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Part 7. Rulings and Agreements

Chapter 25. Exempt Organizations Determinations Manual

Section 3. Religious, Charitable, Educational, Etc., Organizations (Cont. 2)

7.25.3  Religious, Charitable, Educational, Etc., Organizations (Cont. 2)

7.25.3.11 
Health

7.25.3.11.2 
Other Healthcare Organizations—Traditional

7.25.3.11.2.2  (02-23-1999)
Activities Pursuant to Applicable Statute

  1. Public Law 104–121, section 105, enacted on March 29, 1996, terminates payments as well as Medicare/Medicaid coverage, effective Jan. 2, 1997, for SSA beneficiaries whose disabilities are based on drug addiction or alcoholism. Termination of their payments and insurance benefits will not result if drug addiction or alcoholism is not material to the beneficiaries’ disabilities.

  2. Section 205(j)(4)(B) of the of the Social Security Independence and Program Improvements Act of 1994 (P.L. 103–296) defines the term qualified organization to include any community based non-profit agency. In 20 CFR 404.2040a of the Code of Federal Regulations, SSA defines community based non-profit agency as:

    1. a non-profit social service agency;

    2. that is "community-based," i.e., it is located within its service area, comprised of one or more neighborhoods, city or county locales;

    3. that is bonded or licensed in the state in which it serves as representative payee, regularly provides representative services concurrently to at least five beneficiaries, and is not a creditor of the beneficiary; and

    4. a nonprofit social service organization founded for religious, charitable or social welfare purposes that is tax-exempt under IRC 501(c).

  3. Representative payee organizations (RPOs) first must use the payments from SSA to pay for the basic needs (such as food and shelter) of the beneficiaries. Then, they may use the excess to pay for other needs such as

    • clothing,

    • medical expenses not covered by Medicare or Medicaid, or

    • recreation.

  4. RPOs are compensated for providing such services to SSA RPOP beneficiaries, by deducting a fee set by statute and SSA regulations from each beneficiary’s SSA funds.

7.25.3.11.2.3  (02-23-1999)
Rationales for Exemption

  1. RPOs may qualify for exemption under IRC 501(c)(3) on two rationales:

    • providing relief to the poor and distressed;

    • lessening the burdens of government.

  2. Relief of the Poor and Distressed — RPOs assist a class of individuals who are mentally or physically debilitated. By managing, monitoring, and providing funds that pay for their basic necessities of living, a RPO relieves the poor and distressed and, therefore, are furthering IRC 501(c)(3) or IRC 501(c)(4) purposes.

  3. Lessening the Burdens of Government — Rev. Rul. 81–276, 1981–C.B. 128 holds that a professional standards review organization qualifies for exemption under IRC 501(c)(3) because it is lessening the burdens of government. The ruling reasons that the organization assumes the government’s burden of reviewing the professional activities of health care practitioners and institutions to ensure they are appropriate recipients of Medicare and Medicaid reimbursement. Similarly, a PRO, by assisting the SSA ensure that public funds are used to provide necessities of life to SSA beneficiaries, may lessen the burdens of government.

  4. A RPO’s operations may be distinguished from the organization held to be engaged in a trade or business ordinarily carried on for profit in Rev. Rul. 72–369, 1972 C.B. 245. Rev. Rul. 72–369 describes an organization regularly providing managerial and consulting services to unrelated charities for a fee no more than its cost. It concludes that the organization does not qualify for exemption because it is only providing services of a ordinary commercial nature. A PRO is distinguishable from a commercial trade or business organizations because it provides services that may not be available through commercial channels to all eligible beneficiaries of the SSA RPOP, regardless of the potential fees.

7.25.3.11.2.4  (02-23-1999)
Requirement to Serve Public Rather Than Private Interests

  1. A RPO must otherwise satisfy the requirements for exemption under IRC 501(c)(3), including the requirement in Reg. 1.501(c)(3)–1(d)(1)(ii) to be operated for the benefit of public rather than private interests.

  2. Many RPO’s are organized in a manner that raise the issue whether the organization primarily serves the private interests of those who control it rather the public interests of the SSA. Facts that suggest private interests may be served include:

    1. The RPO was created and is controlled by one or two people, who are also the sole or controlling employees.

    2. If there are other employees, they are related to the controlling individual(s).

    3. The board of directors is comprised of controlling individual(s) and related persons.

    4. Expenses consist primarily of compensation or rent to those individuals who control the organization.

  3. The presence of the following factors suggest that a RPO is organized and operates for public rather than private purposes:

    1. Services are provided to all eligible SSA RPOP beneficiaries without regard to the amount (and corresponding RPO service fee) of the benefit that an eligible beneficiary may receive;

    2. The governing body is comprised primarily of community members who do not have a financial interest in the RPO’s activities;

    3. The governing body has exclusive authority to determine compensation of employees and other parties that perform major services for the RPO;

    4. Any members of the governing body who are also compensated for services provided to the RPO are not eligible to vote on board decisions involving their compensation;

    5. The governing body and key employees have experience or background in social services;

    6. Officials of the RPO represent that the organization will follow the operational requirements of the SSA, including fulfilling the duties described in SSA publications and regulations.

  4. The criteria are not unique to RPO’s, and have long been applied to a variety of organizations seeking recognition of exemption. For example, the requirement that such an organization be governed by a board of directors representative of the community served, rather than by "insiders" with a financial interest in the organization’s activities, is consistent with published precedents. In the health care area, health care providers and similar organizations are required to have a "community board" rather than a governing body dominated by financially interested individuals. See, e.g., Rev. Rul. 69–545, 1969–2 C.B. 117; compare Rev. Rul. 55–656, 1955–2 C.B. 262 (community nursing bureau qualified for exemption under IRC 501(c)(3)), with Rev. Rul. 61–170, 1961–2 C.B. 112 (private duty nurses’ registry did not qualified for exemption under IRC 501(c)(3) and distinguished from community nursing bureau on basis that public control and support of latter demonstrated operation for public benefit).

7.25.3.11.3  (02-23-1999)
Digests of Precedent Rulings

  1. Hospitals—A non-profit organization whose purpose and activity are providing hospital care is promoting health and may, therefore, qualify as organized and operated in furtherance of a charitable purpose if it meets the other requirements of IRC 501(c)(3) Rev. Rul. 69–545, 1969–2 C.B. 117.

  2. Medical staff of hospital—A nonprofit organization formed by a medical staff of an exempt hospital to carry on a charitable program of benefit to the hospital is described in IRC 501(c)(3). Rev. Rul. 69–631, 1969–2 C.B. 119.

  3. Clinic to aid drug victims—A nonprofit organization operating a clinic to aid victims of hallucinatory drugs and providing information concerning such drugs is described in IRC 501(c)(3). Rev. Rul. 70–590, 1970–2 C.B. 116.

  4. Medical society; local—A city medical society exempt under IRC 501(c)(6), that primarily directs its activities to the promotion of the common business purposes of its members may not be reclassified as an educational or charitable organization under IRC 501(c)(3). Rev. Rul. 71–504, 1971–2 C.B. 231.

  5. Rehabilitation program, former medical patients—An organization providing a residence facility and therapeutic "group living program" for individuals recently released from a medical institution is described in IRC 501(c)(3). Rev. Rul. 72–16, 1972–1 C.B. 143.

  6. Home health care—A nonprofit organization, a qualified "home health agency" as defined in 1861(c) of the Social Security Act, formed to provide low cost home health care for people of a community may qualify for exemption as an organization described in IRC 501(c)(3). Rev. Rul. 72–209, 1972–1 C.B. 148.

  7. Rural health center—An organization formed and supported by residents of an isolated rural community to provide a medical building and facilities at a reasonable rent to attract a doctor who would provide medical services to the entire community is promoting the health of the community and thus exempt as a charitable organization under IRC 501(c)(3). Rev. Rul. 73–313, 1973–2 C.B. 174.

  8. Medical specialty board—A medical specialty board that devises and administers written examinations to physicians in a particular medical specialty and issues certificates to successful candidates is exempt from tax as a business league under IRC 501(c)(6), but is not exempt as an organization described in IRC 501(c)(3). Rev. Rul. 73–567, 1973–2 C.B. 178.

  9. Medical information retrieval system; donated body organs—A nonprofit organization that operates a free computerized donor authorized retrieval system to facilitate transplantation of body organs upon a donor’s death qualifies for IRC 501(c)(3) exemption. Rev. Rul. 75–197, 1975–1 C.B. 156.

  10. Trust used to satisfy hospital’s malpractice claims—A trust created by an exempt hospital for the sole purpose of accumulating and holding funds to be used to satisfy malpractice claims against the hospital, and from which the hospital directs the bank-trustee to make payments to claimants qualifies for exemption under IRC 501(c)(3). Rev. Rul. 78–41, 1978–1 C.B. 148.

  11. Health care facility; Christian Science—An otherwise qualifying nonprofit organization that operates a health care facility for patients under the care of Christian Science practitioners, receives its income principally from contributions, patients, fees, medicare, medicaid, and health insurance qualifies for exemption as an organization described in IRC 501(c)(3). As funds permit, the organization accepts patients who are unable to pay. Rev. Rul. 80–114, 1980–1 C.B. 115.

  12. Hospital—Organization formed to construct, maintain, and operate or lease—An otherwise qualifying nonprofit organization that was created to construct, maintain and operate or lease a public hospital and related facilities for the benefit of a city and the surrounding communities is operated exclusively for charitable purposes and qualifies for exemption. Rev. Rul. 80–309, 1980–1 C.B. 183.

  13. Hospitals—A nonprofit hospital that is not required to operate an emergency room where a state or local health planning agency has found that this would unnecessarily duplicate emergency services and facilities that are adequately provided by another medical institution in the community is described in IRC 501(c)(3). Amplifies Rev. Rul. 69–545, supra. Rev. Rul. 83–157, 1983–2 C.B. 94.

  14. Recruitment incentives—A nonprofit hospital may pay recruitment incentives to a physician without jeopardizing its exempt status provided the transactions further charitable purposes, do not result in inurement, do not result in the hospitals serving a private rather than a public purpose, and do not constitute an illegal activity. Rev. Rul. 97–21, 1997–18 I.R.B. 8.

  15. Joint ventures—A nonprofit hospital that transfers substantially all of its assets to a joint venture with a for-profit entity may continue to qualify as an IRC 501(c)(3) organization if the facts and circumstances indicate that the organization’s participation in the joint venture furthers a charitable purpose and the transaction is structured so that the organization is not operating for the private benefit of its for-profit partners. Rev. Rul. 98–15, 1998–12 I.R.B. 6.

7.25.3.12  (02-23-1999)
Instrumentalities

  1. There is no provision in the Internal Revenue Code that imposes a tax on the income of governmental units. The term "governmental units" refers to the states and their political subdivisions. The income of governmental units is not generally subject to federal income taxation. However, the income of a separately organized entity, that is, an organization that is not an integral part of a state government or a political subdivision, is subject to tax unless a Code exemption or an exclusion applies.

  2. The term "instrumentality" of a governmental unit does not appear in IRC 501. It is referenced, however, in the Code sections applying the FICA and FUTA employment taxes

7.25.3.12.1  (02-23-1999)
IRC 501(c)(3) Exemption

  1. A wholly owned state or municipal entity which is separately organized and not an integral part of the state or local government itself, and which is organized and operated exclusively for purposes described in IRC 501(c)(3) may qualify for exemption from federal income tax under IRC 501(a) as an organization described in IRC 501(c)(3). Rev. Rul. 60–384, 1960–2 C.B. 172.

7.25.3.12.1.1  (02-23-1999)
Organizational Requirements

  1. Reg. 1.501(c)(3)–1(b) requires that an organization’s enabling document set forth purposes that limit it to exclusively serving one or more exempt purposes. Nevertheless, where an organization is established pursuant to a state statute, its stated purposes satisfy the organizational test by sufficiently describing its operations.

  2. To be considered a separately organized entity, an organization must establish that it is either a corporation, a trust, or an association. A review of the organization’s creating documents will normally disclose the nature of its formal structure, that is, whether it is in form a corporation, a trust, or an association.

7.25.3.12.1.2  (02-23-1999)
Corporations

  1. A corporation is a legal entity, created under the authority of the non-profit laws of a state. It is regarded as having an existence completely separate and apart from that of its creators and constituents.

  2. The separate organization requirement is generally met if the entity is incorporated under state non-profit corporation law. This is because by definition a corporation is a legal entity, created under the authority of the laws of a state, which is regarded as having an existence completely separate and apart from that of its creators and constituents. Accordingly, if the instrumentality in question is in substance and in form a corporation, it must be considered a separately organized entity.

7.25.3.12.1.3  (02-23-1999)
Trusts

  1. A trust is an arrangement created either by a will or by an inter vivos declaration where trustees take title to property to protect or conserve it for the beneficiaries under the ordinary rules applied in chancery or probate courts. Reg. 301.7701–4(a). If the purpose of an arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit, then it is a trust.

    Example:

    O is a trust, created under the will of X, to provide college scholarships for graduates of public schools in County C. The trust instrument appoints the public school board in County C as trustee of the trust. Under the trust provisions, the County C school board invests trust principal and uses the income therefrom to provide scholarships. The organization is a trust as defined in Reg. 301.7701–4(a).

7.25.3.12.1.4  (02-23-1999)
Associations

  1. IRC 7701(a)(3) states that the term "corporation" includes associations. Thus, any entity that is a "corporation" for federal tax law purposes will be considered separately organized, even if it is not incorporated under state law.

  2. Reg. 301.7701–2 lists six characteristics that are ordinarily found in a pure corporation, which, taken together, distinguish it from other organizations. As adapted to fit unincorporated nonprofit bodies, these corporate characteristics are: (i) associates, (ii) an objective by the associates to carry on the activity for which the organization was formed, (iii) continuity of life, (iv) centralized management, (v) limited liability, and (vi) free transferability of interests. The presence or absence of these characteristics will depend upon the facts in each individual case. Thus, an organization will be treated as an association if it more nearly resembles a corporation than a partnership or trust and, therefore, may be considered to be an organization distinct from its creator.

  3. Entities considered "separately organized" include colleges and universities; hospital, housing, or development authorities; public library boards; water or park districts; public school athletic associations; charitable trusts; and organizations created by inter-governmental agreement.

  4. Specific examples of separately organized entities, which have continuity of life and centralized management, as well as associates (their board members) who have an objective to carry on each organization’s activity separate and apart from the general activity of the government, are:

    1. Pursuant to a statute of State A, several county and municipal governments in A entered into an intergovernmental cooperation agreement providing for the creation of M. M’s purpose is to provide special education services to students in schools in counties and municipalities which are parties to the agreement. The services M provides are required by federal law. M is governed by a board of directors composed of one representative of each member government. The board annually assesses member governments, proportionately based on population of each county or municipality, an amount needed to fund M’s activities. The members may, by majority vote, provide for the dissolution of M. Upon dissolution, any funds remaining after payment of M’s liabilities will be returned to the school fund of each governmental unit which has participated in M’s activities, proportionately to assessments paid by the unit.

    2. N is a public hospital authority, created by a county in State B, pursuant to B statute. The statute provides that any county in B may create such an authority by vote of the county legislature. Under the statute, management of N’s facilities is vested in a board of governors. N’s initial governing board was named in the legislative enactment creating it; thereafter, N’s board members are appointed by the county executive with the approval of the county legislature. N receives an annual appropriation for its activities from the county legislature, as well as fees for patient services. State law authorizes N to issue bonds to construct new facilities. N may be dissolved, pursuant to statute, by vote of the county legislature. Upon dissolution, any facilities N owns become the property of County B, and any funds remaining after payment of N’s debts are transferred to a County Hospital Fund, to be used in providing health care services to residents of County B.

  5. Rev. Rul. 62–66, 1962–1 C.B. 84, describes an organization that is not separately organized. It holds that a committee created by executive order of the governor of a state as an official state agency, to educate the public about the purposes and activities of the United Nations as an instrument of world peace, does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 62–66 concludes the organization is an "integral part" of the State government, and therefore, under Rev. Rul. 60–384, not described in IRC 501(c)(3).

7.25.3.12.2  (02-23-1999)
Powers Other Than Those Described in IRC 501(c)(3)

  1. Rev. Rul. 60–384 provides that even though a wholly-owned state or municipal instrumentality may be a separately organized entity, it is not entitled to IRC 501(c)(3) exemption if it has powers other than those described in IRC 501(c)(3). Where an instrumentality exercises substantial regulatory or enforcement powers in the public interest, it will not qualify. Powers of regulation or enforcement are powers which are possessed by governmental agencies such as school boards and boards of health and welfare. These powers are referred to as sovereign powers. The three acknowledged sovereign powers are the police power, the power to tax, and the power of eminent domain. The presence of either the police power or the power to tax, if substantial, will disqualify a separately organized government entity from exemption under IRC 501(c)(3).

    1. U is a public housing authority incorporated under a statute giving it power to conduct examinations and investigations, take sworn testimony at hearings, issue subpoenas requiring attendance of witnesses or production of books and papers, and issue commissions to examine witnesses not attending hearings. Through these means, it collects information and makes it available to other agencies to use in enforcing planning, building, and zoning ordinances. U does not qualify for exemption because its investigatory powers are beyond those permitted under IRC 501(c)(3). Rev. Rul. 74–14, 1974–1 C.B. 125.

  2. Compare Rev. Rul. 74–15, 1974–1 C.B. 126, in which a public library organized as a separate entity under a State statute has the authority to certify the tax rate needed for its operation to the rate-making authority. The library was held to qualify for exemption under IRC 501(c)(3). Since the State statute conferred only a limited power upon the public library to determine the tax rate necessary to support its operations, the power regarding the tax rate was not a regulatory or enforcement power within the meaning of Rev. Rul. 60–384.

  3. There is no distinction between the power to recommend or certify a tax rate, the power to determine a tax rate, and the power to "levy," "assess," or "impose" a tax. The regulatory or enforcement power lies with the power to collect, not the power to certify or levy a tax rate. Thus, if an organization has the power to collect the tax, it will be disqualified from being recognized as exempt.

  4. Certain limited powers do not disqualify if they do not indicate purposes beyond those qualifying as "exclusively" exempt under IRC 501(c)(3).

    Example:

    V a state university, has a police force to regulate traffic, motor vehicles, and speed limits on campus and to issue citations, impose fines, and arrest persons to detain them until city police arrive. Because V’s police powers are not substantial and are limited to its campus, they do not disqualify it from exemption under IRC 501(c)(3).

    1. Although Rev. Rul. 77–165, 1977–1 C.B. 21, dealing with qualification as a political subdivision under IRC 103, does not address IRC 501(c)(3) exemption, it is relevant, as organizations without "substantial sovereign powers" in the IRC 103 context also lack "powers other than those described in IRC 501(c)(3)" under Rev. Rul. 60–384.

  5. Although the power of eminent domain is indisputably a governmental power, it is not necessarily a power of regulation or enforcement within the meaning of Rev. Rul. 60–384, and may not disqualify a separately organized government entity from exemption.

    1. Rev. Rul. 67–290, 1967–2 C.B. 183, describes a public hospital corporation organized under a statute giving it power to acquire property essential to its purposes by eminent domain. Because its eminent domain power is limited to acquiring property for its charitable purpose, and such a limited power is commonly bestowed on non-governmental entities, the hospital corporation qualifies for exemption under IRC 501(c)(3). The ruling reasoned that the limited power of eminent domain is not a "regulatory" or "enforcement" power of the type described in Rev. Rul. 60–384.

  6. If the power of eminent domain is combined with other powers to give an organization purposes broader than those described in IRC 501(c)(3), then the organization does not qualify for exemption. For example, if an organization, in addition to condemning property by the power of eminent domain, has the power to conduct investigations, hear testimony and take proof under oath, issue subpoenas, and recommend standards of maintenance and requirements of applicable health and safety ordinances and zoning, it does not qualify.

7.25.3.12.3  (02-23-1999)
Dissolution Provisions

  1. Many instrumentalities have language in their governing instrument providing that upon dissolution, all remaining assets will be distributed to a state or any political subdivision thereof to satisfy IRC 115 requirements. This raises a potential problem, as Reg. 1.501(c)(3)–1(b)(4) requires that upon dissolution assets be distributed to the Federal government, or to a State or local government, for a public purpose. However, if the organization has been created by a state statute, local ordinance, or similar enabling vehicle, and there is no indication that upon dissolution the assets will be distributed for private use, then it can be considered to satisfy the dissolution requirements without explicitly including the phrase "for a public purpose," which would normally be required.

7.25.3.12.4  (02-23-1999)
Application Consideration: Exempt Status

  1. Exhibit 7.25.3–1, "INSTRUMENTALITY" EXEMPTION APPLICATION Checksheet for Organizations Closely Affiliated with Government, provides a checksheet of factors to assist in a determination whether an organization qualifies under IRC 501(c)(3).

7.25.3.12.5  (02-23-1999)
Application Consideration: Late Filers

  1. Applications from wholly-owned state or municipal instrumentalities frequently involve "late filers" , i.e., organizations not filing within the 15-month period set by Reg. 1.508–(a)(2). Although there is no special exception to the notice requirement for government entities, they can request relief from the filing deadline pursuant to Reg. 301.9100–1, Reg. 301.9100–2, and Reg. 301.91003 in the same manner as other applicants.

7.25.3.12.6  (02-23-1999)
IRC 115 Exclusion

  1. IRC 115(1) provides that gross income does not include

    1. income derived from the exercise of any essential governmental function, and

    2. accruing to a state or any political subdivision thereof.

  2. Factors to consider in determining whether income is excluded under IRC 111 are described in Rev. Rul. 57–128, 1957–1 C.B. 311.

    1. An organization seeking exclusion from income tax may request a ruling under IRC 115. The procedures for requesting a ruling are set out in Rev. Proc. 98–1, 1998–1 I.R.B. 11, or its successor.

  3. The fact that an organization’s income may be excluded under IRC 115(1), does not preclude it from also qualifying for exemption under IRC 501(c)(3).

7.25.3.12.7  (02-23-1999)
Employment Tax Requirements

  1. As of January 1, 1984, service performed in the employ of an organization exempt from federal income tax under IRC 501(a) as an organization described in IRC 501(c)(3) is liable for FICA tax requirements (social security and medicare taxes) on remuneration of $100.00 or more paid to each employee during a calendar year.

  2. Under IRC 3306(c)(8), service performed in the employ of an organization exempt from federal income tax under IRC 501(a) as an organization described in IRC 501(c)(3) is excepted from FUTA tax requirements.

  3. Unless covered under an agreement entered into under section 218 of the Social Security Act, under IRC 3121(b)(7), service in the employ of states, political subdivisions, and their instrumentalities is generally excepted from FICA tax requirements. However, under IRC 3121(u)(2), wages of any employees not covered under a section 218 agreement, but who are hired after March 31, 1986, are subject to the medicare portion of the FICA taxes. Further, under IRC 3121(b)(7)(F), regarding services performed after July 1, 1991, the wages of any employees not covered under a section 218 agreement and who are not members of a retirement system of the state, political subdivision, or instrumentality, are subject to FICA tax requirements (social security and medicare taxes).

  4. Under IRC 3306(c)(7), service in the employ of states, political subdivisions, and their instrumentalities is excepted from FUTA tax requirements.

  5. As previously noted, the term "instrumentality" is important in the Code sections applying the FICA and FUTA employment taxes. Therefore, when issuing a favorable determination letter to an organization as being exempt from federal income tax under IRC 501(a) as an organization described in IRC 501(c)(3), where the organization appears to be sufficiently connected and controlled by a political subdivision that it is likely to be an instrumentality, the specialist should include specialized language applicable to instrumentalities as provided by IRM 7.21.1, EO Automated Processing Procedures, (formerly 7690, Exhibit 300–26).

  6. Any questions that the organization may have as to whether it is an instrumentality of a state or a political subdivision for FICA or FUTA tax purposes should be addressed to the Office of the Chief Counsel (Tax Exempt/Government Entities), located in National Headquarters.

7.25.3.12.8  (02-23-1999)
Return Requirements

  1. IRC 6033 requires any organization exempt from federal income tax under IRC 501(a) to file an annual information return (Form 990), unless excepted, either by statute or pursuant to exercise of the Commissioner’s discretionary authority.

  2. Reg. 1.6033–2(g)(1)(v) provides that an organization that is exempt from tax under IRC 501(a) and that is a state institution, the income of which is excluded from gross income under IRC 115, is not required to file an annual information return.

    1. An organization may request a ruling that it meets the requirements of Reg. 1.6033–2(g)(1)(v) from the Washington POD.

  3. Certain governmental units and affiliates of governmental units are excepted from the requirement to file Forms 990 pursuant to exercise of the Commissioner’s authority in Rev. Proc. 95–48, 1995–2 C.B. 418. The entities covered are:

    1. Governmental unit

    2. Affiliate of a governmental unit described in IRC 501(c)(3) that has a ruling or determination letter

    3. Affiliate of a governmental unit described in IRC 501(c)(3) that does not have a ruling or determination letter from the Service.

  4. A governmental unit is defined as a state or local governmental unit defined in Reg. 1.103–1(b) and either

    1. it is entitled to receive deductible charitable contributions under IRC 170(c)(1), or

    2. it is an Indian tribal government or political subdivision thereof under IRC 7701(a)(40) and IRC 7871.

  5. An affiliate of a governmental unit described in IRC 501(c)(3) that has a ruling or determination from the Service that:

    1. its income from IRC 501(c)(3) activities is excluded under IRC 115;

    2. it is entitled to receive deductible charitable contributions under IRC 170(c)(1) on the basis that they are "for the use of" governmental units; or

    3. it is a wholly owned instrumentality of a state or political subdivision for employment tax purposes.

  6. An affiliate of a governmental unit that is described in IRC 501(c)(3) that does not have a ruling or determination from the Service, but:

    1. it is either operated, supervised, or controlled by governmental units, or by organizations that are affiliates of governmental units, or the members of its governing body are elected by the public at large, pursuant to local statute or ordinance;

    2. it possesses two or more affiliation factors listed in section 4.02 of Rev. Proc. 95–48; and

    3. its filing of Form 990 is not otherwise necessary to the efficient administration of the internal revenue laws.

7.25.3.12.9  (02-23-1999)
Information Letter

  1. A state or municipal organization that inquires about its exempt status should be informed in writing that it may qualify for exempt status under IRC 501(c)(3) only if it is organized as a separate entity and if it otherwise meets the organizational and operational tests of IRC 501(c)(3), including the absence of governmental powers.

  2. The information letter should further advise the organization that the gross income of a state or municipal entity may not be subject to tax under IRC 115. The letter should refer to Rev. Proc. 98–1, 1998–1 I.R.B. 10, or its successor, and advise that a ruling may be requested from the Washington POD using the address indicated in the revenue procedure.

  3. IRM 7.25.3-2 contains a pattern letter for use in responding to such inquiries.

7.25.3.12.10  (02-23-1999)
Native American (Indian) Tribal Governments

  1. Before 1983, Native American tribal governments were not considered state or local governments under the Code. Although tribal governments were not subject to tax (Rev. Rul. 67–284, 1967–2 C.B. 55), the favorable consequences available to private parties entering into transactions with state governments did not apply to similar transactions with Native American tribal governments. For example, a bequest to a Native American tribe could not be deducted for estate tax purposes under IRC 2055(a)(1).

7.25.3.12.10.1  (02-23-1999)
Current Law

  1. In 1983, Congress sought to equalize this treatment by enacting IRC 7871. IRC 7871(a) provides that, for certain specified federal tax purposes, an Indian tribal government shall be treated as a State. The term "Indian tribal government" is defined in IRC 7701(a)(40) as a governing body of any tribe, band, community, village, or group of Indians, or (if applicable) Alaska Natives, that is determined by the Secretary of the Treasury, after consultation with the Secretary of the Interior, to exercise governmental functions. Neither IRC 7701(a)(40) nor 7871 defines the term "governmental function." Nevertheless, the relevant legislative history indicates that Congress considered the term "governmental function" to be synonymous with the term "sovereign powers."

  2. IRC 7871(d) provides that for the purposes specified in IRC 7871(a), a subdivision of an Indian tribal government shall be treated as a political subdivision of a State if (and only if) the Secretary of the Treasury determines (after consultation with the Secretary of the Interior) that such subdivision has been delegated the right to exercise one or more of the substantial governmental functions of the Indian tribal government.

  3. Neither IRC 7701(a)(40) nor 7871 define the term "political subdivision." The legislative history provides that it is intended that essentially equivalent criteria be used in making determinations as to delegations of sovereign powers by Indian tribal governments to their subdivisions and delegations of sovereign powers by states to their political subdivisions. The determination of an entity’s status as a political subdvision of an Indian tribal government is therefore to be based on the same criteria as have traditionally been applied to states and their political subdivisions under IRC 103. Reg. 1.103–(b) defines a "political subdivision" as either a municipal corporation, or a division of government that has been delegated the right to exercise one of the three sovereign powers.

  4. Rev. Proc. 83–87, 1983–2 C.B. 606, lists Indian tribal governments that are treated similarly to states for federal tax purposes, including IRC 7871 and 7701(a)(40).

  5. Rev. Proc. 84–36, 1984–1 C.B. 510, lists subdivisions of Indian tribal governments that are treated as political subdivisions of states for the same specified purposes under the Internal Revenue Code that are noted in Rev. Proc. 83–87.

  6. Rev. Proc. 84–37, 1984–1 C.B. 513, provides guidance how a governmental unit of an Indian tribe or a political subdivision of an Indian tribal government not included among those listed in Rev. Proc. 83–87 and Rev. Proc. 84–36, can request a determination qualifying it for treatment as a state or a political subdivision of a state for purposes of IRC 7871 and 7701(a)(40).

  7. An entity listed in Rev. Proc. 83–87 and treated similarly to a state for federal tax purposes, or listed in Rev. Proc. 84–36 and treated as a political subdivision of a state, is not subject to federal income tax on amounts derived from performing its tribal functions. This non-tax treatment is derived from the Service’s long-standing position, set forth in Rev. Rul. 67–284. Under this revenue ruling an Indian tribal government is not a taxable entity, i.e., it will not qualify for exemption as described under IRC 501(c)(3), rather, it is simply not taxed.

  8. Tribal governments and their political subdivisions are not the only Native American organizations that may apply for recognition of exemption. The Service has processed applications from a variety of Native American related organizations, including: a tribal corporation organized under section 17 of the Indian Reorganization Act of 1934; a separately organized entity created under state law by a tribal government; a separately organized entity created by a tribal government recognized by a particular State but not the federal government; and a tribal government believed to qualify for treatment as a state or a political subdivision of a state for purposes of IRC 7871 and 7701(a)(40).

  9. A Native American tribal corporation organized under section 17 of the Indian Reorganization Act of 1934, is treated as a tribal government under federal tax law, i.e., is not a taxable entity. It does not qualify for exemption as described under IRC 501(c)(3), but is simply not taxed.

    1. Rev. Rul. 94–16, 1994–12 I.R.B. 4, in clarifying Rev. Rul. 81–295, 1981–2 C.B. 15, held that an Indian tribal corporation organized under section 17 of the Indian Reorganization Act of 1934 shares the same tax status as the Indian tribal government. Therefore, any income earned by such a corporation, regardless of the location of the business activities that produced the income (either on or off the tribe’s reservation), is not subject to federal income tax.

  10. A separately organized entity created under state law by a tribal government to conduct specific activities may qualify for exemption from federal income tax if it otherwise meets the organizational and operational tests of IRC 501(c)(3), including the absence of substantial sovereign powers.

    1. Rev. Rul. 94–16, 1994–12 I.R.B. 4, in amplifying Rev. Rul. 67–284, 1967–2 C.B. 55, held that a corporation organized by an Indian tribal government under state law does not share the same tax status as the Indian tribal government for federal income tax purposes. Therefore, any income earned by such corporation, regardless of the location of the business activities that produced the income (either on or off the reservation), is subject to federal income tax.

    2. The corporation will qualify for exemption if it conducts charitable and educational activities as a corporation separate from the tribe. Such activities may include tribal history research, cultural activities, and self-help projects for tribe members who are located in areas of economic blight and living on incomes below the poverty level.

    3. These charitable and educational activities are often conducted by an organization as part of an effort to be recognized as an Indian tribe by the federal government. As obtaining tribal recognition usually entails historical documentation, but not political or legislative activity, this activity will not disqualify an organization from obtaining recognition under IRC 501(c)(3).

  11. A separately organized entity created by a tribal government that is recognized by a particular State but not the federal government may qualify for exemption from federal income tax if it otherwise meets the organizational and operational tests of IRC 501(c)(3), including the absence of substantial sovereign powers.

  12. If an application from an Indian tribal government is denied under IRC 501(c)(3), but it appears that the entity will qualify for treatment as a state or a political subdivision of a state for purposes of IRC 7871 and 7701(a)(40), the denial should advise that a formal determination of status as a state or a political subdivision of a state for purposes of IRC 7871 and 7701(a)(40) may be requested pursuant to Rev. Proc. 84–37, supra.

7.25.3.13  (02-23-1999)
Financial Support of Other Organizations

  1. Many charitable foundations do not engage in active charitable undertakings themselves, but rather assist the work of religious, charitable, educational, or similar organizations by contributing money to them.

7.25.3.13.1  (02-23-1999)
Grant Making Organizations

  1. Grant-making organizations are sometimes controlled by corporate and individual taxpayers who use them as channels for their charitable contributions. Some have very large endowments and make grants totaling millions of dollars annually. This indirect form of charitable activity provides a basis for recognition of exemption under IRC 501(c)(3). Rev. Rul. 67–149, 1967–1 C.B. 133.

7.25.3.13.2  (02-23-1999)
Indirect Support of Charity

  1. An organization that owns and leases a building to the member agencies of a community chest may be providing a form of indirect support of charitable activities. If rentals are at rates substantially below fair rental value, the organization may qualify for recognition of exemption. Rev. Rul. 69–572, 1969–2 C.B. 119.

7.25.3.13.3  (02-23-1999)
Support of Charity Through Non-exempt Organizations

  1. Some charitable organizations make distributions to nonexempt organizations. These funds must be used for specific projects that further the purposes of the charitable organization.

  2. The charitable organization must retain discretion and control over the use of the funds and maintain records establishing that the funds are used for charitable purposes. An organization’s failure to document that funds distributed to nonexempt organizations or persons were used for exempt purposes could, if substantial, cause the organization to be operated for a substantial nonexempt purpose. Rev. Rul. 68–489, 1968–2 C.B. 210.

7.25.3.14  (02-23-1999)
U.S. Department of Agriculture Child and Adult Care Food Program

  1. Organizations created to assist in the implementation of the United States Department of Agriculture Child and Adult Care Food Program (USDA CADFP) may qualify for exemption under IRC 501(c)(3) as charitable organizations under the rationale that they lessen the burdens of government. The USDA CADFP is authorized under Section 17 of the National School Lunch Act, as amended, at 42 U.S.C. § 1766.

  2. The CACFP provides assistance to states through grants-in-aid and other means to initiate, maintain, and expand nonprofit food service programs for children or adult participants in nonresidential programs that provide care. In most states, the CACFP is administered by state agencies under USDA guidelines.

  3. The CACFP supports public institutions, private entities exempt under IRC 501(c)(3), and proprietary family day care providers. However, non-exempt family day care providers may participate in the program only under the sponsorship of a "sponsoring organization" that is tax-exempt, or "moving towards that status" by filing an application for recognition of exemption with the Service.

7.25.3.14.1  (02-23-1999)
Sponsoring Organization Responsibilities

  1. A "sponsoring organization" is responsible for:

    1. Submitting applications for participation or renewal in CACFP on behalf of sponsored day care providers

    2. Accepting final administrative and financial responsibility for program operations with respect to sponsored day care providers

    3. Monitoring the program at all facilities under its sponsorship

    4. Maintaining records required by USDA

    5. Acting as "fiscal intermediary" for food service funds between the state agency and the sponsored day care provider

  2. A "sponsoring organization" must:

    1. Conduct pre-approval visits to each provider

    2. Verify that the proposed food services do not exceed the providers capability

    3. Provide training for the providers in their responsibilities under CACFP

    4. Review operations to assess compliance with CACFP at least three times a year

  3. Sponsoring organizations receive the following payments under the CACFP program:

    1. Payment for meals (which they must pay over to sponsored providers at a rate established by law;

    2. Administrative payments, which may be the actual expenditures for cost of administering the program or the amount of administrative costs approved by the state agency

    3. One-time start-up payments to develop or expand successful CACFP operations in day care homes.

7.25.3.14.1.1  (02-23-1999)
Private Interest Considerations—One-Person Organizations

  1. Many "sponsoring organizations" applying for recognition of exemption are essentially one-person operations:

    1. The principal serves as an officer and director.

    2. The principal’s compensation is the organization’s primary expense.

    3. Other board members and employees may be members of the principal’s family.

  2. Operating under the control of one person or a small, related group suggests that an organization operates primarily for non-exempt private purposes, rather than exclusively for public purposes. See, e.g., Rev. Rul. 69–545, 1969–2 C.B. 177; compare Rev. Rul. 55–656, 1955–1 C.B. 262 (community nursing bureau qualified for exemption under IRC 501(c)(3)), with Rev. Rul. 61–170, 1961–2 C.B. 112 (private duty nurses; registry distinguished from community nursing bureau on basis that public control and support of latter demonstrated operation for public vs. private benefit).

  3. Sponsoring organizations may raise many of the same issues as Representative Payee Organizations discussed in IRM 7.25.3.11.2.4.

7.25.3.14.1.2  (02-23-1999)
Provider Control

  1. Sponsoring organizations may also be created and controlled by the day care providers they sponsor, to enable the providers to participate in CACFP. As with employee-dominated sponsoring organizations, provider-dominated sponsoring organizations may not be operated exclusively for exempt public purposes.

7.25.3.14.1.3  (02-23-1999)
Selective Sponsorship

  1. Organizations that refuse to sponsor state-licensed or federally-qualified day care providers that meet program requirements, because of their income or education levels, are not operated exclusively to further exempt purposes.

7.25.3.14.1.4  (02-23-1999)
Multiple Sponsorship Organizations Under Single Control

  1. One example of an abusive arrangement that operates primarily for private, non-exempt interests is where an Individual forms multiple sponsoring organizations to increase the amount of reimbursement received under CACFP.

7.25.3.14.2  (02-23-1999)
Exemption Criteria

  1. To qualify for exemption under IRC 501(c)(3), a sponsoring organization must meet the following criteria:

    1. A governing body comprised primarily of community members with no financial interest in its activities (in other words, persons other than organization employees, sponsored day care providers, or related parties).

    2. Members of the governing body should not vote on decisions concerning their compensation or that of a related party.

  2. Examples of an IRC 501(c)(3) exemption include—

    1. Decisions about compensation of employees and other parties providing services to the organization should be made by the governing body.

    2. No person receiving compensation for services under CACFP may receive compensation for services from any other sponsoring organization.

    3. Accept any qualified day care provider, consistent with its capacity to provide services to sponsored providers.

7.25.3.15  (02-23-1999)
Scientific Organizations

  1. Organizations may be described IRC 501(c)(3) if they are organized and operated exclusively for "scientific" purposes.

  2. "Scientific" is not defined in the Code, regulations, or any published rulings. However, a dictionary defines science as "a branch of study that is concerned with observation and classification of facts and especially with the establishment … of verifiable general laws chiefly by induction and hypotheses." Webster’s New Third New World Dictionary.

  3. An organization engaged in surveying scientific and medical literature and abstracting and publishing it free of charge was held to be exempt because it was engaged in the advancement of education and science. Rev. Rul. 66–147, 1966–1 C.B. 137.

  4. In another case, an organization c