Internal Revenue Service
Revenue Ruling
Rev. Rul. 78-145
1978-1 C.B. 169
Sec. 513
IRS Headnote
Unrelated trade or business; blood bank. Sale of plasma to commercial
laboratories by an exempt blood bank, engaged in collecting and maintaining
blood products for use by hospitals, is not unrelated trade or business
where the blood bank sells either by-product plasma from which red blood
cells have been removed for use by hospitals or plasma salvaged from whole
blood nearing the end of its shelf life. However, sale of plasma derived
from donors through plasmapheresis or purchased from other blood banks is
unrelated trade or business. Rev. Rul. 66-323 modified.
Full Text
Rev. Rul. 78-145
Advice has been requested whether, under the circumstances described below,
a blood bank exempt from Federal income tax under section 501(c)(3) of the
Internal Revenue Code of 1954 that sells blood components to commercial
laboratories is engaged in unrelated trade or business within the meaning
of section 513.
The blood bank collects and maintains inventories of human blood and blood
products, which are furnished to hospitals for immediate patient use. As a
part of its functions, the blood bank maintains records covering all donors
within the geographic area it serves, and it attempts, through contacts
with hospitals within or near that area, to keep records on all persons
whose blood is known to contain rare antigens and antibodies.
Recent technological developments in the field of medicine have reduced the
need for whole blood transfusions by perfecting techniques whereby red
blood cells and other components are transfused into the patient in lieu of
whole blood. Thus, an increasing amount of the whole blood collected by the
blood bank is separated into components to meet the modern medical demands
for red blood cell transfusion. As a result, the blood bank is left with a
large supply of plasma after the removal of the red blood cells. Since only
a small part of this supply of plasma is needed by the hospitals serviced
by the blood bank, most of it is sold to commercial laboratories.
The blood bank also obtains plasma from donors through a procedure called
plasmapheresis, in which whole blood is drawn from a donor, the red cells
are separated and replaced in the donor, and plasma is collected. This
plasmapheresis technique is used, primarily, to collect plasma from donors
known to have rare antigens, reagents and antibodies in their plasma. The
plasma obtained in this way is sold to commercial laboratories for
processing into its various components, referred to in the profession as
plasma fractions.
A third source of plasma is the supply of whole blood that the blood bank
maintains for use in the hospitals that it serves. Although the inventory
of whole blood maintained by the blood bank is designed to meet the needs
of the hospitals, it is impossible to predict accurately the exact amount
of each type of blood that will be needed. Whole blood has a limited shelf
life. After the expiration of this period, either the blood must be
discarded or the red cells must be extracted and the plasma salvaged. Thus,
as unused whole blood maintained in the blood bank's inventory nears the
end of its shelf life, the blood bank salvages the plasma and sells it to
commercial laboratories.
Finally, the blood bank purchases some plasma from other blood banks. This
plasma is not used by the blood bank itself, but is sold to commercial
laboratories.
Thus, the plasma that the blood bank sells to commercial laboratories is
derived from four different sources: (1) by-product plasma, which is what
remains of whole blood after the red cells have been extracted for use; (2)
plasmapheresed plasma drawn from donors by the blood bank; (3) salvage
plasma, which is plasma extracted from units of whole blood which are no
longer fresh enough for transfusions because their shelf life has expired;
and (4) plasma obtained from other blood banks.
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),
with certain exceptions not here pertinent.
In section 512(a)(1) of the Code, the term "unrelated business taxable
income" is defined as the gross income derived by any organization from any
unrelated trade or business regularly carried on by it, less certain
deductions not here applicable.
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 function.
Section 1.513-1(d)(2) of the Income Tax Regulations provides that trade or
business is related to exempt purposes only where the conduct of the
business activities has causal relationship to the achievement of exempt
purposes (other than through the production of income); and it is
"substantially related" only if the causal relationship is a substantial
one. Thus, for the conduct of trade or business from which a particular
amount of gross income is derived to be substantially related to purposes
for which exemption is granted, the production or distribution of the goods
or the performance of the services from which the gross income is derived
must contribute importantly to the accomplishment of those purposes.
Whether activities productive of gross income contribute importantly to the
accomplishment of any purpose for which an organization is granted
exemption depends in each case upon the facts and circumstances involved.
Section 1.513-1(d)(4)(ii) of the regulations provides that, ordinarily,
gross income from the sale of products which results from the performance
of exempt functions does not constitute gross income from the conduct of
unrelated trade or business if the product is sold in substantially the
same state it is in on completion of the exempt functions.
None of the sales of plasma described above can be said to bear a causal
relationship to the blood bank's exempt purposes. However, where the blood
bank is merely disposing of products which result from the performance of
its exempt functions, it will not be considered to be engaging in unrelated
trade or business.
Since providing blood and blood products to hospitals for immediate patient
use is one of the organization's exempt functions, its sale of by-product
plasma remaining after the red blood cells are removed for use by the
hospitals is not unrelated trade or business. Similarly, since the
maintenance of an inventory of whole blood is one of the organization's
exempt functions, its sale of plasma salvaged from blood nearing the end of
its shelf life is not unrelated trade or business. This assumes, of course,
that the amount of whole blood maintained in inventory is not excessive in
view of the expected needs of the hospitals that the organization serves.
The sale of plasma derived by the blood bank from donors through the
process of plasmapheresis, however, is unrelated trade or business. This
plasma is not a product resulting from the performance of the
organization's exempt functions, but is obtained for resale. Similarly, the
plasma purchased from other blood banks and resold to commercial
laboratories is not a result of the performance of an exempt function. The
sale of this plasma also constitutes unrelated trade or business.
Rev. Rul. 66-323, 1966-2 C.B. 216, which describes a blood bank exempt
under section 501(c)(3) of the Code, is modified. Rev. Rul. 66-323 suggests
that all sales of blood and blood products to commercial laboratories will
be unrelated trade or business. This conclusion is in error to the extent
that it fails to recognize that certain sales may be of products resulting
from the organization's performance of its exempt functions. As indicated
above, such sales are not unrelated trade or business under section
1.513-1(d)(4)(ii) of the regulations.
