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:
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