IRS rules that online job placement service results in UBTI

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Overview

The IRS ruled in TAM 202039018 that income derived by a tax-exempt organization from operation of an online job placement service resulted in unrelated business taxable income (UBTI). The taxpayer contended that income from the placement service constituted royalties from a vendor that hosted and managed the placement service. Royalty income would be excluded from UBTI under Section 512(b)(2).  

Relying on the language of the written agreement between the taxpayer and the vendor, and other facts and circumstances, the IRS concluded that the income amounted to fees paid to the taxpayer by users of the placement service and not royalty income. Thus, the income should be included in the taxpayer’s UBTI.

The IRS continues to examine tax-exempt organizations on the identification of income as UBTI.  Organizations should understand the characteristics and tax implications of licensing arrangements that can generate nontaxable royalties and fee-for-service arrangements that can produce UBTI. Organizations should take into account the potential for UBTI from commercial arrangements and determine whether such agreements are drafted to reflect the nature of the transaction and intention of the parties.

The takeaway

The IRS continues to examine tax-exempt organizations on the identification of income as UBTI.  Organizations should understand the characteristics and tax implications of licensing arrangements that can generate nontaxable royalties and fee-for-service arrangements that can produce UBTI. Organizations should take into account the potential for UBTI from commercial arrangements and determine whether such agreements are drafted to reflect the nature of the transaction and intention of the parties.

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Rob Friz

Health Services Tax Leader, PwC US

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