The U.S. Tax Court issued an opinion holding that the fees that a tax-exempt organization (comprising hospitals and a medical school) received from third-party vendors for debt-collection services and group purchasing programs were subject to unrelated business income tax because the payments were derived from an “unrelated trade or business” that the organization regularly conducted.
The case is: New Jersey Council of Teaching Hospitals v. Commissioner, 149 T.C. No 22 (December 20, 2017). Read the Tax Court’s opinion [PDF 118 KB]
A tax-exempt charitable organization (pursuant to section 501(c)(3)) has as its exempt purposes the promotion of health care and medical education. During its calendar tax years 2004-2007, the organization contracted with two third-party vendors to provide its members (hospitals and a medical school) access to debt-collection services and group purchasing programs. The organization received fees from these vendors, in exchange for administering these programs and promoting the programs to its members.
On its Forms 990, Return of Organization Exempt From Income Tax, the organization treated all of these receipts as “substantially related” to the conduct of its tax-exempt purposes, and as exempt from federal income tax. The IRS, on examining the organization’s returns, determined that the fees received from the vendors constituted unrelated business taxable income (UBTI) and were subject to unrelated business income tax (UBIT).
The Tax Court held:
For more information, contact a tax professional with KPMG’s Washington National Tax practice:
Alexandra Mitchell | +1 202 533 6078 | firstname.lastname@example.org
Preston Quesenberry | +1 202 533 3985 | email@example.com
Randall Thomas | +1 202 533 3786 | firstname.lastname@example.org
© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.