89 T.C. 7">*8 Respondent determined deficiencies in Federal unrelated business income tax (sec. 511 ¹ et seq.) against petitioner as follows:

After concessions by respondent, 1987 U.S. Tax Ct. LEXIS 103">*105 the issue for decision is whether certain amounts received by petitioner constitute unrelated business taxable income.

FINDINGS OF FACT

Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.

When the petition was filed in the instant case, petitioner's principal place of business was in Lansing, Michigan.

The Veterans of Foreign Wars of the United States (hereinafter sometimes referred to as the VFW) dates back to the closing days of the Spanish-American War in 1899. ³ The VFW was chartered by an act of Congress on May 28, 1936. Its national headquarters is in Kansas City, Missouri. The VFW's congressional charter and its constitution state that 89 T.C. 7">*9 its purposes1987 U.S. Tax Ct. LEXIS 103">*106 are fraternal, patriotic, historical, and educational. The VFW's congressional charter and its constitution state that it will preserve and strengthen comradeship among its members; assist worthy comrades; perpetuate the memory and history of our dead, and assist their widows and orphans; maintain true allegiance to the Government of the United States of America and fidelity to its Constitution and laws; foster true patriotism; maintain and extend the institutions of American freedom; and preserve and defend the United States from all her enemies. Among the functions performed by the VFW are the aid and assistance of veterans and their dependents with any claim they may have with the Federal Government, including, but not limited to, pensions, compensation, educational benefits, and housing loans. The VFW operates a number of programs including, but not limited to, "Americanism", community service, "Voice of Democracy", youth activities, hospital visitations, safety seminars, and maintenance of the National Home.

1987 U.S. Tax Ct. LEXIS 103">*107 The VFW is comprised of various State departments, one of which is petitioner. Petitioner was chartered by the VFW on November 14, 1920. Petitioner is comprised of about 400 local posts in Michigan. In 1974, 1975, and 1976, petitioner had between 75,000 and 80,000 members.

Petitioner is exempt from Federal income taxation under section 501(a) because it is an organization described in sections 501(c)(4) and 501(c)(19). ⁴

Petitioner uses a fiscal year beginning on July 1 and ending on June 30 for both financial reporting purposes and tax reporting purposes. (See note 2 supra.)

From 1959 through the years in issue, petitioner had1987 U.S. Tax Ct. LEXIS 103">*108 a written contract with Famous Artists' Studios, Inc./Lipschutz Organization (hereinafter sometimes referred to as Lipschutz). For the years in issue, the contract provided essentially as follows: Lipschutz was to prepare boxes of greeting cards and envelopes and mail them to the people shown on a list provided by petitioner. Lipschutz 89 T.C. 7">*10 was to supply all work necessary to the proper handling of the program, including maintaining the list provided by petitioner and mailing three followup notices to all persons who did not pay for, or return, the box of cards by Christmas of each year.

Payments from those who received the cards were to be sent directly to petitioner, and petitioner was to deposit the funds daily into a special bank account held jointly by petitioner and Lipschutz. ⁵ Petitioner was to remit any returned cards to Lipschutz for "credit". Petitioner was to pay Lipschutz $ 0.93 for each box of cards Lipschutz mailed (see note 10 infra). For each box of cards returned to Lipschutz, petitioner was to receive a credit of $ 0.47. When the sum of (a) the payments received and (b) the credit for return cards, exceeded (c) the amounts due Lipschutz, the excess1987 U.S. Tax Ct. LEXIS 103">*109 was to go to petitioner, except for up to 10 percent of the excess above $ 2,500, which was to be remitted to Lipschutz. ⁶1987 U.S. Tax Ct. LEXIS 103">*110 If the amounts received by petitioner were insufficient to pay Lipschutz the amounts due, then petitioner had no liability to Lipschutz for the unpaid amounts. ⁷ The contract was cancelable at the will of each party if proper notice was given in accordance with the terms of the contract.

Pursuant to this contract, in each of the years 1974, 1975, and 1976, petitioner (through VFW) provided Lipschutz with a list of its members, including new and reinstated members. This list was updated 3 times each year. Lipschutz used this list to distribute Christmas cards to petitioner's 89 T.C. 7">*11 members. If a member did not participate in any one of the immediately preceding 3 years, then that member's name was removed from the list. The removal of a member's name from the list had no effect on that member's status in petitioner.

Before distributing the Christmas cards to petitioner's1987 U.S. Tax Ct. LEXIS 103">*111 members, Lipschutz provided petitioner with drafts of the materials which were to be included in the Christmas card distribution. On or about September 1 of 1974, 1975, and 1976, after securing approval by petitioner of the draft Christmas card package, Lipschutz distributed a package to each of the members shown on the list petitioner provided to Lipschutz. Each package included a cover letter, a box of 20 assorted Christmas cards, a return envelope, and an IBM remittance card.

The cover letter included in the package asked the recipient to pay $ 2 to petitioner for the 1974 mailing, ⁸ and $ 3 to petitioner for the 1975 and 1976 mailings. The literature contained in the packages stated "You can help perpetuate goodwill, Holiday cheer and Americanism by supporting the VFW Christmas Card Program * * * Here's how you help -- Hospital programs for veterans -- Youth activities -- Legislative liaison at all government levels -- Americanism and community service programs * * * REMEMBER! YOUR CONTRIBUTION IS TAX-DEDUCTIBLE."

1987 U.S. Tax Ct. LEXIS 103">*112 The literature reminded members that petitioner must pay for the cards and their postage, whether accepted or not, that every unsold box adds an additional cost burden to the program, and that the cards have been sent as part of an "authorized and endorsed" or "approved" program and "should not be considered unsolicited". ⁹ However, 89 T.C. 7">*12 petitioner had no authority to solicit the cards on behalf of its members.

1987 U.S. Tax Ct. LEXIS 103">*113 The literature pointed out that the recipient could have the Christmas cards "personalized free" if the recipient would "order three or more boxes in addition to the one enclosed." The 1975 and 1976 remittance cards state as follows: "Enclosed is $     for     boxes of cards at $ 3.00 per box. I am enclosing $ 3.00 for box already received."

Lipschutz sent three reminder notices per year to petitioner's members who had not participated in the Christmas card program by the time any particular notice was mailed. These notices stressed that payment from the recipients was asked for. These notices stressed the word "contribution". They also urged recipients to send "orders" for more boxes of Christmas cards, at the same price as the suggested contribution for the box of Christmas cards that had already been sent. Recipients of the boxes of Christmas cards were not under any legal obligation to pay for them. Petitioner never requested the return of any boxes of Christmas cards and never pursued collection actions on account of any member's failure to either pay or return the cards.

Funds received by petitioner as a result of its Christmas card programs were forwarded by members1987 U.S. Tax Ct. LEXIS 103">*114 directly to petitioner and deposited and accounted for by petitioner's employees in a special bank account in the name of petitioner. Both petitioner and Lipschutz had to authorize withdrawals from this special account. (See note 5 supra.) The Christmas card program involved petitioner for about 1 week of time per month from September through February of each year.

89 T.C. 7">*13 The services Lipschutz provided for petitioner with regard to the Christmas card program for petitioner's taxable years 1975, 1976, and 1977, consisted of preparing and providing the Christmas cards, envelopes, and box; preparing and supplying the cover letter, order blank, return envelope, addressed return (IBM) card; collating and assembling; addressing and sorting for Post Office breakdown; counting and bonding; sorting; tying; sacking; delivering to Post Office; providing postage for mailing; maintaining files; preparing and supplying reminder notices and the accompanying return envelopes and mailing envelopes; addressing, sorting, tying, sacking and delivering reminder notices to the Post Office; and providing postage for the reminder notices.

Petitioner paid Lipschutz $ 0.89 for the above-mentioned 1987 U.S. Tax Ct. LEXIS 103">*115 materials and services for each Christmas card package Lipschutz distributed to petitioner's members for the taxable year 1975. For the taxable years 1976 and 1977, petitioner paid Lipschutz $ 1.15 per package for the above-mentioned materials and services. ¹⁰

Table 1 shows petitioner's membership's response to Lipschutz's mailings of Christmas cards.

89 T.C. 7">*14 Petitioner's audited financial statements include the information shown in table 2 as to major revenue sources.

1987 U.S. Tax Ct. LEXIS 103">*117 During the years in issue, Lipschutz conducted Christmas card programs involving mailings through frequently updated membership lists, for about three-fourths of the VFW's departments. During the years in issue, Lipschutz' sole clientele was nonprofit tax-exempt organizations, and a major portion of Lipschutz' business involved Christmas card programs the same as those it conducted for petitioner. In material it sent to petitioner on September 13, 1976, and October 6, 1977, Lipschutz represented that, although each package cost $ 1.15 (see note 10 supra), the cards alone in each package had a retail value of $ 7 to $ 9.

There are numerous private business enterprises within the State of Michigan whose activities constitute a trade or business within the meaning of the Internal Revenue Code that are engaged in the sale of cards, including Christmas 89 T.C. 7">*15 cards, for profit. The sale of Christmas cards is an activity normally undertaken by nonexempt commercial organizations only on a seasonal basis. The Christmas cards Lipschutz distributed on behalf of petitioner were used by petitioner's members and others for mailing to friends and relatives. Hallmark Cards Inc. viewed1987 U.S. Tax Ct. LEXIS 103">*118 the Christmas cards Lipschutz distributed for exempt organizations like petitioner as competition in the Christmas card market since individuals using cards distributed by Lipschutz for tax-exempt organizations reduced the opportunity for Hallmark Cards Inc. to sell cards to a significant share of the Christmas card market. During 1974, 1975, and 1976, Lipschutz' share of the Christmas card market was 1.52 percent, 1.84 percent, and 2.12 percent, respectively. This was a significant share of the Christmas card market.

No nonexempt commercial distributors of greeting cards distributed cards only during the Christmas season. No nonexempt commercial distributors of greeting cards distributed only Christmas cards. Nonexempt commercial distributors of greeting cards who solicited by mail used the devices of catalogs and prior orders before sending out their greeting cards, and they required orders or payments before sending out cards. Nonexempt commercial distributors of greeting cards distributed Easter cards, Father's Day cards, Mother's Day cards, Thanksgiving cards, and other greeting cards in addition to Christmas cards. During taxable years 1975, 1976, and 1977, about 13 percent1987 U.S. Tax Ct. LEXIS 103">*119 of greeting cards were distributed by direct marketing or mail including tax-exempt organizations.

Petitioner did not report any unrelated business taxable income on the information returns it filed for the years in issue (it reported a loss from its unrelated trade or business of advertising for its taxable year 1977). Table 3 shows respondent's determinations as to petitioner's unrelated business income, modified to take into account respondent's concessions (other than the concession described infra that receipts in excess of $ 5 on any box are excludable from gross income). 89 T.C. 7">*16

Petitioner conducted the Christmas card program with the predominant intent of producing income.

Petitioner's Christmas card program was in substance1987 U.S. Tax Ct. LEXIS 103">*120 the sale of goods.

Petitioner's Christmas card program was a trade or business that it regularly carried on.

Petitioner's Christmas card program effectively competed with Christmas cards marketed by commercial, taxpaying entities.

Apart from petitioner's use of the proceeds it derived, petitioner's Christmas card program had as only an incidental effect and purpose, the advancement of petitioner's exempt purposes.

The fair market value of the Christmas cards petitioner sent in taxable year 1975 was $ 2 per box; in 1976 and 1977, $ 3 per box. Those who paid to petitioner more than the foregoing amounts per box intended to make gifts of the excess to petitioner.

OPINION

Respondent contends that the profits derived from the operation of petitioner's 1974, 1975, and 1976 Christmas card programs are subject to the tax on unrelated business income. In support of this contention, respondent asserts that petitioner's Christmas card program was a "trade or business" (included in this is the assertion that the Christmas cards petitioner distributed to its members were not "low cost articles"), petitioner's Christmas card program 89 T.C. 7">*17 was "regularly carried on", and petitioner's Christmas1987 U.S. Tax Ct. LEXIS 103">*121 card program did not bear a "substantial relation" to petitioner's exempt purposes.

Petitioner contends that the cards it sent to its members were gifts to them and the money its members sent to it were gifts to it, not includable in its income. Petitioner contends that its Christmas card program was merely a means of requesting additional voluntary dues, not a trade or business; also, there were no "sales", and so no activity of the sort which the Congress had intended to treat as a trade or business. In addition, petitioner contends, there was no unfair competition and so its activities are not what the Congress aimed at when the Congress enacted the unrelated trade or business provisions. In addition, petitioner maintains that since under Federal and Michigan law, the recipient has no obligation to the sender, petitioner would have no reasonable expectation of receiving income, let alone a profit, and therefore petitioner's activity does not constitute a trade or business. Petitioner also asserts that it is not subject to the unrelated business income tax since the utilization of the Christmas cards as a "premium is substantially related to the Petitioner's exempt purpose of1987 U.S. Tax Ct. LEXIS 103">*122 promoting comradeship amongst petitioner's members." Petitioner further contends that the Christmas cards are low-cost articles, which were sent incidental to the solicitation of charitable contributions and, consequently, its activity falls within an exception to the unrelated business income tax. Petitioner also asserts that its activity is not subject to the unrelated business income tax because the activity was not regularly carried on.

In the alternative, petitioner maintains that, even if it is taxable on its Christmas card program, its receipts in excess of the lesser of (a) the amounts it asked the recipients to pay ¹² and (b) the fair market value of the cards ¹³ are gifts and so are excludable from tax. Respondent contends that the fair market value is $ 3 to $ 5 per box and, on answering brief, agrees that receipts in excess of $ 5 89 T.C. 7">*18 on any box are excludable from petitioner's unrelated business income.

1987 U.S. Tax Ct. LEXIS 103">*123 We agree with respondent's conclusion as to the taxability of petitioner's Christmas card program under the unrelated business income tax. We agree with part of petitioner's alternative contention, in that its receipts on any box in excess of $ 2 for taxable year 1975, and $ 3 for taxable years 1976 and 1977, are excludable from its unrelated business income.

Under section 501(a), ¹⁴ petitioner is exempt from income tax because it is an organization described in paragraphs (4) and (19) of section 501(c). ¹⁵1987 U.S. Tax Ct. LEXIS 103">*124 Nevertheless, as the Congress warned in section 501(b), ¹⁶ petitioner is an organization to which the tax on unrelated business taxable income (secs. 89 T.C. 7">*19 511 et seq., ¹⁷1987 U.S. Tax Ct. LEXIS 103">*125 the part III referred to in sec. 501(b)) applies. ¹⁸

Under sections 512(a)(1) and 513(a), the Christmas card program produces unrelated business income only if the program (1) constitutes a trade or business; (2) is regularly carried on; and (3) is not substantially related to petitioner's tax-exempt purpose. United States v. American Bar Endowment, 477 U.S. 105">477 U.S. 105,     (1986); United States v. American College of Physicians, 475 U.S. 834">475 U.S. 834, 475 U.S. 834">838 (1986); Professional Ins. Agents of Michigan v. Commissioner, 726 F.2d 1097">726 F.2d 1097, 726 F.2d 1097">1102 (6th Cir. 1984),1987 U.S. Tax Ct. LEXIS 103">*126 affg. 78 T.C. 246">78 T.C. 246, 78 T.C. 246">257-258 (1982).

These requirements are in the conjunctive. As a result, although petitioner has the burden of proof ( Welch v. 89 T.C. 7">*20 , 290 U.S. 111">290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure) as to each of the requirements, petitioner avoids the tax entirely if it can show that any one of these requirements has not been satisfied. We consider these requirements seriatim.

If an activity is carried on for the production of income from the sale of goods or the performance of services, then it is a "trade or business" within the meaning of section 513(c). ¹⁹1987 U.S. Tax Ct. LEXIS 103">*127 United States v. American Bar Endowment, 477 U.S. at    . ²⁰

In determining whether petitioner carried on the Christmas card program for the production of income, our inquiry is directed at petitioner's intent in carrying on the activity. We must determine whether petitioner carried on the Christmas card program with the intent of producing income, or stated another way, whether petitioner had a profit motive. E.g., Professional Ins. Agents of Michigan v. Commissioner, 726 F.2d at 1102, 78 T.C. 262; St. Joseph Farms of Indiana v. Commissioner, 85 T.C. 9">85 T.C. 9, 85 T.C. 9">20-21 (1985).

For each of the years in issue, the Christmas 1987 U.S. Tax Ct. LEXIS 103">*128 card program produced substantial profits. Indeed, other than membership dues, the Christmas card program was petitioner's largest revenue source during each of the years in issue (see table 2 supra). Petitioner's contract with Lipschutz described petitioner's revenue from the Christmas card program as "profit" (see note 6 supra). The record does not 89 T.C. 7">*21 show that petitioner's revenue from the Christmas card program was merely an incidental by-product of a programmatic activity. Finally, we are impressed by the testimony of petitioner's quartermaster/adjutant, as follows:

Q. [Respondent counsel on cross examination]

Mr. Schumacher, it is accurate to say that the Petitioner's objective, the Christmas Card Program, was to make a profit; isn't it?

A. It's to supplement the dues that the members pay, that's correct. Otherwise, they would --

Q. But in answer to my question it is accurate you were trying to generate a profit from the program, is it not?

A. That is the object of it. I would say because that is the reason they all get into it.

Q. Well, in fact, if the program had not produced1987 U.S. Tax Ct. LEXIS 103">*129 a profit, you would have terminated the program; would you not?

* * * *

The Court: Mr. Schumacher, you testified, I believe, that the object of this program was to produce some net revenues that would either reduce the dues or at least delay the necessity of asking for an increase of dues?

The Witness: Correct.

We believe the witness. Petitioner conducted the Christmas card program in order to produce income, and would not have conducted the Christmas card program if it had not produced income.

We conclude, and we have found, that petitioner conducted the Christmas card program with the predominant intent of producing income.

We next consider whether the Christmas card program was in substance a "sale of goods", within the meaning of section 513(c). (See note 19 supra).

In general, the "incidence of taxation depends upon the substance of a transaction" rather than its mere form. E.g., Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331, 324 U.S. 331">334 (1945). A taxpayer has the right to minimize taxes as far as the law allows ( United States v. Cumberland Pub. Serv. Co., 338 U.S. 451">338 U.S. 451, 338 U.S. 451">455 (1950); Gregory v. Helvering, 293 U.S. 465">293 U.S. 465, 293 U.S. 465">469 (1935);1987 U.S. Tax Ct. LEXIS 103">*130 United States v. Isham, 84 U.S. 496">84 U.S. 496, 84 U.S. 496">50689 T.C. 7">*22 (1873)); however, the taxpayer ordinarily may not, through form alone, achieve tax advantages which substantively are without the intent of the statute. 324 U.S. 331">Commissioner v. Court Holding Co., supra; 293 U.S. 465">Gregory v. Helvering, supra.

Each year, petitioner (through Lipschutz) sent a box of Christmas cards, with literature soliciting funds and orders for more boxes, to each of the people on the list that Lipschutz maintained pursuant to the contract. Each year, a small portion of these people (see table 1 supra) ordered more boxes of Christmas cards at the prices set forth ($ 2 in the 1974 program and $ 3 in the 1975 and 1976 programs) in the literature enclosed with the boxes. Clearly, with regard to these ordered boxes (about 2 to 4 percent of the total sent to people who participated in the program), petitioner was engaged in the sale of goods.

In each of the years, petitioner solicited a "contribution" of a specified amount for each box. In each of the years, about 85 to 90 percent of those who responded (including those who responded only 1987 U.S. Tax Ct. LEXIS 103">*131 by returning the remittance card without any payment) sent to petitioner precisely the amount of the requested "contribution" (see table 1 supra). As petitioner points out, under both Federal law (39 U.S.C. sec. 3009²¹1987 U.S. Tax Ct. LEXIS 103">*132 ) and Michigan law (Mich. Comp. Laws sec. 445.131²² (1986); Mich. Stat. Ann. sec. 19.416 (51) (Callaghan 89 T.C. 7">*23 1981)), the recipients of the boxes of Christmas cards had no obligation to pay for the cards; indeed, the recipients were by the terms of both statutes free to treat the cards as gifts. This is the result under both statutes because the boxes of Christmas cards in the basic mailings had not been ordered or requested or solicited by the recipients.

However, the literature accompanying the unsolicited boxes of Christmas cards stated, for each of the years in issue, that the cards "should not be considered unsolicited." These statements appear to be directly contrary to the requirement of the Federal Statute that --

All such merchandise [including "merchandise mailed by a charitable organization soliciting contributions"] 1987 U.S. Tax Ct. LEXIS 103">*133 shall have attached to it a clear and conspicuous statement informing the recipient that he may treat the merchandise as a gift to him and has the right to retain, use, discard, or dispose of it in any manner he sees fit without any obligation whatsoever to the sender.

Petitioner's statements to the recipients of the boxes of Christmas cards appear to be designed to cause these recipients to not believe that they could "retain, use, discard, or dispose of" the cards "without any obligation whatsoever to" petitioner.

Because of the mechanics of the transactions (in particular, the shipment of the goods in advance), the recipients had extraordinary leverage. They could pay whatever they wished -- or nothing. Petitioner chose the mechanics and tried to persuade the recipients that they did not have the right to treat the goods as unsolicited gifts. If the recipients had understood that they had no obligations to pay and were really being solicited for contributions, we might have expected to see a substantial scattering of contribution amounts. However, each year 85 to 90 percent of those who responded paid precisely the amount that was requested by petitioner -- the same amount1987 U.S. Tax Ct. LEXIS 103">*134 that petitioner stated it was charging for additional boxes.

Since petitioner's actions were inconsistent with the statutes freeing the recipients from any obligations to pay for the boxes, we will not allow petitioner to hide behind 89 T.C. 7">*24 these statutes. Petitioner chose to so arrange the transactions as to make it appear that there was an obligation. The responses of substantially all the recipients who participated in the program were consistent with an understanding that there was an obligation. We conclude that the substance of substantially all the unsolicited transactions, and the small number of solicited transactions, was an exchange of boxes of Christmas cards for the sums specified by petitioner.

We conclude, and we have found, that petitioner's Christmas card program was in substance the sale of goods.

On brief, petitioner states as follows:

It is the Petitioner's contention herein that, as a matter of law, the mailing of the solicitation package, including the Christmas cards, constitutes a gift from the Petitioner and any contributions from the recipients thereof constitute gifts to the Petitioner.

We have already concluded that the transactions were, in substance, 1987 U.S. Tax Ct. LEXIS 103">*135 sales. We do not believe that petitioner and its members engaged in a program of reciprocal gift-giving. ²³

The Supreme Court dealt with a similar contention in United States v. American Bar Endowment, 477 U.S. at    , as follows:

The only valid argument in ABE's favor, therefore, is that the insurance program is billed as a fundraising effort. That fact, standing alone, cannot be determinative, or any exempt organization could engage in a tax-free business by "giving away" its product in return for a "contribution" equal to the market value of the product. * * *

Based1987 U.S. Tax Ct. LEXIS 103">*136 on all the facts and circumstances, we conclude, and we have found, that petitioner's Christmas card program was an activity which constituted a "trade or business", within the meaning of subsections (a) and (c) of section 513.

Petitioner contends that the unrelated business income tax is designed to eliminate unfair competition between 89 T.C. 7">*25 taxable and tax-exempt entities. If there is no unfair competition, petitioner suggests, then there is no basis for imposing the tax. ²⁴

1987 U.S. Tax Ct. LEXIS 103">*137 We agree with petitioner's understanding of the history of the statute, but not with petitioner's understanding of the statute itself. Also, we disagree with petitioner's contention that it was not competing with taxable entities.

Firstly, although the unfairness of business competition between taxable and tax-exempt entities prompted the Congress to enact in 1950 the predecessors of the provisions we apply in the instant case (see, e.g., the brief historical analysis in United States v. American College of Physicians, 475 U.S. 834">475 U.S. at 838), the statute that the Congress enacted does not set forth any references to competition, unfair or otherwise. This Court has not interpreted the statute to be applicable only where there is unfair competition. Smith-Dodd Businessman's Association Inc. v. Commissioner, 65 T.C. 620">65 T.C. 620, 65 T.C. 620">624 (1975). See discussion in Ill. Association of Professional Ins. Agents v. Commissioner, 801 F.2d 987">801 F.2d 987, 801 F.2d 987">990-991 (7th Cir. 1986), affg. a Memorandum Opinion of this Court; ²⁵Disabled American Veterans v. United States, 227 Ct. Cl. 474">227 Ct. Cl. 474, 227 Ct. Cl. 474">488-490, 650 F.2d 1178">650 F.2d 1178, 650 F.2d 1178">1187 (1981);1987 U.S. Tax Ct. LEXIS 103">*138 Fraternal Order of Police v. Commissioner, 87 T.C. 747">87 T.C. 747, 87 T.C. 747">756 (1986), on appeal (7th Cir. 1987).

89 T.C. 7">*26 Secondly, during 1974 through 1976, Lipschutz enjoyed a 1.5- to 2.1-percent share of the total Christmas card market. This is a significant portion of a nationwide industry. While petitioner is only one of many organizations that market Christmas cards in this manner through the use of the Lipschutz organization, there is no doubt that petitioner's product displaces and competes with Christmas cards marketed by commercial, taxpaying entities. This is precisely the type of situation to which the unrelated business income tax provisions were designed to apply. ²⁶

Petitioner argues that its Christmas card program is not a trade or business because the cards are low cost articles sent incidental to the solicitation of charitable contributions. Petitioner contends that its cost for each box of cards was $ 0.535, about half of the total amount it paid to Lipschutz. Petitioner relies on the second sentence of section 1.513-1(b), Income Tax Regs. (see note 24 supra), the legislative history of the Tax Reform Act of 1969, ²⁷227 Ct. Cl. 474">Disabled American Veterans v. United States, supra, and Hope School v. United States, 612 F.2d 298">612 F.2d 298 (7th Cir. 1980).

1987 U.S. Tax Ct. LEXIS 103">*140 We agree with petitioner that the regulation appears to be consistent with the legislative history and is valid. We disagree with petitioner's view of the significance of the regulation, the legislative history, and the two cases.

Firstly, as the Court of Claims pointed out in Disabled American Veterans v. United States, 650 F.2d 1178">650 F.2d at 1187, the relevant comparison is that between the payment made and the retail value (not the cost) of the article. ²⁸

1987 U.S. Tax Ct. LEXIS 103">*141 89 T.C. 7">*27 Secondly, in the instant case, petitioner maintains that the fair market values (at retail) of the boxes of cards are $ 1.45, $ 1.59, and $ 1.77 for the taxable years 1975, 1976, and 1977, respectively. The solicited amounts were $ 2, $ 3, and $ 3 for the same years, respectively. Respondent contends that the retail values are between $ 3 and $ 5 per box. We have found that the fair market value of the Christmas cards petitioner sent in taxable year 1975 was $ 2 per box; in 1976 and 1977, $ 3 per box. Apart from that finding, it is clear that the solicited amounts were "within a reasonable range" of the retail values of the Christmas cards ( Commissioner v. Brown, 380 U.S. 563">380 U.S. 563, 380 U.S. 563">572 (1965)), and that the Christmas cards thus were not "low-cost articles", and so we conclude that the "low-cost-article" exception does not apply. As we see it, then, the analysis in the Court of Claims' opinion in 227 Ct. Cl. 474">Disabled American Veterans v. United States, supra, serves to bolster respondent's case and not petitioner's case.

Finally, petitioner cites 612 F.2d 298">Hope School v. United States, supra,1987 U.S. Tax Ct. LEXIS 103">*142 for the proposition that the box of cards in the instant case is a low-cost item as a matter of law. In Hope School, the facts were similar to those in the instant case. Hope School was a nonprofit charitable and educational organization exempt from Federal income tax under section 501(c)(3). Hope School entered into a contract with American Mailing Consultants whereby (612 F.2d 298">612 F.2d at 300) --

American Mailing sent out packages of greeting cards to prospective donors, with information about the School and a request for contributions. The recipients of the cards were under no obligation to give any money to the School and were free to keep the cards at no charge. American Mailing bore the entire economic risk of the operation: when the recipients of the cards kept the package without making a contribution, 89 T.C. 7">*28 American Mailing suffered the loss. When contributions were received, however, American Mailing kept the first $ 1.10 per package, with all the surplus going to the Hope School. [Fn. ref. omitted.]

The Court of Appeals stated as follows (612 F.2d 298">612 F.2d at 304):

This evidence in the legislative history, coupled with1987 U.S. Tax Ct. LEXIS 103">*143 the Service's express mention of unfair competition in the context of the "low cost articles" exception supports our conclusion that unfair competition is the key to whether the activities of the Hope School constitute an unrelated trade or business as a matter of law. We hold that they do not.

There was no evidence presented at trial to suggest that Hope School's solicitation campaign presented the possibility of an unfair competitive advantage over taxpaying greeting card businesses. * * *

* * * We find no problem with unfair competition in this case and hold that, as a matter of law, the greeting cards were distributed as low cost articles incidental to the solicitation of charitable contributions.

It is not clear that Hope School retains its full vitality after 475 U.S. 834">United States v. American College of Physicians, supra. See Ill. Association of Professional Ins. Agents v. Commissioner, 801 F.2d 987">801 F.2d at 991; 87 T.C. 747">Fraternal Order of Police v. Commissioner, supra.

Hope School apppeared to rest on the Court of Appeals' conclusion about the state of the record therein regarding unfair competition. However, in Ill. Association of Professional Ins. Agents v. Commissioner, 801 F.2d 987">801 F.2d at 991 n. 4,1987 U.S. Tax Ct. LEXIS 103">*144 the Court of Appeals for the Seventh Circuit seems to deny that that is the thrust of Hope School. ²⁹1987 U.S. Tax Ct. LEXIS 103">*145 In any event, we have found in the instant case that Lipschutz enjoyed a significant portion of the Christmas card market, and that 89 T.C. 7">*29 its Christmas cards (distributed through petitioner and other tax-exempt organizations) reduced the opportunity for at least one major taxable competitor to sell its own Christmas cards to a significant share of the Christmas card market. We believe that, whatever the role that competition may play in determining liability for the tax on unrelated business income, ³⁰ the record in the instant case includes sufficient evidence of such competition.

1987 U.S. Tax Ct. LEXIS 103">*146 Further, we have concluded that the articles were worth as much as was paid for them by most of the recipients who paid (see table 1 supra). Also we have concluded that the recipients who paid the requested amounts were, as a matter of substance, buying the cards and not making contributions. Accordingly, we conclude that the Christmas cards were not distributed as low-cost articles incidental to the solicitation of charitable contributions. ³¹

1987 U.S. Tax Ct. LEXIS 103">*147 We hold for respondent on the trade or business issue.

In examining the application of a particular statute, our first reference must be to the words of that statute. E.g., 89 T.C. 7">*30 Minahan v. Commissioner, 88 T.C. 492">88 T.C. 492, 88 T.C. 492">503 (1987); Service Bolt & Nut Co. Trust v. Commissioner, 78 T.C. 812">78 T.C. 812, 78 T.C. 812">817 (1982), affd. 724 F.2d 519">724 F.2d 519 (6th Cir. 1983). Under section 512(a)(1) (see note 17 supra), even if an exempt organization engages in a trade or business, the income therefrom is not subject to the unrelated business income tax unless the organization regularly carries on that trade or business. ³²Suffolk County Patrolmen's Association v. Commissioner, 77 T.C. 1314">77 T.C. 1314 (1981). However the statute does not describe what criteria are to be used in determining whether a trade or business is "regularly carried on by [the organization]". There has been little case law on the "regularly carried on" provision in the statute, even though the predecessor of the current statutory provision was enacted 37 years ago. Both parties look to the regulations1987 U.S. Tax Ct. LEXIS 103">*148 for guidance; we now proceed to a consideration of the regulations.

Paragraph (c) of section 1.513-1, Income Tax Regs., ³³1987 U.S. Tax Ct. LEXIS 103">*150 89 T.C. 7">*31 provides an elaboration of the statute. ³⁴ Subparagraph (1) sets forth the general rule that "regard must be had to the frequency and continuity with which the activities productive of the income are conducted and the manner in which they are pursued." This is immediately qualified by the statement that "This requirement must be applied in light of the purpose of the unrelated business income tax to place exempt organization business activities upon the same tax basis as the 1987 U.S. Tax Ct. LEXIS 103">*149 nonexempt business endeavors with which they compete."

Subparagraph (2) applies the principles of subparagraph (1) "in certain cases". Subparagraph (2) consists of three subdivisions. Subdivision (i) focuses on comparisons of time spans. If nonexempt organizations normally conduct such activities on a year-round basis, then (a) the activity is to be considered regularly carried on if the exempt organization conducts it on a year-round basis, ³⁵ and (b) the activity is not to be considered regularly carried on if the exempt organization conducts it for only a few weeks each year. If 89 T.C. 7">*32 nonexempt organizations normally conduct such activities on a seasonal basis, then the activity "ordinarily" is to 1987 U.S. Tax Ct. LEXIS 103">*151 be considered regularly carried on if the organization conducts it during a "substantial portion" of the season.

Subdivisions (ii) and (iii) deal with "intermittent" activities. The regulation does not, in terms, define "intermittent". We gather from the context that an activity is to be regarded as intermittent if it is not conducted by the tax-exempt organization on a year-round basis (or, with regard to an activity that is normally conducted by nonexempt organizations only on a seasonal basis, the activity is intermittent if it is not conducted by the tax-exempt organization for substantially the full season). Subdivision (ii) provides that "In general, exempt organization business activities which are engaged in only discontinuously1987 U.S. Tax Ct. LEXIS 103">*152 or periodically will not be considered regularly carried on if they are conducted without the competitive and promotional efforts typical of commercial endeavors. * * * On the other hand, where the nonqualifying [i.e., under sec. 513(a)(2)] sales are not merely casual, but are systematically and consistently promoted and carried on by the organization, they meet the section 512 requirement of regularity." Subdivision (iii) provides that some activities "occur so infrequently that neither their recurrence nor the manner of their conduct will cause them to be regarded as trade or business regularly carried on."

Nonexempt organizations normally conduct greeting card sales business as on a year-round basis, but the Christmas card portion of their activities is on a seasonal basis. If we compare petitioner's Christmas card activities with the Christmas card activities of nonexempt organizations, then it is evident that, under the tests of section 1.513-1(c)(2)(i), Income Tax Regs., petitioner's activities "ordinarily" would be considered regularly carried on. If we compare petitioner's Christmas card activities with the full greeting card activities of nonexempt organizations, then 1987 U.S. Tax Ct. LEXIS 103">*153 petitioner's activities fall between the poles that are illustrated in subdivision (i); that is, petitioner's activities are substantially less extensive than the year-round activities of nonexempt organizations, but substantially more extensive 89 T.C. 7">*33 than the "few weeks" that would constitute a safe harbor for petitioner.

Under subdivision (ii), we have a similar uncertainty. In many respects petitioner's Christmas card activity was not conducted in the same manner that nonexempt organizations use in such activities. In particular, we note the following:

(1) No nonexempt commercial distributors of greeting cards distributed such cards only during the Christmas season; petitioner distributed only Christmas cards and did so only during the season for such cards. Thus, petitioner provided no competition to or interference with nonexempt distributors as to, e.g., Mother's Day cards, Father's Day cards, Easter cards, and Thanksgiving cards.

(2) Substantially all of the Christmas cards that petitioner distributed were sent to the recipients without prior (or simultaneous) orders or payments. ³⁶ In contrast, nonexempt distributors who solicited by mail used the devices of catalogs1987 U.S. Tax Ct. LEXIS 103">*154 and prior orders before sending out their greeting cards.

(3) Petitioner sent the Christmas cards under circumstances such that the recipients could keep and use the cards without being liable to pay for the cards. (However, it must be noted that recipients who failed to participate for 3 years in a row were removed from the lists.) In contrast, nonexempt organizations required payment before sending out the cards.

(4) Petitioner solicited only its members; it did not compete with nonexempt organizations for general public patronage. ³⁷

1987 U.S. Tax Ct. LEXIS 103">*155 Thus, it may be that petitioner's Christmas card activity was "conducted without the * * * promotional efforts typical of commercial endeavors", within the test of subdivision (ii). On the other hand, it is clear that petitioner's Christmas card sales "are not merely casual, but are systematically and consistently promoted and carried on", and so appear 89 T.C. 7">*34 to "meet the section 512 requirement of regularity", within the test of subdivision (ii). Thus, subdivision (ii) gives us inconclusive guidance.

As to subdivision (iii), we conclude that petitioner's Christmas card activities did not "occur so infrequently" that that fact alone would warrant treating them as not having been regularly carried on. However, this merely means that petitioner fails to qualify for the safe haven that subdivision (iii) provides. This failure does not of itself lead us to decide in favor of respondent.

Petitioner relies on, and respondent distinguishes, our opinion in 77 T.C. 1314">Suffolk County Patrolmen's Association v. Commissioner, supra. In that case, the organization presented and sponsored a professional vaudeville show 1 weekend per year for at least 6 consecutive years. 1987 U.S. Tax Ct. LEXIS 103">*156 Each year, the preparation time was 8 to 16 weeks. Most of the organization's income from this activity was derived from the sale of advertising in program guides that were distributed at the performances, with no distribution to the general public. A small portion of the income was derived from ticket sales. We held that the activity was not regularly carried on, relying on the similarity of the activity to the following two examples in the regulations (77 T.C. 1314">77 T.C. 1321-1322):

For example, the publication of advertising in programs for sports events or music or drama performances will not ordinarily be deemed to be the regular carrying on of business. * * * [Sec. 1.513-1(c)(2)(ii), Income Tax Regs.]

Accordingly, income derived from the conduct of an annual dance or similar fund raising event for charity would not be income from trade or business regularly carried on. [Sec. 1.513-1(c)(2)(iii), Income Tax Regs.]

In the Suffolk County case, respondent relied on several revenue rulings. We pointed out that a "revenue ruling is merely respondent's interpretation of a section or regulation and is not binding upon us. Edwards v. Commissioner, 32 T.C. 751">32 T.C. 751, 32 T.C. 751">756 (1959).1987 U.S. Tax Ct. LEXIS 103">*157 " 77 T.C. 1314">77 T.C. 1324. We then discussed two of those rulings, which appeared to present factual settings similar to that of the Suffolk County case. In Rev. Rul. 73-424, 1973-2 C.B. 190, respondent ruled that an organization's distribution of an annual yearbook, containing editorial matter and advertising, to the organization's entire membership gave rise to unrelated business taxable 89 T.C. 7">*35 income. In Rev. Rul. 75-201, 1975-1 C.B. 164, respondent ruled that an organization's distribution of an annual concert book, which contained paid advertising, to patrons of an annual ball at the event itself, to raise funds for an exempt symphony orchestra did not give rise to unrelated business taxable income.

We analyzed the two rulings as follows in our Suffolk County opinion (77 T.C. 1314">77 T.C. 1325):

On the other hand, Rev. Rul. 73-424, supra, is substantially dissimilar from Rev. Rul. 75-201, supra, and the instant case. In light of the regulations and the legislative1987 U.S. Tax Ct. LEXIS 103">*158 history of sections 511 through 513, wherein every example of an activity not considered regularly carried on concerns an event of some sort (sandwich stand, sports, drama or music event, dance, etc.), the fact that Rev. Rul. 73-424 presents no event to accompany its publication is no small variance. While we express no opinion as to the correctness of respondent's holding in that ruling, suffice to say that it is distinguishable from the case at bar.

Although the Suffolk County case has some similarities to the instant case, we conclude that it differs from the instant case in precisely those factors that our Suffolk County opinion stressed. The instant case is not like the illustrations in the regulations, dealing with (1) advertising in programs for sports events or music or drama performances, or (2) the conduct of an annual dance or similar fund raising event. The instant case is like Rev. Rul. 73-424 (and unlike Rev. Rul. 75-201) in that the instant case does not concern "an event of some sort (sandwich stand, sports, drama or music event, 1987 U.S. Tax Ct. LEXIS 103">*159 dance, etc.)". Accordingly, we conclude that the expressed rationale in our opinion in Suffolk County serves to undermine petitioner's case rather than support it.

Since none of the subdivisions of subparagraph (2) of section 1.513-1(c), Income Tax Regs., clearly requires a specific answer in the instant case, we return to subparagraph (1), which directs us to apply the general rule (relating to frequency, continuity, and manner) "in light of the purpose of the unrelated business income tax to place exempt organization business activities upon the same tax basis as the nonexempt business endeavors with which they compete."

89 T.C. 7">*36 The "regularly carried on" requirement dates back to the 1950 legislation which enacted the unrelated business income tax. The requirement appeared in the opening flush language of section 422(a) of the Internal Revenue Code of 1939. The legislative history includes the following comment (S. Rept. 2375, 81st Cong., 2d Sess., at 30 (1950), 1950-2 C.B. 483, 505, to accompany H.R. 8920, the Revenue Act of 1950) as to the purpose of this requirement:

In order to eliminate the cases in which the unrelated business income is incidental, 1987 U.S. Tax Ct. LEXIS 103">*160 both the House bill and your committee's bill include a specific exemption of $ 1,000. This, in addition to the requirement that such businesses must be carried on "regularly" to be taxable, will dispose of most of the nuisance cases. Moreover, imposition of the tax in cases where the income is below $ 1,000 would involve excessive costs of collection and payment.

The House report (H. Rept. 2319, 81st Cong., 2d Sess., at 37 (1950), 1950-2 C.B. 380, 409) provides almost exactly the same explanation.

In the instant case, petitioner each year attempts to sell Christmas cards to some 50,000 of its members. It has established an elaborate mechanism for targeting its activities and for keeping current the list of targeted members. In 1974, 1975, and 1976, petitioner's Christmas card activity, together with similar activity by other tax-exempt organizations, constituted a significant portion of the total Christmas card market. About 13 percent of greeting cards are distributed by direct marketing or mail including tax-exempt organizations. Lipschutz' sole clientele was "nonprofit" tax-exempt organizations, and a major portion of Lipschutz' business involved1987 U.S. Tax Ct. LEXIS 103">*161 Christmas card programs like the one petitioner conducted. During 1974, 1975, and 1976, Lipschutz' share of the Christmas card market was 1.52 percent, 1.84 percent, and 2.12 percent, respectively.

Petitioner's profits from the Christmas cards program are not "incidental"; petitioner's financial statements indicate (table 2 supra) that this program grew substantially during the years before the Court and, by the last of these years, it had become petitioner's second largest source of revenue. The program's consistency, size, purposefulness, and impact on competition lead us to conclude that this is not one of 89 T.C. 7">*37 the "nuisance cases" that the Congress sought to eliminate from the unrelated business income tax.

Although the matter is not free from doubt, we conclude that petitioner's Christmas card activities during the years in issue were more like those which the regulations treat as "regularly carried on", than they were like those which the regulations treat as not being regularly carried on. We conclude that this result is consistent with the Congress' purpose. We conclude that petitioner's activities were regularly carried on by it, within the meaning of section 1987 U.S. Tax Ct. LEXIS 103">*162 512(a)(1).

We hold for respondent on this issue.

Under sections 512(a)(1) and 513(a), even if an exempt organization regularly carries on a trade or business, the income therefrom is not subject to the unrelated business income tax if the trade or business is "substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501" (sec. 513(a)).

Petitioner contends that its "utilization of Christmas cards as a premium is an item which enhances the good feelings of members." Thus, petitioner contends, the Christmas card program "is substantially related to the Petitioner's exempt purpose of promoting comradeship amongst Petitioner's members."

Respondent, relying on section 1.513-1(d)(2), Income Tax Regs., ³⁸ argues that whether we view petitioner as being an 89 T.C. 7">*38 exempt organization under section 501(c)(4) (relating to social welfare organizations, etc.) or section 501(c)(19) (relating to veterans' organizations), the Christmas1987 U.S. Tax Ct. LEXIS 103">*163 card program bears no causal relationship to the advancement of the exempt purposes of the organization.

1987 U.S. Tax Ct. LEXIS 103">*164 We agree with respondent.

We have concluded, and we have found, that petitioner's Christmas card program was in substance the sale of goods. We have concluded, and we have found, that petitioner conducted the Christmas card program with the predominant intent of producing income. In applying the "substantially related" test to the Christmas card program, we are to focus on the manner of petitioner's operation of the program, and not on the benefits to petitioner's members. United States v. American College of Physicians, 475 U.S. 834">475 U.S. at 848-849; Shiloh Youth Revival Centers v. Commissioner, 88 T.C. 565">88 T.C. 565, 88 T.C. 565">575-576 (1987).

Petitioner chose to use a marketing device that involved sending goods to prospective purchasers without requiring orders or payment in advance. We may speculate that the "good feelings" of those of petitioner's members who received the Christmas cards were "enhanced". On the basis of the record in the instant case, we conclude that the manner in which petitioner operated its program was a "straight-forward marketing" device used primarily to increase profits on sales and not primarily to enhance good feelings. 1987 U.S. Tax Ct. LEXIS 103">*165 See Florida Trucking Association v. Commissioner, 87 T.C. 1039">87 T.C. 1039, 87 T.C. 1039">1045 (1986).

We do not believe it is helpful, in resolving the instant case, to engage in an analysis of the circumstances in which enhancing the good feelings of an organization's members can be a "purpose or function constituting the basis for [the organization's] exemption under section 501". (Sec. 513(a).) It suffices to conclude that, in the instant case, we do not believe that the Christmas card program contributed importantly to that purpose, other than by producing income for petitioner.

89 T.C. 7">*39 We hold for respondent on this issue.

Petitioner contends that (1) substance controls over form, (2) the Christmas card program served to keep the dues lower than they otherwise would be, (3) the Christmas card program amounted to "a means of requesting additional voluntary dues from the members" and, (4) such voluntary dues are not subject to the unrelated business income tax.

Respondent agrees that substance controls over form, but notes "that courts rarely permit a taxpayer to deny the form of his own transactions." Respondent argues that "the term voluntary dues1987 U.S. Tax Ct. LEXIS 103">*166 is somewhat a contradiction in terms." Respondent asserts that petitioner's decision-making and record-keeping procedures for dues were different from those employed for receipts from the Christmas card program. Respondent concludes that petitioner's dues arguments are not a justification for excluding petitioner's Christmas card program receipts from the unrelated business income tax.

We agree with respondent's conclusion.

The unrelated business income tax applies or not, depending on the source of the organization's receipts. With exceptions not here relevant (see, e.g., paragraphs (3) and (4) of sec. 512(a)), the use to which the organization puts its revenues does not affect the inclusion of the revenues in unrelated business income. See, e.g., United States v. American College of Physicians, 475 U.S. 834">475 U.S. at 838. Accordingly, it does not matter whether petitioner's receipts from the Christmas card program were used to reduce dues, or to delay an increase in dues, or for any of the charitable or other activities that petitioner conducted.

If petitioner had acquired the funds by raising dues, the unrelated business income tax would not apply. Petitioner1987 U.S. Tax Ct. LEXIS 103">*167 chose to acquire its funds by regularly carrying on an unrelated trade or business and so the unrelated business income tax does apply.

We hold for respondent on this issue.

Section 512(a)(1) provides that "the term 'unrelated business taxable income' means the gross income derived by 89 T.C. 7">*40 any organization from any unrelated trade or business * * *, less the deductions allowed by this chapter which are directly connected with the carrying on of such trade or business." Therefore, in order for an organization to have "unrelated business taxable income", it must have "gross income derived * * * from any unrelated trade or business."

Section 61(a) provides that "except as otherwise provided in this subtitle [subtitle A, relating to income taxes], gross income means income from whatever source derived". Section 102(a), ³⁹ which is in subtitle A, provides that gifts are excluded from gross income. Consequently, if a receipt of property is properly considered a "gift", it is not includable in "gross income". Commissioner v. Duberstein, 363 U.S. 278">363 U.S. 278, 363 U.S. 278">284 (1960); Estate of McAdow v. Commissioner, 12 T.C. 311">12 T.C. 311, 12 T.C. 311">316 (1949).1987 U.S. Tax Ct. LEXIS 103">*168 See Parrott v. Commissioner, 1 B.T.A. 1">1 B.T.A. 1 (1924). It follows that if the receipt is not "gross income", then it is not a part of "unrelated business taxable income" as defined in section 512(a)(1).

In United States v. American Bar Endowment, 477 U.S. at    , the Supreme Court endorsed the two-part test of Rev. Rul. 67-246, 1967-2 C.B. 104, for determining how much of a dual payment transaction constitutes a gift. As the Supreme Court noted, the Tax Court has adopted the same approach in Murphy v. Commissioner, 54 T.C. 249">54 T.C. 249, 54 T.C. 249">254 (1970). ⁴⁰

1987 U.S. Tax Ct. LEXIS 103">*169 Under this approach, firstly, the payment can be a gift only to the extent it exceeds the fair market value of the benefit received. Secondly, the portion of the payment that passes the first test is a gift only to the extent it was paid with the intention of making a gift. E.g., Considine v. Commissioner, 74 T.C. 955">74 T.C. 955, 74 T.C. 955">968-969 (1980).

Petitioner contends that each payor made a gift (excludable from petitioner's income) to the extent of the excess of (a) the amount that person paid over (b) the fair market value of the box of Christmas cards that person received. 89 T.C. 7">*41 Petitioner asserts that the fair market value per box was $ 1.45 for the 1974 program, $ 1.59 for the 1975 program, and $ 1.77 for the 1976 program. Respondent concedes that such an excess is excludable, but only to the extent that the recipient of a box paid more than $ 5. Respondent points to the fair market value testimony of his expert witness ($ 3 to $ 5 per box), to the Lipschutz assurances that the Christmas cards it would supply would be worth $ 7 to $ 9 per box, and to the indications on the Christmas cards themselves that they were to list for $ 0.50 each. (Since each1987 U.S. Tax Ct. LEXIS 103">*170 box contained 20 cards, this means that the cards in each box listed for an aggregate of $ 10.) Petitioner stresses the poor quality of the cards ⁴¹ -- "rudimentary folding; inexpensive paper stock; inferior embossing" -- as justification for its contention that the boxes of Christmas cards were worth less than the amounts petitioner asked its members to pay.

Petitioner has the burden of proof as to fair market value and motive of the payors. 290 U.S. 111">Welch v. Helvering, supra; Hornung v. Commissioner, 47 T.C. 428">47 T.C. 428, 47 T.C. 428">438-439 (1967).

The Christmas cards were generally paid for by people who used them for mailing to friends and relatives and who acquired them one box at a time. We conclude that the relevant market for determining fair market value is retail or direct (rather than, e.g., wholesale or job-lot) 1987 U.S. Tax Ct. LEXIS 103">*171 sales by the box (rather than, e.g., individual cards). See Anselmo v. Commissioner, 80 T.C. 872">80 T.C. 872 (1983), affd. 757 F.2d 1208">757 F.2d 1208 (11th Cir. 1985).

In addition to the testimony of the parties' expert witnesses, which in the instant case sets the parameters of possible fair market values, we have information about the "contributions" that petitioner requested, petitioner's offer to send additional boxes at the same price, and petitioner's membership's response to petitioner's requests and offers.

As table 1, supra, indicates, substantially all the payments were in precisely the amount of petitioner's requests. This may mean that most of those responding thought that they were getting bargains (i.e., that the boxes had greater fair market values). However, if this were so, then we would expect to see substantial numbers of people ordering 89 T.C. 7">*42 additional boxes at the requested price. Table 1 shows that, of the boxes to which members responded (i.e., total boxes shipped, less "no participation" boxes), for taxable years 1975 and 1977, about 4 percent consisted of additional orders; for 1976 (the year in which the requested1987 U.S. Tax Ct. LEXIS 103">*172 amount was increased from $ 2 to $ 3), about 2 percent. This low additional order rate suggests that the fair market values did not significantly exceed the requested amounts.

On the other hand, the fact that substantially all the payments precisely matched petitioner's requests may mean that most of those who participated were motivated by charitable considerations to pay more than fair market value. However, if this were so, we would not expect orders for additional boxes at the requested price. It would be simpler to make any additional contributions by sending a larger check for the first box rather than go through the trouble of sending additional orders and having to wait for the additional, hypothetically overpriced, cards to arrive. Thus, the fact that some members took the trouble to go through the reorder process suggests that the fair market values were not significantly less than the requested amounts.

We cannot set fair market values with a high degree of confidence that our conclusions are precisely correct. However, we believe that the record in the instant case warrants our conclusion that the fair market values approximate the requested amounts. Thus, we conclude, 1987 U.S. Tax Ct. LEXIS 103">*173 and we have found, that the Christmas cards for taxable year 1975 had a fair market value of $ 2 per box; for 1976 and 1977, $ 3 per box. We conclude, and we have found, that those who paid more than these amounts intended to make gifts of the excesses to petitioner.

We hold that, for any year, amounts paid in excess of the amounts petitioner requested for that year are excludable from petitioner's gross income from its unrelated trade or business for that year.

As a result of the foregoing, we hold, for respondent, that much of petitioner's receipts from its Christmas card program is subject to the unrelated business income tax for 89 T.C. 7">*43 taxable years 1975, 1976, and 1977. Because we hold that some of those receipts are not includable in petitioner's gross income, and because of concessions by respondent (referred to in the text preceding table 3 supra),

Decision will be entered under Rule 155.