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Management services are taxable.

The providing of management services by an exempt organization to other exempt organizations with a similar purpose is generally treated as unrelated business income.

The IRS's position is epitomized by Rev. Ruls. 71-529 and 72-369. Income received for providing management services is taxable unless services are provided at substantially below cost or with charitable intent.

The Service recently ruled in Letter Ruling 9204033 that an exempt hospital's provision of management services at a profit to a for-profit hospital in its service area was not an unrelated activity. Providing management services facilitated the delivery of health care in the exempt hospital's service area. The presence of a profit element did not cause the activity to be taxable and was essential to preserve the hospital's exempt status.

Just when it looked like the IRS might be softening its position, it issued Letter Ruling 9232003, in which an exempt health maintenance organization (HMO) entered into a contract to manage another exempt HMO. The services were provided at cost plus a profit element.

Under the facts of this letter ruling, the services were in competition with commercial businesses and, in fact, replaced those of a for-profit company. Therefore, the Service ruled that managing the other HMO did not further the managing HMO's exempt purpose and was an unrelated trade or business.

It appears that the IRS position is that management fees can be excluded from unrelated business income only if (1) they further the exempt purpose and (2) do not compete with a commercial management service.
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Author:Berger, Harvey J.
Publication:The Tax Adviser
Article Type:Brief Article
Date:Feb 1, 1993
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