Rev. Rul. 69-275

Advice has been requested as to the income tax treatment of fees received by physicians that are turned over to a hospital under the circumstances described below.

A hospital, a charitable organization described in section 170(c) of the Internal Revenue Code of 1954, admits patients who come directly to the hospital without a recommendation of a physician. Each patient is treated by interns and residents under the supervision of a hospital staff physician. Some of these patients have health insurance coverage that entitles the staff physicians to receive fees for the services rendered. A number of the staff physicians have voluntarily entered into an agreement with the hospital to turn over to the hospital any fees received from such patients.

Under the agreement the staff physician may designate a particular department of the hospital to receive the benefit of the fees. The monies received are to be used in furtherance of the training and educational program of the particular department, but in no event will the participating staff physicians receive any personal benefit from the use of the fees. The staff physician may terminate this agreement at will.

Section 61(a) of the Code defines gross income as all income, from whatever source derived, except as otherwise provided by law. It specifically includes compensation for services, including fees and similar items.

Section 170 of the Code provides, in part, that there shall be allowed as a deduction any charitable contribution (as defined in subsection (c) payment of which is made within the taxable year.

Under the circumstances described, it is held that the fees received by the staff physicians must be included in the gross income of the staff physicians. However, it is further held that the staff physicians are entitled to charitable contribution deductions, subject to the limitations provided in section 170(b) of the Code, for the monies turned over to the hospital under the agreement.

This case is distinguishable from Revenue Ruling 66-377, C.B. 1966-2, 21, which similarly holds that fees received by faculty members of a university's school of medicine from their private professional practices are includible in their gross incomes, even though under the terms of their employment contracts such fees are required to be turned over to the school. However, the fees turned over to the school under the circumstances described in that Revenue Ruling are deductible as ordinary and necessary business expenses under the provisions of section 162(a) of the Code. In Revenue Ruling 66-377 the faculty members were required under their employment contracts to turn the fees over to the school, whereas, in the instant case the staff physician voluntarily elects whether he wants to enter into the agreement, and he may terminate the agreement at will.

Revenue Ruling 66-377 is hereby distinguished.