IRS rulings directly relating to clinical trial/drug test activities

FDA Drug Testing for Benefit of Patients is Exempt

A teaching and research hospital served as the principal clinical unit of the schools of medicine and dental medicine of a university. The hospital performed some large scale testing (Phase III) of drugs prior to obtaining Food and Drug Administration (FDA) approval of the drug for marketing. Primarily research and clinical fellows under the supervision of staff physicians performed the testing. The results were presented and discussed at departmental and scientific meetings and were also published in medical journals.

The clinical tests were conducted both "for benefit" and "not for benefit" of hospital patients. According to IRS interpretations, "for benefit" drug testing includes those studies in which drugs are offered to hospital patients who have the disease for which eventual commercial use of a particular drug is intended. "Not for benefit" drug testing of patients includes studies involving patients receiving care for unrelated medical reasons.

The IRS held that this testing was distinguishable from the testing described in IRS Revenue Ruling 68-373 based on the relationship to patient need. With respect to "for benefit" testing, the IRS stated that "although the testing serves the business purposes of the sponsoring drug company by enabling the manufacturer to meet FDA requirements for marketing, the testing also serves patient care purposes and adds to the body of available scientific knowledge concerning drug use." Accordingly, the IRS concluded "for benefit" drug testing is not ordinary testing as an incident to commercial operations of the drug company, but rather is an activity that "bears a substantial causal relationship to the hospital's exempt purposes". "Not for benefit" testing, however, was determined to be unrelated activity subject to the UBIT. (IRS Letter Ruling 8230002).

Testing of Drugs Solely to Meet FDA Requirements is Taxable

A nonprofit organization was primarily engaged in testing drugs for commercial pharmaceutical firms. The clinical testing was performed for the companies to meet FDA requirements before marketing of the drug. The test results were freely available for publication. It was not established that the testing contributed to the training of students or to patient care.

The IRS held that the clinical testing of a drug for safety and efficacy in order to enable the manufacturer to meet FDA requirements is not "testing for public safety" but is merely a service performed for the manufacturer. The fact that highly qualified professionals must perform the testing does not change its commercial nature. Accordingly, the IRS determined that the organization failed to qualify for exemption under Federal income tax. (IRS Revenue Ruling 68-373).