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business, both computed with the modifications
provided in subsection (b).
Accordingly, income is UBTI if it arises from a regularly
carried-on trade or business that is not substantially related to
the organization's tax-exempt purpose. See sec. 1.513-1(a),
Income Tax Regs. Royalties, however, are excluded from UBTI
pursuant to section 512(b)(2).2 See Sierra Club, Inc. v.
Commissioner, 86 F.3d 1526, 1531 (9th Cir. 1996), affg. T.C.
Memo. 1993-199 and revg. on another issue 103 T.C. 307 (1994);
Disabled Am. Veterans v. Commissioner, 94 T.C. 60, 76 (1990) (DAV
II), revd. on other grounds 942 F.2d 309 (6th Cir. 1991).
Neither the Code nor the regulations define the term
"royalty" for UBTI purposes. Instead, section 1.512(b)-1, Income
Tax Regs., provides that "Whether a particular item of income
falls within any of the modifications provided in section 512(b)
shall be determined by all the facts and circumstances of each
2 Sec. 512(b) provides:
SEC. 512(b). Modifications.--The modifications
referred to in subsection (a) are the following:
* * * * * * *
(2) There shall be excluded all
royalties (including overriding
royalties) whether measured by
production or by gross or taxable
income from the property, and all
deductions directly connected with
such income.
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