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Fees for services provided by third-party vendors subject to UBIT

Fees for services provided by third-party vendors

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.


Related content

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:

  • The fees represented payments for services, not for the use of intangible property, and thus were not “royalties” within the meaning of section 512(b)(2). 
  • The business activities that gave rise to the fees were not “carried on * * * primarily for the convenience of its members” within the meaning of section 513(a)(2). 
  • Because the exclusions under sections 512(b)(2) and 513(a)(2) did not apply, the fees that the organization received from the third-party vendors were subject to UBIT—the fees were derived from an “unrelated trade or business” that the organization regularly conducted.


For more information, contact a tax professional with KPMG’s Washington National Tax practice:

Alexandra Mitchell | +1 202 533 6078 | aomitchell@kpmg.com

Preston Quesenberry | +1 202 533 3985 | pquesenberry@kpmg.com 

Randall Thomas | +1 202 533 3786 | randallthomas@kpmg.com

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