                            149 T.C. No. 22



                   UNITED STATES TAX COURT



NEW JERSEY COUNCIL OF TEACHING HOSPITALS, Petitioner v.
   COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 2822-16.                           Filed December 20, 2017.



       P is a tax-exempt charitable organization described in I.R.C.
sec. 501(c)(3) whose exempt purposes include promoting health care
and medical education. During its calendar tax years 2004-2007, P
contracted with third-party vendors, V1 and V2, to provide its mem-
bers (hospitals and a medical school) access to debt-collection serv-
ices and group purchasing programs. P received fees from V1 and V2
in exchange for administering these programs and promoting the pro-
grams to its members.

       On its Forms 990, Return of Organization Exempt From In-
come Tax, P treated all of these receipts as “substantially related” to
the conduct of its tax-exempt purposes, see I.R.C. sec. 513(a), and
thus as exempt from Federal income tax. The IRS selected P’s re-
turns for examination and determined that the fees it received from
V1 and V2 constituted unrelated business taxable income (UBTI)
subject to unrelated business income tax (UBIT) under I.R.C. secs.
511(a)(1) and 512(a).
                                         -2-

             1. Held: The fees P received from V1 represented payments
      for services, not for the use of intangible property, and thus did not
      constitute “royalties” within the meaning of I.R.C. sec. 512(b)(2).

             2. Held, further, the business activities that gave rise to the
      fees P received from V1 and V2 were not “carried on * * * primarily
      for the convenience of its members” within the meaning of I.R.C. sec.
      513(a)(2).

             3. Held, further, given the inapplicability of the exclusions in
      I.R.C. secs. 512(b)(2) and 513(a)(2), the fees P received from V1 and
      V2 were subject to UBIT because they were derived from an “unre-
      lated trade or business” that P regularly carried on.



      T. J. Sullivan and Joseph A. Rillotta, for petitioner.

      Joan Casali and Mark L. Hulse, for respondent.



                                     OPINION


      LAUBER, Judge: With respect to petitioner’s calendar tax years 2004,

2005, 2006, and 2007, the Internal Revenue Service (IRS or respondent) deter-

mined deficiencies in unrelated business income tax (UBIT) under section

511(a)(1) as follows:1


      1
        All statutory references are to the Internal Revenue Code (Code), in effect
for the tax years at issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure. We round all monetary amounts to the nearest dollar.
                                         -3-

                          Year                    Deficiency

                          2004                     $51,104
                          2005                     156,502
                          2006                     234,193
                          2007                     319,527

      Although petitioner is exempt from Federal income tax under section 501(a)

and (c)(3), it is subject to tax on its “unrelated business taxable income” (UBTI).

See secs. 511(a)(1), 512(a)(1). The question presented is whether fees petitioner

received under certain contracts with third parties are excluded from UBTI as

“royalties” under section 512(b)(2) or as amounts received in a trade or business

“carried on * * * primarily for the convenience of its members” under section

513(a)(2). We conclude that neither of these exclusions applies and hence that the

fees petitioner received are subject to UBIT.

                                    Background

      The parties submitted this case for decision without trial under Rule 122.

The stipulation of facts and the attached exhibits are incorporated by this refer-

ence. Petitioner had its principal place of business in New Jersey when it filed its

petition.

      Petitioner was incorporated in 1986 as University Health Systems of New

Jersey, Inc. In February 2001 it changed its name to New Jersey Council of
                                          -4-

Teaching Hospitals. Since its incorporation petitioner has been a membership or-

ganization whose members consist primarily of teaching hospitals operating in

New Jersey. At all relevant times petitioner’s board of trustees has consisted of

petitioner’s president and the chief executive officer (CEO) of each of its

members.

      In November 1988 the IRS issued petitioner a determination letter recogniz-

ing it as exempt from Federal income tax under section 501(a) and (c)(3). The IRS

classified petitioner as a public charity rather than a private foundation by virtue of

its status as a “supporting organization,” i.e., an entity organized and operated “ex-

clusively for the benefit of, to perform the functions of, or to carry out the pur-

poses of” one or more public charities. Sec. 509(a)(3)(A). The entities petitioner

supports are its members, all of which are tax-exempt organizations as specified in

section 509(a)(1) or (2).

      In its application for tax exemption petitioner stated that its “charitable ob-

jectives, like those of its supported organizations, are to further undergraduate and

graduate medical education, to coordinate such education with the clinical pro-

grams available in [its affiliated] hospitals, and to help provide innovative and cost

efficient health care delivery systems” in New Jersey. On its Forms 990, Return of

Organization Exempt From Income Tax, for 2004-2007, petitioner defined its ex-
                                        -5-

empt purposes to include “promoting health care, medical education and techno-

logy by studying and improving graduate medical education” and “articulat[ing] a

vision of a superior healthcare system for all New Jerseyans.” Petitioner incurred

the following expenses in advancing these goals:

                         Year                  Expenses

                         2004                 $1,895,228
                         2005                  2,214,338
                         2006                  2,299,562
                         2007                  2,633,921

      During 2004-2007 petitioner’s members consisted of 9 to 11 teaching hospi-

tals, one nonteaching hospital, and one medical school. Each member paid annual

dues. The dues for major teaching hospitals were generally set at $257,500 per

year; other members paid annual dues between $25,750 and $130,000. During the

tax years at issue petitioner received dues from its members as follows:

                         Year                    Dues

                         2004                 $1,570,750
                         2005                  1,828,250
                         2006                  1,893,250
                         2007                  1,932,500

      Besides dues income, petitioner received fees under contracts with third par-

ties. Petitioner’s “business model” was to offer various programs and services to

its members. If its members patronized or contracted with the third parties who
                                        -6-

supplied these programs and services, the third parties would make payments to

petitioner based on the revenues thus derived.

      The third-party programs and services petitioner offered to its members dur-

ing 2004-2007 included credit cards, internet services, research and polling, equip-

ment maintenance, transportation services, debt collection, and group purchasing

arrangements. The revenues at issue in this case were derived from agreements

with two third parties: OSI Collection Services, Inc. (OSI),2 which provided debt-

collection services, and Greater New York Hospital Association (GNYHA), which

provided (directly or through affiliates) group purchasing programs.3

A.    OSI Agreement

      OSI was formerly known as Payco-General American Credits, Inc. (Payco).

In July 1992 petitioner and Payco executed a contract, captioned “Service Agree-

ment,” that was renewed periodically through the tax years at issue. This agree-

ment recites that petitioner “had been appointed purchasing agent by certain of its



      2
      During 2004-2007 OSI was a subsidiary of Outsourcing Solutions, Inc. For
convenience we will refer to OSI and its parent collectively as OSI.
      3
        Petitioner also appears to have derived fees during 2004-2007 from third
parties that supplied its members with transportation services and research and
polling services. The aggregate amounts of these fees were $2,402 in 2004,
$3,273 in 2005, $5,042 in 2006, and $4,535 in 2007. The notice of deficiency did
not include these amounts in petitioner’s UBTI.
                                         -7-

members” and that petitioner “desire[d] to recommend the services of Payco to its

members” under the conditions stated in the agreement. For its part, Payco agreed

to provide petitioner’s current and future members, in exchange for specified fees,

“a full range of collection services for primary accounts, secondary accounts, and

accounts subject to litigation.”

      Article 1 of the agreement, captioned “Purpose,” states that petitioner “here-

by endorses Payco as a * * * collection agency and shall advise its members that

Payco is one of * * * [petitioner’s] selected vendors.” Article 3, which sets forth

petitioner’s “Rights and Responsibilities,” provides that petitioner “shall endorse

Payco as a * * * collection agency” and shall “advise its members that * * * Payco

is one of [petitioner’s] selected vendors to provide collection agency services.”

Neither these nor any other provisions of the agreement license Payco to use peti-

tioner’s intangible property or obligate petitioner to make intangible property

available to Payco. Nowhere in the agreement is there any reference to tangible or

intangible property owned by petitioner.

      To fulfill its obligations under the OSI agreement, petitioner listed OSI in

the “member services” section of its website. This listing included OSI’s logo, a

“hot link” to OSI’s website, and a paragraph-long description of OSI’s offerings.

During several board meetings petitioner’s president encouraged the CEOs of its
                                         -8-

member hospitals to hire OSI to perform their debt collection services, represent-

ing that OSI’s fees were important to petitioner’s financial stability. Petitioner

provided OSI with a list of its member hospitals, but that list was already publicly

available on petitioner’s website, along with the names and phone numbers of the

hospitals’ CEOs and chief financial officers.

      In article 2 of the agreement, captioned “Payco’s Rights and Responsibili-

ties,” Payco agreed to pay petitioner “for its services as group purchasing organi-

zation a fee equal to three percent (3%) of the amount collected on * * * [petition-

er’s] members’ accounts placed with Payco.” Additionally, “in consideration for

the coordination and liaison services to be provided by * * * [petitioner] in its ca-

pacity as group purchasing agent,” Payco agreed to pay petitioner a distinct 3% fee

“pursuant to a separate agreement” previously executed. During the tax years at

issue, OSI (as successor to Payco) paid petitioner aggregate fees as follows:

                          Year                   Fees

                          2004                  $97,577
                          2005                  157,304
                          2006                  165,049
                          2007                  120,399
                           Total                540,329

      During 2004 three of petitioner’s nine dues-paying members participated in

the OSI program. During 2005 three of petitioner’s ten dues-paying members par-
                                         -9-

ticipated in the OSI program. During 2006 three of petitioner’s 11 dues-paying

members participated in the OSI program. During 2007 four of petitioner’s ten

dues-paying members participated in the OSI program. Members who chose not

to participate in the OSI program were free to contract with other debt-collection

service providers. Petitioner did not track or assess, and cannot now quantify, the

extent to which its members saved money as a result of discounts or favorable pri-

ces offered by OSI.

B.    GNYHA Agreement

      In 2002 Health Alliance, Inc., a for-profit affiliate of petitioner, entered into

a “management agreement” with GNYHA.4 Under this agreement Health Alliance

was paid a share of the fees that GNYHA received as a result of enrollment by pe-

titioner’s members in certain group purchasing programs. This agreement applied

only with respect to hospitals that did not have contracts with GNYHA before be-

coming members of petitioner. The agreement had an initial term of two years but

was extended periodically through the tax years at issue.

      Health Alliance subsequently assigned to petitioner all of its rights and obli-

gations under the GNYHA agreement. Health Alliance filed its final Federal in-

      4
      Certain activities under this agreement were performed by affiliates of
GNYHA, including GNYHA Services, Inc., and GNYHA Ventures, Inc. For con-
venience we will refer to these entities collectively as GNYHA.
                                        -10-

come tax return for its 2003 tax year and apparently became dormant sometime the

following year. Thus, during the tax years at issue, all fee payments under the

GNYHA agreement were received by petitioner.

      During 2004-2007 GNYHA offered hospitals in New York, New Jersey,

and Connecticut the opportunity to select purchasing agreements from two port-

folios: its own “regional portfolio” and a “national portfolio” offered in conjunc-

tion with Premier, Inc., a national healthcare group purchasing organization. The

products and services that hospitals might purchase in this way included medical

and surgical supplies, pharmaceuticals, imaging and cardiology products, nutrition

services, operating room instruments, and various types of capital equipment. If a

hospital enrolled in either program, it was able to purchase products and services

from vendors at discounted prices that GNYHA and Premier had negotiated with

those vendors.

      Under the 2002 agreement petitioner received “sales-related administrative

fees” for promoting GNYHA’s group purchasing programs to its members and for

helping to administer those programs (e.g., by distributing application forms and

instructions). Petitioner listed GNYHA in the “member services” section of its

website. This listing included a description of GNYHA’s offerings, a “hot link” to

its website, and the name and telephone number of a GNYHA contact person.
                                        -11-

      The fees petitioner received from GNYHA were labeled “commissions” in

petitioner’s financial statements. These commissions were calculated as a percent-

age of the fees that vendors paid GNYHA and/or Premier with respect to pur-

chases by petitioner’s members who chose to participate in the group purchasing

programs. During the tax years at issue GNYHA paid petitioner fees as follows:

                         Year                      Fees

                         2004                    $77,407
                         2005                    303,996
                         2006                    524,754
                         2007                    820,388
                          Total                1,726,545

      During 2004 three of petitioner’s nine hospital members participated in a

GNYHA group purchasing program. During 2005 six of petitioner’s ten hospital

members participated in a GNYHA group purchasing program. During 2006 six

of petitioner’s 11 hospital members participated in a GNYHA group purchasing

program. During 2007 seven of petitioner’s ten hospital members participated in a

GNYHA group purchasing program. Members who chose not to enroll with

GNYHA were free to enter into group purchasing agreements with Premier direct-

ly or to participate in arrangements offered by other providers, such as the Volun-

tary Hospitals of America.
                                         -12-

      During 2004-2007 a hospital was not required to belong to an association

such as petitioner in order to participate in GNYHA’s group purchasing programs.

Hospitals received essentially the same vendor discounts regardless of whether

they joined individually or through an association. However, whereas GNYHA

paid fees to petitioner when its members enrolled through it, GNYHA did not pay

fees to hospitals that enrolled individually (and would not have paid fees to peti-

tioner’s members had they done so). Petitioner did not track or assess, and cannot

now quantify, the extent to which its members saved money (in absolute terms or

in comparison with other group purchasing programs available to them) as a result

of discounts made available through GNYHA.

C.    IRS Examination

      Petitioner timely filed Form 990 for each year at issue. On these returns it

treated all of its receipts as “substantially related” to the conduct of its tax-exempt

purposes, see sec. 513(a), and thus as exempt from Federal income tax. It did not

include with any of these returns Form 990-T, Exempt Organization Business In-

come Tax Return.

      Following an examination of these returns the IRS sent petitioner a timely

notice of deficiency determining that the fees it had received from OSI and

GNYHA constituted UBTI subject to tax under sections 511(a)(1) and 512(a).
                                           -13-

The IRS determined that petitioner had “marketed and administered” the GNYHA

program and that this activity was not substantially related to its educational pur-

poses. The IRS likewise concluded that the fees received from OSI were subject

to UBIT, concluding that a charity’s need for “revenues to accomplish its charit-

able mission does not make a questioned activity related to its exempt purposes.”

         In reaching these conclusions the IRS rejected petitioner’s reliance on sec-

tion 513(a)(2), which provides that an “unrelated trade or business” does not in-

clude an activity “which is carried on * * * by the organization primarily for the

convenience of its members.” According to the IRS, petitioner’s efforts to secure

“economic benefit[s] due to bulk marketing” did not constitute an activity under-

taken primarily for its members’ convenience. The IRS likewise rejected petition-

er’s reliance on section 512(b)(2), which excludes “royalties” from UBIT. In the

IRS’ view, OSI and GNYHA were paying fees to petitioner, not for use of its in-

tangible property, but for its services in endorsing, marketing, and administering

those programs.

         Petitioner timely petitioned this Court for redetermination of the deficien-

cies set forth in the notice. See supra p. 3. By order dated March 20, 2017, we

granted the parties’ motion to submit the case under Rule 122 for decision without

trial.
                                        -14-

                                    Discussion

A.    Burden of Proof

      The IRS’ determinations in a notice of deficiency are generally presumed

correct, and the taxpayer bears the burden of proving them erroneous. Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Petitioner does not con-

tend that the burden of proof should shift to respondent under section 7491. In

any event, because only legal issues remain, the burden of proof is irrelevant. See,

e.g., Nis Family Tr. v. Commissioner, 115 T.C. 523, 538 (2000).

B.    Governing Statutory Structure

      Congress enacted the UBIT regime in 1950, prompted in part by a universi-

ty’s acquisition of a macaroni company. See Note, “The Macaroni Monopoly:

The Developing Concept of Unrelated Business Income of Exempt Organiza-

tions,” 81 Harv. L. Rev. 1280 (1968). The goal of these provisions was to level

the playing field between for-profit companies and tax-exempt entities that engage

in business activities. Otherwise, charitable and educational organizations could

leverage their tax-exempt status to gain an unfair competitive advantage over

businesses required to pay the corporate income tax. See United States v. Am.

College of Physicians, 475 U.S. 834, 837-838 (1986); S. Rept. No. 81-2375, at 28

(1950), 1950-2 C.B. 483, 504.
                                          -15-

      Section 511(a)(1) imposes a tax at regular corporate tax rates on the UBTI

of most charitable and educational organizations. Section 512(a)(1) defines UBTI

as the “gross income derived by any organization from any unrelated trade or bus-

iness * * * regularly carried on by it,” subject to certain modifications and less al-

lowable deductions.5 Consistently with its legislative purpose, Congress excluded

from UBTI most types of passive investment income, such as dividends, interest,

and capital gains. See sec. 512(b)(1), (5). Among the excluded forms of passive

income are “royalties.” Sec. 512(b)(2).

       Section 513(a) generally defines an “unrelated trade or business” as:

      any trade or business the conduct of which is not substantially related
      (aside from the need of such organization for income or funds or the
      use it makes of the profits derived) to the exercise or performance by
      such organization of its charitable, educational, or other purpose or
      function constituting the basis for its exemption under section 501.

The statute provides three exceptions to this general rule. The exception relevant

here, set forth in section 513(a)(2), provides that an “unrelated trade or business”

does not include a trade or business that an organization carries on “primarily for

the convenience of its members, students, patients, officers, or employees.”




      5
      Petitioner does not contend that it incurred any allowable deductions for
expenses incurred in generating its fee income from OSI and GNYHA.
                                        -16-

C.    Analysis

      Petitioner concedes that the activities by which it earned fees from OSI and

GNYHA constituted a “trade or business,” that this business was “regularly car-

ried on,” and that the conduct of this business was “not substantially related” to

the performance of its educational purposes. But it urges that these fees were nev-

ertheless exempt from UBIT on the grounds that its fees from OSI constituted

“royalties” and that its fees from both vendors were derived from a business “car-

ried on * * * primarily for the convenience of its members.” We address these

contentions in turn.

      1.     Royalty Exclusion

      Section 512(b)(2) excludes from UBTI “all royalties (including overriding

royalties) whether measured by production or by gross or taxable income from the

property.” The regulations do not define “royalty,” except to indicate that the term

includes “mineral royalties.” Sec. 1.512(b)-1(b), Income Tax Regs. Whether an

item of income constitutes a royalty is to be determined “by all the facts and cir-

cumstances of each case.” Id. sec. 1.512(b)-1 (first sentence).

      As relevant here, “royalties” are “payments for the right to use intangible

property.” Sierra Club, Inc. v. Commissioner, 86 F.3d 1526, 1532 (9th Cir. 1996),

aff’g in part, rev’g in part, and remanding 103 T.C. 307 (1994); see Disabled Am.
                                        -17-

Veterans v. Commissioner, 94 T.C. 60, 70 (1990) (concluding that “royalties” for

purposes of section 512(b)(2) “are payments for the use of valuable intangible pro-

perty rights”), rev’d on other grounds, 942 F.2d 309 (6th Cir. 1991). We have

held that “royalties” include payments to a tax-exempt organization for use of such

intangible assets as its name, logo, service marks, and membership list. See, e.g.,

Common Cause v. Commissioner, 112 T.C. 332 (1999); Planned Parenthood

Fed’n of Am., Inc. v. Commissioner, T.C. Memo. 1999-206; Sierra Club, Inc. v.

Commissioner, T.C. Memo. 1999-86, 77 T.C.M. (CCH) 1569, 1575.6

      On the other hand, “royalties” for purposes of section 512(b)(2) “cannot in-

clude compensation for services rendered by the owner of the property.” Sierra

Club, 86 F.3d at 1532. For example, in Texas Farm Bureau v. United States, 53

F.3d 120 (5th Cir. 1995), an insurance company paid a tax-exempt organization to

“use its good offices, influence and prestige” to promote the companies’ life insur-

ance plans and provide various administrative services. The Court of Appeals

held these fees subject to UBIT, reasoning that “the plain language of the agree-

      6
        See also Disabled Am. Veterans, 94 T.C. at 70-71 (noting that “royalties”
are generally defined to include payments for “the rights to use copyrights, literary
works, motion picture rights, and dramatic rights”). The Commissioner has ruled
that “royalties” for purposes of section 512(b)(2) include proceeds derived by a
tax-exempt organization from licensing the use of its members’ names, photo-
graphs, likenesses, and facsimile signatures. Rev. Rul. 81-178, 1981-2 C.B. 135.
                                        -18-

ments demonstrates that the agreements were strictly for services and did not con-

template a royalty payment.” Id. at 124; see Nat’l Water Well Ass’n, Inc. v. Com-

missioner, 92 T.C. 75, 100-101 (1989) (ruling that “a royalty is a payment for the

use of a valuable right” and that “compensation for services rendered” does not

constitute royalty income); cf. Sierra Club, 77 T.C.M. (CCH) at 1579 (holding that

the organization’s receipts were not received “in consideration for services pro-

vided” but rather “in consideration for the use of * * * intangible property”).

      Petitioner’s contract with OSI was captioned “Service Agreement.” Peti-

tioner thereby agreed to advise its members that OSI was a “selected vendor,” to

endorse OSI as a collection agency, and to provide various administrative services.

In exchange for petitioner’s “services as group purchasing organization” and its

“coordination and liaison services,” OSI agreed to pay petitioner specified fees.

      Nowhere in the agreement does petitioner license OSI to use its intangible

property or obligate itself to make intangible property available to OSI. Indeed,

the agreement makes no reference whatever to tangible or intangible property

owned by petitioner. That being so, it is hard to see how the fees petitioner re-

ceived under the agreement could be regarded as “royalties * * * measured by pro-

duction or by gross or taxable income from the property.” See sec. 512(b)(2)

(emphasis added).
                                         -19-

      Petitioner urges that the services it actually provided OSI were quite mod-

est. It listed OSI on the “member services” page of its website, which displayed

OSI’s name and logo, supplied a “hot link” to OSI’s website, and provided a para-

graph-long description of OSI’s offerings. During several board meetings peti-

tioner’s president encouraged the CEOs of its member hospitals to hire OSI to per-

form their debt collections, representing that OSI’s fees were important to petition-

er’s financial stability. Hypothesizing that this volume of services could not have

been worth the $540,329 it received from OSI during 2004-2007, petitioner urges

that OSI must in fact have been paying for something else. That “something else,”

petitioner says, was “OSI’s acquisition of the right to associate its name and mark

with * * * [petitioner’s] name and mark” and with petitioner’s “reputation with its

members.” In petitioner’s view, this was “the crux of the contract.”

      This argument is unpersuasive because petitioner has failed to identify any

intangible property of its own that it licensed OSI to use. The placement of OSI’s

trademark on petitioner’s website obviously did not constitute the use of petition-

er’s intangible property by OSI; rather, it constituted the rendition of a service to

OSI by petitioner. And while petitioner’s “reputation” might be described as an

intangible asset, petitioner did not license OSI to use petitioner’s reputation. Rath-
                                         -20-

er, petitioner exploited its own reputation with its members by endorsing OSI and

inducing its members to patronize that company.

      It is not our role to second-guess the value that OSI placed on petitioner’s

endorsement and administrative services. By agreeing to endorse OSI as one of its

“selected vendors,” petitioner directed to OSI’s door a potentially large stream of

revenue, and OSI agreed to pay petitioner at least 3% of the resulting receipts.

The fact that petitioner’s share of these receipts amounted to $540,329 simply at-

tests to the depth of that revenue stream; it creates no inference that OSI was pay-

ing petitioner for the right to use some unspecified intangible property. We con-

clude that OSI was paying petitioner for its services, not for the use of its intangi-

ble property, and that the OSI fees cannot be excluded from UBTI as “royalties”

under section 512(b)(2).

      2.     “Convenience” Exception

      Section 513(a)(2) excepts from the definition of “unrelated trade or busi-

ness” any trade or business “which is carried on, in the case of an organization de-

scribed in section 501(c)(3) or in the case of a college or university described in

section 511(a)(2)(B), by the organization primarily for the convenience of its

members, students, patients, officers, or employees.” Neither the Code nor the

regulations explain the scope of this exception or define the term “convenience.”
                                         -21-

However, the regulations supply three examples of activities that qualify for the

“convenience” exception: “the sale of books by a college bookstore to students,”

“the sale of pharmaceutical supplies by a hospital pharmacy to patients of the hos-

pital,” and “a laundry operated by a college for the purpose of laundering dormi-

tory linens and the clothing of students.” Sec. 1.513-1(c)(2)(ii), (e) (flush lan-

guage), Income Tax Regs. These examples resemble those set forth in the legis-

lative history. See H.R. Rept. No. 81-2319, at 37 (1950), 1950-2 C.B. 380, 409

(stating that, “[i]n the case of an educational institution, income from dining halls,

restaurants, and dormitories operated for the convenience of the students” would

qualify for the section 513(a)(2) exception).

      The Commissioner has expanded on these examples in a series of revenue

rulings.7 Elaborating on one regulatory example, the IRS has ruled that a laundry


      7
        We are not bound by revenue rulings. Under Skidmore v. Swift & Co., 323
U.S. 134, 140 (1944), the weight we afford them depends upon their persuasive-
ness and the consistency of the Commissioner’s position over time. PSB Hold-
ings, Inc. v. Commissioner, 129 T.C. 131, 142 (2007) (“[W]e evaluate the revenue
ruling under the less deferential standard enunciated in Skidmore [.]”); see United
States v. Mead Corp., 533 U.S. 218, 234 (2001) (citing Chevron U.S.A., Inc. v.
Natural Res. Def. Council, Inc., 467 U.S. 837 (1984) (“Chevron did nothing to
eliminate Skidmore’s holding that an agency’s interpretation may merit some de-
ference whatever its form [.]”)) The Commissioner’s rulings on the “convenience
exception” date back to 1955 and reflect a consistent position. We conclude that
these rulings are entitled to some deference. See Webber v. Commissioner, 144
T.C. 324, 352-353, 357-358 (2015).
                                        -22-

and dry-cleaning plant operated by a university primarily to serve its students and

faculty qualified for the “convenience” exception, even though some members of

the public were also served. Rev. Rul. 55-676, 1955-1 C.B. 266. The Commis-

sioner has similarly ruled that the operation of vending machine facilities on a

college campus, including food and soft drink vending and laundromat facilities,

would qualify for the “convenience” exception. Rev. Rul. 81-19, 1981-1 C.B.

353, 354. The Commissioner concluded that “[t]he goods and services dispensed

by the vending machines are necessary for the day-to-day living on the campus of

students, faculty, and staff.” Accordingly, these activities “further[ed] the educa-

tional program of the university” and qualified for the section 513(a)(2) exception

“by operating facilities for the convenience of the university community.” Ibid.;

see also Rev. Rul. 58-194, 1958-1 C.B. 239, 240-241 (holding that an organization

operating a bookstore and cafeteria on a college campus for the convenience of

students and faculty qualified for exemption under section 501(c)(3)).

      On the other hand, distinguishing another of the regulatory examples, the

Commissioner has ruled that sales of pharmaceutical supplies by a tax-exempt

hospital to members of the general public, or to private patients of physicians prac-

ticing in a building owned by the hospital, do not qualify for the “convenience”

exception. Rev. Rul. 68-375, 1968-2 C.B. 245; Rev. Rul. 68-374, 1968-2 C.B.
                                          -23-

242. The Commissioner reasoned that “[t]he buyer-seller relationship between

these off-street patrons and the pharmacy” was insufficient to classify them as

“patients” of the hospital. Rev. Rul. 68-374, 1968-2 C.B. at 243. The Commis-

sioner concluded that these revenues were subject to UBIT because there was “no

substantial causal relationship between the achievement of the hospital’s exempt

purposes and the sale of pharmaceutical supplies” to such individuals. Ibid.; Rev.

Rul. 68-375, 1968-2 C.B. at 246.

      Read together, these examples suggest that a business conducted by a uni-

versity or a hospital will be regarded as carried on for the convenience of its stu-

dents or patients if the business activity assists those individuals in their capacity

as such, viz., by helping them be better students or healthier patients. On-campus

cafeterias assist students in fulfilling their role as students by facilitating student

interaction before and after class. On-campus dormitories allow students to live

close to classrooms and libraries and share quarters with fellow students. On-

campus bookstores, laundromats, and vending machines enable students to obtain

day-to-day living necessities without the inconvenience of traveling to distant off-

campus locations. And operation of a pharmacy helps hospital patients stay

healthier by enabling them to secure needed drugs and supplies without endanger-

ing their health by leaving the premises. In each case, the university or hospital
                                         -24-

furthers its own educational or health-advancement purpose by helping the recipi-

ents of its services to perform better. See also St. Luke’s Hosp. v. United States,

494 F. Supp. 85, 92 (W.D. Mo. 1980) (pathology tests performed by hospital pri-

marily for convenience of member physicians).

      The case law on this subject, while sparse, supports this interpretation of the

“convenience” exception. See Am. College of Physicians v. United States, 3 Cl.

Ct. 531 (1983), rev’d on other grounds, 743 F.2d 1570, 1577 (Fed. Cir. 1984),

rev’d on other grounds, 475 U.S. 834 (1986). The question addressed by the Su-

preme Court in that case was whether a medical association’s publication of com-

mercial advertising in its medical journal was “substantially related” to its tax-

exempt purposes. See Am. College of Physicians, 475 U.S. at 835-836. But the

College advanced an alternative argument at the trial and appellate levels, namely,

that its advertising activity was “carried on primarily * * * for the convenience its

members” within the meaning of section 513(a)(2). The Claims Court rejected

that argument, and its holding to this effect was affirmed on appeal. See Am.

College of Physicians, 743 F.2d at 1577.

      The Claims Court’s reasoning is instructive here. The College contended

that journal advertising served the convenience of its physician members by bring-

ing to their attention new medical products and positions offered in classified ads.
                                        -25-

The court assumed that this advertising might benefit the College’s members in

their capacity as practicing physicians. Am. College of Physicians, 3 Cl. Ct. at

536. But it found the “convenience” exception unavailable because the advertis-

ing was not published for the convenience of members in their capacity as such:

      The members’ interests as members concern such matters as attending
      the College’s educational functions, participating in research and test-
      ing, disseminating health information to the public and promoting
      quality medical education. The members’ interests as physicians are
      much broader and include all aspects of medical practice. * * *
      [Ibid.]

      Although journal advertising might “assist practicing physicians by inform-

ing them of new products [or] publicizing the availability of positions,” the court

found that the College’s advertising “does not * * * have any connection with

their responsibilities as members of the College.” Ibid. It accordingly ruled that

the College’s advertising business was not carried on “for the convenience of its

members” within the meaning of section 513(a)(2).

      Petitioner contends that its activities under the GNYHA contract were un-

dertaken for the purpose of “providing members access to discounted supplies and

services” and “generating non-dues revenue to support * * * [its] operations on

behalf of its members.” Its activities under the OSI contract were allegedly under-

taken for the purpose of “refer[ring] to its members a vetted and reliable collec-
                                         -26-

tions vendor.” Because its business activity allegedly assisted its members in

these ways, petitioner insists that this activity was carried on primarily for their

convenience.

      We reject this contention for a variety of reasons. First, by helping its mem-

bers save time or money by directing them to low-cost or high-quality vendors,

petitioner was not serving “the convenience of * * * [its] members in their capa-

city as members.” Am. College of Physicians, 3 Cl. Ct. at 535. The members’

interests as members may include attending petitioner’s educational functions and

participating in its research programs. Petitioner might serve its members’ con-

venience in their capacity as members (for example) by providing travel services

in connection with its conferences or by contracting with research or consulting

firms. Although helping its members save money might improve the hospitals’

balance sheets, it would not provide a convenience to them in their capacity as

members of petitioner. Nor would it enable petitioner to advance its own educa-

tional purposes, as a university does by serving the convenience of its students in

their capacity as students.

      Second, petitioner has not established that its activity benefitted its members

in any meaningful way. Petitioner did not track or assess, and cannot now quan-

tify, the extent to which its members saved money (in absolute terms or in compar-
                                         -27-

ison with other programs available to them) as a result of discounts or favorable

prices offered by GNYHA or OSI. Hospitals were not required to belong to an

association like petitioner in order to participate in GNYHA’s group purchasing

programs, and they received essentially the same vendor discounts regardless of

whether they joined individually or through an association. Petitioner insists that

it served its members’ convenience, “if only in terms of saved time and effort,” by

vetting OSI through a request for proposals. But this alleged vetting was conduct-

ed in 1991, more than a decade earlier. And only a third of petitioner’s members

signed up for the OSI program, suggesting that its benefits were not obvious. Peti-

tioner cannot show that these activities were conducted “primarily for the conveni-

ence of its members” without showing that the activities plausibly benefitted its

members in some way.

      Third, even if petitioner’s business activity saved its members money, there

is no legal support for the notion that saving money, without more, is enough to

qualify for the “convenience” exception in section 513(a)(2). There is nothing in

the statute or its legislative history, in the regulations promulgated by the Secre-

tary, or in the rulings issued by the Commissioner, to suggest that saving money is

an important (or even a relevant) consideration. A university’s operation of on-

campus cafeterias and laundromats might save students (or their parents) money
                                        -28-

by offering lower prices than those available commercially. But there is no evi-

dence that considerations of this sort played any role in Congress’ enactment of

the “convenience” exception. Indeed, petitioner’s “money saving” theory is hard

to reconcile with Congress’ overall purpose in enacting the UBIT provisions,

which was to eliminate unfair competition between tax-exempt and taxpaying bus-

inesses.

      Petitioner’s “money saving” theory also proves too much. Tax-exempt or-

ganizations could engage in a wide array of businesses that might save time or

money for their members, students, patients, officers, or employees, by selling

directly to those individuals or by directing them to low-cost or high-quality vend-

ors. Were section 513(a)(2) construed as petitioner urges, it “would significantly

undercut the purpose of the UBIT” because “there would be no end to the types of

goods and services an organization could provide its members while avoiding tax

on the income so derived.” Am. College of Physicians, 3 Cl. Ct. at 535.8

      8
        Insurance programs are one example of a business that might qualify under
petitioner’s interpretation of the “convenience” exception. Many tax-exempt or-
ganizations sponsor or endorse insurance plans for their members, receiving fees
from the insurance companies when their members sign up. Such organizations
may plausibly contend that these plans have been well vetted and may save their
members time or money. But it is well established that this activity generally con-
stitutes an “unrelated trade or business” the revenues from which are subject to
UBIT. See, e.g., United States v. Am. Bar Endowment, 477 U.S. 105, 119 (1986);
                                                                      (continued...)
                                        -29-

      Fourth, even if petitioner’s business activity were thought to provide a con-

venience to its members by saving them time or money, petitioner has not shown

that it conducted this activity “primarily for the convenience of its members,” as

the statute requires. Sec. 513(a)(2) (emphasis added). In another tax context, the

Supreme Court has interpreted the term “primarily’ to mean “of first importance”

or “principally.” Malat v. Riddell, 383 U.S. 569, 572 (1966) (construing section

1221(1)). As the Claims Court concluded in Am. College of Physicians, “[t]here

seems to be no reason to depart from this common sense definition in interpreting

section 513(a)(2).” 3 Cl. Ct. at 536.

      During 2004-2007 petitioner derived aggregate fees of $2,266,874 (approxi-

mately 23% of its total revenue) under its contracts with OSI and GNYHA. As

petitioner’s president emphasized to his fellow board members, these revenues

were important to petitioner. Petitioner’s annual expenditures substantially ex-

ceeded the dues its members paid; in 2007, the gap between expenditures and dues

was more than $700,000. See supra p. 5. Without the fees it received from OSI

and GNYHA, petitioner would have been forced to curtail its activities (or raise its

dues) significantly. Even if petitioners’ members were thought to have derived

      8
       (...continued)
Texas Farm Bureau, 53 F.3d at 126; Am. Postal Workers Union, AFL-CIO v.
United States, 925 F.2d 480, 483-485 (D.C. Cir. 1991).
                                         -30-

some incidental benefit from the conduct of these two businesses, it seems clear

that petitioner’s primary purpose for engaging in these activities was to raise reve-

nue for itself. See Am. College of Physicians, 3 Cl. Ct. at 536.9

      If raising revenue were deemed its primary purpose, petitioner asserts that

its fee-generating activity nevertheless served its members’ convenience by en-

abling it to conduct a broader range of charitable activities or by reducing the dues

its members would otherwise have had to pay. But this is simply a variation on

the “money saving” theory we have already rejected. See supra pp. 27-29. Peti-

tioner offers no legal authority, and we have found none, to support the proposi-

tion that a desire to raise revenue (whether rebated to members or not) is sufficient

to meet the requirements of the “convenience” exception.

      The UBIT provisions adopt the general rule that an organization’s business

revenues are taxable unless the underlying activity is “substantially related” to its

exempt purposes “aside from the need of such organization for income or funds or

the use it makes of the profits derived.” Sec. 513(a). Adoption of petitioner’s

premise--that raising revenue to support its operations is sufficient to meet the

      9
        Hospitals were not required to belong to an association like petitioner in
order to participate in GNYHA’s group purchasing programs. But if petitioner’s
members participated through it rather than individually, GNYHA would pay peti-
tioner substantial fees. This makes it clear that petitioner operated this business,
not for its members’ convenience, but primarily to raise revenue for itself.
                                         -31-

“convenience” exception--would cause that exception to swallow this general rule.

“In construing provisions * * * in which a general statement of policy is qualified

by an exception, we usually read the exception narrowly in order to preserve the

primary operation of the provision.” Commissioner v. Clark, 489 U.S. 726, 739

(1989).

      For all these reasons, we find that the business activities giving rise to peti-

tioner’s fees from OSI and GNYHA were not “carried on * * * primarily for the

convenience of its members” within the meaning of section 513(a)(2). Those rev-

enues were thus derived from an “unrelated trade or business” that petitioner reg-

ularly carried on. The royalty exclusion of section 512(b)(2) being inapplicable,

petitioner’s fees constitute UBTI under section 512(a)(1) that is subject to UBIT

under section 511(a)(1).

      To implement the foregoing,


                                                Decision will be entered for

                                       respondent.
