (provided
                                      to members in NEA Today) stated that $7.70 and $8.32 of the annual membership dues for the
                                      two years, respectively, went to ‘‘[p]roduce communications that provide a common under-
                                      standing of Association priorities.’’ The record does not enable us to reconcile those figures, but
                                      such a reconciliation is not necessary to decide this case.




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                                      (100)                            NEA v. COMMISSIONER                                                  107


                                      fiscal years 2002 and 2003. That minimal revenue consisted
                                      of NEA’s proceeds from selling subscriptions to nonmembers.
                                      The low circulation revenue that NEA reported caused NEA to
                                      show excess readership costs, which it used to fully offset its
                                      profits from advertising. Accordingly, NEA reported zero UBTI
                                      for each of the years at issue. NEA also reported (but did not
                                      need to use) a loss carryforward that it derived from excess
                                      readership costs in prior years.
                                      The IRS’s notice of deficiency
                                        After an examination, the IRS issued a notice of deficiency
                                      dated June 25, 2009, determining adjustments to NEA’s UBTI
                                      and UBIT. The effect of the IRS’s adjustments is set out in the
                                      table below:
                                                                                                                  FYE Aug. 31

                                                                                                       2001          2002            2003

                                       Advertising income:
                                        Advertising and royalty revenue                          $2,960,652        $3,109,378    $3,453,075
                                        Less direct advertising costs                             2,047,756         1,838,023     2,473,673

                                         Net advertising income                                        912,896      1,271,355        979,402
                                       Circulation income:
                                         Circulation revenue                                          8,656,335     9,448,601    10,517,943
                                         Less readership costs                                        6,701,483     7,557,196     7,673,271

                                        Excess exempt expenses (a.k.a. excess readership
                                          costs)                                                          -0-             -0-           -0-
                                       Unrelated business taxable income:
                                        Net profit from advertising                                    912,896      1,271,355        979,402
                                        Less other allowable deductions = taxes, licenses,
                                          and other                                                      1,200          1,200          1,200

                                           UBTI before net operating loss carryforward                 911,696      1,270,155        978,202
                                           Net operating loss carryforward                                -0-           -0-             -0-

                                         UBTI                                                          911,696      1,270,155        978,202
                                       Tax:
                                         UBIT—rate                                                        35%            35%            35%
                                         UBIT—tax                                                      319,094        444,554        342,371

                                        As is shown above, the IRS allocated a portion of NEA’s
                                      membership dues to circulation income, which caused the IRS
                                      to determine that for the three years at issue NEA had cir-
                                      culation income of approximately $8.7 million, $9.4 million,
                                      and $10.5 million. NEA has conceded that if it must allocate
                                      a portion of membership dues to circulation income in the
                                      manner that the IRS determined, then NEA would not have a
                                      net operating loss carryforward from its fiscal year ended
                                      August 31, 2000. The above table also reflects, and NEA has
                                      conceded, relatively minor adjustments to NEA’s advertising




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                                      108                137 UNITED STATES TAX COURT REPORTS                                      (100)


                                      revenue, royalty revenue, advertising costs, readership costs,
                                      and other allowable deductions.

                                                                                  OPINION

                                      I. Burden of proof
                                        As a general rule, 5 we presume that the Commissioner’s
                                      determinations are correct, and the taxpayer has the burden
                                      of establishing that the determinations in the notice of defi-
                                      ciency are erroneous. Rule 142(a); Welch v. Helvering, 290
                                      U.S. 111, 115 (1933). Similarly, the taxpayer bears the bur-
                                      den of proving entitlement to any adjustments that would
                                      reduce the deficiency. INDOPCO, Inc. v. Commissioner, 503
                                      U.S. 79, 84 (1992). ‘‘[T]he fact that a case is fully stipulated
                                      does not change the burden of proof.’’ Borchers v. Commis-
                                      sioner, 95 T.C. 82, 91 (1990), affd. 943 F.2d 22 (8th Cir.
                                      1991).
                                      II. The fragmentation of an exempt organization’s activities
                                           A. Provisions of the Code
                                        The Internal Revenue Code taxes the UBTI of an exempt
                                      organization as a trade or business activity that is not
                                      substantially related to the organization’s exempt purpose.
                                      Sec. 511(a)(1). One of the main purposes for taxing UBTI is
                                      to prevent unfair competition with taxable counterparts and
                                      to curb related abuses by otherwise nontaxable businesses.
                                      United States v. Am. Bar Endowment, 477 U.S. 105, 114
                                      (1986); United States v. Am. College of Physicians, 475 U.S.
                                      834, 837–838 (1986). Corollary aims include the ‘‘ ‘larger
                                      goals of producing revenues and achieving equity in the tax
                                      system.’ ’’ Am. Med. Association v. United States, 887 F.2d
                                      760, 772 (7th Cir. 1989) (quoting La. Credit Union League v.
                                      United States, 693 F.2d 525, 540 (5th Cir. 1982)).
                                        The Code generally defines UBTI as gross income from an
                                      unrelated trade or business less allowable deductions con-
                                      nected directly with the carrying on of such trade or busi-
                                      ness. Sec. 512(a)(1). For these purposes, a trade or business
                                      may include not only a complete business enterprise but also
                                        5 Under certain circumstances, if the taxpayer meets specific criteria, the burden of proof can

                                      shift to the Commissioner. See sec. 7491(a). However, NEA did not argue for a shift in the bur-
                                      den of proof, and the record does not suggest a basis for such a shift.




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                                      any component activity of a business. 26 C.F.R. sec. 1.513–
                                      1(b).
                                           B. Provisions of the regulations
                                          With respect to periodicals published by tax-exempt
                                      organizations, section 1.512(a)–1(f)(3)(i) of the regulations
                                      ‘‘fragments’’ the organization’s taxable trade or business of
                                      selling advertising space (i.e., advertising income) from the
                                      organization’s nontaxable activity of publishing readership
                                      content related to the organization’s exempt purpose (i.e., cir-
                                      culation income). See Am. Med. Association v. United States,
                                      887 F.2d at 764; W. Va. State Med. Association v. Commis-
                                      sioner, 91 T.C. 651, 656 (1988), affd. 882 F.2d 123 (4th Cir.
                                      1989). The approach likewise divides the periodical’s costs
                                      into two categories: direct advertising costs and readership
                                      costs. 26 C.F.R. sec. 1.512(a)–1(f)(6)(i).
                                          The organization may deduct the full amount of direct
                                      advertising costs from gross advertising income, 26 C.F.R.
                                      sec. 1.512(a)–1(f)(2)(i); and in this case the IRS generally
                                      allowed these deductions (with only minor adjustments not
                                      now in dispute). In addition, the organization may deduct
                                      from its advertising income the readership costs that it
                                      incurs in the same year, but only if those readership costs
                                      exceed circulation income (and thereby yield ‘‘excess reader-
                                      ship costs’’). 26 C.F.R. sec. 1.512(a)–1(f)(2)(ii)(b). The fol-
                                      lowing formula conceptualizes these rules: (1) Gross adver-
                                      tising income, minus (2) direct advertising costs, minus (3)
                                      excess readership costs (the amount by which readership
                                      costs exceed circulation income), equals (4) net UBTI from the
                                      sale of advertising. Natl. Association of Life Underwriters,
                                      Inc. v. Commissioner, T.C. Memo. 1992–442, 64 TCM (CCH)
                                      379, 386, revd. and remanded on other grounds 30 F.3d 1526
                                      (D.C. Cir. 1994).
                                          The rationale for allowing the deduction of excess reader-
                                      ship costs—but only where they are excess readership costs—
                                      is that where there are such excess costs, the circulation
                                      activity is not self-sustaining, and therefore the exempt
                                      organization needs the paid advertisements to cover the
                                      shortfall. In other words, the paid advertising ‘‘ ‘contribute[s]
                                      importantly’ ’’ to maintaining the publication’s exempt pur-
                                      pose. Am. Med. Association v. United States, 887 F.2d at 763




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                                      (quoting United States v. Am. College of Physicians, 475 U.S.
                                      at 847)). If, on the other hand, the organization earns a profit
                                      on its circulation income, 6 then the publication did not need
                                      any advertising revenue to sustain its readership content,
                                      and therefore, the advertising was not ‘‘ ‘substantially
                                      related’ ’’ to the organization’s exempt purpose, id.; the adver-
                                      tising was, instead, a fundraising activity in competition with
                                      non-exempt publications that likewise sell advertising and
                                      must pay income tax on their profits. Consequently, when
                                      the circulation activity earns a profit, the exempt organiza-
                                      tion may not deduct its readership costs against its adver-
                                      tising income, and the organization must pay UBIT on its
                                      profits from advertising. Id.
                                           C. The parties’ contentions
                                         The disputed issue in this case is the calculation of NEA’s
                                      circulation income. NEA contends that its members did not
                                      have ‘‘the right to receive’’ the magazines because NEA was
                                      under no obligation to continue publishing—it could stop
                                      sending issues at any time—and because its members as well
                                      as the general public could access the magazines for free on
                                      the Internet. NEA therefore contends that it (a) had virtually
                                      no circulation income, (b) consequently had substantial
                                      excess readership costs, and (c) can deduct those costs from
                                      its advertising income, reducing that income to zero.
                                         The IRS contends, to the contrary, that NEA members had
                                      the right to receive the magazines because a portion of NEA’s
                                      members’ dues was in fact paid for magazines. The IRS there-
                                      fore contends (a) that NEA had substantial circulation income
                                      that more than covered the cost of producing the magazines,
                                      (b) that NEA consequently had zero excess readership costs,
                                      and (c) that as a result NEA had unrelated business taxable
                                      income from its paid advertising.




                                        6 Since the organization’s publication is a means of accomplishing its exempt purpose, the net

                                      profit resulting from the publishing activity is treated as income related to its exempt activity,
                                      not unrelated income. The advertising, however, is treated as a distinct activity that is unrelated
                                      and therefore taxable.




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                                      III. The meaning of ‘‘the right to receive’’
                                           A. The regulatory language at issue
                                        The outcome in this case is determined by 26 C.F.R. sec.
                                      1.512(a)–1(f)(3)(iii), Income Tax Regs., which provides as fol-
                                      lows:
                                      Where the right to receive an exempt organization periodical is associated
                                      with membership or similar status in such organization for which dues,
                                      fees or other charges are received (hereinafter referred to as ‘‘membership
                                      receipts’’), circulation income includes the portion of such membership
                                      receipts allocable to the periodical (hereinafter referred to as ‘‘allocable
                                      membership receipts’’). * * * [Emphasis added.]

                                           B. The lack of ‘‘plain meaning’’
                                         The starting point for interpreting a regulatory provision is
                                      its plain meaning, Intermountain Ins. Serv. of Vail, LLC v.
                                      Commissioner, 134 T.C. 211, 218 (2010), revd. on other
                                      grounds 650 F.3d 691 (D.C. Cir. 2011), and NEA argues that
                                      the interpretation of the phrase ‘‘the right to receive’’ is clear
                                      on its face as meaning a legally enforceable claim or interest.
                                      To support its position, NEA points to definitions for the word
                                      ‘‘right’’ in Black’s Law Dictionary 1436 (9th ed. 2009)
                                      (Black’s), 7 from which it quotes the first five definitions:
                                      right, n. (bef. 12c) 1. That which is proper under law, morality, or ethics
                                      <know right from wrong>. 2. Something that is due to a person by just
                                      claim, legal guarantee, or moral principle <the right of liberty>. 3. A
                                      power, privilege, or immunity secured to a person by law <the right to dis-
                                      pose of one’s estate>. 4. A legally enforceable claim that another will do
                                      or will not do a given act; a recognized and protected interest the violation
                                      of which is a wrong <a breach of duty that infringes one’s right>. 5. (often

                                         7 NEA also relies on Lamont v. Postmaster General, 381 U.S. 301, 305–306 (1965), but the au-

                                      thority is off the mark. Lamont held that, because the First Amendment bars Congress from
                                      ‘‘abridging’’ the freedom of the press, the Government may not interfere with an addressee’s
                                      ability to receive his mail. The phrase ‘‘right to receive’’ does not appear in the majority opinion
                                      in Lamont; and even if it did, invoking authorities that address First Amendment rights—which
                                      plainly are enforceable legal rights, see U.S. Const., art. VI (‘‘This Constitution * * * shall be
                                      the supreme Law of the Land’’)—begs the question whether a member’s ‘‘right to receive’’ maga-
                                      zines from NEA is in fact, like First Amendment rights, a legal right. Even if NEA has no obli-
                                      gation to produce and the member has no right to receive NEA Today, the Government is pre-
                                      sumably barred from blocking the member’s receipt of the magazine once it is mailed, so that,
                                      vis-a-vis the Government, NEA members can be said to have ‘‘the right to receive’’ NEA’s maga-
                                      zines without Government interference. However, the question whether the Government could
                                      bar NEA members from receiving NEA Today (a question more like the one at issue in Lamont)
                                      is a different question from whether, vis-a-vis NEA, the member has ‘‘the right to receive’’ the
                                      magazine.




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                                      pl.) The interest, claim, or ownership that one has in tangible or intangible
                                      property <a debtor’s rights in collateral> <publishing rights>. * * *

                                      Of these, NEA asserts that the fourth is the most fitting—i.e.,
                                      ‘‘A legally enforceable claim that another will do or will not
                                      do a given act; a recognized and protected interest the viola-
                                      tion of which is a wrong’’.
                                         The IRS argues for an interpretation of ‘‘right to receive’’
                                      that is less stringent than a legally enforceable right. The IRS
                                      criticizes NEA’s selection from the definitions in Black’s and
                                      asserts that the ‘‘just claim’’ portion of the second definition
                                      (‘‘Something that is due to a person by just claim, legal guar-
                                      antee, or moral principle’’) is the one most consistent with
                                      the regulation. Whether or not the IRS’s counter-selection is
                                      superior, it must be noted that Black’s definitions of a ‘‘right’’
                                      include both a ‘‘legally enforceable’’ claim (No. 4, to which
                                      NEA prefers to point) and a claim that is merely ‘‘just’’ or
                                      ‘‘moral’’ (No. 2, to which the IRS prefers to point). Con-
                                      sequently, we conclude that we cannot determine, by ‘‘plain
                                      meaning’’, whether a ‘‘right to receive’’ must be legally
                                      enforceable, and that other interpretive principles must be
                                      consulted. 8
                                           C. The lack of an agency position to which a court could
                                              defer
                                         In support of its position, the IRS invokes the principle that
                                      an agency’s interpretation of its own regulation is controlling
                                      unless it is ‘‘ ‘plainly erroneous or inconsistent with the regu-
                                      lation.’ ’’ Auer v. Robbins, 519 U.S. 452, 461 (1997) (quoting
                                      Robertson v. Methow Valley Citizens Council, 490 U.S. 332,
                                      359 (1989)); Lantz v. Commissioner, 132 T.C. 131, 144 n.10
                                      (2009), revd. on other grounds 607 F.3d 479 (7th Cir. 2010).
                                      However, the application of this principle to resolve the cur-
                                      rent dispute is difficult, first, because of unclarity in the IRS’s
                                      position. The IRS stops short of adopting Black’s definition
                                      No. 2 of ‘‘right’’ (‘‘due to * * * just claim * * * or moral prin-
                                      ciple’’), and does not declare what should be the precise
                                      interpretation of ‘‘right to receive’’, other than to say what it
                                      is not—i.e., it is not necessarily an enforceable legal right to
                                      receive. The IRS contends that, on a case-by-case basis, courts
                                         8 The rules of statutory construction also apply to the construction of regulations. See Estate

                                      of Schwartz v. Commissioner, 83 T.C. 943, 953 (1984).




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                                      should apply an unspecified looser standard. We cannot defer
                                      to a position that is not expressly articulated.
                                         Deference here to the agency’s interpretation is difficult,
                                      second, because the IRS is unable to show that the agency
                                      has in fact stated a position on the interpretation of ‘‘right
                                      to receive’’. Its only cited support for the existence of an
                                      announced agency position is the preamble to the final regu-
                                      lations at issue, which states: ‘‘Where periodicals are fur-
                                      nished dues paying members * * * without further charge,
                                      a portion of the dues must be allocated to the circulation
                                      income of the periodical.’’ 40 Fed. Reg. 58638 (Dec. 18, 1975)
                                      (emphasis added). However, if this statement were the
                                      agency’s position on the meaning of ‘‘the right to receive’’, it
                                      would prove far too much. This sentence alone, construed lit-
                                      erally, would call for allocation of income not when there was
                                      a ‘‘right to receive’’ (whether legal or moral) but whenever
                                      the periodical was ‘‘furnished’’, with or without the organiza-
                                      tion’s prior promise or prediction. If courts were obliged to
                                      defer to that sentence in the preamble to govern disputes like
                                      the current one, then the requirement of a ‘‘right to receive’’
                                      would be displaced by the notion of mere receipt; whenever
                                      members received a periodical (whether or not they had a
                                      right to receive it), income would be allocated.
                                         But the IRS does not advance that interpretation of the
                                      regulation (and for good reason, since it would ignore the
                                      actual language of the regulation). Rather, its position does
                                      acknowledge that there must be a showing of a ‘‘right’’ of
                                      some sort, and for that position the preamble language gives
                                      no support. We therefore find no articulated agency
                                      interpretation to which we could defer.
                                           D. The lack of comparable regulations
                                        To put in perspective the ‘‘right to receive’’ regulation at
                                      issue here, the IRS points to one regulation that looks to ‘‘an
                                      enforceable right to receive’’ 9 and another that looks to ‘‘a
                                      legally enforceable right to receive.’’ 10 In these regulations,
                                      the modifiers ‘‘enforceable’’ and ‘‘legally enforceable’’ either
                                      are surplusage or else suggest (as the IRS contends) that
                                        9 26 C.F.R. sec. 20.2039–1(b)(1)(ii), Estate Tax Regs. (emphasis added) (concerning the inclu-

                                      sion of an annuity or other payment stream in the gross estate of a decedent).
                                        10 26 C.F.R. sec. 1.823–6(c)(2)(ii), Income Tax Regs. (emphasis added) (concerning statutory

                                      underwriting income or loss for mutual insurance companies).




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                                      there can be a ‘‘right to receive’’ that is not legally enforce-
                                      able. And if there can be such a non-enforceable ‘‘right’’, then
                                      where such modifiers are absent (as in the regulation at
                                      issue), a ‘‘right to receive’’ should (the IRS contends) be
                                      considered to exist even where it is not enforceable.
                                         By way of example, the IRS points to one regulation where
                                      ‘‘right to receive’’ lacks such modifiers and is indeed under-
                                      stood to refer to a non-enforceable right: 11 26 C.F.R. section
                                      1.451–1(a) provides that ‘‘[u]nder an accrual method of
                                      accounting, income is includible in gross income when all the
                                      events have occurred which fix the right to receive such
                                      income and the amount thereof can be determined with
                                      reasonable accuracy.’’ (Emphasis added.) In Flamingo Resort,
                                      Inc. v. United States, 664 F.2d 1387, 1388 (9th Cir. 1982), the
                                      Court of Appeals for the Ninth Circuit held ‘‘that accrual [of
                                      income] was proper despite the absence of legal enforce-
                                      ability.’’ That is, in the income accrual context, a ‘‘right to
                                      receive’’ could apparently exist even where there was not
                                      necessarily a legally enforceable right to receive. If that is
                                      true with respect to the accrual regulation at issue in Fla-
                                      mingo Resort, then (the IRS contends) it is also true with
                                      respect to the circulation income regulation at issue here.
                                         ‘‘ ‘It is generally presumed that Congress acts intentionally
                                      and purposely’ when it ‘includes particular language in one
                                      section of a statute but omits it in another.’ ’’ See Lantz v.
                                      Commissioner, 132 T.C. at 139 (citing City of Chicago v.
                                      Envtl. Def. Fund, 511 U.S. 328, 338 (1994)). We likewise pre-
                                      sume that the Secretary of the Treasury acts intentionally
                                      when including language in one section of a regulation but
                                      not another. This principle, however, does not necessarily
                                      extend to construing common language that occurs in dif-
                                      ferent regulations, especially not when their context and pur-
                                      pose are very different, as they are here. The phrase ‘‘right
                                      to receive’’ appears in dozens of different contexts in the
                                         11 In fact the IRS points to two regulations, but one is clearly inapposite: 26 C.F.R. sec.

                                      1.691(a)–1(b), Income Tax Regs., provides that ‘‘the term income in respect of a decedent [IRD]
                                      refers to those amounts to which a decedent was entitled as gross income’’ (emphasis added);
                                      and Rollert Residuary Trust v. Commissioner, 752 F.2d 1128 (6th Cir. 1985), affg. 80 T.C. 619
                                      (1983), held that ‘‘[t]he key test for determining whether the decedent had a ‘right’ or was ‘enti-
                                      tled’ to the post-mortem bonus should be based on the likelihood, at the time of his death, that
                                      he would receive the bonus, not on his legal rights to it’’, id. at 1132 (emphasis added), thus
                                      showing that an ‘‘entitlement’’ might exist even where there may not be a legal right. However,
                                      a regulation involving an ‘‘entitlement’’ is hardly in pari materia with a regulation involving a
                                      ‘‘right to receive’’, especially where their respective contexts (IRD and UBTI) are so different.




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                                      Code and regulations. 12 Under the accrual regulation the IRS
                                      cites, ‘‘the issue is when does the right to receive the income
                                      * * * become ‘fixed’ for accrual purposes’’. Flamingo Resort,
                                      Inc. v. United States, 664 F.2d at 1388 (emphasis added).
                                      Thus, the focus of the cited provision in the accrual regula-
                                      tion is not whether there is revenue (which is presumed) but
                                      rather the timing of the recognition of revenue, whereas the
                                      focus of the circulation income regulation at issue here is not
                                      when but whether circulation income ought to be allocated at
                                      all.
                                         We therefore do not find that the meaning of ‘‘right to
                                      receive’’ in the circulation income regulation is informed by
                                      its meaning in the other regulations the IRS has cited.
                                           E. Our analysis of ‘‘the right to receive’’
                                        The interpretive question to be decided is whether ‘‘the
                                      right to receive’’ in 26 C.F.R. section 1.512(a)–1(f)(3)(iii) is, as
                                      NEA contends, a legal right or is instead, as the IRS contends,
                                      a ‘‘right’’ founded on a claim that is just or moral but not
                                      enforceable or legal. We hold that the ‘‘right to receive’’ must
                                      be a legal right.
                                        Pursuant to section 7805(a), the Secretary has the
                                      authority to ‘‘prescribe all needful rules and regulations for
                                      the enforcement of ’’ the unrelated business income tax. He
                                      thus had the power to articulate, by regulation, the standard
                                      by which membership dues would and would not be allocated
                                      to circulation income. He did not promulgate a regulation
                                      that allocates membership dues to circulation whenever
                                      members simply ‘‘receive a periodical’’, or whenever they have
                                      a ‘‘reasonable expectation of receiving a periodical’’, or when-
                                      ever they have a ‘‘just or moral claim to receive a periodical’’.
                                      Instead, the IRS’s regulation allocates dues when a ‘‘right to
                                      receive an exempt organization periodical is associated with
                                      membership * * * for which dues * * * are received’’. 26
                                      C.F.R. sec. 1.512(a)–1(f)(3)(iii) (emphasis added).
                                        We believe that ‘‘right to receive’’ is a term that the Sec-
                                      retary would not have used if he had intended the regulation
                                      to set any of those looser standards. To interpret that term
                                      to mean that mere receipt triggers allocation (which the IRS
                                         12 A computer search revealed 253 instances where provisions in the Code, in final regula-

                                      tions, or in temporary regulations use the phrase ‘‘right to receive’’.




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                                      does not argue), one must effectively ignore the word ‘‘right’’
                                      in the regulation. To interpret that term to mean that
                                      expectation of receipt triggers allocation (which the IRS does
                                      not explicitly argue), one must equate ‘‘expectation’’ with
                                      ‘‘right’’—two terms that are not at all interchangeable. To
                                      interpret that term to mean that a non-enforceable just or
                                      moral claim gives rise to a non-legal ‘‘right’’ that triggers
                                      allocation (which the IRS does appear to argue), one must
                                      read the regulation as conferring on the tax collector and the
                                      courts the responsibility of adjudicating justice and morality
                                      in the sphere of membership periodicals. While it cannot be
                                      said that the Internal Revenue Code never makes tax con-
                                      sequences turn on other-than-legal considerations, see, e.g.,
                                      sec. 6015(f) (granting relief from joint liability where ‘‘it is
                                      inequitable to hold the individual liable’’), it is nonetheless
                                      overwhelmingly true that the Code sets up rights and
                                      responsibilities that are determined by objective, reviewable,
                                      legal standards. The IRS does not explain, and we cannot
                                      imagine, the rules or standards by which one would make
                                      the non-legal determination of the justice or morality of a
                                      member’s claim to an organization’s periodical. We decline to
                                      hold that this difficult and improbable regime is enacted into
                                      the UBIT rules by the term ‘‘right to receive’’.
                                         Instead, we hold that membership dues are allocated to
                                      circulation income when the dues-paying members have a
                                      legal right to receive the organization’s periodical.
                                      IV. Whether NEA’s members had a legal ‘‘right to receive’’ the
                                         periodicals
                                           A. The parties’ arguments
                                         NEA claims that its members had no legally enforceable
                                      right to receive the periodicals, and therefore that an alloca-
                                      tion of membership dues under 26 C.F.R. section 1.512(a)–
                                      1(f)(3)(iii) is inappropriate. NEA also contends that by making
                                      the publications available free on the Internet, it negates any
                                      right that the members might otherwise have to receive the
                                      periodicals and therefore nullifies any requirement under the
                                      regulation for NEA to allocate its membership dues.
                                         The IRS counters that NEA failed to meet its burden of
                                      establishing that its members did not have a legal right to
                                      the periodicals and that the preponderance of the evidence




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                                      shows that NEA’s members did have a legally enforceable
                                      right to receive the publications. Further, the IRS contends
                                      that NEA is wrong about the significance of its Internet
                                      publications. For the reasons discussed below, we agree with
                                      the IRS.
                                           B. The right to receive the periodicals under NEA’s gov-
                                              erning documents
                                         Section 2–3(c) of NEA’s bylaws states that members are
                                      ‘‘eligible to receive * * * publications of the Association in
                                      accordance with the policies and procedures of the Associa-
                                      tion’’. This bylaw would appear to resolve the issue and grant
                                      NEA’s dues-paying members ‘‘the right to receive’’ the maga-
                                      zines. NEA rejoins that this provision does not say which
                                      publications would be received and argues that it maintained
                                      the right to unilaterally reduce or eliminate the number of
                                      periodicals it published.
                                         NEA’s bylaws do not explicitly reserve that right to NEA,
                                      and the following evidence shows that NEA could not halt
                                      publication of the magazines at its whim.
                                           1. NEA’s practical obligation to publish
                                           NEA’s
                                               periodicals at issue are not mere pamphlets or
                                      mimeographed newsletters but are substantial magazines,
                                      for which the ‘‘press schedule * * * is set a year in advance’’.
                                      Nothing in the record in this case would support the sugges-
                                      tion that NEA could simply halt publication. At any given
                                      moment when a member pays his dues, NEA has a year’s
                                      worth of periodical issues in the pipeline—and under the
                                      bylaws the member is ‘‘eligible’’ to receive them when they
                                      are published.
                                         Other provisions in NEA’s governing documents indicate
                                      that NEA could not simply cease publication at its discretion:
                                      Standing rule 9C, sections 1(b) and 2(b), and standing rule
                                      10D required that NEA publish proposed amendments to its
                                      constitution and bylaws and annual candidate pictures and
                                      statements in publications that it sends to members; and it
                                      was in NEA Today that NEA fulfilled that requirement. NEA
                                      argues that nothing would have prevented NEA from issuing
                                      the required notices to members in some other official NEA
                                      publication, including an annual report or special publica-




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                                      tion. NEA, however, provided no evidence that it has ever
                                      used these alternative means of communication. Clearly, NEA
                                      Today was NEA’s normal means of communicating with mem-
                                      bers, and NEA’s modus operandi was to use NEA Today to ful-
                                      fill the obligations imposed by its bylaws.
                                           2. Contracts with advertisers
                                         The record does not include NEA’s contracts with its adver-
                                      tisers, but it does show that NEA did have such contracts, in
                                      which it made commitments about the volume of its circula-
                                      tion. NEA has not shown how it could halt publication with-
                                      out violating those contractual commitments.
                                           3. Postal regulations
                                         Another practical impediment to NEA’s cessation of publica-
                                      tion results from the postal regulations. Section E211.10.5(c)
                                      of the Domestic Mail Manual (‘‘DMM’’), 13 as in effect for the
                                      years at issue, required that a periodical include a ‘‘state-
                                      ment of frequency’’ of publication, and section E211.5.3 pro-
                                      vided:
                                      All issues must be published regularly as called for by the statement of
                                      frequency. * * * If a publication does not maintain regular issuance
                                      according to its stated frequency, even after USPS notice, the RCSC [Rates
                                      and Classification Service Center] serving the known office of publication
                                      revokes the publication’s Periodicals mailing privileges.

                                      A favorable postal rate is important to an organization that
                                      sends mail to 2.5 million members. NEA therefore needed to
                                      fulfill the commitment it made in its statement of frequency.
                                           4. The irrelevance of a right to cease publication
                                        Even if we assume that NEA had the prerogative of ceasing
                                      the publication of one or both of the periodicals at issue, that
                                      assumption does not resolve the issue in NEA’s favor. Under
                                      the regulation, the question is simply whether dues-paying
                                      members have ‘‘the right to receive an exempt organization
                                      periodical’’. The fact is that during the periods at issue NEA
                                        13 See 39 C.F.R. sec. 111.1 (2011) (‘‘the U.S. Postal Service hereby incorporates by reference

                                      in this part, the Domestic Mail Manual’’). Sections 5.3 and 10.5(c) are identical in DMM Issue
                                      55 (Jan. 10, 2000), Issue 56 (Jan. 7, 2001), and Issue 57 (June 30, 2002). The parties’ stipulation
                                      includes excerpts from the 2005 version of the DMM, but we rely on the versions in effect for
                                      the years at issue without deciding whether their terms are regulations with the force of law
                                      or simply facts of which we take judicial notice pursuant to Federal Rule of Evidence 201.




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                                      did publish the periodicals. Given that the periodicals were
                                      published, NEA’s bylaws establish that the members were
                                      entitled to receive them. After each year-end, when NEA was
                                      preparing its tax returns, NEA already knew that it had pub-
                                      lished the magazines in the prior year and that its members
                                      had received them as they were entitled, making it irrelevant
                                      whether the members would have had a right to receive the
                                      magazines if NEA had stopped publishing them.
                                           C. NEA’s affiliates’ grant of the right to receive the periodi-
                                              cals
                                         All four of the State affiliate enrollment forms in the
                                      record list the same amount—$4.50—as the amount of a
                                      member’s dues allocable to a subscription to NEA Today; and
                                      we presume that the forms for the other affiliates are equiva-
                                      lent. 14 NEA acknowledges that the State membership enroll-
                                      ment forms in the record ‘‘mentioned’’ the publications as a
                                      benefit of membership. But NEA claims that it ‘‘does not con-
                                      trol those state entities or the language on their application
                                      forms.’’ Even if true, however, that claim of non-control does
                                      not undo the effect of the affiliates’ statements.
                                         The only means for joining NEA is to join an affiliate, and
                                      NEA authorizes its affiliates to solicit membership applica-
                                      tions. The NEA-authorized affiliates’ forms promise the
                                      publications. By signing a State affiliate’s enrollment form,
                                      an applicant agrees to pay membership dues to the affiliate
                                      and to NEA in exchange for, in part, receiving a subscription
                                      to NEA’s periodicals. The affiliate thus induces the applicant’s
                                      payment of dues in return for (inter alia) the promise that
                                      NEA will provide the periodical. In so doing, the affiliate only
                                      echoes what NEA regularly announced on its masthead (‘‘NEA
                                      Today is mailed to all NEA members as a benefit of member-
                                      ship’’ (emphasis added)) and what NEA’s Handbook stated
                                      (‘‘NEA members receive a variety of timely and informative
                                      periodicals, including NEA Today’’). Accordingly, the following
                                      common law principles of agency apply:

                                        14 See Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946) (‘‘The rule

                                      is well established that the failure of a party to introduce evidence within his possession and
                                      which, if true, would be favorable to him, gives rise to the presumption that if produced it would
                                      be unfavorable’’), affd. 162 F.2d 513 (10th Cir. 1947).




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                                      In order to bind the principal [i.e., NEA], the agent [i.e., the affiliate] must
                                      have either actual or apparent authority, or the principal must ratify the
                                      agent’s acts. Trans World Travel v. Commissioner, * * * [T.C. Memo.
                                      2001–6, 81 TCM (CCH) 979, 983]. Authority may be granted by express
                                      statements or may be derived by implication from the principal’s words or
                                      actions. Restatement, Agency 2d, sec. 26 (1957). Whether an agent is
                                      authorized to act for the principal is decided by taking into account all the
                                      circumstances, including the relationship of the parties, the common busi-
                                      ness practices, the nature of the subject matter, and the facts of which the
                                      agent has notice concerning objects the principal desires to accomplish. Id.
                                      at sec. 34. * * * [Gouveia v. Commissioner, T.C. Memo. 2004–256, 88 TCM
                                      (CCH) 424, 431.]

                                        An individual signing an affiliate’s enrollment form would
                                      have every reason to believe that the State affiliate, as the
                                      agent, had authority to bind NEA, the principal, to delivering
                                      the periodicals as the benefit that NEA had promised and
                                      according to the publication schedule that NEA had
                                      announced. The State enrollment forms explicitly stated that
                                      a specific portion of the member’s dues went toward a one-
                                      year subscription to NEA Today, and the enrollment forms
                                      correctly indicated that joining the State affiliate was not
                                      possible without also joining NEA.
                                        The State affiliates had at least apparent authority as
                                      agents to bind NEA to provide the periodicals; and NEA’s
                                      words and actions as the principal affirmed the agent-affili-
                                      ates’ representations, giving NEA members the legal right to
                                      receive the periodicals.
                                           D. Availability of the periodicals on the Internet
                                           NEA’s
                                               final argument is that even if its members had a
                                      legal right to receive the periodicals, the fact that NEA made
                                      the periodicals available free to the general public on the
                                      Internet negates the regulation’s allocation requirement. 15
                                      That is, NEA contends in effect that because both members
                                      and non-members can receive the periodicals on the Internet
                                        15 In support of this argument, NEA cites an unpublished Field Service Advice Memorandum

                                      and an unpublished Private Letter Ruling. The IRS objects to this use of an FSA and a PLR,
                                      distinguishes them from NEA’s case, and counter-cites two unpublished Technical Advice Memo-
                                      randa. However, such unpublished determinations ‘‘may not be used or cited as precedent’’, sec.
                                      6110(k)(3), and we decline to consider any of these determinations, see Abdel-Fattah v. Commis-
                                      sioner, 134 T.C. 190, 202 & n.15 (2010). NEA also cites IRS Announcement 2000–84, 2000–2
                                      C.B. 385, 385, which states: ‘‘The growing use of the Internet by exempt organizations raises
                                      questions regarding whether clarification is needed concerning the application of the Code to
                                      Internet activities’’. However, this Announcement says nothing about advertising or circulation
                                      income.




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                                      (100)                            NEA v. COMMISSIONER                                        121


                                      without regard to the payment of dues, it is not fair to say
                                      that members receive the periodicals in return for the pay-
                                      ment of dues. This contention is contradicted, however, by
                                      two facts:
                                         First, the Internet versions of the periodicals do not
                                      include all of the content of the paper editions. The paid
                                      advertising and the letters to the editor are available only in
                                      the print edition. The record includes no evidence that these
                                      features are of no value to members.
                                         Second, that NEA goes to significant expense and trouble to
                                      produce the paper editions shows that paper copies of the
                                      periodicals have value even in the Internet era. We take
                                      judicial notice of the fact that many periodicals have both on-
                                      line editions that one may access without cost and paper edi-
                                      tions for which subscriptions must be paid. Evidently, a
                                      market still exists for paper publications. A user who has on-
                                      line access to a publication may still value receiving a paper
                                      copy. NEA put on no evidence that its members do not value
                                      the paper periodicals, and its decision to persist in publishing
                                      them is strong evidence to the contrary.
                                         Allocation of dues to circulation income, notwithstanding
                                      the free availability of most of the periodicals’ content on the
                                      Internet, is consistent with the opinion of the Court of
                                      Appeals for the Seventh Circuit in Am. Med. Association v.
                                      United States, 887 F.2d 760 (7th Cir. 1989). The American
                                      Medical Association (‘‘AMA’’) is a tax-exempt organization,
                                      organized ‘‘to promote the science and art of medicine for the
                                      betterment of public health.’’ Id. at 762. To further that mis-
                                      sion, AMA published two periodicals, the Journal of the Amer-
                                      ican Medical Association (JAMA) and the American Medical
                                      News (AM News) Id. The periodicals contained medical arti-
                                      cles as well as paid advertising. Id. AMA members received
                                      the periodicals at no additional cost as a benefit of member-
                                      ship. Id.
                                         To attract more advertising sponsors, the AMA informed
                                      advertisers that it was sending complimentary copies of JAMA
                                      and AM News to certain prized groups of physicians called
                                      controlled circulation groups. Id. Many of the targeted physi-
                                      cians were also dues-paying members of AMA and therefore
                                      would have been entitled to receive JAMA and AM News with-
                                      out cost anyway, because of their membership. Id. The AMA
                                      did not directly inform these targeted physicians that they




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                                      122                137 UNITED STATES TAX COURT REPORTS                                      (100)


                                      were entitled to the free copies as a benefit of their member-
                                      ship. The AMA also did not refund any portion of the member-
                                      ship dues to these prized dues-paying physicians. Id.
                                         The Court of Appeals for the Seventh Circuit held that
                                      under 26 C.F.R. section 1.512(a)–1(f)(3)(iii), AMA had to allo-
                                      cate a portion of its membership dues from the controlled
                                      group to circulation income to the same extent as with the
                                      dues of AMA’s other members. Id. at 777. The court reasoned
                                      that ‘‘[a]lthough our over-generous physicians paid more for
                                      the journal than they needed to, this does not change the
                                      basic fact—they did pay for the journal, and the publisher
                                      was only too happy to keep the unnecessary payment.’’ Id.
                                      The court concluded that a commercial publisher similarly
                                      situated to the AMA would have been ‘‘laughing all the way
                                      to the bank’’ as it retained the money paid by the unknowing
                                      physicians while purging their names from the controlled cir-
                                      culation list to make sure that those physicians did not
                                      receive two copies of the publications. Id. Similarly, the court
                                      held, dues were allocable to circulation income even in the
                                      case of AMA members who would have received the periodi-
                                      cals apart from their payment of dues (i.e., doctors who were
                                      in the controlled circulation group and received free copies as
                                      such). In the same way, dues from NEA’s members are allo-
                                      cable to circulation income even though members can access
                                      the content apart from their payment of dues (i.e., via the
                                      Internet).
                                         NEA attempts to distinguish its situation from that in
                                      American Medical Association. NEA argues that its members
                                      had ‘‘no right to receive’’ NEA Today and This Active Life
                                      because ‘‘anyone can get the publications for free’’, whereas
                                      in American Medical Association only a limited number of
                                      targeted members received the periodicals for free. We dis-
                                      agree that this distinction makes a difference. Whether the
                                      periodical content is available without cost to only a few
                                      members (as with ‘‘controlled circulation’’ in American Med-
                                      ical Association) or to all members and the world at large (as
                                      with NEA’s periodicals on the Internet), the question is the
                                      same: Does the alternative free availability of a publication
                                      to a member nullify his right to receive the publication that
                                      results from his payment of dues? We agree with the Court
                                      of Appeals for the Seventh Circuit that the answer is no.
                                      Like the hypothetical commercial publisher who laughed all




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                                      (100)                            NEA v. COMMISSIONER                                        123


                                      the way to the bank in American Medical Association, NEA
                                      could induce the payment of dues by telling its members that
                                      a portion of their membership dues is to pay for a magazine
                                      subscription but at the same time could know that the
                                      publications are available for free on the Internet. NEA’s
                                      arrangement with its members required them to pay for the
                                      paper editions of the periodicals when they paid their dues,
                                      and the additional availability of an on-line edition did not
                                      change the fact that the members obtained the paper edi-
                                      tions by paying their dues.

                                                                               CONCLUSION

                                         26 C.F.R. section 1.512(a)–1(f)(3)(iii), Income Tax Regs.,
                                      requires an allocation of membership dues to circulation
                                      income if the exempt organization’s members have a legal
                                      right to receive the publications. For the years at issue, NEA
                                      members had such a legal right to receive the periodicals.
                                      The fact that NEA also made most of the content of the
                                      periodicals available on the Internet does not change this
                                      conclusion. Consequently, the IRS was correct in requiring
                                      NEA to allocate a portion of its membership dues to circula-
                                      tion income. NEA does not dispute the IRS’s computations,
                                      and therefore NEA must allocate a portion of its members’
                                      dues in the amounts that the IRS determined.
                                         To reflect the foregoing,
                                                                         Decision will be entered under Rule 155.

                                                                               f




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