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personal service corporation for which section 448(b)(2) grants
an exception to the general prohibition by section 448(a) of the
use of the cash method of accounting by C corporations,
partnerships which have a C corporation as a partner, and tax
shelters).17
Relying on certain State law cases, respondent contends that
the trend is to consider hospital services as part of sale
transactions involving medical supplies. According to
respondent: "This case law endeavors to protect the patient from
defective hospital services, since the patient is unable to
discern or control defective services and because physicians are
depending on the hospital's services in undertaking the patient's
treatment." Respondent thus asserts that any medical services
accompanying a "sale" of medical supplies is part of the "sale"
transaction.
Petitioners deny that the hospitals engage in the sale of
medical supplies. They argue that the hospitals use medical
supplies in the course of providing medical services, but they
maintain that all of their income is derived from the performance
of services. Petitioners contend that the business of operating
17 For purposes of sec. 448(d)(2), the performance of services
in the field of health means the provision of medical services by
physicians, nurses, dentists, and other similar healthcare
professionals. Sec. 1.448-1T(e)(4)(ii), Temporary Income Tax
Regs., 52 Fed. Reg. 22768 (June 16, 1987). In the instant case,
respondent does not deny that the hospitals perform services in
the field of health.
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