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Forms 990-T for 1989, 1990, and 1991, petitioner reported taxable
income from the sale of merchandise including rings and watches.
Petitioner reported commission income on insurance on Forms 990-T
for 1989 and 1990.
OPINION
A. Taxation of Unrelated Business Income and Royalties
Section 511(a)(1) imposes a tax on the unrelated business
taxable income (UBTI) of certain tax-exempt organizations.
Petitioner is subject to tax on its UBTI under section 511(a)(2)
because it is tax exempt under section 501(c). As a general
rule, income is UBTI if: (1) The income arises from a trade or
business, (2) the trade or business is regularly carried on, and
(3) the trade or business is not substantially related to the
organization's tax-exempt purpose. Sec. 512(a)(1); Veterans of
Foreign Wars v. Commissioner, 89 T.C. 7, 19-20 (1987).
Royalties are excluded from UBTI. Sec. 512(b)(2). Whether
income is a royalty is decided on the basis of all the facts and
circumstances. Texas Farm Bureau v. United States, 53 F.3d 120,
123 (5th Cir. 1995); sec. 1.512(b)-1, Income Tax Regs. The
taxpayer bears the burden of proof. Rule 142(a).
A royalty is a payment for the right to use valuable
intangible property rights; it is not a payment for services
rendered by the owner of the property. Texas Farm Bureau v.
United States, 53 F.3d at 123-124; Sierra Club, Inc. v.
Commissioner, 86 F.3d 1526, 1531-1532 (9th Cir. 1996), affg. T.C.
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