Country / Language

Tax-Exempt Hospital’s Income from Non-Patient Lab Testing Is Not UBTI


8/28/14

Synopsis
 

In Technical Advice Memorandum 201428030, the IRS held that income derived by a tax-exempt hospital from the performance of laboratory testing services on referred specimens from individuals who are not its patients in a medically underserved, rural area is not unrelated business taxable income (UBTI).
 
Issue
 
In general, the IRS position is that a tax-exempt hospital’s income from laboratory services provided for individuals who are not its patients (“non-patients”) is UBTI. Exceptions to this rule include an exception for teaching hospitals where the non-patient laboratory services provide a supply of specimens needed in the hospital’s teaching program, and an exception for laboratory services provided by a tax-exempt hospital at cost to one or more tax-exempt hospitals with no more than 100 inpatient beds.
 
There is also a “unique circumstances” exception. For example, the provision of emergency laboratory diagnosis of blood samples from non-patient drug overdose or poisoning victims in order to identify specific toxic agents may not be an unrelated trade or business if referral of these specimens to other locations would be detrimental to the health of hospital non-patients. Similarly, if other laboratories are not available within a reasonable distance from the area served by the hospital or are clearly unable or inadequate to conduct tests needed by hospital non-patients, the provision of testing services may not be an unrelated trade or business. Whether such unique circumstances exist will be determined by the IRS on a case-by-case basis.
 
In this case, laboratory testing services were available from a commercial laboratory. However, the IRS concluded that the unique circumstances exception applied because the commercial laboratory was not within a reasonable distance of the communities served by the hospital and did not adequately serve their health care needs, particularly the need for timely testing.
 
What Does CohnReznick Think?
Tax-exempt hospitals that provide laboratory services and/or other goods and services to non-patients may want to consider conducting a review to determine whether any of the income may be UBTI or covered by an exception, as well as any potential federal and state tax return reporting implications.

Contact

For more information, please contact Phil Royalty, Director, at 916-930-5222 or Tom Lanning, Partner, at 646-834-4108. To learn more about CohnReznick’s Healthcare Industry Practice, please visit our webpage.


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