                          T.C. Memo. 1999-206



                        UNITED STATES TAX COURT



    PLANNED PARENTHOOD FEDERATION OF AMERICA, INC., Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent1



       Docket No. 13922-97.                  Filed June 22, 1999.


       Albert G. Lauber, Jr., Milton Cerny, Lloyd H. Mayer,

Julie W. Davis, and Carl S. Kravitz, for petitioner.

       Dianne I. Crosby and Bettie N. Ricca, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


       WELLS, Judge:   Respondent determined deficiencies in

petitioner's Federal income taxes as follows:

                       Year       Deficiency

                       1991        $51,441
                       1992         33,549


1
     This case was consolidated, for trial purposes only, with
Common Cause v. Commissioner, 112 T.C.     (1999), in which an
opinion is also being issued today.
                                  - 2 -


                      1993           49,210

     Unless otherwise indicated all section references are to the

Internal Revenue Code in effect for the years in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.

     The issues presented by the parties include:     (1) Whether,

for purposes of the unrelated business income tax provisions of

section 511, petitioner is carrying on a list rental business

that is not substantially related to its exempt purpose; (2) if

so, whether the list brokers, list managers, and computer house

used by petitioner are agents of petitioner for the purpose of

carrying on such a business; and (3) whether the mailer's list

rental payments are royalties that are excluded from unrelated

business taxable income pursuant to section 512(b)(2).

                             FINDINGS OF FACT

     Some of the facts and certain exhibits have been stipulated

for trial pursuant to Rule 91.      The parties' stipulations of fact

are incorporated herein by reference and are found as facts in

the instant case.

      Petitioner is a corporation with its principal office in

New York, New York.

     Petitioner is exempt from Federal income tax as an

organization described in section 501(c)(3).     Petitioner was

formed for the purpose of assuring quality reproductive health

care for women.   Petitioner maintains a list of names and
                               - 3 -


addresses of its members, donors, and other supporters

(collectively supporters) to whom it regularly sends mail (master

list).   The master list also contains other information about the

supporters, including their gender and the frequency, recency,

and amount of contributions that each supporter has made to

petitioner.   Petitioner communicates by direct mail with its

supporters.

     The master list is kept on large computerized databases that

petitioner regularly maintains and updates.   Because it is very

valuable, petitioner builds its master list by acquiring new

names and addresses and guards its master list against misuse.

     From the master list, petitioner creates another list that

contains names, addresses, and other limited information about a

segment of petitioner's supporters (rental list).   Petitioner's

master and rental lists are intangibles in which petitioner has

ownership rights.   Petitioner's master and rental lists are

valuable because they are collections of names and addresses of

people with similar characteristics such as willingness to

respond to solicitations received by mail and interest in

supporting certain types of tax-exempt organizations.    Petitioner

makes its rental list available for rent or exchange with other

organizations.

     The direct mail and mailing list industry has its own

industry standards and trade practices.   In structuring its list

rental transactions, petitioner abides by the trade practices of
                               - 4 -


the mailing list industry and arranges its transactions roughly

on the same terms and conditions that are standard in the

industry.

     In a list rental transaction, the party (mailer) seeking to

send mail to the individuals or entities named on a list (mailing

list) pays the owner of the mailing list (list owner or owner)

for the one-time right to send mail to the named individuals or

entities.   If any of the named individuals or entities to which

the mailer has mailed responds to the mailing, the mailer then

"owns" that name and can continue to send that named individual

or entity additional mail.   If the named individual or entity

does not respond to the one-time mailing, the mailer may not

directly send mail to that named individual or entity again.

List owners "seed" their mailing lists with names and addresses

of their employees or of the employees of their list managers to

make sure that such unauthorized mailings do not occur.

     Petitioner's rental list is stored at Triplex Direct

Marketing Corp. (Triplex), a professional computer service

business that stores and maintains computer databases for mailing

lists.   From petitioner's rental list, Triplex produces a copy on

labels or magnetic tape for mailers.   Although petitioner has

used Triplex's services since the early 1980's, a written

contract between petitioner and Triplex does not exist.   Triplex

corresponds with petitioner regarding the fees it charges for
                               - 5 -


computer services.   Triplex provides similar services to both

nonprofit and commercial entities on the same terms.

     Petitioner retains Craver, Mathews, Smith, & Company, Inc.

(CMS), to assist it in raising funds and building its master and

rental lists.   Petitioner first contracted with CMS for list

management services during the 1980's.   Petitioner renewed its

contract with CMS on December 17, 1990, October 7, 1992, and

February 4, 1993.2   As petitioner's list manager, CMS determines

the overall management strategy and supervises all list rental

transactions involving petitioner's rental list.

     CMS retains the services of other list managers to handle

the details of the list rental transactions.   Before August 1993,

CMS retained the services of Names in the News (Names), a

professional list manager and list broker that regularly handles

both nonprofit and commercial mailing lists.   On July 23, 1993,

CMS communicated with petitioner regarding its choice of American

List Counsel, Inc. (ALC), as list manager for future list rental

transactions.   After August 1993, CMS retained the services of




2
     Petitioner renewed its contract with CMS sometime between
August 1993 and February 1995. The contract provides that it is
effective beginning August 1993, which is within the period in
issue in the instant case. Petitioner contends, however, that
the terms of the contract were not agreed upon until February
1995, which is after the period in issue in the instant case, and
petitioner argues that the terms of this contract therefore are
not relevant to the instant case. We find that the date the
contract became binding is irrelevant because after August 1993
the rental transactions involving petitioner's rental list were
actually arranged in accordance with the terms of the contract.
                               - 6 -


ALC as petitioner's list manager.      The list manager3 is

responsible for the day-to-day activities regarding petitioner's

rental list.   The list manager promotes list rental transactions

involving petitioner's rental list via distribution of data cards

(printed cards providing basic information as to price per

thousand and all other list rental information for a given list),

solicitations, and personal sales calls directed at list brokers

and potential customers.   The list manager advertises

petitioner's rental list in the same places as exempt and

nonexempt entities advertise their lists. The list manager pays

all costs of promoting and marketing petitioner's rental list and

does not charge petitioner additional fees for such services.

     CMS reviews the data cards, advertisements, and promotional

materials used by the list manager.      Petitioner also reviews all

data cards, advertisements, and promotional materials used by the

list manager in connection with petitioner's rental list.

     No written contract exists between petitioner and the list

manager.   However, the form language on Names' list orders during

1991 and 1992 states:   "We will bill mailer on behalf of list

owner; payment (less commission) will be made upon receipt of

payment from the mailer.   We act only as agent for the list owner


3
     For the most part, Names and ALC conducted transactions
involving petitioner's rental list in the same manner. To that
extent, we will refer to them as the list manager for the
remainder of this opinion. To the extent that there are
differences in any particular rental transaction during the
period that either Names or ALC was petitioner's list manager, we
will refer to the respective list manager individually.
                                - 7 -


in these transactions."    During 1993, Names changed that language

to state:    "We will bill mailer on behalf of list owner; payment

(less commission) will be made upon receipt of payment from the

mailer.    We act only as agent for the list owner or the mailer in

these transactions."

     The list manager can also act for the mailer as a list

broker.    The activities of a list broker include:   (1) Searching

advertisements and databases for appropriate list offerings for

the mailer to rent, (2) coordinating the rental transaction on

behalf of the mailer, (3) collecting payment from the mailer to

remit to the list manager or list owner, and (4) analyzing the

results of the mailing to determine whether it was successful.

The same list broker does not participate in every transaction.

Rather, each mailer chooses its own list broker to act on its

behalf.

     In a typical list rental transaction involving petitioner's

rental list, the mailer contacts the list manager either directly

or through a list broker and submits a proposed list rental

order.    If any mailer, other than petitioner's affiliates,

contacts petitioner directly, petitioner refers that mailer to

the list manager.    Along with the list order, the mailer

indicates the time of the mailing and encloses a copy of the

materials to be sent.    The list manager forwards the order to CMS

for approval.    CMS reviews the proposed mailing pursuant to

guidelines that petitioner provides and either approves or denies
                                 - 8 -


the list order.   Occasionally, CMS forwards the list order to

petitioner for final approval.

     Upon receiving approval, the list manager arranges with

Triplex to fill the order.   Triplex produces a copy of the rental

list according to the mailer's specifications and sends it to the

mailer's mail house.

     Petitioner divides its rental list into specific segments

based on the recency of the donors' contributions.    Pursuant to

the recommendations of the list manager and CMS, petitioner

charges a different base price for each segment.    Before August

1993, the base price included a 10-percent list management

commission retained by Names, a 15-percent commission retained by

CMS, and a 10-percent list brokerage commission retained by

either the independent list broker or Names (if the mailer was

not using an independent broker).    After August 1993, the base

price includes a 25-percent list management commission divided by

ALC and CMS4 and a 20-percent list brokerage commission retained

by either the independent list broker or ALC (if the mailer is

not using an independent list broker).    The base price also

includes a fee of $3.90 (running fee) remitted by the list

manager to Triplex to pay for the computer charges incurred in

producing the copy of petitioner's rental list.



4
     The method by which commissions are divided between CMS and
ALC is outlined in the contract between CMS and ALC which was
produced as evidence in the instant case but was placed under
seal at the request of ALC and CMS.
                               - 9 -


     It is standard in the mailing list industry to include the

management commission, brokerage commission, and running fees in

the base price.   The commissions paid to the list manager, CMS,

and the list brokers are within the range of usual and customary

amounts paid for such services.

     For an additional cost, a mailer can further customize its

order.   For an extra fee per 1,000 names, a mailer can request

that the names it rents be selected by certain other criteria.

Selection criteria (special selections) include:   Gender,

ethnicity, State, and ZIP code.   Petitioner, pursuant to the

recommendation of CMS, determines which special selections to

offer and how much to charge the mailer.    Petitioner includes the

special selection information on its data cards.   Triplex

actually performs the special selections.   Triplex charges

different fees for performing different special selections and

regularly notifies petitioner of the fees for such selections.

Before August 1993, the amount that the mailer was charged for

special selection fees was equal to the amount that Triplex

charged petitioner and did not include any commissions paid to

CMS, the list manager, or the list brokers.   After August 1993,

the amount that the mailer is charged for special selection fees

exceeds the amount which Triplex charges petitioner and includes

a 20-percent list brokerage commission and a 25-percent list

management commission retained by CMS and ALC.
                               - 10 -


     The mailer also determines the type of media on which it

receives petitioner's rental list.      For the base price, the

mailer receives the rental list printed on Cheshire labels

(ungummed labels that are affixed by machine).      For an extra fee,

the mailer can receive the rental list on pressure-sensitive

labels or on magnetic tape.    Triplex charges petitioner extra

fees for the provision of the rental list on the different media.

Before August 1993, petitioner charged the mailer, as media fees,

the same amount which Triplex charged petitioner.      After August

1993, CMS, with petitioner's approval, set prices for the media

fees in excess of the Triplex fees.      A mailer determines the way

the rental list is shipped, and, depending on the mailer's

choice, Triplex charges petitioner a shipping fee.      Petitioner

charges the mailer a shipping fee equal to the amount that

Triplex charges petitioner.

     As is standard in the industry, the mailer is billed and

payment is collected by the following process.      After filling an

order, Triplex bills the list manager for the fees associated

with filling the order including running, special selection,

media, and shipping fees.   The list manager then bills the mailer

or the mailer's list broker.    If the mailer uses an independent

list broker, the bill is for the listed base price, plus any

special selection, media, and shipping fees, less the list

brokerage commission (which was included in the base price).

Before it sends the bill to the mailer, the list broker adds its
                               - 11 -


commission to the bill.   The mailer pays the list broker the full

price reflected on the bill that the mailer receives.    The list

broker deducts its commission and remits the remaining payment to

the list manager.    If the list manager acts as the list broker in

the transaction, the bill sent to the mailer includes the full

base price (including the list brokerage commission), plus any

special selection, media, and shipping fees, and the mailer

remits the full payment directly to the list manager.

     After receiving payment from the mailer or its list broker,

the list manager deducts its commission, pays Triplex its fees,

and remits the remainder to CMS.   CMS deducts its commission and

remits the remainder to petitioner as part of a monthly

accounting for all the list rental transactions of the past

month.   Before August 1993, if a mailer canceled its order, it

was required to pay a "processing fee" of $50.    The fee was

retained by Names.

     List rental transactions are carried on continuously.

During 1991, 1992, and 1993, petitioner's gross receipts (base

price less commissions, Triplex running fees, and other

miscellaneous fees) from its list rental transactions were

$191,415, $161,273, and $192,185, respectively.    For each of the

years in issue petitioner timely filed Form 990, Return of

Organization Exempt from Income Tax, on which it reported the

income it received from its rental list transactions as

nontaxable royalty income.   Petitioner also timely filed Form
                                  - 12 -


990-T, Exempt Organization Business Income Tax Return, for each

of the years in issue.

                                  OPINION

     Section 511(a)(1) imposes the unrelated business income tax

(UBIT) on the unrelated business taxable income (UBTI) of certain

tax-exempt organizations.    Section 512 defines UBTI as follows:

     SEC. 512. UNRELATED BUSINESS TAXABLE INCOME.

           (a) Definition.--For purposes of this title--

              (1) General Rule.--Except as otherwise
           provided in this subsection, the term "unrelated
           business taxable income" means the gross income
           derived by any organization from any unrelated
           trade or business (as defined in section 513)
           regularly carried on by it, less the deductions
           allowed by this chapter which are directly
           connected with the carrying on of such trade or
           business, both computed with the modifications
           provided in subsection (b).

Accordingly, income is UBTI if it arises from a regularly

carried-on trade or business that is not substantially related to

the organization's tax-exempt purpose.      See sec. 1.513-1(a)

Income Tax Regs.    Royalties, however, are excluded from UBTI

pursuant to section 512(b)(2).5      See Sierra Club, Inc. v.


5
     Sec. 512(b) provides:

          SEC. 512(b). Modifications.--The modifications
     referred to in subsection (a) are the following:

       *       *      *       *        *      *      *

               (2) There shall be excluded all
            royalties (including overriding
            royalties) whether measured by
                                                         (continued...)
                               - 13 -


Commissioner, 86 F.3d 1526, 1531 (9th Cir. 1996), affg. T.C.

Memo. 1993-199 and revg. on another issue 103 T.C. 307 (1994);

Disabled Am. Veterans v. Commissioner, 94 T.C. 60, 76 (1990) (DAV

II), revd. on other grounds 942 F.2d 309 (6th Cir. 1991).

     Neither the Code nor the regulations define the term

"royalty" for UBIT purposes.   Instead, section 1.512(b)-1, Income

Tax Regs., provides that "Whether a particular item of income

falls within any of the modifications provided in section 512(b)

shall be determined by all the facts and circumstances of each

case."   Petitioner bears the burden of proving that the list

rental payments are royalties that are excluded from UBTI

pursuant to section 512(b)(2).   See Rule 142(a).

     In the instant case, respondent contends that, in each of

the list rental transactions, the mailer's entire payment

(including the amounts paid to the list brokers, list manager,

CMS, and Triplex) constitutes UBTI to petitioner because

petitioner regularly carries on a list rental business that is

not substantially related to its exempt purpose.    In that regard,

respondent contends that the list brokers, list manager, CMS, and

Triplex are petitioner's agents for the purpose of carrying on

the list rental business.   Petitioner disputes respondent's


5
 (...continued)
          production or by gross or taxable
          income from the property, and all
          deductions directly connected with
          such income.
                              - 14 -


contentions and, additionally, contends that the mailers'

payments are excluded from UBTI as royalties pursuant to section

512(b)(2).   Before addressing respondent's trade or business and

agency arguments, we address the royalty issue.

     In the instant case, the parties accept the definition of a

royalty found in Rev. Rul. 81-178, 1981-2 C.B. 135.6

Additionally, the parties agree that petitioner's rental list is

a valuable intangible.   However, the parties disagree as to

whether any portion of the list rental transaction constitutes

compensation for goods and services.   The parties further



6
      In Rev. Rul. 81-178, 1981-2 C.B. 135, the Internal Revenue
Service sought to clarify the definition of royalty for purposes
of sec. 512(b)(2). The ruling deals with two different factual
situations. In the first situation, various businesses pay the
taxpayer, an exempt organization, for the right to use the
taxpayer's symbols and the signatures and likenesses of its
members in promoting their products. See id. In the second
situation, the businesses pay the taxpayer in return for its
members' making appearances in endorsement of the businesses'
products. See id., 1981-2 C.B. at 136. The ruling provides, in
pertinent part:

          To be a royalty, a payment must relate to the use
     of a valuable right. Payments for the use of
     trademarks, trade names, service marks, or copyrights,
     whether or not payment is based on the use made of such
     property, are ordinarily classified as royalties for
     federal tax purposes. * * * On the other hand,
     royalties do not include payments for personal
     services. [Id.; citations omitted.]

In the first situation, the ruling concludes that, because the
exempt organization receives payment solely for the use of its
intangibles, the payment is a royalty. See id. In the second
situation, the ruling concludes that, because the organization
receives payment for the services of its members in endorsing
products, the payment is not a royalty. See id.
                               - 15 -


disagree as to whether the presence of any compensation for goods

and services in the list rental payment precludes royalty

treatment, pursuant to section 512(b)(2), for any portion of the

list rental payment.   The issue has been the subject of much

litigation.   See Disabled Am. Veterans v. United States, 227 Ct.

Cl. 474, 650 F.2d 1178 (1981) (DAV I), affd. after remand 704

F.2d 1570 (Fed. Cir. 1983); Disabled Am. Veterans v.

Commissioner, supra; Sierra Club, Inc. v. Commissioner, T.C.

Memo. 1993-199.   We discuss each of those cases in more detail

below.

Earlier Cases

     Disabled American Veterans

     In DAV I, the exempt organization engaged in the rental of

its mailing list, but, unlike petitioner, the organization itself

performed all of the list management and list fulfillment

functions.    On the question of whether the list rental payments

were royalties, the Court of Claims concluded that the list

rentals "[were] the product of extensive business activity by DAV

and [did] not fit within the types of 'passive' income set forth

in section 512(b)."    Disabled Am. Veterans v. United States, 650

F.2d at 1189.   The court found that the payments were more akin

to rent from the use of personal property than to royalties, and

held that the income from the transaction was not excluded from

UBTI under section 512(b).   See id. at 1189-1190.
                                 - 16 -


       In DAV II, the same exempt organization that appeared before

the Court of Claims in DAV I appeared before this Court; however,

a different taxable year was in issue.     Although DAV II involved

the same parties and legal issues as DAV I, we concluded that the

issuance of Rev. Rul. 81-178, supra, had changed the legal

climate.    Consequently, we held that collateral estoppel did not

apply.    See Disabled Am. Veterans v. Commissioner, supra at 69.

Relying on the definition of royalty contained in Rev. Rul. 81-

178, supra, we concluded that there is no distinction between

active and passive royalties for section 512(b)(2) purposes.     See

Disabled Am. Veterans v. Commissioner, supra at 75.      We also made

it clear that we could distinguish payments for the use of an

intangible, which constitute a royalty from payments for

advertising, compensation for services, or other profits

masquerading as royalties.     See id. at 77.   The Court of Appeals

for the Sixth Circuit, reversing the decision of this Court, held

that the issuance of Rev. Rul. 81-178, supra, was not a

sufficient change of legal climate to preclude collateral

estoppel.    See Disabled Am. Veterans v. Commissioner, 942 F.2d at

314.

       Sierra Club

       The issue of whether income from a mailing list transaction

is UBTI arose again in Sierra Club, Inc. v. Commissioner, T.C.

Memo. 1993-199.      Unlike the exempt organization in DAV I and DAV

II, the exempt organization in Sierra Club did not itself perform
                               - 17 -


any of the list management or list fulfillment functions.

Rather, as in the instant case, a professional list manager

performed all list management functions, and a computer house

performed all list fulfillment functions.    On cross-motions for

summary judgment, we held that the payment received by the exempt

organization was, at least in part, a royalty.    We rejected the

Commissioner's argument that royalties, in the context of section

512(b)(2), meant only those earned passively.    We also held,

however, that an issue of fact existed regarding whether any part

of the list rental transaction price, specifically the fees for

special selections, media, and shipping, was payment for goods

and services.

       Before appeal, the parties in Sierra Club settled the issue

of whether any part of the list rental payment was for goods or

substantial services provided in connection with the rental

transactions.    See Sierra Club, Inc. v. Commissioner, 103 T.C. at

310.    In affirming our decision as to the royalty issue, the

Court of Appeals for the Ninth Circuit held that the term

"royalty", as it is used in section 512(b)(2), "is by definition

'passive' and thus cannot include compensation for services

rendered by the owner of property."     Sierra Club, Inc. v.

Commissioner, 86 F.3d at 1532.     Additionally, the court reasoned

that, because the exempt organization did not itself provide any

services to the mailer, the entire amount it actually received

was a royalty for UBIT purposes.    See id. at 1535-1536.
                              - 18 -


Royalty-Related Activity or Services

     In the instant case, we must decide whether any part of the

mailing list rental payments constitutes compensation to

petitioner for goods or services.7     In each mailing list rental

transaction, the mailer's rental payment compensates petitioner

for the mailer's use of petitioner's list and, also, compensates

the list manager, CMS, Triplex, and the list brokers for their

participation in the transaction.    Certain of these activities

exploit and protect the intangible (i.e., the list).     We have

held that the owner of an intangible may engage in certain

activities to exploit and protect the intangible which do not

change the nature of the payment received.     See Wm. J. Lemp

Brewing Co. v. Commissioner, 18 T.C. 586, 596 (1952) (payment to

the owner of the intangible was a royalty even though the owner

reserved the right to supervise the advertising, marketing, and

quality of the product which was to bear the trademarked name);

see also Mississippi State Univ. Alumni, Inc. v. Commissioner,

T.C. Memo. 1997-397 (review of marketing material and endorsement

of an affinity credit card program bearing the name of an exempt

organization were not services provided to the card issuing

company).   To hold otherwise, it seems to us, "would require us

to hold that any activity on the part of the owner of intangible



7
     This is the same issue that the parties settled in DAV II
and Sierra Club and that the courts therefore did not have before
them.
                              - 19 -


property to obtain a royalty, renders the payment for the use of

that right UBTI and not a royalty."    Sierra Club, Inc. v.

Commissioner, 86 F.3d at 1536.   Accordingly, in the instant case,

we carefully scrutinize the activities of each of the parties

compensated in the list rental transaction to ascertain whether

they are undertaken to exploit or protect petitioner's list.

Hereinafter, we refer to activities which are undertaken to

exploit or protect the list as royalty-related activities.

     The List Manager

     In a list rental transaction, the list manager's activities

include:   (1) Promoting list rental transactions involving

petitioner's rental list via advertising, distribution of data

cards, solicitations, and personal sales calls directed at list

brokers and potential customers; (2) forwarding the list rental

order to CMS for approval; (3) arranging with Triplex to fill the

order; (4) billing the mailer or the mailer's list broker; (5)

paying Triplex the amounts it is owed; and (6) remitting payment

to CMS.

     In the context of the list rental transaction, a list owner

has certain intangible information regarding the individuals and

entities whose names and addresses appear on its list.

Specifically, the list owner knows that such individuals and

entities are responsive to direct mail and willing to support

certain tax-exempt organizations.   To exploit that knowledge, the

list owner must first let others know that the list is available.
                               - 20 -


In the instant case, that is accomplished through the promotional

efforts of the list manager.   Accordingly, we conclude that the

list manager's activities in distributing data cards and other

forms of advertising directed to list brokers and potential

mailers on petitioner's behalf are royalty-related activities.

     Additionally, to protect the value of its mailing list, a

list owner will not allow the individuals and entities whose

names appear on the list to receive mail that the list owner

considers objectionable.   Accordingly, the list owner must engage

in activities to ensure that the list is rented only to

appropriate mailers.   Consequently, we conclude that the list

manager's activities in forwarding the list orders to CMS for

approval are royalty-related activities.

     To exploit its intangible and convey it to the user, the

list owner must also render it in tangible form.   In the list

rental context, that is accomplished by producing a copy of the

list for the mailer.   Consequently, we conclude that, the list

manager's activities in forwarding the order to Triplex for

fulfillment and obtaining from Triplex a copy of the rental list

are royalty-related activities.

     Finally, the owner of the intangible is entitled to be paid

for its use.   Accordingly, we conclude that the list manager's

activities in billing the mailer, paying Triplex, and remitting

payment to CMS are royalty-related activities.   On the basis of
                               - 21 -


the foregoing, we conclude that all of the activities in which

the list manager engages are royalty-related activities.

     CMS

     The activities of CMS include:     (1) Reviewing the data

cards, advertisements, and promotional materials used by the list

manager; (2) reviewing the proposed mailing pursuant to

guidelines that petitioner provides; (3) occasionally forwarding

the list order to petitioner for final approval; and (4)

remitting payment to petitioner.

     As we discussed above, the data cards are the means by which

the list manager promotes and advertises petitioner's rental

list.   Review of promotional and advertising material by the

owner of an intangible is not inconsistent with royalty

treatment.    See Wm. J. Lemp Brewing Co. v. Commissioner, supra;

Mississippi State Univ. Alumni, Inc. v. Commissioner, supra.

Similarly, as we discussed above, review of all list rental

transactions is part of the protection of the list.     Finally, as

discussed above, the list owner is entitled to be paid.

Accordingly, CMS' activities in remitting payment to petitioner

are royalty-related activities.    Consequently, we conclude that

all of the activities in which CMS engages are royalty-related

activities.

     Petitioner
                              - 22 -


     Petitioner does not directly engage in any significant

activities with regard to a rental list transaction.     The only

activities in which petitioner directly engages are review of the

promotional materials and occasional approval of list rental

transactions.   As we discussed above, such activities are

royalty-related activities.

     Triplex

     Triplex's activities include:     (1) Printing a copy of

petitioner's list on the medium chosen by the mailer; (2)

performing the special selections chosen by the mailer; and (3)

shipping the completed order to the mailer.

     As we discussed above, producing an intangible in tangible

form is necessary for the exploitation of the intangible.

Mailers that order petitioner's list on magnetic tape, instead

of, for example, on Cheshire labels, still receive only the one-

time right to mail to the names and addresses on the rental list.

It appears to us that the medium itself is of little or no value

to the mailer without the information it contains.     Moreover, the

provision of the list on various media is also customary within

the mailing list industry and consistent with the rental of a

mailing list for one-time use only.     Accordingly, we conclude

that Triplex's activities in printing a copy of petitioner's list
                              - 23 -


on the medium chosen by the mailer are royalty-related

activities.

     Special selections are the means by which a mailer further

narrows the types of individuals and entities whose names will

appear on the list that the mailer orders.   Certain mailers may

prefer a list consisting of only the names of female donors,

while others may prefer only the names of individuals or entities

within a specific State or ZIP code.   The essence of a mailer's

order is the one-time right to use a portion of petitioner's

mailing list.   We conclude that there is no significant

difference between, on the one hand, the rental of a list

consisting of all of the names of petitioner's supporters and, on

the other hand, the rental of a list consisting of only

petitioner's female supporters or, for example,8 the rental of a

list consisting of only the names of petitioner's male supporters

between the ages of 20 and 25 who reside in a particular ZIP

code.   The culling out or special selection of certain names is

ancillary to the maintenance and exploitation of the list.   Cf.

Glen O'Brien Movable Partition Co. v. Commissioner, 70 T.C. 492,

502 (1978) ("Where services are performed subsidiary and

ancillary to the transfer of patent rights and proprietary know-

how, they take on the nature of the patent rights and know-how as


8
     Petitioner does not offer age as a special selection.
                              - 24 -


'property'."); Ruge v. Commissioner, 26 T.C. 138, 143 (1956)

("The consulting services * * * were ancillary and subsidiary to

the assignments of the inventions").   In other words, payment for

the one-time right to mail to names on a list, no matter how

specialized that list is, is a royalty.

     As to the shipping, in order to exploit the intangible the

owner ordinarily will need to send the information contained in

the intangible to the user.   Consequently, we conclude that

Triplex's activities in shipping the list to the mailer are

royalty-related activities.   In sum, we conclude that, in the

course of the list rental transaction, all of the activities in

which Triplex engages are royalty-related activities.

     List Brokers

     The activities of the list brokers include:   (1) Searching

advertisements and databases for appropriate list offerings for

the mailer to rent; (2) coordinating the rental transaction on

behalf of the mailer; (3) collecting payment from the mailer to

remit to the list manager or list owner; and (4) analyzing the

results of the mailing to determine whether it was successful.

We conclude that the list brokers' activities are not royalty-

related activities.   Rather, the list brokers' activities are

provided solely to the mailers and solely for the mailers'
                                - 25 -


convenience.9    Accordingly, we conclude that the list brokers'

activities are services and are not part of the royalty-related

activities.     Consequently, any portion of the mailers' payments

that is to compensate the list brokers for their activities in

the mailing list transaction is not a royalty.

     Our inquiry as to the list brokers' services, however, does

not end there.    Because we hold that the portion of the mailers'

payments that is related to the list brokers' activities is not a

royalty, we must address respondent's other arguments that the

list brokers are petitioner's agents for carrying on a list

rental business and that any services they provide and any

portion of the list rental payment received by them for the

rental of petitioner's list should be attributed to petitioner

for purposes of calculating petitioner's UBTI.    Petitioner argues

that the list brokers are independent contractors and that the

services they provide, and any compensation they receive for such

services, should not be attributed to petitioner.

     As to whether an agency relationship exists, the manner in

which the parties to an agreement designate their relationship is

not controlling.    See Board of Trade v. Hammond Elevator Co., 198

U.S. 424, 437 (1905).    Rather, the question of agency is based on



9
     As discussed below, this factor is also important in
deciding whether the list brokers are petitioner's agents.
                                - 26 -


the surrounding facts and circumstances of each case.    See id.

(citing Connecticut Mut. Life Ins. Co. v. Spratley, 172 U.S. 602,

617 (1899)).    "An essential characteristic of an agency

relationship is that the agent acts subject to the principal's

direction and control."    In re Shulman Trans. Enters., Inc., 744

F.2d 293, 295 (2d Cir. 1984).    "[A]n independent contractor can

be an agent if, and to the extent that, the contractor acts for

the benefit of another and under its control in a particular

transaction."    State Police Association v. Commissioner, 125 F.3d

1, 7 (1st Cir. 1997), affg. T.C. Memo. 1996-407; see also

National Collegiate Athletic Association v. Commissioner, 92 T.C.

456, 467 (1989), revd. on other grounds 914 F.2d 1417 (10th Cir.

1990).

     As we stated above, the list brokers act solely on behalf of

the mailers.    The same list broker does not participate in every

transaction.    Rather, each mailer chooses its own list broker to

act on its behalf.    Additionally, petitioner does not exercise

any control over the list brokers or over the list manager when

it acts in its capacity as list broker.    Petitioner directs all

rental inquiries to the list manager.10   Consequently, even if a

mailer or a broker contacts petitioner directly, petitioner has



10
     Petitioner only deals directly with inquiries from its
affiliates.
                              - 27 -


no dealing with that mailer or broker.   Moreover, although the

list broker's commission is factored into the base price that is

listed on the data cards describing petitioner's rental list, the

bill sent by the list manager includes a list broker's commission

only where the list manager acts as the list broker.   If the

mailer uses an independent list broker, the list manager sends

that list broker a bill that does not include a list broker's

commission.   Accordingly, it remains the list broker's choice

whether to charge the mailer any list brokerage commission.     On

the basis of the foregoing, we conclude that the list brokers and

list manager, when it is acting in its capacity as list broker,

are not agents of petitioner, and, therefore, neither their

activities nor the compensation that they receive for those

activities can be attributed to petitioner.   Consequently, the

list brokerage activities do not change the character of the

remainder of the mailers' list rental payments.

     In sum, we hold that with the exception of the list

brokerage activities (which are not attributable to petitioner),

all of the activities in which the parties to the list rental

transaction engage are royalty-related activities.   Consequently,

with the exception of the list brokerage commissions (which are

not attributable to petitioner), the mailer's list rental payment

in each list rental transaction is a royalty which is excluded
                                - 28 -


from UBTI under section 512(b)(2).       Our holdings obviate the need

to address respondent's trade or business arguments.

Respondent's Remaining Arguments

     No Written Licensing Agreement

     Respondent contends that the list rental payments are not

royalties because there is no written licensing agreement between

petitioner and the list manager, CMS, or Triplex.      We conclude

that, even though there is no written agreement termed a

"licensing agreement", the terms and conditions of the

transaction between the mailer and petitioner require the mailer

to receive only a one-time right to use the information contained

on petitioner's rental list.    Accordingly, we conclude that each

mailing list transaction represents a separate licensing of

petitioner's list by the mailer and that the absence of a written

"licensing agreement" does not prevent the mailer's list rental

payment from being a royalty.

     Section 513(h)

     Finally, respondent argues that the enactment of section

513(h) precludes a conclusion that the list rental payment is a

royalty.   The relevant parts of section 513(h) provide:

          SEC. 513(h). Certain Distributions of Low Cost
     Articles Without Obligation to Purchase and Exchanges
     and Rentals of Member Lists.--

                (1) In general.--In case of an
           organization which is described in section
                              - 29 -


          501 and contributions to which are deductible
          under paragraph (2) or (3) of section 170(c),
          the term "unrelated trade or business" does
          not include--

                *       *     *        *      *        *

                     (B) any trade or business
                which consists of--

                          (i) exchanging with
                     another such organization
                     names and addresses of donors
                     to (or members of) such
                     organization, or

                          (ii) renting such names
                     and addresses to another such
                     organization.

Section 513(h) provides a safe harbor for the rental and exchange

of mailing lists between certain charities.       Section 513(h) was

enacted during 1986, after the decision of the Court of Claims in

DAV I.   Respondent argues that, in enacting section 513(h) and

specifically excluding the income from mailing list transactions

between charities, Congress has agreed with the holding of the

Court of Claims in DAV I that the mailer's list rental payment in

a mailing list transaction is not a royalty that is excludable

from UBTI under section 512(b)(2).

     We do not agree.   On the day of the adoption of the

conference report accompanying the bill which included section

513(h), Representative Daniel Rostenkowski (D-Ill.), Chairman of

the Ways and Means Committee, commented:
                                - 30 -


          I also have discussed with Congressman Duncan [(R-
     Tenn.) Ranking Republican Member of the Ways and Means
     Committee] the issue of whether the provision of the
     bill which excludes certain income from unrelated trade
     or business income creates any inference under present
     law. We have reached a common understanding regarding
     the following specific issue:

          The question relates to section 1601 of the bill which
     excludes from unrelated trade or business income revenues
     from the use of a tax-exempt organization's mailing list by
     another such organization. Section 1601 of the bill, which
     specifically exempts certain such revenues from the tax on
     unrelated business income in the future, carries no
     inference whatever that mailing list revenues beyond its
     scope or prior to its effective date should be considered
     taxable to an exempt organization. [132 Cong. Rec. 26208
     (Sept. 25, 1986).]

Additionally, the General Explanation provided by the Staff of

the Joint Committee on Taxation explains:    "No inference is

intended as to whether or not revenues from mailing list

activities other than those described in the provision, or from

mailing list activities described in the provision, but occurring

prior to the effective date, constitute unrelated business

income."     Staff of Joint Comm. on Taxation, General Explanation

of the Tax Reform Act of 1986, at 1325 (J. Comm. Print 1987).     We

conclude that the enactment of section 513(h) does not require

that we hold that the revenues from the rental of petitioner's

mailing list during the years in issue are UBTI and thus subject

to UBIT.11


11
     Respondent also contends that the list rental payments
                                                   (continued...)
                             - 31 -


     We have considered the parties' remaining arguments and

conclude that they are without merit, irrelevant, or unnecessary

to reach.

     To reflect the foregoing,

                                        Decision will be entered

                                   for petitioner.




11
 (...continued)
cannot be royalties because petitioner paid "development" or
"production" costs. Respondent borrows those terms from the
mineral royalty context, and we conclude that they are not
helpful to our inquiry.
