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In deciding whether income a taxpayer receives is royalty
income, we may consider the taxpayer's financial risks and
rewards, including whether the taxpayer has a net profits and
gross profits interest. See Sierra Club, Inc. v. Commissioner,
supra at 333.
In Sierra Club, the taxpayer did not have a net profits
interest in the royalty payments because its income was based on
a percentage of the total charges. Id. at 333. Instead, it had
a gross profits interest. A gross profits interest is the right
to share in the gross profits without bearing the risk of loss.
Id. Gross profits are the difference between sales and the cost
of goods sold. Black's Law Dictionary 703 (6th ed. 1990).
Petitioner had a gross profits interest in the credit card
program, not a net profits interest. Petitioner received a fixed
percentage of all of the authorized cash purchases and advances,
and a fixed amount for new accounts, regardless of whether USNB
had losses from the affinity credit card program. Here, as in
Sierra Club, no provision was made to periodically compute net
income or loss from the credit card program. The fact that
petitioner did not have a net profits interest supports
petitioner's contention that its income from the program was a
royalty.
5. Petitioner's Desire To Make Money From the Affinity
Credit Card Program
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