Exempt hospitals in group purchasing partnerships.

• Author: Levenson, Howard A.
• Position: Unrelated business income

Recent IRS Letter Ruling (TAM) 9739001 held that a tax-exempt hospital's distributive share of income from a partnership that performed group purchasing services for its hospital-partners was not unrelated business income (UBI), to the extent such distributive share did not exceed the amount a hospital-partner would have received based on purchases made by the partnership on its behalf. A distributive share greater than the amount it would have received based on purchases made on its behalf would constitute UBI to the extent of such excess.

At issue was a purchasing agreement entered into by a limited partnership consisting of one general partner and 39 limited partners. The general partner was a Corporation; the limited partners were Sec. 501(c)(3) organizations that owned and operated hospitals. One of the limited partners (4) controlled tour separate hospitals.

Under the purchasing agreement, the partnership negotiated and executed contracts with vendors of medical supplies and monitored the purchases made by the limited partners and the quality of the available supplies. The partnership made no purchases; instead, the individual limited partners made purchases based on contracts negotiated by the partnership. The arrangement served to reduce overall costs and promote product consistency and availability.

The partnership entered into purchase contracts with a variety of suppliers, providing competitive pricing on a broad range of products, including medical and surgical supplies, pharmaceuticals, capital equipment and dietary supplies. The contracts also covered car rentals, telephone services, plant operations and management services. The contracts fell into three categories: Corporate, Committed and Preferred Agreements.

The Corporate Agreements provided that the supplier pays the partnership 2% of the total sales of products to the limited partners. In addition, the supplier paid amounts directly to each limited partner based on the volume of purchases from the supplier...