Exempt Organization Loses UBI Case; Payments Held Not Royalties Nor for Convenience of Members

• Published date: 01 March 2018
• DOI: http://doi.org/10.1002/npc.30434
• Date: 01 March 2018

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

EXEMPT

ORGANIZATION LOSES

UBI CASE; PAYMENTS

HELD NOT ROYALTIES

NOR FOR CONVENIENCE

OF MEMBERS

The US Tax Court, on December 20, held that a tax-exempt charitable

organization, the purposes of which include promoting health care and medical

education, is liable for the unrelated business income tax on payments it received

for its services, rejecting the arguments that the revenue constitutes royalties or

that the underlying activities were carried on primarily for the convenience of its

members (New Jersey Council of Teaching Hospitals v. Commissioner).

Facts

The Council is a supporting organization with respect to its members, most of

which are teaching hospitals in New Jersey. Its purposes, as stated in its applica-

tion for recognition of exemption, are to “further undergraduate and graduate

medical education, to coordinate such education with the clinical programs avail-

able in [its affiliated] hospitals, and to help provide innovative and cost effective

health care delivery systems” in the state.

The Council contracted with two vendors to provide its members with a vari-

ety of services, including credit cards, internet use, research and polling, equip-

ment maintenance, transportation, debt collection, and group purchasing. Fees

were paid to it in exchange for administration of these programs and promotion

of them to its members.

During the years at issue, the Council annually received about $1.5 to nearly

$2 million in dues revenue. It received about $2.2 million in fees from vendors dur-

ing that period (approximately 23 percent of its total revenue). In the most recent

year involved, the gap between expenditures and dues was more than $700,000.

The Council conceded that the activities involved constitute a trade or busi-

ness, that this business was regularly carried on, and that the conduct of this busi-© 2018 Wiley Periodicals, Inc.

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DOI:10.1002/npc

Analysis of current developments in tax

and related law for nonprofit organiza-

tions and their professional advisors.

Volume 35 Number 3

March 2018

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in Case Construing Scope of

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A Detailed Look at Accuracy-

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Performance Art Organization

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Three Applications of Private

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IRS Creeping Back With

Erroneous Ruling About

Governance 5

Commerciality, Private Benefit

Doom Social Welfare Exemption 6

Other Recent IRS Private Letter

Rulings 7

Form 1023-EZ Regulations Issued 7

Taxpayer Advocate Strikes Again 7

IRS Issues Procedural Rules for

2018 8

Other Developments 8