Analogous rulings regarding training and testing activities
Non-patient Lab Testing Involving Student Training
A hospital organized to operate a school for teaching medical students, interns, residents, medical technologists, and nurses performed laboratory testing for non-patients. The outside testing services provided the hospital with an additional supply of human tissue samples needed for the training of these medical professionals. Interns and residents performed and interpreted the tests and made diagnoses based on the results. Abnormal test results were also discussed in weekly conferences with the interns and residents.
The IRS held that the hospital was not engaged in an unrelated trade or business where the outside testing services contributed importantly and substantially to the hospital's medical education program. (IRS Revenue Ruling 85-109).
Where the performance of diagnostic laboratory testing is otherwise available within the community, testing of specimens from private office patients of the hospital's staff physicians constituted an unrelated trade or business subject to UBIT. (IRS Revenue Ruling 85-110).
Normally Taxable Drug Testing Conducted by Students is Exempt
A medical college undertook studies for five pharmaceutical manufacturers to explore the effects of certain drug products on the diagnosis and treatment of various human afflictions. In all five studies, the medical college was responsible for the design and management of the studies including data collection and analysis. The studies were conducted by the professors, technicians, and graduate students of the college. The results of the studies were subsequently published in scholarly journals and used in the instruction of graduate students. The IRS determined that the studies were not merely quality control programs but were central to the college's "basic purposes of promoting and teaching medical science". Consequently, the studies did not constitute unrelated business activities. (IRS Letter Ruling 7936006).
Production Testing by Students is Exempt
A state university offered use of its radiation and nuclear science laboratories to pharmaceutical companies and other commercial entities to generate income for research. Experimental construction and production testing were conducted for the companies within the laboratories. Undergraduate and graduate students either actively participated in the experiments contracted for by the industries or were brought in as observes to review the results of each new project cycle. Moreover, the projects generated numerous publications, presentations, and a series of seminars. Fifty-six undergraduates and postgraduate degrees were also a direct result of the major service projects.
The IRS held that this contribution to the university's educational purpose was more than incidental and therefore, the income generated from these service contracts was not unrelated business income. (IRS Letter Ruling 8445007).
Clinical Testing of Developmental Equipment is Taxable
A university entered into a contract with a for-profit entity for the purpose of conducting research into blood smear testing. The commercial entity had developed an automatic blood-testing instrument and was interested in seeing it work and tested in a clinical setting. During a one-year period, the university conducted experiments using the instrument and compared its results with current methods of blood smear study. It was not established that students were involved in the experiments. The research results were available for publication.
The IRS determined that while the experiments conducted using the instrument were clearly related to the university's research purpose, the primary purpose of the research contract between the parties was the development and perfection of an instrument for marketing. Consequently, the Service held that income derived from the research was subject to the UBIT. (IRS Letter Ruling 7902019).