Sierra Club, Inc. - Page 18




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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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