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n a victory for the Sierra Club, the United States Tax Court has agreed that the Club's
credit card royalties are not taxable. Each time a Sierra Club credit card holder makes a
purchase, a portion of that payment goes toward implementation of the Club's conservation
programs.
Since the creation of the Club's credit card program in 1985, the Internal Revenue
Service has held that it generates profit and therefore is taxable. But the Sierra Club
argued successfully that these funds are royalties earned based on the use of the Club's
intangible assets, name and licensed marks. As such, they are specifically excluded by
statute from taxation, the court found.
"The tax court's ruling validates our assertion that royalties earned from
intangible assets are not taxable under Unrelated Business Tax statutes," said
Lou Barnes, the Club's Director of Finance. "However, even though we have the
support of these statutes as well as the recent positive tax court ruling, the IRS will
probably appeal the case because of its relevance to the entire non-profit
community," Barnes said. If the agency does appeal, Barnes said, the case might
not be heard for up to two years.
A favorable ruling in the appeals court would mean the Club could reverse any liability
from the controversy over the current "taxable" status of the credit card
program. Since the appeals court process is usually lengthy, the earliest the Club would
be able to reverse that liability would be in 1996 or 1997, Barnes said.
Contact Lou Barnes, (415) 977-5596.
SOURCE: The Planet, November 1994
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