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unrelated business are to be excluded from unrelated business
taxable income. The text of section 512(b)(2) provides as
follows:
There shall be excluded [from unrelated business taxable
income] 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.
Royalties reflect payment for the use of valuable intangible
property rights, such as trademarks, trade names, and copyrights.
See, e.g., Fraternal Order of Police v. Commissioner, 833 F.2d
717, 723 (7th Cir. 1987), affg. 87 T.C. 747 (1986); Rev. Rul. 81-
178, 1981-2 C.B. 135, 136.
Royalties, however, do not include payment for personal
services. See Sierra Club, Inc. v. Commissioner, 86 F.3d 1526,
1532 (9th Cir. 1996), affg. T.C. Memo. 1993-199, and revg. in
part on other grounds and remanding 103 T.C. 307 (1994); see also
Mississippi State Univ. Alumni, Inc. v. Commissioner, T.C. Memo.
1997-397; Rev. Rul. 81-178, 1981-2 C.B. 135, 136.
De minimis personal participation in an unrelated business
will not necessarily disqualify royalty treatment for payments
received by a tax-exempt organization. See Oregon State Univ.
Alumni Association, Inc. v. Commissioner, T.C. Memo. 1996-34,
affd. 193 F.3d 1098 (9th Cir. 1999).
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Last modified: May 25, 2011