An exempt society's online job-board income is taxable business income, not a tax-free royalty

Plain-English summary

A tax-exempt professional and academic society (a 501(c)(3) public charity) runs an online job board that connects employers with job seekers for a fee, using an outside for-profit vendor to host and operate the site. The society did not report that income as taxable, arguing the money it got from the vendor was a tax-free "royalty" for the vendor's use of the society's name and website, excluded from unrelated business income tax under section 512(b)(2). In this Technical Advice Memorandum, the IRS National Office concluded the payments are not royalties: the job board is the society's own unrelated trade or business, and the vendor merely provides services as the society's agent. The IRS pointed to the contract calling itself a "service agreement" (with the society as the paying "customer"), the society keeping essentially 100% of the revenue, setting prices, providing staff and career-advice services, and holding the service out to the public under its own name. Because the activity is the society's business (not a licensing of intangible property), the income is taxable under section 511, and this outcome guides how exempt organizations that outsource fee-generating web activities must treat that revenue.

Ruling snapshot

• Question: Is income from the exempt organization's online job placement service excludable from unrelated business taxable income as a royalty under section 512(b)(2)?
• Outcome: advice given (income is taxable under section 511; not a royalty)
• Key authorities: IRC §§ 511, 512(b)(2); Treas. Reg. §§ 1.512(b)-1, 1.513-4(f) Ex. 12; Rev. Rul. 81-178; Sierra Club v. Comm'r; New Jersey Council of Teaching Hospitals v. Comm'r; State Police Ass'n of Mass. v. Comm'r; National Carbide Corp. v. Comm'r

Full text (IRS public release)

                           INTERNAL REVENUE SERVICE
                 NATIONAL OFFICE TECHNICAL ADVICE MEMORANDUM

                                             June 29, 2020

Number:     202039018
Release Date:    9/25/2020

                                                  Third Party Communication: None
                                                  Date of Communication: Not Applicable

Index (UIL) No.:         512.01-01
CASE-MIS No.:            TAM-103019-20

Director
Exempt Organizations Examinations

        Taxpayer's Name:                          ------------------------------------------
        Taxpayer's Address:                       --------------------
                                                  -----------------------------------------
        Taxpayer's Identification No              ----------------
        Year(s) Involved:                         --------------
        Date of Conference:                       -----------------


LEGEND:

Taxpayer = -----------------------------------------
Topic = ------------------
Vendor = --------------------
Network = -------------------------------------------------
Website = ------------------------------------
X = ---
Y = -------
Z = ----




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ISSUE(S):

Whether income derived by Taxpayer from the operation of an online job placement
service constitutes unrelated business income subject to tax under section 511 of the
Internal Revenue Code.1

Specifically:

Whether income from the activity is excluded from the computation of unrelated
business taxable income as royalty income under section 512(b)(2).

CONCLUSION(S):

The income is not excluded from the computation of unrelated business taxable income
as royalty income under section 512(b)(2).

Therefore, income derived by Taxpayer from the operation of an online job placement
service constitutes unrelated business income subject to tax under section 511.

FACTS:

Taxpayer is exempt from federal income tax under the provisions of section 501(a), as
an organization described in section 501(c)(3) and as a public charity under sections
509(a)(1) and 170(b)(1)(A)(vi).

Taxpayer is organized and operated as an association of academicians, graduate
students, and practitioners of Topic to receive, administer, and expend funds for the
following purposes, as stated in its articles of incorporation:

    1. ------------------------------------------------------------------------------------------------------------
      --------------------------------------------------------------

    2. ------------------------------------------------------------------------------------------------------------
      ------------------------------------------------------------------------------------------------------------
      --------------------------

    3. ------------------------------------------------------------------------------------------------------------
      ------------------------------------------------------------------------------------------------------------
      --------------



1 The Internal Revenue Code of 1986, as amended, to which all subsequent section or “§” references are

made unless otherwise indicated.


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TAM-103019-20

    4. To engage in any and all lawful activities incidental to the foregoing purposes
      except as restricted herein.

Taxpayer has ----- classes of membership: -----------------------------------------------------------
------------. Members pay membership fees although certain members pay reduced
rates. Taxpayer publishes academic journals that contain articles that address various
issues in the field of Topic. Articles that appear in the journals are typically submitted by
Taxpayer’s members. Taxpayer receives revenue from advertisements in its journals
and pays unrelated business income tax on this advertising income. Due to their
academic nature, the journals contain relatively few advertising pages. Taxpayer
reported no other sources of unrelated business income.

Taxpayer derives substantially all of its program service revenue from:

   •   The licensing of journal content including archived materials. This is the largest
       source of revenue and represents approximately --- percent of total revenue.

   •   Membership fees, comprising approximately --- percent of total revenue.

   •   Registration fees from members and ancillary revenue relating to the annual
       meeting and other conferences organized by Taxpayer is the third largest source
       of revenue.

Members can take advantage of various activities offered by the Taxpayer including:

   •   Educational Resources – including print and/or online subscription to Taxpayer’s
       journals and newsletter. Taxpayer also provides access to other educational
       resources.

   •   Networking Opportunities – includes complimentary memberships in two of
       Taxpayer’s -------------- divisions and/or interest groups and access to various
       Taxpayer networking sites and directories.

   •   Meeting and Events – including the Annual Meeting and various conferences.

   •   Volunteer Leadership and Recognition Opportunities.

Job Placement Service

In addition, Taxpayer offers a job placement program that seeks to connect employers
to qualified candidates, and to provide job seekers access to job opportunities.
Taxpayer has operated the job placement program for more than forty years. In the late
------ Taxpayer developed its web application and offered its placement services online.
Several years later, Taxpayer began encountering technical difficulties with its web
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application; thus, in -------, Taxpayer contracted with an unrelated, for-profit vendor,
Vendor, to manage the job placement program on Taxpayer’s website.

The job placement program has an in-person function at Taxpayer’s annual meeting but
primarily functions through the online job board (Online Placement Service). Taxpayer
requires an employer that wants to do in-person recruiting at Taxpayer’s annual meeting
to place an online posting on the Online Placement Service. Employers, recruiters, and
job seekers may access the Online Placement Service. Separate fee structures exist
for employers/recruiters and for job seekers who wish to make listings or purchases
through the Online Placement Service.

       The Online Placement Service

The Online Placement Service allows website users to post resumés, manage job
searches, view job postings, view website resumés, store resumés, and monitor and
manage postings. Job seekers are directed to enter their member ID number and last
name to access the service. Employers can post a job by creating an account that can
only be accessed with email and password information.

Job seekers are charged a non-refundable fee to list their profiles for employers seeking
candidates and to view current positions available on the Online Placement Service.
The Online Placement Service provides “a full featured Placement Service with a wide
array of services and tools to assist applicants (job seekers) find employment
opportunities.” Employers are also charged fees. Prices for a single position job
posting range from $----- for a basic posting to $----- for a featured job posting. For an
additional fee of $-----, one network option entitles the employer to a single position job
posting that is bundled for secondary exposure on all sites (meaning other online job
boards) within the Network. Employers seeking to post job openings for multiple
positions can choose: a two-position package, posting for 180 days, priced at $-----; a
three-position package, posting for 365 days, priced at $-----; or a five-position package,
posting for 365 days, priced at $-----. Other optional upgrades are available for
additional fees. As an alternative to posting a job position, employers can purchase
access to ten job seeker profiles for a 90-day period for $-----, twenty-five profiles for $--
-------, or sixty profiles for $-----. Single job seeker profiles can be purchased for $---.
Taxpayer is solely responsible for determining the products to be offered on the Online
Placement Service and setting the price that is charged for each product including
upgrades and bundling options.

The Online Placement Service exists at Website, which is a domain owned by Taxpayer
and having Taxpayer’s acronym in the URL. A button labeled “Placement Services”
appears on the navigation screen at the top of Taxpayer’s home page as well as on
other pages; clicking on the button takes you to the Online Placement Service. The
Online Placement Service consists of several web pages within Taxpayer’s larger
website. The Online Placement Service, as well as the pages describing its function on

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TAM-103019-20
Taxpayer’s website, all contain the same appearance and heading as the rest of
Taxpayer’s website. Further, the website calls these services “[Taxpayer’s] Placement
Services.” In the description of “[Taxpayer’s] Placement Services” Taxpayer’s website
provides that “[Taxpayer] provides a wide array of services and tools to assist applicants
(job seekers) find employment opportunities and help academic and industry employers
find qualified candidates to fill open positions through our partnership with [Vendor].”
The description of the services states that “if you have any questions, feel free to
contact the [Taxpayer] Placement Team.” Taxpayer’s website also lists the various
options for using the Online Placement Service at various price points. There is no
separate, independent website for the Online Placement Service.

        Services Provided by Taxpayer to Users of the Online Placement Services

Three employees and one independent contractor2 provide services for Taxpayer
relating to the operation of the Online Placement Service. One employee, the Director
of Membership, Marketing, and Communications, is responsible for deciding what
products and services are offered and the price points. Another employee, the
Membership Services Manager, is responsible, together with an independent
consultant, for ensuring that content provided by Taxpayer for the landing page and
other parts of the website is accurate and updated as necessary; for processing
Vendor’s monthly invoice for payment; and for generally insuring that the Online
Placement Service is being operated in a manner consistent with the Agreement and
that members are satisfied with the Online Placement Service. The third employee is
responsible for ensuring that Vendor’s software interfaces properly with Taxpayer’s
membership database, enabling members to sign into the Online Placement Service.
This role is a small part of her overall duties at Taxpayer. An independent contractor
working on behalf of Taxpayer, is the primary contact for Taxpayer’s placement
services. The independent contractor receives and responds to questions and
concerns of users of the Online Placement Service on behalf of Taxpayer. The
independent contractor’s work in connection with the Online Placement Service is to
liaise between Taxpayer’s Headquarters’ staff and Taxpayer’s Placement Committee to
facilitate the continued operations of Taxpayer’s placement services; to serve as a
liaison between Taxpayer and Vendor; and to handle customer service questions and
complaints in a timely fashion either by phone or email.

Taxpayer maintains a placement service team to assist members with employment
opportunities. Taxpayer’s website directs users to contact the Taxpayer Placement
Team if they have academic questions or need more information about Taxpayer’s

2 The designations of “employee” and “independent contractor” are based on Taxpayer’s representations;

no independent evaluation has been made to determine whether these designations are accurate. The
conclusions contained in this TAM do not address the worker classification status of any worker who is
providing services to the Taxpayer, and whether they are employees of the Taxpayer or independent
contractors.

                                                   5
TAM-103019-20
Placement Service. The members of the Placement Team, for purposes of customer
service, is made up of the independent contractor discussed above and several
volunteers in the field of Topic.

A page on Taxpayer’s website includes the Terms and Conditions of Service for using
the Online Placement Service. These Terms and Conditions provide that they “will form
a binding contract between you…and [Vendor] governing Your use of our website and
Career Centers.”

Vendor Contract

Taxpayer entered into a --------year contract with Vendor in -------, that is automatically
renewed for one additional year on the same terms and conditions unless terminated.
The agreement between Taxpayer and Vendor is titled “[Vendor] Website Operator
Service Agreement.” The agreement provides that Taxpayer is the “customer” while
Vendor is the “provider.” The service agreement provides that the services to be
performed are for the benefit of Website, one of Taxpayer’s web pages. Per the terms
of the contract, Vendor hosts and manages the Online Placement Service on behalf of
the customer, Taxpayer, and its website, Website.

       Revenue from the Online Placement Service

Section IV discusses the fee structure between Taxpayer and Vendor. Part (b) of
section IV provides that “[Vendor] will collect all fees related to [Taxpayer’s] clients’ use
of the [Online Placement Service].” This section then provides that Vendor will remit
monthly amounts that are paid by Taxpayer’s clients. The agreement provides that 100
percent of the revenue earned exclusively through the use of Taxpayer’s Online
Placement Service are remitted to Taxpayer. Thus, Taxpayer is entitled to receive 100
percent of the revenue from employers, recruiters, and other of Taxpayer’s members
who post job listings or resumés exclusively on the Online Placement Service.
Additionally, Taxpayer is entitled to receive 100 percent of the proceeds from all
advertising displayed on the Online Placement Service.

       Revenue from Other Online Placement Services




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TAM-103019-20
Vendor operates many job boards for a number of organizations and specializes in
cross-posting of listings on its other job boards, where relevant. When revenue was
generated through the use of cross-postings either to or from other job boards hosted
by Vendor, Taxpayer also received a share, less than half, of that revenue. Sales
originating at Vendor’s other job boards but that used the services offered by the Online
Placement Service earned Taxpayer 2X percent of that revenue. Meanwhile, sales
originating on the Online Placement Service of services offered by other job boards
operated by Vendor earned Taxpayer X percent of that revenue.3 A report from Vendor
for a single month in --------indicates that less than three percent of the payments to
Taxpayer came from cross-posting services in that month. This revenue, like that
received from direct postings on Online Placement Service, was not reported on
Taxpayer’s Form 990-T.

        Taxpayer Fees Paid to Vendor

The agreement provides that Taxpayer will pay, in consideration for the services
provided by Vendor, a monthly fee of $Y and an amount equal to Z percent of the gross
sales amount for all purchases covered by the revenue sharing agreement to “cover
credit card fees, billing fees, postage, materials, and handling costs.” In addition to
these payments, Taxpayer was also required by the agreement to integrate the Online
Placement Service into Website by adding a link on Website’s top navigation and by
including a link on the Website homepage.

The service agreement does not mention the transfer of, or use of, any of Taxpayer’s
tangible or intangible assets to, or by, Vendor.

        Terms within the Agreement

Section IV of the service agreement also discusses the “Services Provided.” This
section indicates that Vendor “shall host and manage an online job board for [Website].”
The section further provides that:

        “This service shall include an online job board, recruitment advertising, resume
        bank, career advice, resume services, coaching services, and other services
        related to user job searching and employer recruiting ("Career Services"). For
        the duration of the Agreement, [Vendor] shall be the sole and exclusive provider
        of said services for [Website].

        [Vendor] will bill [Taxpayer’s] clients, collect client fees, and provide [Online
        Placement Service] technical support and customer service to [Taxpayer’s]

3 An addendum in late --------changes the split of revenue from postings to and from other job boards to

an even split and newly labels this revenue “royalties” while the same payments were labeled
“commissions” in the --------agreement.

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TAM-103019-20
       clients. [Vendor] will have the right to send client communications which are co-
       branded with [Taxpayer], for communications related directly to the [Online
       Placement Service] service, but [Vendor] shall in no event send client
       communications involving the marketing of other services to clients which are co-
       branded with [Taxpayer] without [Taxpayer’s] prior written approval.”

The agreement provides for some “General Terms and Conditions.” These terms and
conditions include an agreement that the service agreement “is not a transfer or license
of software rights,” and that Vendor “maintains all ownership and rights over its
software, and the associated upgrades, customizations, and other materials and other
technologies associated with the software.” The terms and conditions also provide that
Taxpayer agrees “to comply with the terms of the user agreements, privacy statements,
and any other existing agreements currently in use by [Vendor] to collect and manage
the content provided to [Vendor] by the job seekers and employers using [Taxpayer’s]
[Online Placement Service].” Finally, one of several “general provisions” in the terms
and conditions provides that “the parties herein agree that they are independent
contractors4 and will have no power or authority to assume or create any obligations on
behalf of each other. This agreement will not be construed to create or imply any
partnership, agency, or joint venture.”

Emails Regarding the Online Placement Service

Emails from accounts associated with Taxpayer consistently refer to the Online
Placement Service as Taxpayer’s Online Placement Service and provide statements
such as, “We strive to provide you with the highest quality…job search experience both
on-site during the annual meeting, as well as, online year round.” Further, emails from
accounts associated with Taxpayer discuss how “we accept PayPal, Visa,….” Emails
discussing payments also indicate that users directed requests for refunds to Taxpayer,
where Taxpayer then directed Vendor to provide such refunds. Other emails also refer
to Vendor as “our [Online Placement Service] provider.” Finally, all receipts for
payments made to use the online placement services were signed by the director of
Taxpayer.

Email exchanges between Taxpayer and Vendor also indicate that Vendor
recommended advertising strategies that Vendor was using with other parties to use to
increase the number of Online Placement Service listings. These emails identify
Vendor as recommending an advertising strategy where Taxpayer made the final
decision on whether to follow that strategy for the Job Board.


4 The designation of “independent contractor” is based on Taxpayer’s representations; no independent

evaluation has been made to determine whether this designation is accurate. The conclusions contained
in this TAM do not address worker classification status.


                                                   8
TAM-103019-20
Membership List

During the years in question, Taxpayer did not license or otherwise provide its
membership list, mailing list, or other proprietary member data to Vendor for Vendor’s
use in expanding its own operations.

Disagreement

Taxpayer filed Forms 990-T for the tax years in question, but the only income reported
on such transactions was the income from advertisements in its journals. Upon
examination, the IRS contends that the income received by Taxpayer from the Online
Placement Service should also have been reported on the Taxpayer’s Forms 990-T for
the years in question. Taxpayer does not dispute that the Online Placement Service
activity constitutes a trade or business, that it is regularly carried on, or that it is
unrelated to Taxpayer’s exempt purpose. Instead, Taxpayer argues in response to the
IRS examination that the Online Placement Service and the services connected
therewith are not conducted by Taxpayer at all and that any income it receives from this
activity constitutes royalties from Vendor’s conduct of the Online Placement Service. As
such, Taxpayer contends that any income received from the Online Placement Service
is a royalty to Taxpayer thus excluded from unrelated business taxable income under
section 512(b)(2).

LAW AND ANALYSIS:

Section 512(b)(2) excludes from unrelated business taxable income, all royalties
whether measured by production or by gross or taxable income from the property, and
all deductions directly connected with such income.

Treas. Reg. § 1.512(b)-1 indicates that all the facts and circumstances of each case
must be examined to determine whether a particular item of income falls within any of
the modifications provided in section 512(b). As an example, the regulations state that
if a payment termed "rent" by the parties is, in fact, a return of profits by a person
operating the property for the benefit of the tax-exempt organization, or is a share of the
profits retained by such organization as a partner or joint venturer, then the payment is
not within the modification provided for rents. Thus, the actual nature of the income and
not its designation by the parties is controlling.

Rev. Rul. 69-430, 1969-2 C.B. 129, describes an organization, which is exempt from
Federal income tax under section 501(a), that engages primarily in activities in
furtherance of its exempt purposes. It also owns the publication rights to a book. The
publication and distribution of the book will not contribute in any manner to the
accomplishment of the exempt purposes of the organization except for the
organization's need for the income to be derived therefrom. The organization has
undertaken to exploit the book in a commercial manner. It has arranged for the printing,
distribution, and retail sale of the book. The organization has also arranged for
                                              9
TAM-103019-20
appropriate publicity and advertising in connection with the distribution and sale of the
book. The ruling holds that income from the publication and sale of a book by an
exempt organization is unrelated business income; however, if it transfers its publication
rights to a commercial publisher, royalty income received is not unrelated business
income.

Rev. Rul. 81-178, 1981-2 C.B. 135, considers the application of section 512(b)(2) to two
situations in which payments are received by an exempt organization. The ruling states
that to be a royalty, a payment must relate to the use of a valuable right. Payments for
the use of trademarks, trade names, service marks, or copyrights, whether or not
payment is based on the use made of such property, are ordinarily classified as
royalties for federal tax purposes. Situation (1) holds that payments for the use of the
organization’s trademarks, trade names, and service marks are royalties within section
512(b)(2). However, situation (2) holds that payments for personal appearances and
interviews are not royalties but are compensation for personal services.

Texas Farm Bureau v. United States, 53 F.3d 120, 123–24 (5th Cir. 1995), determined
that the activities giving rise to income were those of Texas Farm Bureau (TFB). The
court put significant weight on the terms of the agreement stating, “TFB agreed to use
its own offices, its influence and prestige to promote [the insurance plan], and to provide
[the insurance plan] with stationary and postage, secretarial and clerical help, office
supplies, furniture, and equipment. Nowhere in the agreements is a ‘royalty’
mentioned.”

In Sierra Club, Inc. v. Commissioner, 86 F.3d 1526 (9th Cir. 1996), the court stated that
royalties in section 512(b)(2) are defined as payments received for the right to use
intangible property rights, and that such definition does not include payments for
services. With respect to income derived from Sierra Club’s rental of its mailing list, the
court held that such income was royalty income under section 512(b)(2) and not
payment for services. The Ninth Circuit also remanded the case to the Tax Court to
review whether the affinity card activities resulted in a royalty payment. In Sierra Club,
Inc. v. Commissioner, 77 T.C.M. (CCH) 1569 (1999), the court discussed at length the
contracts associated with the affinity card service and the services provided by Sierra
Club to the contracting party and ultimately determined that the affinity card services
resulted in a royalty payment to Sierra Club. See also Common Cause v. Comm’r, 112
T.C. 332 (1999).

Oregon State University Alumni Ass’n v. Commissioner, 71 T.C.M. 1935 (1996), aff’d,
193 F.3d 1098 (9th Cir. 1999), held that activities in connection with an affinity credit
card program generated royalty income under section 512(b)(2). The activities were
primarily undertaken to protect the association’s relationship with its members and to
keep alumni aware of their ties to the university.



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TAM-103019-20
In State Police Ass'n of Massachusetts v. Commissioner, 72 T.C.M. (CCH) 582 (1996),
aff'd, 125 F.3d 1 (1st Cir. 1997), the court held that income from advertising in the
annual publication of a section 501(c)(5) labor organization of state troopers was
unrelated business taxable income. The organization contracted with Publisher to
conduct advertising on the organization’s behalf. The organization argued that the
contract designated Publisher as an independent contractor and not as the
organization’s agent; that the organization had no control over Publisher's personnel or
business activities; that Publisher agreed to indemnify the organization from liability
resulting from Publisher's activities; and that the contract guaranteed a minimum
payment to the organization, shifting the risk of loss to Publisher. The court noted that
the manner in which the parties to an agreement designate their relationship is not
controlling. The court concluded that the agreement set forth an agency relationship in
substance between Publisher (and its subcontractors) and the organization. Publisher
acted on the organization’s behalf because Publisher had the authority to use the
organization’s name in soliciting advertising, and collected payments made payable to
Association. Publisher was subject to Association's control because the organization
reserved the right (1) to enter Publisher's offices at any time without prior notice to verify
compliance with agreement and (2) to approve advertisements, and Publisher reported
weekly to Association on payments received. Thus, Publisher's activities were
attributable to Association in determining whether Association's advertising activities
were regularly carried on. The appellate court noted that the facts, taken as a whole,
solidly supported the finding that Publisher acted as Association's agent, noting that the
Association retained tight control over the method and manner of solicitation, the sales
pitch, the identity of solicitors, the financial aspects of the arrangement, the use of the
Association's name, the advertising formats, and the contents of the yearbook.

Arkansas State Police Ass'n v. Commissioner, 81 T.C.M. (CCH) 1172 (2001), aff’d, 282
F.3d 556 (8th Cir. 2002), involved an exempt organization (EO) that entered into a
"Royalties and Licensing Agreement" with a publisher to publish the EO's official
magazine containing articles and advertising. Publisher solicited the ads in the EO's
name. The EO approved the sales pitches, ads, and editorial content. Publisher bore
all production costs, paid the EO an annual fee, and received 73% of the proceeds.
The EO received 27%. The court rejected the EO's royalty argument, reasoning that
the EO substantially participated in and maintained control over significant aspects of
the publication. The court distinguished certain mailing list and affinity credit card cases
as involving minimal activity on the EO's part. See also Fraternal Order of Police v.
Comm’r, 87 T.C. 747 (1986), aff'd, 833 F.2d 717 (7th Cir. 1987).

In New Jersey Council of Teaching Hospitals v. Commissioner, 149 T.C. 466 (2017),
the Tax Court held that fees received by a section 501(c)(3) teaching hospital under
contracts with third-party vendors represents payments for services, not for the use of
intangible property, and thus did not constitute “royalties” within the meaning of section
512(b)(2). One vendor provided debt collection services and the other provided group
purchasing programs. The hospital had "marketed and administered" the group

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TAM-103019-20
purchasing programs and the activity was not substantially related to its educational
purposes. Further, the fees received from the debt collection services were subject to
unrelated business income tax, because the revenues generated did not accomplish its
charitable mission. Nowhere in the debt collection agreement did the hospital license
the debt collection company to use its intangible property or obligate itself to make
intangible property available to the company. Therefore, the fees received by the
hospital under the agreement could not be regarded as royalties. Moreover, the
revenues from the group purchasing programs were subject to unrelated business
income tax because there was "no substantial causal relationship between the
achievement of the hospital's exempt purposes and the sale of pharmaceutical
supplies" to members of the general public or to private patients of physicians practicing
in a building owned by the hospital. The court relied heavily on the language of the
contract noting that the contract did not reference the use of an intangible asset. Since
the exclusions under section 512(b)(2) did not apply, the court held that the fees were
subject to unrelated business income tax because they were derived from a regularly
carried on, unrelated trade or business.

National Carbide Corp. v. Commissioner, 336 U.S. 422 (1949), evaluates whether or not
a wholly owned subsidiary of a corporation is an agent, or has the same identity as, the
parent corporation such that all income is taxed at the parent level. In making this
determination, the Court created what have come to be known as the “six National
Carbide factors” for agency:

       “[1] Whether the corporation operates in the name and for the account of the
       principal, [2] binds the principal by its actions, [3] transmits money received for
       the principal, and [4] whether receipt of income is attributable to the services of
       employees of the principal and to assets belonging to the principal are some of
       the relevant considerations in determining whether a true agency exists. [5] If the
       corporation is a true agent, its relations with its principal must not be dependent
       on the fact that it is owned by the principal if such is the case. [6] Its business
       purpose must be the carrying on of the normal duties of an agent.” Id. at 437.

Treas. Reg. § 1.513-4(f), Example 12, indicates that a hyperlink from a charity’s website
to a for-profit’s website that includes an endorsement by the charity of the for-profit’s
merchandise on the for-profit’s website constitutes advertising; this advertising is
taxable to the charity to the extent of the fair market value of the advertising.

Taxpayer, as an organization exempt under section 501(c)(3), is subject to the tax
imposed by section 511 on its unrelated business taxable income (as defined in section
512). Sections 511(a)(1) and 511(a)(2)(A). Taxpayer does not dispute that the Online
Placement Service activity constitutes a trade or business, that it is regularly carried on,
or that it is unrelated to Taxpayer’s exempt purpose. A regularly carried on, unrelated
trade or business is generally subject to tax unless one of the modifications in section
512(b) apply. Taxpayer contends that the revenue received from Vendor constitutes
royalty income under section 512(b)(2).
                                             12
TAM-103019-20


The term “royalty” is not defined by section 512(b)(2) or the regulations thereunder.
Nevertheless, to be a royalty, a payment must relate to the use of a valuable right. See
Rev. Rul. 81-178. Payments for the use of trademarks, trade names, service marks, or
copyrights, whether or not payment is based on the use made of such property, are
ordinarily classified as royalties for federal tax purposes. Id. Similarly, payments for the
use of a professional athlete's name, photograph, likeness, or facsimile signature are
ordinarily characterized as royalties. Id. A royalty is a payment for the right to use an
intangible asset and does not include payments for services. See, e.g., Sierra Club, 86
F.3d 1526. For example, payments for personal appearances and interviews are not
royalties but are compensation for personal services. See Rev. Rul. 81-178. Cases
have held that certain affinity credit card programs, in which an organization licenses its
name and logo for use by a bank on a credit card, or the sale of mailing lists, generate
royalties under section 512(b)(2) that are exempt from unrelated business income tax.
See, e.g., Sierra Club, 86 F.3d 1526; Oregon State Alumni Ass’n, 71 T.C.M. 1935.
Whether a particular item of income is royalty income depends on the facts and
circumstances. Treas. Reg. § 1.512(b)-1.

Taxpayer contends that any payments remitted to it from Vendor are in the form of
royalties for the Vendor’s use of Taxpayer’s name, trademarks, website address, and
mailing list. Taxpayer states that the Online Placement Service is Vendor’s trade or
business. Taxpayer further states that the Online Placement Service technology
belongs to Vendor who also manages the Online Placement Service and collects
payments for use of the Online Placement Service.

The facts and circumstances surrounding the production of income for Taxpayer
through the Online Placement Service do not support Taxpayer’s contention, however.

Name and Trademarks

First, there does not appear to be any transfer to or use of Taxpayer’s name and/or
trademarks by Vendor. In New Jersey Council, 149 T.C. at 477, the court reasoned that
“Nowhere in the agreement does petitioner license [the contracting party] to use its
intangible property or obligate itself to make intangible property available to [the
contracting party]. 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 received under the agreement could be regarded as ‘royalties.’” Similarly, in
this case, there is no mention of Taxpayer’s tangible or intangible property to be used
by Vendor in any agreement. The lack of discussion of intangible properties was a
major factor in the decision by the court in New Jersey Council, 149 T.C. at 476–77, to
determine that the amounts paid to the organization in that case were not royalties.
Further, Website is not a Vendor web page with Taxpayer’s name on it, but rather is a
part of Taxpayer’s web pages that uses a code owned by Vendor.


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TAM-103019-20
Income Share

Taxpayer receives 100 percent of the income from users of the Online Placement
Service that exclusively use the online placement services offered through Taxpayer’s
website, minus a nominal, Z percent fee that pays for credit card transaction fees. The
fact that Taxpayer receives almost all of the income, including advertising income, from
users exclusively using the Online Placement Service on Taxpayer’s website indicates
that the Online Placement Service is Taxpayer’s activity. A royalty represents a
payment made to the owner of property for permitting another to use the property.
Sierra Club, 86 F.3d at 1531–32. In Sierra Club, 86 F.3d at 1528, the taxpayer received
as little as 50 percent of the income from a member’s use of an affinity card, far lower
than the 100% minus an administrative fee from the Online Placement Service. The
percentage of sales from the Online Placement Service on Taxpayer’s website, for the
one month of statistics provided to the IRS, furthers this argument as over 97 percent of
the users of the Online Placement Service on Taxpayer’s website exclusively used this
Online Placement Service; thus, nearly all of the income from Online Placement Service
went to Taxpayer, indicating that the Online Placement Service is Taxpayer’s activity
and not that of Vendor for which Taxpayer received a royalty.

Further, Taxpayer bore the cost of the credit card transaction fees to collect that
income. The credit card transaction fees are a cost of operating the Online Placement
Service. Bearing the cost of operations is a strong indicator that those operations are
the ultimate responsibility of Taxpayer. As such, these costs also indicate that the
Online Placement Service is Taxpayer’s activity and not that of Vendor.




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TAM-103019-20
Service Agreement

In Sierra Club and New Jersey Council, the agreement between the parties was
discussed at length by the courts and was significant in the final conclusions of the
courts in both cases. In New Jersey Council, 149 T.C. at 476–77, the court noted as
part of the determination that a royalty did not exist in that the agreement was titled a
service agreement and discussed the services to be provided. The Service Agreement
between Taxpayer and Vendor provides several items indicating that the Online
Placement Service is Taxpayer’s business and that Taxpayer contracted with Vendor to
provide services to further Taxpayer’s unrelated trade or business. While not
necessarily dispositive of the type of arrangement created by the agreement, as noted
in New Jersey Council, the terms and language used in the agreement are relevant in
determining the intentions of the parties to the agreement. First, in this case, the
agreement in effect for the tax years in question calls itself a “Website Operator Service
Agreement” indicating that the parties believed the contract to be outlining the terms of
services provided by Vendor and not a licensing agreement. Next, in defining the
parties involved, the agreement refers to Vendor as the “provider” while Taxpayer is
called the “customer” indicating that services will be provided by Vendor for the benefit
of Taxpayer. In contrast, a licensing agreement would establish that Taxpayer’s
intangibles would be provided for the benefit of Vendor. Further, the agreement
provides that the services to be provided will be for Taxpayer’s website rather than
indicating that Taxpayer’s website is being provided for the benefit of Vendor’s
business.

Section IV of the Service Agreement, “Services Provided,” provides the greatest
evidence in the agreement that Vendor is acting as a service provider in aid of
Taxpayer’s unrelated trade or business. The court in Texas Farm Bureau, 53 F.3d at
124, concluded that a royalty did not exist by saying “the plain language of the
agreements demonstrates that the agreements were strictly for services and did not
contemplate a royalty payment.” Here too, the language of the agreement
demonstrates a contract for services and not a royalty payment. This section provides
the services to be provided by Vendor. These services include hosting and managing
an online placement service for Taxpayer’s website. This section further provides that
Vendor “will bill [Taxpayer’s] clients, collect client fees, and provide Online Placement
Service technical support and customer service to [Taxpayer’s] clients.” This language
indicates that the users of the Online Placement Service are Taxpayer’s clients and not
those of Vendor (who considers Taxpayer to be its customer). This language also
indicates that even though fees for the online placement services may have been paid
directly to Vendor, such collection of fees was done on behalf of Taxpayer as part of the
services for which Vendor was paid under the agreement. Notably, this section
provides only that Vendor will provide services and does not discuss any activities to be
provided by Taxpayer. Instead, this section discusses fees to be paid by Taxpayer to
include a monthly fee to be paid to Vendor and a credit card/invoicing fee to “cover all
credit card fees, billing fees, postage, materials, and handling costs” associated with

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TAM-103019-20
collecting fees on Taxpayer’s behalf. The presence of a monthly fee to Vendor adds to
the contention that the agreement was for services to be provided by Vendor in
consideration for monthly payments by Taxpayer for the use of those services rather
than an agreement for Vendor to use Taxpayer’s intangible assets.

Section IV also discusses a revenue splitting arrangement as part of the income that
may be earned by either party on fees paid to use the online placement services. The
heading for the revenue sharing section provides that Vendor “will collect all fees related
to [Taxpayer’s] clients’ use of the Online Placement Service. [Taxpayer] will be entitled
to monthly commissions…on these collected fees.” This revenue splitting arrangement
indicates that Taxpayer will receive 100 percent of the income from users of the Online
Placement Service that exclusively use the online placement services offered through
Taxpayer’s website. The language of this section refers to users as Taxpayer’s clients
and indicates that Vendor collects users’ fees on behalf of Taxpayer. Far from being a
royalty, payments remitted by Vendor to Taxpayer represent the collection of fees by
Vendor paid to Taxpayer for use by individuals and employers of Taxpayer’s services.

The description of services provided and the lack of discussion of intangible assets
makes Taxpayer’s agreement with Vendor similar to the agreement described in New
Jersey Council that was determined not to be an agreement for a royalty. Given that (1)
the agreement calls itself a “service agreement,” (2) calls Taxpayer the customer of
those services, (3) describes only services to be provided for the benefit of Taxpayer,
and (4) does not discuss the exchange of intangible properties at all, such agreement
should be understood by its terms, rather than being viewed erroneously as a license
agreement for royalties.

Other Facts and Circumstances

The agreement also needs to be considered within the context of the overall operation
of the online placement services on Taxpayer’s website. Prior to the agreement,
Taxpayer operated its job placement services on its own for over two decades. Then,
Taxpayer operated an online job placement service for several years before it ran into
technical difficulties. Because of these technical problems, Taxpayer contracted with
Vendor.

Further, Taxpayer provides significant services for its job placement activity. The prices
for using the Online Placement Service services, as well as the varying products and
services that can be purchased through the Online Placement Service, are determined
by Taxpayer for all users of the Online Placement Service. Taxpayer also determines
the content, type, and timing of any advertising for the Online Placement Service.
Taxpayer ensures that its landing page and other parts of its website, which includes
the Online Placement Service, are accurate and updated as necessary. Taxpayer
processes Vendor’s monthly invoice for payment. Taxpayer ensures that the Online
Placement Service is being operated in a manner consistent with the Agreement and

                                            16
TAM-103019-20
that its members are satisfied with the Online Placement Service. One of Taxpayer’s
employees is responsible for ensuring that Vendor’s software interfaces properly with
Taxpayer’s membership database, enabling members to sign into the Online Placement
Service. Furthermore, Taxpayer maintains a small team that offers career and resumé
advice as part of its online placement services to assist members with employment
opportunities. On behalf of Taxpayer, these individuals offer advice directly to the users
of the Online Placement Service, as well as responding to questions and concerns, in a
timely fashion either by phone or email. Taxpayer’s website directs users to contact the
Taxpayer Placement Team if they have academic questions or need more information
about Taxpayer’s Placement Service. All of these facts suggest that the online
placement services offered through Taxpayer’s website are a continuation of the
services offered, without the use of a vendor, in prior tax years. See Rev. Rul. 69-430.
This fact distinguishes Taxpayer’s situation from that found in Sierra Club, where the
taxpayer never offered, and could not offer, the affinity credit card program on its own.

Other facts about the operation of the Online Placement Service also indicate that
Taxpayer considers the Online Placement Service to be its trade or business and that
users of the Online Placement Service consider themselves to be paying for a service
provided by Taxpayer. First, the Online Placement Service is operated as part of
Taxpayer’s web pages. The web pages containing and discussing the Online
Placement Service are indistinguishable from the other web pages on Taxpayer’s
website. The URL used for the web pages containing and discussing the Online
Placement Service also contain Taxpayer’s name in acronym form in the same manner
as all other pages on Taxpayer’s website. Further, these webpages refer to the Online
Placement Service as “[Taxpayer’s] Placement Services.” Users of the Online
Placement Service only have a few indications of the presence of Vendor in the
operation of the Online Placement Service. These indications include a small logo at
the bottom right of the Online Placement Service pages that indicate that the Online
Placement Service is “hosted by [Vendor].” These indications also include statements
on the web pages describing the service as Taxpayer’s who has “partnered with
[Vendor] to provide a full-featured Placement Service,” and a statement in the Terms
and Conditions of using the Online Placement Service that the terms represent the full
agreement between the user and Vendor. These statements are consistent with, if not
indicative of, the online placement services being the trade or business of Taxpayer.
Additionally, the first two statements provide no indication to users of the online
placement services that they are services provided by anyone other than Taxpayer.
These statements leave the impression that Taxpayer holds itself out as providing the
online placement services.




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TAM-103019-20
       Direct Communications

Additionally, the language used in direct communications from Taxpayer indicates that
Taxpayer treated the online placement services as its trade or business. First,
advertisements that went out to Taxpayer’s members continued the use of “[Taxpayer’s]
Placement Services.” Other communications from Taxpayer refer to the Online
Placement Service as “our job board” and, regarding pricing, provide that “we only have
a 90-day posting…” (emphasis added). Another communication on the Online
Placement Service from Taxpayer provides that “we strive to provide you with highest
quality…job search experience both on-site during our annual meeting, as well as,
online year-round.” (emphasis added.) This last statement joins the Online Placement
Service with the job search activities conducted by Taxpayer at its annual meeting, with
which Vendor did not participate, suggesting that both the online and in-person
placement services are conducted by the same entity, Taxpayer. Other
communications from Taxpayer to Online Placement Service users refer to Vendor as
“our job board provider” and state that “we use [Vendor] as our online job board
provider.” Finally, receipts for users of the online placement services are signed by the
director of Taxpayer indicating to users that they are doing business with Taxpayer.
Communications from the users also indicate that these users believe the Online
Placement Service to be Taxpayer’s trade or business. These statements, and others,
indicate that Taxpayer holds the online placement services out as its trade or business
and not that of Vendor.

The terms of Taxpayer’s contract with Vendor, the appearance of Taxpayer’s website
and the Online Placement Service, the language used by Taxpayer in communications
with the public, the public’s view of who conducted the activity, the fact that Taxpayer
conducted the Online Placement Service itself for many years, the control and many
services provided by Taxpayer in connection with the Online Placement Service, and
the overall divide of sources of income all point to the fact that the Online Placement
Service trade or business is conducted by Taxpayer who outsources certain operations
to Vendor on Taxpayer’s behalf.

Mailing List

Taxpayer argues that providing a link on its website to the Online Placement Service is
no different than providing mailing lists to Vendor and requires less effort than providing
mailing lists. The rental of mailing lists may constitute royalty income under section
512(b)(2). See Sierra Club, 86 F.3d 1526. However, the facts and circumstances do
not indicate that Taxpayer has rented its mailing list to Vendor. By providing a link,
Taxpayer is not providing a mailing list to Vendor so that Vendor can contact members
on the list. Taxpayer is providing a link so that its members who choose to, can click on
the link to use the Online Placement Service. The link is merely a way to navigate on
Taxpayer’s own website. Additionally, Treas. Reg. § 1.513-4(f), Example 12, illustrates


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TAM-103019-20
a situation where one independent website is linked to another independent website;
the guidance does not consider a link as the provision of mailing lists.

Alternatively, if the Online Placement Service is treated as separate from Taxpayer’s
website, which we do not believe to be the case, the precedent indicates that there are
still consequences to providing a link; these consequences include possible advertising
activity that is typically an unrelated business activity, as in Treas. Reg. § 1.513-4(f),
Example 12. In this instance, Taxpayer would be generating unrelated business income
from advertising for Vendor. If links could be viewed as the sale of mailing lists, as
Taxpayer contends, then any link to a for-profit entity on any exempt organization’s
website could be viewed as exempt royalty income; yet for the most part, unless exempt
as corporate sponsorship, these links constitute advertising that is subject to unrelated
business taxable income. See Treas. Reg. § 1.513-4(f), Example 12.

Additionally, Taxpayer has, in the past, sold portions of its mailing list using a third-party
entity in the business of selling mailing lists. In this case, there is no use of this same
third-party entity in the provision of the link. These facts indicate that Vendor is not
paying Taxpayer to provide a link, or for the use of Taxpayer’s mailing list. Rather, the
link is a navigation tool on Taxpayer’s own Website that leads users to Taxpayer’s own
Online Placement Service.

Agency

Despite the language of the service agreement discussed above, Taxpayer puts
significant weight on language found later in the agreement.

Taxpayer points to paragraph c), “No Agency,” of Item 7, “General Provisions” that
provides that “the parties agree that they are independent contractors5 and will have no
power or authority to assume or create any obligation or responsibility on behalf of each
other. This Agreement will not be construed to create or imply any partnership, agency,
or joint venture.” Taxpayer points to this language to indicate that Vendor’s efforts in
collecting fees and hosting and managing the Online Placement Service cannot be on
Taxpayer’s behalf. Similar to the other terms of the agreement, however, this language
alone is not controlling. State Police Ass’n of Mass., 125 F.3d at 7. Taxpayer also
points to the language found in the “Terms and Conditions” for individuals to use the
Online Placement Service posted on Taxpayer’s website. These terms provide that the
“Terms and Conditions” “form a binding contract between you…and [Vendor].” This
language is not inconsistent with the activities of an agent acting on Taxpayer’s behalf,
however. As such, this language cannot outweigh the body of factors discussed above.

5 The designation of “independent contractor” is based on Taxpayer’s representations; no independent

evaluation has been made to determine whether this designation is accurate. The conclusions contained
in this TAM do not address worker classification status.


                                                  19
TAM-103019-20


Further, Taxpayer points to the National Carbide principles to indicate that Vendor is not
the agent of Taxpayer and that, therefore, Vendor’s efforts cannot be in furtherance of
Taxpayer’s trade or business. Even if Taxpayer’s assertion is correct, we do not agree
that the question of whether or not Vendor is an agent is controlling in this issue.
National Carbide is primarily used to determine whether a subsidiary corporation should
be ignored as the agent of the parent and was not used in cases such as State Police
Ass’n of Massachusetts; nevertheless, using these principles indicates that users of the
online placement services viewed Vendor as an agent of Taxpayer and believed Vendor
to be Taxpayer’s agent.

      Six Factor Test

The “six National Carbide factors” for agency include:

      “[1] Whether the corporation operates in the name and for the account of the
      principal, [2] binds the principal by its actions, [3] transmits money received for
      the principal, and [4] whether receipt of income is attributable to the services of
      employees of the principal and to assets belonging to the principal are some of
      the relevant considerations in determining whether a true agency exists. [5] If the
      corporation is a true agent, its relations with its principal must not be dependent
      on the fact that it is owned by the principal if such is the case. [6] Its business
      purpose must be the carrying on of the normal duties of an agent.” 336 U.S. at
      437.

(1) Vendor operates in the name of Taxpayer. This is indicated by the fact that the
Online Placement Service is called “[Taxpayer’s] Placement Services” and is found on
Taxpayer’s website using a URL with Taxpayer’s acronym in it. The fact that Taxpayer
receives 100 percent of the revenue from sales provided to users of the Online
Placement Service made through the Online Placement Service and the fact that the
agreement calls these users “[Taxpayer’s] clients” indicates that Vendor operated for
the account of Taxpayer. (2) Vendor’s actions bind Taxpayer to the extent that when
Vendor accepts payments and personal information from users of the Online Placement
Service, Taxpayer is bound by Vendor’s user agreements, privacy statements, and
other existing agreements used by Vendor with users of the Online Placement Service.
This binding is explicitly stated in Item 3 of the “General Terms and Conditions” in the
agreement between Taxpayer and Vendor. (3) As indicated in the revenue sharing
portion of section IV of the agreement, Vendor transmits to Taxpayer money received
on Taxpayer’s behalf. (4) While Vendor continues to own the code and software used
to create the software, as discussed earlier, Taxpayer pays Vendor to use these assets
in a manner similar to a lessee of office space. Furthermore, the Online Placement
Service exists on a domain name belonging to Taxpayer using Taxpayer’s trademarks.
In this way, the receipt of income is attributable to assets owned or leased by Taxpayer.
(5) Since Vendor is not a subsidiary of Taxpayer, principle [5] does not apply. Finally,
(6) Vendor was in the business of offering hosting and managing services to job board
                                               20
TAM-103019-20
providers; thus, Vendor was in the business of being an agent. The fact that this is
Vendor’s business is evidenced by the terms of the service agreement, which labels
Vendor as “provider” and Taxpayer as the “customer.” The fact that Vendor hosts
similar job boards for other organizations in a similar manner is also evidence of this
fact. Furthermore, communications between Taxpayer and Vendor during the tax years
in question indicate that Vendor reached out to Taxpayer to suggest methods of
advertising the online placement service that Vendor uses for other clients. These
communications indicate that Vendor is in the business of providing these services on
behalf of its “customers,” who are the organizations controlling job boards rather than
the users of the job boards. Taking all of the “National Carbide factors” into account
further indicates that, despite the language in Taxpayer’s agreement, Vendor acted on
behalf of Taxpayer as its agent.

Taxpayer’s activities and service agreement with Vendor are similar to those found in
State Police Ass’n of Massachusetts where the court stated “The manner in which the
parties to an agreement designate their relationship is not controlling. A true agency
relationship may be established despite the parties' designation to the contrary.” In that
case the court determined that “the agreements manifested an intent that [the
contracting parties] would act on behalf of petitioner in conducting the sale of
advertising…the agreements provided a payment collection procedure in which ‘All
checks or money orders received as a result of the solicitation shall only be made
payable to * * * [petitioner].’ By providing [the contracting parties] with the authority to
use petitioner's name and to collect petitioner's solicitation payments, the agreements
authorized those companies to act on behalf of petitioner in conducting the sale of
advertising.” As discussed above, these facts are synonymous with Taxpayer’s
situation indicating that similar to the organizations in State Police Ass’n of
Massachusetts, Vendor acts as Taxpayer’s agent when collecting fees on Taxpayer’s
behalf.

Website Address

Taxpayer also points to item 2 in “General Terms and Conditions” of the agreement,
which provides that “At all times…[Vendor] maintains all ownership and rights over its
software…and technologies associated with the software. [Vendor] retains the right to
all content, code, data, and other materials created as a result of this Agreement and/or
usage of its software.” Taxpayer points to this language to indicate that the operation of
the Online Placement Service must be that of Vendor since Vendor continues to own
the software used to run the Online Placement Service. This argument fails to discuss
that the web address for the Online Placement Service is not transferred or licensed to
Vendor. Similar to the names and trademarks, the agreement does not discuss, nor do
any other facts indicate, that Vendor has licensed the use of Taxpayer’s website.
Rather, the agreement and the facts discussed above indicate that Taxpayer is paying
to use property owned by Vendor – Vendor’s code - in furtherance of Taxpayer’s trade
or business conducted on Taxpayer’s web pages. In fact, Taxpayer conducted the

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TAM-103019-20
Online Placement Service itself for several years before contracting with Vendor to
service the information technology of the Online Placement Service. Before the Online
Placement Service, Taxpayer conducted placement services for over twenty years, and
continues to provide in-person placement services that now require the use of the
Online Placement Service. Vendor merely provides software and services to Taxpayer
so that the Online Placement Service will run correctly.

Utilizing the information technology (IT) services of another organization does not
generally transfer ownership of a website or a website’s activities to the IT service
organization. For example, if an organization used the software of another organization
to run various parts of its website, the organization would still be considered the
licensee of its website domain and the owner of all the activities on that domain.
Taxpayer has created an online site where members can search for jobs and employers
can post jobs. The activity belongs to Taxpayer; the software to operate this activity
belongs to Vendor. In this case, the fact that Taxpayer operated the Online Placement
Service initially and keeps that Online Placement Service on its website indicates that
the Online Placement Service is Taxpayer’s activity and that Taxpayer pays fees to
Vendor to service that activity.

Conclusion

Because the conduct of the online placement services is a trade or business of
Taxpayer, the income from the online placement services stems primarily from the fees
paid by the users of the Online Placement Service, as well as advertising, rather than
the licensing of Taxpayer’s website, trademarks, and members list. Accordingly, the
income from the Online Placement Service is not a royalty payment from Vendor to
Taxpayer. This decision is made on the weight of the facts and circumstances in this
case; however, not all factors are needed and no single fact is necessarily dispositive.
The income from the Online Placement Service activity is taxable under section 511 as
income from an unrelated trade or business and not excludable under the royalty
modification found in section 512(b)(2).

CAVEAT(S):

A copy of this technical advice memorandum is to be given to the taxpayer(s). Section
6110(k)(3) of the Code provides that it may not be used or cited as precedent.




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