Rev. Rul. 54-173

Advice is requested as to the uses, if any, which may be made of tax-free alcohol withdrawn by a municipally-owned or a privately-owned hospital other than for routine medicinal, mechanical, and scientific purposes of the hospital itself.

Section 182.661 of Regulations 3 provides that tax-free alcohol withdrawn by hospitals, sanitariums, or clinics operated for charity and not for profit, may be used only for medicinal, mechanical, and scientific purposes and in the treatment of patients. The use of the tax-free alcohol and the resultant products shall be confined strictly to the premises of the institution withdrawing the alcohol, except that where any such resulting product does not contain alcohol and is to be used in further research, it may be removed, without sale, for that purpose only. Such further research may be conducted at any scientific university or college of learning, laboratory engaged in scientific research, or hospital or clinic. Bona fide medicines compounded with tax-free alcohol withdrawn by clinics operated for charity and not for profit may be used outside of such clinics for treatment of the patients thereof, but such medicines may not be sold.

The following questions and answers illustrate the application of the foregoing statement of regulations.

Question 1 . May a municipally-owned hospital conduct laboratory tests of any nature in which the use of tax-free alcohol is involved for another institution, either permittee, nonpermittee, or individual?

Answer . The use of tax-free alcohol by a municipally-owned hospital is authorized for the use of such hospital for medical, mechanical, and scientific purposes and for use in treating its patients. However, the use of the tax-free alcohol in making tests of any nature for another institution or individual is not authorized under the provisions of Regulations 3 unless such tests are made in pursuance of state or county requirements and are in essence a recognized function of the municipally-owned institution.

Question 2 . Do the same conditions apply to a privately-owned hospital as apply to a municipally-owned hospital?

Answer . A privately-owned hospital may not use tax-free alcohol withdrawn under its permit to make pathological examinations or tests for other hospitals, for physicians, or for individuals who are not patients of such hospital. Such laboratory work of a privately-owned hospital is not considered distinguishable from that carried on by any commercial laboratory.

Question 3 . May a charge be made or a fee accepted by the tax-free permittee in whose laboratory the tests involving tax-free alcohol are made?

Answer . A charge or fee may be made or accepted by the permittee hospital, whether municipally or privately owned, provided the payment is for examinations or tests using tax-free alcohol which the hospital is authorized to make.

Question 4 . Would the fact that a patient is charged for the test by the institution, physician, or other person submitting the specimen to the tax-free permittee for analysis have any bearing on the legitimacy of the permittee's use of the tax-free alcohol?

Answer . If a permittee is not authorized to use tax-free alcohol in making examinations for other institutions, for physicians, or other persons submitting specimens to the permittee for analysis, the question of whether the patient is or is not charged by the submitting institution, physician, or other person, would have no bearing on the legitimacy of the permittee's use of tax-free alcohol.