Internal Revenue Service
Revenue Ruling
Rev. Rul. 66-323
1966-2 C.B. 216
Sec. 501
Sec. 511
Sec. 513
Caution: Modified by Rev. Rul. 78-145
IRS Headnote
A blood bank organized and operated exclusively for scientific and
charitable purposes, to provide a community with permanent facilities for
the collection and storage of human blood and blood products and to provide
for the public distribution thereof, may be exempt from Federal income tax
under section 501(c)(3) of the Internal Revenue Code of 1954.
Income from the sale by the organization of blood and blood products to
commercial laboratories constitutes income from an unrelated trade or
business as defined in section 513 of the Code.
Full Text
Rev. Rul. 66-323
Advice has been requested whether a blood bank operated in the manner
described below qualifies for exemption from Federal income tax under
section 501(c)(3) of the Internal Revenue Code of 1954.
The organization was formed to establish and operate permanent facilities
for the collection and distribution of human blood and blood products for
the benefit of the public and to conduct related research. Its charter
provides that no part of the organization's net earnings may inure to the
benefit of any private shareholder or individual. In the event of
dissolution, its assets are to be distributed to exempt charitable,
scientific, or educational organizations to be used for exclusively exempt
purposes.
The organization's board of trustees is comprised predominantly of public
members who are not otherwise associated with it.
The blood bank was established to help meet the needs of a community. It
obtains blood from professional and volunteer donors and supplies blood and
blood products to hospitals, including local and Federal government
institutions, doctors, clinics, and commercial laboratories. Within the
limits of its ability, it supplies blood free for indigent and charity
patients. The bank serves as a free repository of blood for a local
research foundation in a volunteer program jointly maintained by it and the
foundation. It also provides blood to other institutions for research
purposes.
Other activities of the organization include (a) collaborating with an
exempt organization in a free program of blood typing of volunteer donors;
(b) opening of several blood-drawing stations in the area which it serves;
(c) pioneering in the development of a program to help meet the need for
fresh blood in connection with the increasing use of open heart surgery as
a standard surgical procedure; (d) allocating funds to a blood coagulation
research program conducted jointly with an exempt research center; and (e)
providing gratuitous services of an educational nature to the community.
The organization also sells blood and blood components, such as raw serums,
to commercial laboratories.
Although the organization charges those who are able to pay for its
services, its charges for blood and blood products are generally less than
the prevailing rates charged by commercial blood distributors. Furthermore,
it is committed by its charter to use all funds received for its services
in excess of operating costs for the accomplishment of its declared
charitable purposes, including expansion of its services as required by the
community need. Likewise, it is committed to furnish services to any person
notwithstanding his inability to pay. Moreover, its trustees are required
to review periodically the schedule of charges to insure that they are not
higher than is reasonably necessary to enable it to perform its community
function.
In carrying out its purposes, the bank has a volunteer blood replacement
program which enables recipients of blood to extinguish, in whole or in
part, the charges they would otherwise have to pay. With some of the
institutions it serves, replacement of blood is accepted on a two-for-one
basis with no service charge. More usual, however, is full payment or
replacement of blood on a one-for-one basis and payment of the service
charge.
The blood bank's income is derived mainly from the sale of blood products
and services to hospitals, doctors, clinics, and commercial laboratories.
Its expenditures are for blood purchases, laboratory expenses, wages,
administrative expenses, office supplies, delivery expenses, and other
miscellaneous operating expenses.
Section 501(c)(3) of the Code provides for the exemption from Federal
income tax of organizations organized and operated exclusively for
charitable purposes.
On the basis of the information set forth above, the organization serves a
public purpose in a manner which qualifies it for exemption from Federal
income tax as a charitable organization under section 501(c)(3) of the
Code.
Section 511 of the Code imposes a tax on the unrelated business taxable
income of organizations otherwise exempt from tax under section 501(c)(3)
of the Code, with certain exceptions not pertinent here. Section 513 of the
Code defines the term `unrelated trade or business' as any trade or
business the conduct of which is not substantially related (aside from the
need of such organization for income or funds or the use it makes of the
profits derived) to the exercise or performance by such organization of its
exempt functions.
The selling of blood and blood components, such as raw serums, to
commercial laboratories is business of a kind regularly carried on for
profit. Such business is not substantially related to the purposes forming
the basis for exemption of the organization. Accordingly, the selling of
blood and blood products to commercial laboratories constitutes the conduct
of unrelated trade or business within the meaning of section 513 of the
Code, and the organization is subject to the tax imposed by section 511 of
the Code.
An organization which considers itself within the scope of this Revenue
Ruling must, in order to establish exemption under section 501(c)(3) of the
Code, file an application on Form 1023, Exemption Application, with the
District Director of Internal Revenue for the internal revenue district in
which is located the principal place of business or principal office of the
organization. See section 1.501(a)-1 of the Income Tax Regulations.
