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II. Internal Revenue Code
Pursuant to sections 511 through 513, an organization
otherwise exempt from the income tax is required to pay tax, at
regular corporate rates, on its “unrelated business taxable
income” (UBTI). UBTI is defined by section 512(a)(1) as “the
gross income derived by any organization from any unrelated trade
or business * * * regularly carried on by it * * * [less certain
deductions and with certain modifications].” As relevant here,
section 512(b)(2) excludes from UBTI “all royalties * * * whether
measured by production or by gross or taxable income from the
property”.
III. Definition of Royalties
In Sierra Club (1996), 86 F.3d at 1532, the Ninth Circuit
held: “[U]nder � 512(b)(2) ‘royalties’ are payments for the
right to use intangible property.” Accord Disabled Am. Veterans
v. Commissioner, 94 T.C. 60, 70 (1990), revd. on other grounds
942 F.2d 309 (6th Cir. 1991). The Ninth Circuit further held
that a royalty is by definition “passive” and, thus, “cannot
include compensation for services rendered by the owner of the
property.” Sierra Club (1996), 86 F.3d at 1532.
IV. Arguments of the Parties
Both parties fasten on the definition of the term
“royalties” adopted by the Ninth Circuit. Petitioner argues that
its name, logo, and mailing list are all intangible assets,
which, by one of the agreements (the SC-ABS agreement), it
licensed to ABS in return for payments that, in form and
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