Section of Taxation Publications
  VOL. 55
NO. 1
FALL 2001
Contents | TTL Home

 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
Denial of the Royalty Exclusion Because of Excessive Participation in Arkansas State Police Association v. Commissioner
Sharon Light


In Arkansas State Police Ass’n v. Commissioner, the Tax Court held that payments made to the Arkansas State Police Association (Association) by a magazine publisher out of advertising revenue did not qualify as royalties under section 512(b)(2) of the Code and were required to be included in the Association’s computation of unrelated business taxable income under section 511. The Tax Court applied an evolving participation-based test that yields an all-or-nothing result: if the taxpayer participates too much in the unrelated business, it loses all claim to the royalty exclusion from unrelated business taxable income. The court found that the Association’s participation in and control over the publication of The Arkansas Trooper exceeded the de minimis level permitted under royalty arrangements. Because that de minimis level is not yet clearly defined, the court did not assess penalties against the taxpayer for failure to file.

Part I of this Note explains the statutory distinction between royalties and unrelated business taxable income as interpreted by the regulations, revenue rulings, and case law. Part II of this Note discusses the facts of Arkansas State Police and describes the court’s decision. Part III analyzes the decision, finding that, under current case law, the court could reasonably have found that the Association participated too much to qualify for the royalty exclusion from unrelated business taxable income. Part III also suggests, however, that denying the royalty exclusion in full because the Association actively participated ignores the reality that the publisher was, for the most part, paying the Association for the use of its name and not for its services. Part IV discusses the tax planning implications of the case.



Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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