87 T.C. 747">*747 Respondent determined deficiencies in petitioner's income tax as follows: 87 T.C. 747">*748

1986 U.S. Tax Ct. LEXIS 45">*49 The issue for decision is whether the receipts of petitioner generated by certain listings in The Trooper magazine constitute income derived from an unrelated trade or business under section 511, ¹ and if so, whether such receipts are excludable from unrelated business taxable income as royalties under section 512(b)(2).

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by reference.

Petitioner the Fraternal Order of Police, Illinois State Troopers Lodge Number 41 (FOP), is a not-for-profit corporation organized under the laws of the State of Illinois and had its principal place of business in Springfield at the time it filed its petition. Petitioner is an exempt 1986 U.S. Tax Ct. LEXIS 45">*50 organization under section 501(c)(8). Its active members are regularly appointed and commissioned police officers in the Illinois Department of Law Enforcement or Troopers in the Illinois State Police. FOP's constitution and bylaws state that its purpose is to assist worthy members, their families, widows, and orphans.

In August 1975, FOP formed the Troopers Alliance (Alliance). Alliance had basically the same membership as FOP and was formed to carry out the specific goal of providing money for hospitalization and dental programs for members and their families.

In September 1975, Alliance entered into a solicitation and publishing agreement (agreement I) with Organization Services Corp. (OSC) for the publication of a magazine known as The Trooper. Under agreement I, Alliance was to 87 T.C. 747">*749 receive 20 percent of the "gross advertising revenue actually collected" by OSC. Agreement I referred to parties solicited to place "listings" in the magazine as "advertisers" and to "listings" as "advertising." The solicitation program was referred to as the "ad solicitation program," the "advertising marketing program," and the "marketing of advertising." Agreement I also provided that 1986 U.S. Tax Ct. LEXIS 45">*51 OSC was to determine the "advertising rates * * * for local and national advertisers" and referred to the receipts to be derived from the contracts as "advertising revenue."

On December 20, 1975, Alliance assigned all of its right, title, and interest in agreement I to petitioner. On December 23, 1975, petitioner and OSC canceled agreement I and entered into a second solicitation and publishing agreement (agreement II). Agreement II was identical in all material respects to agreement I, except that under the new agreement petitioner was given greater control over the bank account into which the revenues were to be deposited. Petitioner's executive committee was then informed that Alliance had been disbanded and that its "ad solicitation program" would thereafter be conducted by petitioner. The committee was also advised that future proceeds from the program would be used to provide death benefits, legal assistance, scholarships, hardship assistance, and possibly dental insurance for FOP members and their families.

On December 24, 1978, petitioner and OSC entered into another publishing agreement (agreement III). Agreement III provided that OSC was to publish each issue of The 1986 U.S. Tax Ct. LEXIS 45">*52 Trooper within 10 weeks after having collected $ 150,000 in "advertising revenue." Agreement III also increased FOP's share of "gross advertising revenue actually collected" from 20 percent to 23 percent.

The Trooper is comparable in quality to most nationally published commercial magazines, and in content, is almost identical to Law and Order, an independent magazine published for policemen. Its editorials and articles are of particular interest to police officers and cover a wide range of professional, commercial, consumer, and leisure topics. The Trooper's circulation during the years in issue was approximately 2,000. Copies were distributed to FOP members and associate members, businesses and individuals 87 T.C. 747">*750 having listings in The Trooper, Illinois legislators and other public officials, as well as other persons designated by petitioner from time to time. One of petitioner's officers served as executive editor of the magazine and petitioner had the right to censor text, editorials, and business listings, as well as to control any reprints.

The business listings in The Trooper were of two types, both of which covered a wide range of professional, commercial, consumer, 1986 U.S. Tax Ct. LEXIS 45">*53 and leisure goods or services. The first type of listing was the business directory which classified and arranged the listers in the same manner as the "yellow pages" of a telephone directory. The business directory was preceded by this statement:

ON THE FOLLOWING PAGES, listed by category of service or product, are advertisers who support The Trooper magazine. Consider these fine companies when making purchases for yourself or your family.

The second type of listings were referred to as "large listings" and included such well-known companies or products as American Airlines, Michelob Beer, and Johnny Carson Clothes, as well as Midas Mufflers and Ryder Trucks. The Trooper had an "Advertisers' Index" which contained the name of the sponsor of each large listing and the page upon which its listing was located. Large listings contained the usual elements associated with advertisements such as blocking, illustrations, signatures, trademarks, and emblems. Many of the large listings contained well-known slogans used by the sponsors in their national advertising.

OSC employed an independent contractor to solicit listings for individuals and corporations. The contractor or one of his1986 U.S. Tax Ct. LEXIS 45">*54 employees would contact a potential lister and, after a brief introduction, would inform the potential lister that FOP was putting together the next issue of The Trooper, the proceeds from which would be added to FOP's death fund and used to aid the families of policemen and troopers killed or injured in the line of duty. The potential lister would then be asked to sponsor a "nice listing" in the magazine. All solicitations were monitored by FOP members.

The rates for listings during the years in issue were as follows: 87 T.C. 747">*751

Each sponsor of a listing in The Trooper received an acknowledgement form which read in part, as follows:

1986 U.S. Tax Ct. LEXIS 45">*55 Businesses listing in The Trooper frequently noted on their checks that the payments were for "advertising." The bank account for the "advertising marketing program" was in petitioner's name and was controlled by petitioner.

The number of issues of The Trooper published during the years under consideration were as follows:

Petitioner received the following amounts from OSC for business listings during the years at issue: 87 T.C. 747">*752

In its unrelated business taxable income for the taxable years ended September 30, 1976, through September 30, 1979, petitioner included as "gross advertising income" receipts from the large listings but not the receipts from the business directory. For the taxable year ended September 30, 1980, none of the listing receipts were included in unrelated business taxable income.

In his notice of deficiency, respondent determined that all of petitioner's receipts from the listings constituted unrelated business1986 U.S. Tax Ct. LEXIS 45">*56 taxable income.

OPINION

Section 511² imposes a tax upon a tax-exempt organization's "unrelated business taxable income." ³1986 U.S. Tax Ct. LEXIS 45">*58 Sec. 511(a). 87 T.C. 747">*753 "Unrelated business taxable income" is defined by section 512(a)(1) to mean "the gross income derived by any organization from any unrelated trade or business (as defined in section 513) regularly carried on by it less the deductions allowed by this chapter which are directly connected with the carrying on of such trade or business." "Unrelated trade or business," in turn, is defined as "any trade or business the conduct of which is not substantially related * * * to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption." Sec. 513(a). ⁴ Therefore, petitioner's business listing receipts are taxable if (1) the publication of the business listings is a "trade or business," (2) it is regularly carried on, and (3) it is not substantially related to petitioner's tax-exempt purposes. Sec. 1.513-1(a), Income Tax Regs.; United States v. American Bar Endowment, 475 U.S.    (1986); United 87 T.C. 747">*754 1986 U.S. Tax Ct. LEXIS 45">*57 , 475 U.S.    (1986).

1986 U.S. Tax Ct. LEXIS 45">*59 Respondent determined that petitioner's publication of The Trooper constituted an unrelated trade or business within the meaning of section 513 and the receipts therefrom were "unrelated business taxable income" under section 511. Petitioner contests respondent's determination on alternative grounds: (1) The publication of The Trooper does not constitute a trade or business within the meaning of section 513; and (2) even if the publication is a trade or business, the receipts generated from the business listings constitute royalties excluded under section 512(b)(2).

As to the first ground, petitioner concedes that the publication of the paid business listings is regularly carried on and is not substantially related to its exempt purposes. However, petitioner argues that the receipts from the listings are not taxable because: (1) The listings are not advertising; and (2) their publication did not constitute a "trade or business" under section 513(c). Petitioner bears the burden of proof. Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933); Rule 142(a).

We note that neither the Code nor respondent's regulations define the term "advertising" or "advertisement." 1986 U.S. Tax Ct. LEXIS 45">*60 However, after carefully examining the record and copies of The Trooper we are convinced that both the larger listings and the business listings constitute "advertising." To conclude otherwise we would have to ignore the fact that the vast majority of the listings in The Trooper are composed of slogans, logos, trademarks, and other information which is similar, if not identical in content, composition, and message to the listings found in other professional journals, newspapers, and the "yellow pages" of telephone directories. We also note that the contracts with OSC, FOP's business forms, and the magazine itself repeatedly use such words and phrases as "advertising revenues," "advertisers," "prospective advertisers," "advertising marketing program," and "advertising," to describe the listings and related activities.

With regard to petitioner's argument that the publication of advertising in The Trooper is not a trade or business we note that on December 12, 1967, the Treasury Department 87 T.C. 747">*755 promulgated regulations under section 513, as it then existed, concerning the application of the unrelated business tax to business activities constituting only part of a much larger endeavor1986 U.S. Tax Ct. LEXIS 45">*61 which is admittedly exempt. ⁵ In response to criticism of this regulation, section 513(c) was amended, effective January 1, 1970, to read as set forth in the margin at footnote 4. With regard to the amendment, the House committee report stated:

Your committee believes that a business competing with taxpaying organizations should not be granted an unfair competitive advantage by operating tax free unless the business contributes importantly to the exempt function. It has concluded that by this standard, advertising in a journal published by an exempt organization is not related to the organization's exempt functions, and therefore it believes that this income should be taxed.

* * * *

Under this provision, it is anticipated that advertising income from publications (whether or not the publications are related to the exempt purpose of the organization) will constitute unrelated business income to the extent it exceeds the expenses related to the advertising, and, if the editorial aspects of publication are carried on at a loss, to the extent it exceeds this loss.

[H. Rept. 91-413 (1969), 1969-3 C.B. 199, 232. Emphasis supplied.]

87 T.C. 747">*756 In the1986 U.S. Tax Ct. LEXIS 45">*62 Senate committee report, the following comments appear:

The committee agrees with the House that the regulations reached an appropriate result in specifying that when an exempt organization carries on an advertising business in competition with other taxpaying advertising businesses, it should pay a tax on the advertising income. * * * For this reason, the committee agrees with the House that the regulations, insofar as they apply to advertising and related activities, should be placed in the tax laws. [S. Rept. 91-552 (1969), 1969-3 C.B. 423, 472. Emphasis supplied.]

1986 U.S. Tax Ct. LEXIS 45">*63 Recently the Supreme Court had occasion to consider section 513(c) as amended and stated that "The statute clearly established advertising as a trade or business * * *" [which] "is conceded in this case, as it must be, because Congress has declared unambiguously that the publication of paid advertising is a trade or business activity distinct from the publication of accompanying educational articles and editorial content." United States v. American College of Physicians, 475 U.S.    (1986).

Another factor which supports a finding that petitioner's listings constituted a trade or business is the fact that FOP's arrangements with OSC were obviously conducted with a profit motive and, in fact, were very profitable. The profit is not surprising since under the arrangement, FOP's share of the receipts was based upon gross revenue with no risk or expense involved.

Petitioner would have us discount its profit motive and focus instead upon whether its listing activities constituted unfair competition with others in the advertising field. In so arguing, petitioner asserts that under our rule in Golsen v. Commissioner, 54 T.C. 742">54 T.C. 742, 54 T.C. 742">756-757 (1970), affd. 1986 U.S. Tax Ct. LEXIS 45">*64 445 F.2d 985">445 F.2d 985 (10th Cir. 1970), cert. denied 404 U.S. 940">404 U.S. 940 (1971), we are constrained to follow the ruling to that effect by the Court of Appeals to which this case is appealable in Hope School v. United States, 612 F.2d 298">612 F.2d 298, 612 F.2d 298">303, 612 F.2d 298">304 (7th Cir. 1980). Assuming, without so holding, that the Seventh Circuit's ruling in Hope School is still viable after the decision of the Supreme Court in United States v. American College of Physicians, supra, we disagree with petitioner because we here are faced with different facts from those found in Hope School. In that case, an exempt school under section 87 T.C. 747">*757 501(c)(3) solicited contributions by mailing greeting cards to potential donors who could keep the cards without obligation whether or not they sent the school a contribution. Here, we are presented with obvious advertising in the magazine of a section 501(c)(8) organization. Therefore, the decision in Hope School cannot be considered "squarely on point." Golsen v. Commissioner, 54 T.C. 742">54 T.C. 757.

From all of the above, the conclusion is inescapable that petitioner's1986 U.S. Tax Ct. LEXIS 45">*65 listing activities constituted advertising and as such amounted to a trade or business. Since petitioner has conceded that such activities were regularly carried on and were not substantially related to its exempt purposes, the receipts from such activities are "unrelated business taxable income."

Petitioner further contends, however, that even if its listing receipts constitute "unrelated business taxable income" under section 513, such receipts are royalties and are excluded from taxation by section 512.

Section 512(a)(1) states the general rule that:

Except as otherwise provided in this subsection, the term "unrelated business taxable income" means the gross income derived by any organization from any unrelated trade or business (as defined in section 513) regularly carried on by it, less the deductions allowed by this chapter which are directly connected with the carrying on of such trade or business, both computed with the modifications provided in subsection (b).

Insofar as applicable here, section 512(b)(2) provides that one of the modifications referred to in subsection (a) is that "there shall be excluded all royalties * * * whether measured by production or by gross1986 U.S. Tax Ct. LEXIS 45">*66 or taxable income."

Generally, a royalty is a payment for the use of a right such as a trademark, trade name, service mark, or copyright, whether or not the property represented by the right is used. See, e.g., Commissioner v. Wodehouse, 337 U.S. 369">337 U.S. 369 (1949); Rohmer v. Commissioner, 153 F.2d 61">153 F.2d 61 (2d Cir. 1946); Commissioner v. Affiliated Enterprises, Inc., 123 F.2d 665">123 F.2d 665 (10th Cir. 1941), cert. denied 315 U.S. 812">315 U.S. 812 (1942); Sabatini v. Commissioner, 98 F.2d 753">98 F.2d 753 (2d Cir. 1938). However, in Disabled American Veterans v. United States, 650 F.2d 1178">650 F.2d 1178, 650 F.2d 1178">1189 (Ct. Cl. 1981), the Court of Claims concluded that royalties excluded under section 512(b)(2):

87 T.C. 747">*758 are those which constitute passive income, such as the compensation paid by a licensee to the licenser for the use of the licenser's patented invention, * * * or the share of production reserved to the owner of property for permitting another to work mines and quarries or drill for oil or gas * * * [650 F.2d 1178">650 F.2d at 1189; citations 1986 U.S. Tax Ct. LEXIS 45">*67 omitted.]

See also J.E. & L.E. Mabee Foundation, Inc. v. United States, 389 F. Supp. 673">389 F. Supp. 673 (N.D. Okla. 1975), affd. 533 F.2d 521">533 F.2d 521 (10th Cir. 1976).

Whether an item of income falls within one of the modifications provided in section 512(b) is to be determined from all the facts and circumstances in each case. Sec. 1.512(b)-1, Income Tax Regs. In the determination, petitioner has the burden of proof. Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933); Rule 142(a).

On this issue, petitioner contends that it sold to OSC the right to exploit petitioner's name in return for a percentage of the gross advertising revenues and consequently the listing receipts were in actuality royalty payments. On the other hand, respondent contends that the receipts cannot be considered royalties because petitioner's role in the publication of The Trooper was not passive. We agree with respondent because under the various agreements with OSC petitioner had final authority over the content of any issue of the The Trooper and had the right to provide its executive editor, to select the subject of and prepare its editorials and1986 U.S. Tax Ct. LEXIS 45">*68 feature articles, to oversee and monitor the solicitor's activities in the advertising program, to control the program's bank account, and to control the reprint of any material published in The Trooper.

We conclude, therefore, that petitioner's role was not passive, the receipts from the listings did not constitute royalties, and such receipts are not excluded under section 512(b)(2) from petitioner's unrelated business taxable income.

Decision will be entered under Rule 155.