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Tax-free hospital discounts to certain classes of patients.

The IRS has ruled that discounts on hospital services may be provided on a tax-free basis to staff physicians and dentists, hospital employees, certain ministers and missionaries, and senior citizens (Letter Rulings 9525033 and 9506025).

The rulings involved a not-for-profit hospital, tax-exempt under Sec. 501 (c) (3). The hospital offered various discounts on inpatient and outpatient services to the following categories of individuals:

* Category I: Hospital employees, retired employees, and their dependents, who received various percentage discounts based on whether the services were inpatient or outpatient and the number of hours the employee worked per pay period. * Category II: Physicians and dentists in private practice who had been granted staff privileges by the hospital and their dependents, as well as certain resident ministers and missionaries and their dependents. None of the Category II individuals were hospital employees. Category II individuals received a 25% discount on inpatient services and a 50% discount on outpatient services. The hospital also offered a 100% discount (after insurance) to retired resident ministers with at least 15 years of service, including at least 10 years in a certain geographic locale. * Category III: Employees (and their dependents) of the church association that originally formed the hospital, and certain ministers and missionaries and dependents. These individuals received a 10% discount on inpatient services and a 25% discount on outpatient services. * Category IV: Senior citizens who paid a $5 fee to join a discount program, which entitled them to receive a $40 discount on the cost of a mammography, a $45 discount on osteoporosis testing and a one-third discount on meals in the hospital's cafeteria.

The Service concluded that the Category I discounts were indirect reimbursements of medical expenses to employees through employer-provided accident and health insurance, and therefore were not taxable income - except to the extent the discounts constituted discriminatory excess reimbursements to highly compensated individuals.

Because the Category 11, Ill and IV discounts were offered to individuals who were not hospital employees, the IRS concluded that such discounts were not taxable income but were simply an adjustment to the purchase price of hospital services. Note: These rulings did not address the issue of whether the discounts offered by the hospital were consistent with its tax-exempt status. A separate ruling on this issue is reportedly pending with the IRS.

From Phillip G. Royalty, Esq., Washington, D.C.
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Article Details
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Author:Royalty, Phillip G.
Publication:The Tax Adviser
Article Type:Brief Article
Date:Jan 1, 1996
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Next Article:Taxpayer-lessor in constructive receipt of rental income from wholly owned corporation.

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