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Petitioner entered into an agreement with Wayneco
Enterprises, Inc. (Wayneco). Wayneco agreed to provide class
rings and commemorative watches to alumni. Wayneco paid
petitioner $25 for each item purchased.
I. Petitioner's Income From the Affinity Credit Card
Program
Petitioner grossed $223,566 in 1990 and $305,296 in 1991
from the affinity credit card program.
OPINION
A. Taxation of Unrelated Business Income
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 unrelated business income
under section 511(a)(2)(A) because it is tax exempt under section
501(c). 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).
B. Royalty Income
Royalty income is excluded from UBTI. Sec. 512(b)(2). A
royalty is a payment to use valuable intangible property rights.
Disabled Am. Veterans v. Commissioner, 94 T.C. 60, 70 (1990),
revd. on other grounds 942 F.2d 309 (6th Cir. 1991). Whether
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