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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
income is a royalty is decided based on the facts and
circumstances. Sec. 1.512(b)-1, Income Tax Regs.
Respondent contends that USNB’s payments are not royalties
because: (1) USNB did not pay petitioner to use a valuable
intangible property right; (2) petitioner did not use its own
mailing list; (3) the payments to petitioner were for services
rendered by petitioner; and (4) the enactment of section 513(h)
precludes royalty treatment.
1. Whether USNB Paid Petitioner To Use Valuable
Intangible Property Rights
Respondent contends that USNB did not pay petitioner to use
valuable intangible property rights because USNB did not display
petitioner's logo on the cards. We disagree.
The classic VISA card bore a photograph of the Memorial
Union Building and the words "OREGON STATE UNIVERSITY Alumni
Association." The premier card also had those words but had no
photograph. USNB's failure to depict the Memorial Union Building
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