In Oregon State University Alumni Ass’n, Inc. v. Commissioner, 193 F.3d 1098 (9th Cir. 1999), the Ninth Circuit ruled that funds received from affinity credit cards fell within the royalties exclusion from unrelated business income.

The Tax Court concluded that the bank paid the alumni associations for the use of their property rights, not for their services. The credit cards used pictures, colors, words and seals to show the university affiliations…The Tax Court’s findings, that the alumni associations’ promotional activities pursuant to the agreement were de minimis, were well supported. They were not required to mail anything to their members, and merely approved what the bank mailed out in their name once a year. The alumni associations did one mailing during the years at issue, but the agreement did not require it and the bank paid for it separately from the royalties. The Tax Court found that the few telephone responses to members regarding the credit cards were “de minimis and were done to protect petitioner’s goodwill with its members,” a finding well supported in the record. The facts stipulated to and found show that the bank designed the program, promoted it, and maintained it, with de minimis effort from the schools. What little the schools did pursuant to the agreements was the minimal administrative work necessary to give their mailing lists to the bank, and to prevent the bank from promoting the cards in such a way as to sour the associations’ relations with their alumni.

Nonprofits, if you have an affinity credit card program, have you checked that it meets all requirements to fall within the royalties exclusion from unrelated business income? Failure to comply can have significant tax ramifications.