On July 11, 2014, the IRS released a Technical Advice Memorandum ("TAM") finding that a tax-exempt hospital's income from the performance of laboratory services for non-patients was not subject to the unrelated business income ("UBI") tax. In the TAM, the IRS held that this testing was the conduct of a related business because "unique circumstances" existed.

What You Need to Know

Background: Generally, diagnostic laboratory testing of non-patients results in UBI for a tax-exempt hospital. In Revenue Ruling 85-110, the IRS established that "unique circumstances" may exist where such services further the hospital's exempt purposes and thus do not result in UBI. For example, where a hospital's laboratory diagnosed blood samples from non-patient drug overdose or poisoning victims, unique circumstances existed if the transfer of specimens to other locations would be detrimental to the patients' health. The IRS described other unique circumstances in the ruling, such as where alternative laboratories were not available within a reasonable distance from the area served by the hospital and where other local laboratories were incapable of conducting necessary tests to non-patients.

TAM 201428030: TAM 201428030 involved a tax-exempt hospital located in a rural, medically underserved area that provided on-site medical laboratory services to its patients and to the patients of private physicians. There were no full-service commercial or noncommercial laboratories in any of the communities served by the hospital. The nearest laboratories provided testing services for hospital-area physicians, but the turnaround times for test results were longer. The hospital represented that the difference in these times could result in serious medical consequences for the affected individuals, especially the elderly. In addition, the hospital's laboratory services could help physicians reduce inpatient hospitalization and more effectively make decisions for their patients regarding hospital services.

The IRS concluded that, in this instance, although other laboratories could conduct laboratory tests needed by the hospital's non-patients, they were "unable to do so adequately." The IRS found that "unique circumstances" existed, in that the nearest laboratory was not within a reasonable distance of the communities involved to adequately serve the individuals' health care needs for timely laboratory testing. The IRS held that because the hospital provided adequate laboratory services to its communities (where other laboratories could not), its laboratory services contributed importantly to the accomplishment of the hospital's exempt purpose.

What You Should Do Now

You should review the manner in which your hospital organization reports income from the provision of laboratory testing services. To the extent that the income is reported as UBI, you should examine whether unique circumstances exist, such as those outlined in TAM 201428030, to allow treatment of this income as related business income.