IRS ruling - Hospital’s laboratory testing meets “unique circumstances” test 

July 15:  The IRS publicly released a technical advice memorandum (TAM), in which it was concluded that a tax-exempt hospital’s income from the performance of medical laboratory services for non-patients is not subject to unrelated business income tax (UBIT). TAM 201428030 (release date: July 11, 2014; dated March 7, 2008)

Read TAM 201428030 [PDF 243 KB]

Background

A hospital located in a rural, medically underserved area provides medical laboratory services both to its own patients and to patients of private physicians who are not hospital patients. While a commercial laboratory is available to serve the needs of the non-patients, the lab is some distance away and cannot provide test results as quickly as the hospital laboratory. The difference in turnaround time could result in serious medical consequences for the individuals involved.

IRS ruling

The IRS found that the commercial laboratory is not within a reasonable distance of the communities served by the hospital and therefore cannot adequately serve their health needs—particularly the needs of patients for timely laboratory testing.


Accordingly, the IRS concluded that the provision of laboratory services by the hospital to non-patients is substantially related to, and contributes importantly to, the hospital’s exempt purpose. Income from the performance of such services is not subject to UBIT.

KPMG observation

The IRS’s general position, as stated in Rev. Rul. 85-110 [PDF 51 KB] is that income from diagnostic laboratory testing performed by a hospital, on non-patients, is subject to UBIT although there may be unique circumstances under which this general rule might not apply. This TAM highlights one such circumstance.


It is interesting to note the emphasis that the IRS places upon the potential medical consequences that might result if the less timely commercial laboratory were used, instead of the hospital laboratory. One wonders whether the IRS would consider this to be a more important factor in the case of an ill or injured patient as opposed to a patient receiving a routine physical examination. This is not addressed in the TAM.



For more information, contact:


Rick Speizman, Partner-in-Charge of KPMG's Washington National Tax Exempt Organizations Tax group

+1 (202) 533-3084





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