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hospitals is the quintessential service business. They argue
that this Court recognized that principle in St. Luke's Hosp. v.
Commissioner, 35 T.C. 236 (1960), as did the Supreme Court in
Abbott Labs. v. Portland Retail Druggists Association, Inc., 425
U.S. 1 (1976), and the Commissioner in the regulations.
Petitioners maintain that hospitals do not sell merchandise but
rather acquire medical supplies for use in performing medical
services.
In the instant case there is no dispute that the hospitals
engage in service activities within the meaning of section
448(d)(5). Rather, the issue we must resolve is whether income
attributable to medical supplies used in the course of performing
those activities is ineligible for the nonaccrual-experience
method of accounting merely because some part of the accounts
receivable attributable to those medical supplies does not
constitute income earned from the performance of services.
We find inapposite to the issue involved here the State law
cases relied on by respondent. The focus of those cases is on
whether strict tort liability principles should be applied to
hospitals. Those cases are concerned with public policy
considerations as to who should bear the loss from defective,
though not negligent, services and/or products. See McDaniel v.
Baptist Memorial Hosp., 469 F.2d 230 (6th Cir. 1972); Johnson v.
Sears, Roebuck & Co., 355 F. Supp. 1065 (E.D. Wis. 1973); cf.
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