Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 62-36

1962-1 C.B. 352

IRS Headnote

Clinics operated for charity and not for profit may furnish medicines made with tax-free alcohol to their patients for use off the premises of such clinics, even though the patients are required to pay a registration fee, or a similar fee, entitling them to use all the services of the clinic.

Clinics operated by colleges, universities and hospitals are considered, under certain conditions, to be clinics operated for charity and not for profit.

Revenue Ruling 54-464, C.B. 1954-2, 509, and Revenue Ruling 55-664, C.B. 1955-2, 703, revoked.

Full Text

Rev. Rul. 62-36

Advice has been requested whether a clinic operated for charity and not for profit, which charges a fee to its patients entitling them to the services of the clinic, would, by reason of its charging such a fee, be precluded by section 5214(a)(3) of the Internal Revenue Code of 1954 from furnishing medicines made with tax-free alcohol to its patients for use off the clinic premises.

In resolving the above issue, it has also been necessary for the Internal Revenue Service to study the question of whether a clinic operated by a college, university, or hospital can be considered to be a clinic `operated for charity and not for profit' within the purview of section 5214(a)(3)(D) of the Code.

In the particular case in question, a university, which holds a permit to procure and use tax-free alcohol, operates a clinic wherein it provides medical facilities to its students for the treatment of all ills not requiring major surgery. All students entering the university are charged a set fee entitling them to the use of the clinic. No other charge is made to the students for clinic services, but no student is exempt from the payment of the set fee.

It is customary for the clinic of this university to furnish medicines made with tax-free alcohol to its students without charge for their use, either on or off the university campus.

Section 5214(a)(3) of the Code, as contained in Public Law 85-859, C.B. 1958-3, 92, at 178, authorizes clinics operated for charity and not for profit to withdraw alcohol from the bonded premises of distilled spirits plants free of tax and, among other purposes, to use such alcohol `in the compounding of bona fide medicines for treatment outside of such clinics of patients thereof.' However, such clinics are restrained by other language in this section of the Code from selling such alcohol or using it in the manufacture of any product for sale. The above provisions of section 5214(a)(3) of the Code are substantially the same as those of section 5310(c) of the Code before amendment by Public Law 85-859.

Revenue Ruling 54-464, C.B. 1954-2, 509, and Revenue Ruling 55-664, C.B. 1955-2, 703, interpreted section 182.661 of the Industrial Alcohol Regulations (now superseded by sections 213.104, 213.105, and 213.108 of the Tax-Free Alcohol Regulations) to mean that the acceptance or collection of a fee by a clinic from its patients precluded that clinic from furnishing medicines made with tax-free alcohol to such patients for use off the clinic premises.

The pertinent restraining provisions of those sections of the Tax-free Alcohol Regulations which have superseded section 182.661 of the Industrial Alcohol Regulations are purposely stated in broader and more liberal terms than the superseded section. They provide that clinics operated for charity and not for profit may furnish medicines made with tax-free alcohol to their patients `for use off the premises if such medicine is not sold and no fee or other charge is exacted by reason of the furnishing of the medicine to the patient .' Emphasis supplied.

Accordingly, it is held that if no part of a fee can be separately identified as a charge for medicines, an amount charged to the patients of a clinic as a registration fee or as a fee entitling the patients to the use of all the services of the clinic is not considered to be a charge `exacted by reason of the furnishing of medicines' to such patients.

Therefore, clinics operated for charity and not for profit may furnish medicines made with tax-free alcohol to their patients for use off the premises of such clinics, even though the patients may pay a registration fee to the clinics. This holding applies to the furnishing of any bona fide medicine compounded with tax-free alcohol, including rubbing alcohol compound, provided any rubbing alcohol compound so furnished is of approximately the same consistency and is denatured to as great a degree as rubbing alcohol compound manufactured with specially denatured alcohol under the Distribution of Denatured Alcohol Regulations.

Except for those institutions which are maintained for the private profit of their owners, colleges, universities, and hospitals are charitable organizations, notwithstanding the fact that they charge fees to their students or patients. Therefore, any clinic operated by and as an integral part of such an institution is a clinic operated for charity and not for profit for purposes of section 5214 of the Code. Within the limits stated above, any such clinic may furnish medicines made with tax-free alcohol to its patients for use off the premises. This applies whether the clinic has qualified for the procurement and use of tax-free alcohol under paragraph (D) of section 5214(a)(3) of the Code, in its limited capacity as a clinic, or whether its authority for such procurement and use is by virtue of its being a part of an institution which has so qualified under paragraph (A) or (C) of that section of the Code.

However, any hospital or clinic, whether operated for charity or for profit, which desires to use alcohol in the manufacture of medicines which it will sell to its patients, must obtain taxpaid alcohol for such purpose. Upon compliance with the pertinent provisions of the Drawback on Distilled Spirits Used in Manufacturing Nonbeverage Products Regulations, such hospital or clinic may claim drawback of tax at the authorized rate on the alcohol so used. In this connection, see also Revenue Ruling 54-173, C.B. 1954-1, 324, and Revenue Ruling 59-188, C.B. 1959-1, 725.

Revenue Ruling 54-464, C.B. 1954-2, 509, and Revenue Ruling 55-664, C.B. 1955-2, 703, are hereby revoked.