7.26.2  Private Foundations Defined – IRC 509(a)(1) Exlcusions (Other Than IRC 170(b)(1)(A)(vi)) and IRC 509(a)(4) Exclusion

7.26.2.1  (03-30-1999)
Private Foundation Defined—IRC 509(a)(1) Exclusions (Other Than IRC 170(b)(1)(A)(vi)) and 509(a)(4) Exclusion

  1. As discussed in IRM 7.26.1, organizations described in IRC 509(a)(1)–(4) are defined as not private foundations (i.e., are "public charities" ).

  2. IRC 509(a)(1) cross-references IRC 170(b)(1)(A)(i)—(vi).

  3. An organization described in IRC 170(b)(1)(A) may qualify under IRC 509(a)(1) even if contributions to such organizations are not deductible under IRC 170(c)(2) because the organization was not organized (or the contributions are not used) within the U.S. or its possessions. See Reg. 1.509(a)–2(a).

  4. Organizations described in IRC 170(b)(1)(A)(i)–(v) and 509(a)(4) are discussed below.

7.26.2.2  (03-30-1999)
IRC 170(b)(1)(A)(i) Exclusion—Church, or Convention or Association of Churches

  1. The IRC 170(b)(1)(A)(i) exclusion covers a "church" or a "convention or association of churches."

  2. Few terms in the Code have proven as difficult to define, and as fraught with controversy, given the First Amendment’s prohibition against government establishment of a religion or interference with the free exercise of religion.

7.26.2.2.1  (03-30-1999)
Relationship of IRC 170(b)(1)(A)(i) to IRC 501(c)(3)—Religious Purposes

  1. Churches are a subset of IRC 501(c)(3) organizations organized and operated for religious purposes. See, e.g., De La Salle Institute v. United States, 195 F.Supp. 891 (N.D. Cal. 1961); Chapman v. Commissioner, 43 T.C. 358, 363 (1967).

    1. A religious organization that does not qualify as a church may still qualify for IRC 501(c)(3) status and public charity status, depending on the circumstances. See the IRM 7.25.3 discussion of religious organizations under IRC 501(c)(3).

  2. While churches may (and often do) conduct activities that further exempt purposes other than purely religious purposes (e.g., promoting education, relieving the poor and distressed), the Service may question whether an organization (viewed as a whole) is a church if it carries on excessive activities viewed as secular when carried on by secular organizations (e.g., operating hospitals, nursing homes, or schools with a general curriculum) or conducts excessive religious broadcasting or publishing in relation to its other activities.

  3. Some cases present the highly sensitive question whether a particular creed constitutes a religion.

    1. The federal government cannot distinguish between religions based on a belief in the existence of God as against religions founded on different beliefs, nor can it require that religious beliefs be acceptable, logical, consistent, or comprehensible to others to merit First Amendment protection. See Torcaso v. Watkins, 367 U.S. 488, 495 (1961); Thomas v. Review Board of the Indiana Employment Security Division, 450 U.S. 707, 714 (1981).

    2. However, courts sometimes distinguish between religious beliefs and philosophical or other types of beliefs as the First Amendment protects only religious beliefs. See, e.g., Wisconsin v. Yoder, 406 U.S. 205, 215–16 (1972); United States v. Seeger, 380 U.S. 163, 166 (1965), and Welsh v. United States, 398 U.S. 333, 340 (1970) (a religious belief includes any sincere and meaningful belief that occupies a place in the life of its possessor parallel to that filled by God in traditionally religious persons).

    3. The Supreme Court suggested in Hernandez v. Commissioner, 490 U.S. 680, 693 (1989) that the IRS cannot reject a claim of religious beliefs on the ground that the beliefs are inherently irreligious, but only on the ground that the alleged beliefs are not sincerely held. However, the case cited for this assertion (United States v. Ballard, 322 U.S. 78 (1944)) merely held that individuals cannot be convicted for making false statements regarding matters of religious belief if the jury finds that the beliefs are sincerely held. Also, the Tax Court in Canada v. Commissioner, 82 T.C. 973, 983 (1984) observed that judicial sensitivity to governmental impingement on religious beliefs generally has been evidenced in cases involving impingement on pursuit of religious beliefs by individuals rather than cases involving tax exemption as a religious organization. In Church of the Chosen People (North American Panarchate) v. United States, 548 F.Supp. 1247 (D.Minn. 1982), the court held an organization promoting the doctrine of The Gay Imperative not a religious organization for IRC 501(c)(3) purposes).

    4. Other cases addressing the issue whether beliefs constitute a religion include Washington Ethical Society v. District of Columbia, 249 F.2d 127 (D.D.C. 1957) (organization with church characteristics but which did not require its followers to believe in a Supreme Being or supernatural power held a religious corporation for property tax purposes); United States v. Kuch, 288 F.Supp. 439 (D.D.C. 1968) (NeoAmerican Church doctrine, which emphasized use of psychedelic drugs, held not a religion so as to justify individual’s use of illegal drugs); Founding Church of Scientology v. United States, 409 F.2d 1146 (D.C. Cir.), cert. denied, 396 U.S. 963 (1969) (Scientology held a religion, rendering its religious articles exempt from federal truth-in-labeling laws); Malnak v. Yogi, 592 F.2d 197 (3d Cir. 1979) (Science of Creative Intelligence/Transcendental Meditation held a religion for purposes of Establishment Clause); Africa v. Pennsylvania, 662 F.2d 1025 (3d Cir. 1981), cert. denied, 456 U.S. 908 (1982) (MOVE doctrine to bring about absolute peace and stop violence and all that is corrupt held not a religion so as to justify inmate’s need for special diet); and United States v. Meyers, 95 F.3d 1475 (10th Cir. 1996), cert. denied (Jan. 1, 1997) (Church of Marijuana doctrine held not a religion so as to justify marijuana possession and distribution).

    5. The Service does not question an organization’s sincerity absent a clear showing that its beliefs are not sincerely held by its members.

  4. The question of whether a particular creed is a religion is ordinarily considered in determining whether an organization is organized and operated for religious purposes rather than whether the organization is a church, unless the organization’s activities further other exempt purposes and the issue need not be decided for purposes of IRC 501(c)(3) exemption.

7.26.2.2.2  (03-30-1999)
Relationship of IRC 170(b)(1)(A)(i) to IRC 501(c)(3)—501(c)(3) Requirements

  1. An organization must be described in IRC 501(c)(3) to qualify as a church under IRC 170(b)(1)(A)(i), although it need not be recognized as such by the Service (given that churches are exempt from the filing requirements of IRC 508(a) and (b)).

    1. The same rule generally applies to the many places in the Code where the term "church" appears (a number of special rules benefit churches). See, e.g., Rev. Rul. 80–59, 1980–1 C.B. 191.

    2. A notable exception is IRC 7611 (restrictions on church inquiries and examinations), in which it is sufficient for the organization to claim to be a church. See IRC 7611(h)(1)(A).

  2. Churches are not exempt from the substantive requirements for exemption under IRC 501(c)(3)—an organization’s religious beliefs or practices cannot serve as an excuse.

  3. Thus, a church’s organizing document must comply with the organizational test.

    1. But see Morey v. Riddell, 205 F.Supp. 918 (S.D.Cal. 1962) (contributions to church held deductible under IRC 170 despite the church’s lack of a distinctive name or organizing document other than the Bible (for religious reasons), permanent headquarters, comprehensive set of records, and bank account designated as the church account).

    2. An individual cannot be a church. See Fields v. United States, 98–1 U.S.T.C. ¶50,361 (D.D.C. 1998)

  4. Consistent with IRC 501(c)(3) exemption, a church’s activities cannot result in:

    1. political intervention or substantial lobbying (see, e.g., Christian Echoes National Ministry v. United States, 470 F.2d 849 (10th Cir. 1972), cert. denied, 414 U.S. 864 (1973))

    2. violations of law or well-established public policy (see, e.g., Rev. Rul. 75–231 (Situation 3), 1975–1 C.B. 158; Church of Scientology of California v. Commissioner, 83 T.C. 381 (1984))

    3. private benefit or other furtherance of substantial nonexempt purposes (see, e.g., First Libertarian Church v. Commissioner, 74 T.C. 396 (1980) (organization engaged in substantial social and political activities); The Ecclesiastical Order of the ISM of AM, Inc. v. Commissioner, 80 T.C. 833 (1983), affirmed, 740 F.2d 967 (6th Cir. 1984), cert. denied, 471 U.S. 1015 (1985) (organization recruited new members by emphasizing to a great extent the tax benefits of becoming a minister in its religion, which indicated a substantial nonexempt purpose to counsel taxpayers on tax avoidance).

    4. inurement (numerous cases—see the IRM 7.25.3 discussion of religious organizations).

  5. A recurring tax-avoidance scheme in recent decades involves individuals attempting to shelter their income from tax by setting up a sham "church" under the following circumstances:

    1. The individual typically obtains a corporate charter and minister’s license through mail order.

    2. The individual controls the organization and "assigns" his or her income to it (or claims a charitable deduction for contributions to it).

    3. The organization, in turn, uses the assets to pay for the individual’s living expenses.

    4. The individual wrongfully claims little or no taxable income on Form 1040.

  6. The courts have consistently refused to recognize IRC 501(c)(3) exemption for these organizations, due to inurement and private benefit, and have penalized the individuals.

7.26.2.2.3  (03-30-1999)
Definition of a "Church" —Legislative History

  1. Congress provided little guidance on the meaning of "church" when it excluded churches from the unrelated business income tax in 1950 and extended special charitable deduction privileges to churches in 1954.

    1. Committee Reports indicate that a religious organization organized under the auspices of a church is not necessarily a church. See H.R. Rep. No. 2319, 81st Cong., 2d Sess. 36, 108 (1950); S. Rep. No. 2375, 81st Cong., 2d Sess. 27, 106 (1950); H.R. Rep. No. 1337, 83d Cong., 2d Sess. A53 (1954).

    2. They also provide that a "church" includes a religious order or other organization which, as an integral part of a church, is engaged in carrying out the functions of the church, whether as a separate corporation or otherwise. See S. Rep. No. 1622, 83d Cong., 2d Sess. 30, 207 (1954).

  2. In 1969, Congress referred to churches and "their integrated auxiliaries" in the enactment of IRC 508(c)(1)(A) and 6033(a)(2)(A) (the latter provision also referred to "the exclusively religious activities of any religious order" ).

    1. Neither the legislative history nor the regulations clearly indicate whether an integrated auxiliary of a church or a religious order under IRC 6033(a)(2)(A) may qualify as a church under IRC 170(b)(1)(A)(i).

7.26.2.2.4  (03-30-1999)
Definition of a "Church" —Administrative Guidance

  1. The current regulations under IRC 170 do not define a "church."

  2. Rev. Rul. 59–129, 1959–1 C.B. 58, held the Salvation Army to be a church or convention or association of churches, without elaboration.

  3. An organization qualifies as a church only if its principal purpose or function is that of a church. See Rev. Rul. 56–262, 1956–1 C.B. 131.

    1. Similarly, Reg. 1.6033–2(g)(5)(iv), Examples (1)–(5) sets forth examples of organizations that do not qualify as integrated auxiliaries of churches (a hospital, elementary school, orphanage, old age home, and university, all affiliated with a church but separately organized).

    2. Consistent with Rev. Rul. 56–262, these organizations would not appear to qualify as churches either.

    3. Of course, to determine whether certain purposes or functions are those of a church, one must know what a church is.

  4. The Service considers all the facts and circumstances in determining whether an organization is a church, including whether the organization has the following characteristics:

    1. a distinct legal existence

    2. a recognized creed and form of worship

    3. a definite and distinct ecclesiastical government

    4. a formal code of doctrine and discipline

    5. a distinct religious history

    6. a membership not associated with any other church or denomination

    7. a complete organization of ordained ministers ministering to their congregations

    8. ordained ministers selected after completing prescribed courses of study

    9. a literature of its own

    10. established places of worship

    11. regular congregations

    12. regular religious services

    13. Sunday schools for religious instruction of the young

    14. schools for the preparation of its ministers

  5. The above list of 14 church characteristics (first published by the Service in 1978 as a news release, IR–1930) is not exclusive—any other facts and circumstances that may bear upon the organization’s claim for church status must also be considered.

    1. An organization need not have all of the characteristics (few churches do, and newly-created churches cannot be expected to); thus, no single characteristic is controlling.

    2. Some of the characteristics may be given more weight than others in a given case.

7.26.2.2.5  (03-30-1999)
Definition of a "Church" —Judicial Guidelines

  1. Court opinions provide most of the guidance on the meaning of "church."

  2. The court in De La Salle Institute v. United States, 195 F.Supp. 891, 903 (N.D. Cal. 1961), reasoned that in not defining "church," Congress left the definition to "the common meaning and usage of the word."

    1. Other courts, as in Foundation of Human Understanding, 88 T.C. 1341, 1356–57 (1987), have questioned the validity of this approach, given the diversity of religious beliefs and the First Amendment’s religious protections.

  3. Many courts, beginning with De La Salle Institute, have rejected arguments that IRC 170(b)(1)(A)(i) is unconstitutional on its face or as applied.

    1. The court in De La Salle Institute reasoned that Congress obviously did not intend to accord church status to every organization that claimed it, and that denying church status to an organization that claims it does not necessarily result in violations of that organization’s First Amendment rights.

  4. The courts have generally supported the principle of Rev. Rul. 56–262 that "the tail cannot be permitted to wag the dog" (as the court put it in De La Salle Institute, 195 F.Supp. at 901). See:

    1. De La Salle Institute (corporation organized under the auspices of the Roman Catholic Church, whose members were the members of a religious order, and that operated (1) a novitiate that trained men for the order, (2) Catholic schools for youth, (3) homes for the members of the order, and (4) a winery and distillery, in addition to chapels at the schools and novitiate, was not a church)

    2. Peek v. Commissioner, 73 T.C. 912 (1980) (trust established independently of religious organization beneficiaries was not a church)

    3. Williams Home, Inc. v. United States, 540 F.Supp. 310 (W.D.Va. 1982) (retirement home for women and shelter for young girls were not churches)

    4. Tennessee Baptist Children’s Homes. Inc. v. United States, 604 F.Supp. 210 (M.D.Tenn. 1984), affirmed, 790 F.2d 534 (6th Cir. 1986) (separately-organized child care facility of Tennessee Baptist Convention was not a church—the court noted that an organization is not a church for tax purposes if its own members do not consider it to be a church)

    5. Lutheran Social Service of Minnesota v. United States, 758 F.2d 1283 (8th Cir. 1985) (organization affiliated with synods of the Lutheran Church and that provided various social services (also provided by secular organizations) to the public regardless of the clients’ religious beliefs was not a church)

    6. Junaluska Assembly Housing, Inc. v. Commissioner, 86 T.C. 1114 (1986) (auxiliary of a church, formed to contract for the construction of housing at the church’s conference and retreat center, was not a church)

  5. Lack of a recognized creed or exclusive membership were deemed significant in Chapman v. Commissioner, 48 T.C. 358 (1967), which held that an organization of dentist missionaries formed to spread the Gospel and improve dental care in foreign countries was not a church, where the organization was not affiliated with any church, drew its members from various Christian denominations, and did not attempt to promote membership in any particular Christian denomination.

    1. The court reasoned that Congress used the term “church” in the sense of a denomination or sect rather than the generic or universal sense.

    2. Judge Tannenwald’s influential concurring opinion reasoned that the organization was not a church, due not to its failure to ascribe to a particular denomination of Christianity, but rather to its failure to bring people together as the principal means of accomplishing its religious purpose—the dentist missionaries operated largely on an individual basis, although they held some religious services.

  6. Courts have frequently applied the 14 criteria in determining whether an organization is a church, the first being American Guidance Foundation, Inc. v. United States, 490 F. Supp. 304 (D.D.C. 1980), affirmed in unpublished opinion (D.C. Cir. 1981), which noted that while some of the 14 criteria are relatively minor, others (e.g., the existence of an established congregation served by an organized ministry, the provision of regular religious services and religious education for the young, and the dissemination of a doctrinal code) are of central importance.

    1. The court reasoned that, at a minimum, a church includes a body of believers that assembles regularly to worship and that is reasonably available to the public in its conduct of worship, educational instruction, and promulgation of doctrine.

    2. The court also noted that superficially responsive documentation for each of the 14 church characteristics is not sufficient to establish church status.

    3. The court held that an IRC 501(c)(3) religious organization composed of a few family members who attended worship services at a relative’s apartment and that made no real effort to extend its membership beyond the family was not a church.

  7. In Foundation of Human Understanding v. Commissioner, 88 T.C. 1341 (1987), acq. in result, 1987–2 C.B. 1, the court held an organization to be a church even though its primary activity was religious publishing and broadcasting.

    1. The organization initially spread its religious teachings through broadcasts (which eventually drew a regular listening audience of 30,000 and a potential audience of 2 million) and publications (including a magazine which eventually drew 5200 subscribers and a reading audience of 15,000).

    2. The organization later conducted regular religious services for congregations of 50–350 people at two locations, in addition to the broadcasting and publishing.

    3. The court reasoned that the organization possessed most of the 14 criteria to some degree, including most of the factors of central importance (the existence of an established congregation served by an organized ministry, the provision of regular religious services and religious education for the young, and the dissemination of a doctrinal code).

    4. The court acknowledged that the case presented a close question, but considered the broadcasting and publishing to further the organization’s mission, and considered the congregational/associational activities as much more than incidental and as sufficient to qualify the organization for church status, even though the organization was not a church at its inception and did not initially perceive of itself as such.

  8. See also:

    1. The Church of the Visible Intelligence that Governs the Universe v. United States, 4 Cl. Ct. 55 (1983) (organization was not a church where it satisfied few of the 14 church characteristics, had only three members, provided no information on sacerdotal functions or doctrine pertaining to them, and provided no information on charitable activities typically associated with a church)

    2. Universal Bible Church. Inc. v. Commissioner, T.C.M. 1986–170 (organization was not a church where it failed to establish a distinct religious history, a membership beyond the trustees (2–50 people attended services, held in the homes of the trustees), or religious instruction for children, and its primary means for promoting its beliefs was to be through radio, t.v. and other media)

    3. Church of Eternal Life and Liberty, Inc. v. Commissioner, 86 T.C. 916 (1986) (organization with only two members that pursued a policy discouraging membership was not a church since it failed to serve any associational role for purposes of worship)

    4. First Church of In Theo v. Commissioner, T.C.M. 1989–16 (organization was not a church where its principal activity was publishing religious literature and it had no plans for membership (although it conducted some religious services), no formal creed (other than the Bible and a belief that God dwells in all people), no sacerdotal functions, no membership unassociated with other churches, no regular congregations or services, no established place of worship, no organized ministry for ministering to congregations, and no youth instruction)

    5. Spiritual Outreach Society v. Commissioner, 927 F.2d 335 (8th Cir. 1991) (organization that held bimonthly outdoor gospel music events and retreats with people of different religions for purposes of meditation and study was not a church where it had no established congregation of members who claimed the organization as their church, no organization of ministers other than guest ministers from other churches, and no religious education of the young)

    6. Purnell v. Commissioner, T.C.M. 1992–289 (organization that held religious meetings and weekly religious services at fixed locations, set up displays and preached on the street, and distributed the founder’s religious books at cost or free of charge was held to be a church where it had a creed and form of worship, a formal code of doctrine and discipline, a literature of its own, established places of worship, regular congregations (including members outside of the founder’s family), and regular religious services, although it lacked a distinct legal existence, a definite and distinct ecclesiastical government, an organization of ordained ministers, and schools for the preparation of its ministers)

    7. VIA v. Commissioner, T.C.M. 1994–349 (organization formed to promote the "wellness" and spiritual growth of its members through use of the latest discoveries in exercise, nutrition, and stress management and that held meetings at the members’ houses (which involved group meditation, exchange of information on wellness, monitoring of the members’ physical fitness, and designing of individual wellness programs), trained mentors to conduct such activities, published a newsletter sold at grocery stores, sold a nutritional food supplement, and planned to broadcast a wellness news program was held not a church—the court reasoned that the organization did not have any of the 14 church characteristics other than a distinct legal existence and literature of its own, and that its meetings, even if viewed as a form of worship, were incidental to its other activities)

7.26.2.2.6  (03-30-1999)
Definition of a "Convention or Association of Churches"

  1. IRC 170(b)(1)(A)(i) also refers to a "convention or association of churches."

  2. The 1950 Act exempting churches from UBIT also exempted conventions or associations of churches, in order to provide equal treatment between the central organization of a religious denomination with a church hierarchy and the central organization of a denomination with autonomous local churches. See S. Rep. No. 2375, 81st Cong., 2d Sess. 27–28 (1950); De La Salle Institute, Inc. v. United States, 195 F.Supp. 891, 899 (N.D.Cal. 1961); Lutheran Social Service of Minnesota v. United States, 758 F.2d 1283 (8th Cir. 1985).

  3. Conventions or associations of churches are, with few exceptions, subject to the same rules as churches under the Code.

  4. The Service has ruled that the member churches need not be of the same denomination. See Rev. Rul 74–224, 1974–1 C.B. 61, which held an organization, whose membership consisted of churches of various denominations in a geographic area and whose purpose was to coordinate its members for the purposes of developing the spirit of Christian fellowship and cooperative mission among the local churches and of promoting the spiritual, moral, social, and civic welfare of the area, to be a convention or association of churches.

  5. The court in Lutheran Social Service of Minnesota, after considering the legislative history, stated that an organization whose board was appointed by three major Lutheran church bodies and whose primary activities consisted of providing social services (similar to services performed by secular organizations) to the public, regardless of the clients’ religious beliefs, was not a convention or association of churches.

7.26.2.3  (03-30-1999)
IRC 170 (b)(1)(A)(ii) Exclusion—Educational Organizations

  1. Educational organizations described in IRC 170(b)(1)(A)(ii) and Reg. 1.170A–9(b)(1), such as primary schools and universities, are excluded from private foundation status under IRC 509(a)(1).

  2. IRC 170(b)(1)(A)(ii) organizations are commonly known as "schools."

  3. An IRC 170(b)(1)(A)(ii) organization must:

    1. present formal instruction as its primary function,

    2. normally maintain a regular faculty and curriculum, and

    3. normally have a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on

7.26.2.3.1  (03-30-1999)
Statutory Development and Related Code Sections

  1. The current IRC 170(b)(1)(A)(ii) provision was enacted in 1969.

    1. Predecessor language first appeared in the Code in 1943 under the predecessor to IRC 6033 (schools were exempt from the annual return requirement).

    2. The language also appeared in 1950 as a class of organizations exempt from the prohibited transaction rules.

    3. The original IRC 170(b)(1)(A)(ii) provision in 1954 simply cross-referenced the exemption under the prohibited transaction rules (IRC 503(b)(2)).

    4. In 1969, the IRC 503(b)(2) language was inserted into the current IRC 170 (b)(1)(A)(ii).

  2. IRC 170(b)(1)(A)(ii) is cross-referenced in many Code sections, such as the following excise tax provisions as a "nonprofit educational organization" exempt from the tax:

    1. IRC 4041(g)(4) (special fuels tax)

    2. IRC 4221(d)(5) (manufacturers’ excise taxes)

    3. IRC 4253(j) (communications tax)

  3. However, each of the cited excise tax exemptions applies not only to an IRC 170(b)(1)(A)(ii) organization but also to a school operated as an activity of an IRC 501(c)(3) organization, even if the school activity is not the organization’s primary activity.

    1. Prior to 1969, the existing excise tax exemptions did not cross-reference IRC 170(b)(1)(A)(ii) or 503(b)(2) but contained the same statutory language (along with the "school operated as an activity" language).

7.26.2.3.2  (03-30-1999)
Primary Function to Present Formal Instruction

  1. An organization is not described in IRC 170(b)(1)(A)(ii) unless its primary function is the presentation of formal instruction. See Reg. 1.170A–9(b)(1).

  2. Any non-educational activities must be merely incidental to the educational activities. See Reg. 1.170A–9(b)(1).

    1. An organization whose activities are educational in the broad sense, and which also maintains an educational institution in the nature of a school as a secondary or incidental activity, does not qualify under IRC 170(b)(1)(A)(ii). See Rev. Rul. 56–262, 1956–1 C.B. 131.

7.26.2.3.2.1  (03-30-1999)
Primary Function—General Principles

  1. The Service considers all the facts and circumstances in determining an organization’s primary function, such as:

    1. the percentage of expenditures allocable to the various functions

    2. the percentage of time of directors, officers, and employees allocable to the various functions

    3. the way in which the organization describes itself in dealings with the public.

  2. Some Code sections, such as the above-referenced excise tax provisions and former IRC 151(e)(4), grant special status to a school that need not be a distinct legal entity but merely a segment or division of a larger entity whose primary function may not be formal instruction; while authorities interpreting such provisions are often helpful in construing IRC 170(b)(1)(A)(ii), the primary function test is applied to the entire legal entity for purposes of IRC 170(b)(1)(A)(ii).

7.26.2.3.2.2  (03-30-1999)
Primary Function—Integral Part

  1. An organization that operates as an integral part of a school may qualify under IRC 501(c)(3). See, e.g., Rev. Ruls. 56–486, 1956–2 C.B. 309 (alumni association), 58–194, 1958–1 C.B. 240 (bookstore and cafeteria), and 67–291, 1967–2 C.B. 184 (training table).

  2. Such an organization, if it does not meet the IRC 170(b)(1)(A)(ii) requirements, may qualify as a public charity under another provision of IRC 170(b)(1)(A) or 509(a) (such as IRC 170(b)(1)(A)(iv) or 509(a)(3)).

  3. The Service has generally taken the view that an organization is not described in IRC 170(b)(1)(A)(ii) unless its primary function is presenting formal instruction, even if it operates as an integral part of an IRC 170(b)(1)(A)(ii) organization. See:

    1. Rev. Rul. 60–110, 1960–1 C.B. 121 (university endowment association organized to receive and hold in trust property for the use of the university held not an IRC 170(b)(1)(A)(ii) organization)

    2. Rev. Rul. 63–15, 1963–1 C.B. 189 (associations of universities formed to solicit contributions or promote the athletic programs of the member universities held not nonprofit educational organizations for excise tax purposes)

    3. Rev. Rul. 63–208, 1963–2 C.B. 468 (administrative office for a parochial school system held not a nonprofit educational organization for excise tax purposes)

  4. An exception was set forth in Rev. Rul. 56–133, 1956–1 C.B. 559, superseded by Rev. Rul. 71–533, 1971–2 C.B. 404, which held that a student government association controlled by a university could itself qualify as a school for purposes of the school exemption from annual return filing requirements.

  5. Although courts have been inconsistent, they have generally favored the Service’s approach in applying IRC 170(b)(1)(A)(ii).

    1. A trust for the sole benefit of a college was held not an IRC 170(b)(1)(A)(ii) organization in Appleby v. Commissioner, 48 T.C. 330 (1967).

    2. However, a city-operated museum whose primary function was not formal instruction was held an IRC 170(b)(1)(A)(ii) organization as an integral part of the city’s school system, due to the museum’s close working relationship with the school system, in Brundage v. Commissioner, 54 T.C. 1468 (1970), acq. in result only, 1970–2 C.B. xix. But see Rev. Rul. 76–167, discussed below.

    3. A trust created by an individual to financially assist teachers of a public school system held was not an IRC 170(b)(1)(A)(ii) organization in Miller v. United States, 393 F.Supp. 831 (E.D.Mo. 1975), affirmed per curiam, 527 F.2d 231 (8th Cir. 1975). In response to the taxpayer’s argument (citing Brundage) that the trust was an integral part of the school system and was controlled by city officials, the court noted that the trust had no curriculum, faculty, or student body (thus distinguishing Brundage) and that the trust could not be carrying out the school system’s purposes since State law prohibited the use of public funds for the trust’s purposes.

    4. A city board of education was held described in IRC 170(b)(1)(A)(ii) in Estate of Green v. Commissioner, 82 T.C. 843 (1984), the court reasoning that the board controlled and operated the city school system.

7.26.2.3.2.3  (03-30-1999)
Primary Function—Other Cases

  1. A museum that operates a school does not necessarily qualify under IRC 170(b)(1)(A)(ii), although a university that incidentally operates a museum does qualify. See Reg. 1.170A–9(b).

    1. An organization that presented formal instruction but whose primary activity was maintaining and operating a museum was held not an IRC 170(b)(1)(A)(ii) organization. See Rev. Rul. 76–167, 1976–1 C.B. 329.

  2. An organization whose primary purpose is medical care or research does not qualify.

    1. An organization organized for the primary purpose of engaging in medical research that provided instruction to professionals and graduate students as a secondary activity was held not an IRC 170(b)(1)(A)(ii) organization. See Rev. Rul. 56–262, 1956–1 C.B. 131.

    2. A university hospital, closely affiliated with a medical school but separately incorporated and lacking a regular faculty, curriculum, and body of students, was held not an IRC 170(b)(1)(A)(ii) organization. See Rev. Rul. 77–175, 1977–1 C.B. 415.

  3. An organization that boards handicapped or troubled youth may qualify.

    1. Rev. Rul. 62–6, 1962–1 C.B. 198, made a distinction between a school for mentally handicapped children and an organization that was primarily a residential facility for such children (who were students at the former), holding that the former but not the latter was a nonprofit educational organization for excise tax purposes.

    2. Rev. Rul. 79–403, 1979–2 C.B. 363, held that an organization that was equivalent to a boarding school for emotionally disturbed children was an IRC 170(b)(1)(A)(ii) organization.

  4. Recreational and camping organizations ordinarily do not qualify.

    1. The Girl Scouts of America and its local councils, providing recreational and camping programs for its members as well as informal instruction in a variety of subjects, were held not to be nonprofit educational organizations for excise tax purposes. See Rev. Rul. 68–659, 1968–2 C.B. 489.

    2. An organization that primarily operated a summer camp involving both recreational and educational activities and that also conducted a training program for camp counselors did not qualify as an IRC 170(b)(1)(A)(ii) organization. See Rev. Rul. 74–366, 1974–2 C.B. 345.

    3. Compare Rev. Rul. 73–434, 1973–2 C.B. 71 (survival course held to qualify), and Rev. Rul. 83–140, 1983–2 C.B. 185 (wilderness camping program for troubled adolescents held to qualify).

  5. Organizations that provide employment or social services to the handicapped in addition to vocational training do not necessarily qualify.

    1. An organization that primarily provided social services to the blind and also conducted a vocational and rehabilitation training program for the blind was not an IRC 170(b)(1)(A)(ii) organization, although the training program was a school activity for excise tax purposes. See Rev. Rul. 75–416, 1975–2 C.B. 417.

    2. An organization that provided classroom and on-the-job vocational training, employment, and other social services to handicapped individuals in a sheltered workshop and retail store was not an IRC 170(b)(1)(A)(ii) organization, as its primary function was not the presentation of formal instruction, although the classroom training program was a school activity for excise tax purposes. See Rev. Rul. 80–20, 1980–1 C.B. 231.

  6. An organization whose principal purpose was to collect and preserve coins and medals and which as a secondary activity provided formal instruction for graduate students was not an IRC 170(b)(1)(A)(ii) organization. See Rev. Rul. 58–433, 1958–2 C.B. 102.

  7. An organization of dentist missionaries formed to spread the Gospel and improve dental care in foreign countries was not an IRC 170(b)(1)(A)(ii) organization where dental training was an incidental part of the activities. See Chapman v. Commissioner, 48 T.C. 358 (1967).

  8. An organization that primarily provided instruction by correspondence was not an IRC 170(b)(1)(A)(ii) organization. See Rev. Rul. 75–492, 1975–2 C.B. 80.

  9. An organization that conducted guided tours for small groups of young people to show them different lifestyles and cultures in various countries and places was not an IRC 170(b)(1)(A)(ii) organization. See Rev. Rul. 76–237, 1976–1 C.B. 331.

  10. An organization that primarily operated a tutoring service for students on a one-on-one basis in their homes did not qualify under IRC 170(b)(1)(A)(ii). See Rev. Rul. 76–384, 1976–2 C.B. 57.

  11. An organization that conducted an internship program placing college students with government agencies for a semester was not an IRC 170(b)(1)(A)(ii) organization since it did not present formal instruction as its primary function. See Rev. Rul. 76–417, 1976–2 C.B. 58.

  12. An organization that primarily operated an improvisational repertory theater for entertainment purposes and also conducted workshops on improvisational theater was not an IRC 170(b)(1)(A)(ii) organization, although the workshops constituted a school activity for purposes of the excise tax provisions. See Rev. Rul. 77–211, 1977–1 C.B. 312.

  13. An organization that promoted the practice of Yoga was not an IRC 170(b)(1)(A)(ii) organization where its activities included (1) regularly scheduled eight-week courses for registered students, and (2) regularly scheduled single-session classes and irregularly scheduled classes, lectures, seminars, and discussions open to the public on a walk-in basis, although the eight-week course program constituted a school activity for excise tax purposes. See Rev. Rul. 79–130, 1979–1 C.B. 332.

  14. A community center that provided city residents with community centers, libraries, classes, club rooms, gymnasiums, camps for adults and children, and music and lecture halls was not an IRC 170(b)(1)(A)(ii) organization since its primary function was not the presentation of formal instruction. See Rev. Rul . 79–167, 1979–1 C.B. 335.

7.26.2.3.3  (03-30-1999)
Regular Faculty

  1. IRC 170(b)(1)(A)(ii) requires that the educational organization normally maintain a regular faculty.

  2. Generally, this requirement is met if qualified teachers instruct the students, and the same teachers do so on a recurrent basis.

  3. For examples in which the requirement was not met, see Rev. Ruls. 64–128, 1964–1 C.B. 191; 74–46, 1974–1 C.B. 304; and 78–82, 1978–1 C.B. 70 (discussed below under Regular Curriculum).

7.26.2.3.4  (03-30-1999)
Regular Curriculum

  1. IRC 170(b)(1)(A)(ii) requires that the educational organization normally maintain a regular curriculum.

  2. In other words, a school must have a curriculum (i.e., a course or courses of study), which must be offered on a recurrent basis.

7.26.2.3.4.1  (03-30-1999)
Regular Curriculum—General Principles

  1. An organization that merely offers a series of unrelated lectures or conferences will not meet the regular curriculum requirement.

    1. An organization that recruited scholars, government officials, and others to conduct research on questions of international importance, publish the results, and conduct lectures and conferences with prominent individuals from all fields of endeavor was held to lack a regular curriculum. See Rev. Rul. 64–128, 1964–1 C.B. 191.

    2. Similarly, an organization that offered to its members and the public a variety of optional lectures, workshops, and short courses on oriental philosophies and psychic phenomena led by various invited authorities and noted personalities in these fields was not an IRC 170(b)(1)(A)(ii) organization because the subject matter was neither organized into an interrelated curriculum so as to constitute formal instruction, nor offered on a regular basis. See Rev. Rul. 78–82, 1978–1 C.B. 70.

  2. An IRC 170(b)(1)(A)(ii) organization need not present courses in traditional academic subjects to satisfy the curriculum requirement.

    1. The statute imposes no limitation on the subject matter of the instruction. See Rev. Rul. 76–237, 1976–1 C.B. 331; Rev. Rul. 79–130, 1979–1 C.B. 332.

    2. However, the curriculum must be educational in the broad sense of improving one’s capabilities, or being useful to the individual and beneficial to the community. See Reg. 1.501(c)(3)1(d)(3)).

  3. Examinations or grades are not essential to maintaining a regular curriculum. See, e.g, Rev. Rul. 68–175, 1968–1 C.B. 83.

  4. Individualized instruction may satisfy a curriculum, depending on the circumstances.

    1. An elementary school was held to meet the regular curriculum requirement, even though it had no formal course program or formal classroom instruction, where it provided an individualized course of study for each child, based on the child’s interests and aptitudes, designed to provide the child with basic educational knowledge. See Rev. Rul. 72–430, 1972–2 C.B. 105.

    2. An organization that primarily operated a tutoring service for students on a one-on-one basis in their homes did not qualify under IRC 170(b)(1)(A)(ii). See Rev. Rul. 76–384, 1976–2 C.B. 57.

  5. The instruction need not be carried on in a classroom setting. See:

    1. Rev. Rul. 73–434, 1973–2 C.B. 71 (survival course had curriculum)

    2. Rev. Rul. 83–140, 1983–2 C.B. 185 (wilderness camping program for troubled adolescents had curriculum)

    3. Rev. Rul. 75–215, 1975–1 C.B. 335 (organization presenting field study courses in the sociological and physical sciences had curriculum)

    4. But see Rev. Rul. 76–237, 1976–1 C.B. 331 (organization that conducted guided tours for small groups of young people to show them different lifestyles and cultures in various countries and places was not described in IRC 170(b)(1)(A)(ii))

7.26.2.3.4.2  (03-30-1999)
Regular Curriculum—Other Cases

  1. A curriculum may be partly or wholly religious in nature. See:

    1. Rev. Rul. 64–276, 1964–2 C.B. 399 (Sunday School and Bible studies)

    2. Rev. Rul. 64–287, 1964–2 C.B. 403 (philosophy and religion)

    3. Rev. Rul. 68–375, 1968–1 C.B. 83 (thought and religion)

    4. Rev. Rul. 69–492, 1969–2 C.B. 36 (theological studies)

  2. Industry vocational training curricula have satisfied the requirement. See Rev. Rul. 72–101, 1972–1 C.B. 144; Rev. Rul. 77–272, 1977–2 C.B. 191.

  3. Preschool children’s nursery schools or day-care centers have been held to meet the requirement.

    1. See Rev. Ruls. 54–472, 1954–2 C.B. 381, and 73–430, 1973–2 C.B. 362.

    2. Compare Rev. Rul. 78–446, 1978–2 C.B. 257 (children’s day-care center not described in IRC 170(b)(1)(A)(ii) had three programs: day-care program held in the homes of trained staff members was not a school activity for excise tax purposes, but group day-care program and afterschool program were school activities).

  4. A school for instructing the blind to function with guide dogs met the requirement in Rev. Rul. 73–456, 1973–2 C.B. 342. Compare:

    1. Rev. Rul. 71–421, 1971–2 C.B. 229 (organization that primarily conducted dog obedience school did not qualify under IRC 501(c)(3), since dog rather than owner was primary object of training)

    2. Ann Arbor Dog Training Club, Inc. v. Commissioner, 74 T.C. 207 (1980) (same holding, where each dog owner attended all training sessions with dog)

  5. Curricula in the following subjects have also satisfied the requirement:

    1. ballet and academic courses (see Rev. Rul. 67–447, 1967–2 C.B. 121)

    2. natural childbirth (see Rev. Rul. 73–543, 1973–2 C.B. 343)

    3. martial arts (see Rev. Rul. 78–309, 1978–2 C.B. 123)

    4. yoga (see Rev. Rul. 79–130, 1979–1 C.B. 332)

  6. A traveling theater company engaged in "involvement drama" or "participation theater" involving participation by the audience (mainly children) lacked a curriculum in Rev. Rul. 74–46, 1974–1 C.B. 304.

  7. A summer internship placement organization described in Rev. Rul. 76–417, 1976–2 C.B. 58, was not described in IRC 170(b)(1)(A)(ii) in part because it lacked a curriculum.

  8. The classes offered by a community center described in Rev. Rul. 79–167, 1979–1 C.B. 335 (in subjects such as art, cooking, dance, photography, swimming, languages, gymnastics, and mechanics) were considered interrelated parts of the organization’s social, cultural, and recreational programs rather than the planned curriculum of a school.

7.26.2.3.5  (03-30-1999)
Normally

  1. An IRC 170(b)(1)(A)(ii) organization normally must regularly carry on its curriculum for a regularly enrolled body of students.

  2. The "normally" requirement first appeared in the predecessor language of IRC 170(b)(1)(A)(ii) during World War II.

    1. The "normally" provision was added for the benefit of schools whose operations were suspended or curtailed during the war due to lack of faculty or students. See S. Rep. No. 627, 78th Cong., 1st Sess. 46 (1943).

  3. Where a new organization is taking reasonable steps that lead to operation as an IRC 170(b)(1)(A) (ii) organization, it may be treated as "normally" meeting the requirements of IRC 170(b)(1)(A)(ii).

7.26.2.3.6  (03-30-1999)
Regularity of Curriculum and Student Attendance

  1. A curriculum may be of several weeks’ duration so long as it is regularly carried on.

    1. An organization that operated eight weeks every summer and had a 30-semester hour degree program consisting of eight hours each summer and prescribed work of three hours over the intervening winter had a regular curriculum and student body. See Rev. Rul. 69–492, 1969–2 C.B. 36.

    2. An organization that operated an eight-week vocational training program on a regular and continuous basis was held to meet the regularity requirements. See Rev. Rul. 72–101, 1972–1 C.B. 144.

    3. An organization that regularly conducted a 26-day survival course met the regularity requirements. See Rev. Rul. 73–434, 1973–2 C.B. 71.

    4. An organization that regularly conducted a four-week course training the blind to function with guide dogs met the regularity requirements. See Rev. Rul 73–456, 1973–2 C.B. 342.

    5. An organization that regularly conducted a six-week natural childbirth course meeting once a week met the regularity requirements. See Rev. Rul. 73–543, 1973–2 C.B. 343.

  2. Where the curriculum is of a much briefer duration, the "regularly enrolled body of students" requirement may not be met.

    1. An organization described in Rev. Rul. 64–128, 1964–1 C.B. 191, which invited individuals to conferences and seminars was held not to have a regularly enrolled body of students.

    2. A traveling theater company in Rev. Rul. 74–46, 1974–1 C.B. 304, lacked a regularly enrolled body of students.

    3. See also Rev. Rul. 79–130, 1979–1 C.B. 332, which held that a Yoga organization that conducted (1) regularly scheduled eight-week courses for registered students, and (2) regularly scheduled single-session classes and irregularly scheduled classes, lectures, seminars, and discussions open to the public on an unregistered walk-in basis, was not a nonprofit educational organization for excise tax purposes, although the eight-week course program constituted a school activity.

  3. An organization that conducts its educational activities on an infrequent basis may not meet the regularity requirements.

    1. A school that conducted courses of two-weeks’ duration twice a year was held not to meet the "normally" and "regular" requirements. See Rev. Rul. 64–293, 1964–2 C.B. 404.

7.26.2.3.7  (03-30-1999)
"Place" Requirement

  1. An IRC 170(b)(1)(A)(ii) organization’s students must attend at the place where its educational activities are regularly carried on.

  2. An IRC 170(b)(1)(A)(ii) organization need not own its own facilities but may use those of another school. See Rev. Rul. 69–492, 1969–2 C.B. 36.

  3. An organization that generally carried on its activities in the field rather than the classroom met the "place" requirement in Rev. Rul. 75–215, 1975–1 C.B. 335. See also Rev. Rul. 73–434, 1973–2 C.B. 71 (survival course); Rev. Rul. 83–140, 1983–2 C.B. 185 (wilderness camping program for troubled adolescents).

  4. Compare Rev. Rul. 75–492, 1975–2 C.B. 80 (correspondence school held not described in IRC 170(b)(1)(A)(ii)); Rev. Rul. 76–237, 1976–1 C.B. 331 (organization that conducted guided tours for small groups of young people to show them different lifestyles and cultures in various countries and places was not described in IRC 170(b)(1)(A)(ii)).

7.26.2.3.8  (03-30-1999)
Other Considerations

  1. A public school, if separately incorporated or organized, ordinarily qualifies under IRC 501(c)(3) and 170(b)(1)(A)(ii) even though it is an instrumentality of a governmental unit; if not separately organized, it ordinarily would qualify under IRC 170(b)(1)(A)(v) as an integral part of a governmental unit. See Reg. 1.170A–9(b)(1) and Rev. Ruls. 55–453, 60–384, 1960–2 C.B. 172, 75–436, 1975–2 C.B. 217, and 75–437, 1975–2 C.B. 218.

    1. Iowa State University was held separately organized and described in IRC 501(c)(3) and 170(b)(1)(A)(ii) in Estate of Johnson v. Commissioner, 56 T.C. 944 (1971).

    2. A State university was held not a political subdivision under IRC 103 despite having campus police with limited police powers, in Rev. Rul. 77–165, 1977–1 C.B. 21.

  2. IRC 170(b)(1)(A)(ii) organizations must have racially nondiscriminatory policies as to students to qualify under IRC 501(c)(3).

    1. Rev. Proc. 75–50, 1975–2 C.B. 587, sets forth guidelines and recordkeeping requirements in this regard.

7.26.2.4  (03-30-1999)
IRC 170(b)(1)(A)(iii) Exclusion—Hospitals and Medical Research Organizations

  1. Organizations described in IRC 170(b)(1)(A)(iii) are excluded from private foundation status under IRC 509(a)(1).

  2. IRC 170(b)(1)(A)(iii) and Reg. 1.170A–9(c) refer to the following two types of organizations:

    1. a hospital whose principal purpose or function is the providing of medical or hospital care or medical education or medical research (a "170(b)(1)(A)(iii) hospital" )

    2. a medical research organization whose principal purpose or function is the providing of medical research and which is directly engaged in the continuous active conduct of medical research in conjunction with a hospital (a "170(b)(1)(A)(iii) medical research organization" )

7.26.2.4.1  (03-30-1999)
IRC 170(b)(1)(A)(iii) Hospitals

  1. An organization qualifies as an IRC 170(b)(1)(A)(iii) hospital under Reg. 1.170A–9(c)(1) if:

    1. it is a hospital, and

    2. its principal purpose or function is providing medical or hospital care or medical education or medical research.

7.26.2.4.1.1  (03-30-1999)
Definition of a Hospital

  1. The regulations do not contain a short, simple a definition of a hospital; instead, Reg. 1.170A–9(c)(1) defines the term by reference to examples of organizations that are hospitals and those that are not.

  2. A rehabilitation institution qualifies as a hospital under Reg. 1.170A–9(c)(1) if its principal purpose or function is the providing of medical or hospital care.

    1. See also Rev. Rul. 55–268, 1955–1 C.B. 28 (rehabilitation center for handicapped individuals was an IRC 170(b)(1)(A)(iii) hospital).

    2. Rehabilitation institutions must be distinguished from (1) convalescent homes and from (2) organizations whose principal purpose or function is vocational training for the handicapped, both of which are defined as not hospitals.

  3. An outpatient clinic qualifies as a hospital under Reg. 1.170A–9(c)(1) if its principal purpose or function is the providing of medical or hospital care.

    1. See also Rev. Rul. 73–131, 1973–1 C.B. 446 (community health care center that provided outpatient medical, dental, and general health care was nonprofit hospital for purposes of excise tax under IRC 4253(h), which cross-references IRC 170(b)(1)(A)(iii)).

    2. See also Rev. Rul. 74–619, 1974–2 C.B. 367 (organization that operated mobile clinics to provide free medical care in certain foreign countries where patients were unable to travel to hospitals was nonprofit hospital under IRC 4253(h), because the mobile medical clinics provided hospital or medical care, much the same as outpatient clinics).

    3. Compare Rev. Rul. 76–452, 1976–2 C.B. 60 (organization that primarily provided health services to sick persons in their own homes under the direction of their private physicians and only incidental treatment at the organization’s office was not an IRC 170(b)(1)(A)(iii) hospital (although its principal purpose was to provide medical care), because it was not equipped to serve as an outpatient facility on a continuing basis).

  4. A community mental health or drug treatment center qualifies as a hospital under Reg. 1.170A–9(c)(1) if its principal purpose or function is the providing of medical or hospital care.

  5. An organization, all the accommodations of which qualify as a "skilled nursing facility" under 42 U.S.C. 1395x(j), qualifies as a hospital under Reg. 1.170A–9(c)(1) if its principal purpose or function is the providing of medical or hospital care.

    1. Such an organization provides skilled nursing services under the supervision of physicians and registered professional nurses to inpatient injured, disabled or sick persons transferred from hospitals.

    2. A skilled nursing facility must obtain certification as such from the appropriate State or federal authority for purposes of the Medicare laws. See 42 U.S.C. 1395i–3(g)(1)(A).

  6. Cooperative hospital service organizations that qualify under IRC 501(e) and Reg. 1.501(e)–i are deemed hospitals. See Reg. 1.170A–9(c)(1).

  7. Hospitals that are instrumentalities of governmental units under IRC 170(c)(1) may qualify as hospitals under IRC 170(b)(1)(A)(iii). See Reg. 1.170A–9(c)(1); Rev. Rul. 55–453, 1955–2 C.B. 54.

  8. Homes for children or the aged are defined as not hospitals. See Reg. 1.170A–9(c)(1).

    1. See also Rev. Rul. 69–401, 1969–2 C.B. 128 (home for the aged whose principal purpose was to provide domiciliary and custodial care for 120 residents and also maintained a 15-bed infirmary for treatment of minor illnesses was not hospital under former IRC 503(b)(5) since medical or hospital care was not principal purpose or function).

    2. See also Rev. Rul. 76–9, 1976–1 C.B. 348 (nonprofit residential center for aged or indigent and their families was not nonprofit hospital under IRC 4253(h) since its medical care function, although extensive, was secondary to its primary purpose to operate a home for the aged and indigent).

7.26.2.4.1.2  (03-30-1999)
Medical or Hospital Care

  1. The critical issue in many determinations is whether the organization provides "medical or hospital care" as its principal function.

  2. "Medical care" includes the treatment of any physical or mental disability or condition, whether on an inpatient or outpatient basis, provided the cost of such treatment is deductible under IRC 213 by the person treated. See Reg. 1.170A–9(c)(1).

  3. IRC 213(d)(1) defines "medical care" as including amounts paid:

    1. for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body

    2. for transportation primarily for and essential to medical care referred to in (a.)

    3. for qualified long-term care services, defined in IRC 7702B(c) as certain services required by a "chronically ill individual" pursuant to a plan of care prescribed by a "licensed health care practitioner" ; see also Notice 97–31, 1997–1 C.B. 417.

    4. for insurance covering medical care referred to in (a.) and (b.) or for any qualified long-term care insurance contract, defined in IRC 7702B(b).

    5. See also Reg. 1.213–1(e)(1).

  4. Legal abortions and vasectomies are considered medical care under IRC 213. See Rev. Rul. 73–201, 1973–1 C.B. 140.

    1. Thus, an abortion clinic that qualifies under IRC 501(c)(3) may qualify as an IRC 170(b)(1)(A)(iii) hospital.

  5. Cosmetic surgery, as defined in IRC 213(d)(9), is excluded from the definition of medical care.

  6. Not all organizations that provide "medical care" of the type listed in IRC 213(d)(1) will necessarily qualify as IRC 170(b)(1)(A)(iii) hospitals.

    1. An organization that provided ambulance services as its sole activity ordinarily would not qualify as an IRC 170(b)(1)(A)(iii) hospital, since ambulances are not ordinarily regarded as mobile clinics (as in Rev. Rul. 74–619).

    2. A home for the aged that provided qualified long-term care services as its principal function would not necessarily qualify as an IRC 170(b)(1)(A)(iii) hospital unless all of its accommodations qualified as a skilled nursing facility.

    3. An organization that provided medical insurance would not qualify as an IRC 170(b)(1)(A)(iii) hospital if its principal function were not the direct provision of medical care but instead the reimbursement of separately-organized medical providers; also, IRC 501(m) would likely preclude the organization from IRC 501(c)(3) qualification.

  7. The medical care provided must be for human beings; thus, an organization that maintains a free clinic for animals cannot qualify as a hospital or a provider of medical or hospital care under IRC 170(b)(1)(A)(iii). See Rev. Rul. 74–572, 1974–2 C.B. 82.

7.26.2.4.1.3  (03-30-1999)
Medical Education or Research as Principal Function

  1. A hospital’s principal purpose or function need not be medical or hospital care to qualify under IRC 170(b)(1)(A)(iii).

  2. While medical or hospital care may be the principal purpose or function of most hospitals, an organization may qualify as an IRC 170(b)(1)(A)(iii) hospital even if its principal purpose or function is medical education or medical research, but only if it is actively engaged in providing medical or hospital care to patients on its premises or in its facilities, on an inpatient or outpatient basis, as an integral part of its medical education or medical research functions. See Reg. 1.170A–9(c)(1).

  3. Prior to the Tax Reform Act of 1969, an organization could qualify as an IRC 170(b)(1)(A)(iii) hospital only if its principal purpose or function was providing medical or hospital care. See Reg. 1.170–2(b)(4)(i).

7.26.2.4.1.4  (03-30-1999)
Other Cases

  1. An organization whose primary purpose and function consisted of making distributions to tax-exempt hospitals and medical research organizations, but which was not operated primarily for the purpose of actually performing the activities generally carried on by such organizations, was held not engaged in providing medical or hospital care within the meaning of the predecessor to former IRC 503(b)(5). See Rev. Rul. 54–137, 1954–1 C.B. 289.

  2. An organization whose activities included the conducting of religious services, vocational instruction for the mentally retarded, and rehabilitation medical services for the handicapped, although it had some characteristics of a hospital, was held not an IRC 170(b)(1)(A)(iii) organization, because its principal purpose or function was not that of a hospital. See Rev. Rul. 56–262, 1956–1 C.B. 131.

  3. An organization whose principal function was raising funds needed by hospitals and public agencies for the care of crippled children and that operated a medical treatment center as a secondary activity was held not an IRC 170(b)(1)(A)(iii) organization since its principal activity was raising funds. See Rev. Rul. 59–27, 1959–1 C.B. 57.

  4. An organization of dentist missionaries whose primary function was to spread Christianity in foreign countries and improve dental care by setting up dental clinics was not an IRC 170(b)(1)(A)(iii) hospital where dental care was not shown to be the organization’s principal purpose or function but an incidental activity. See Chapman v. Commissioner, 48 T.C. 358 (1967).

  5. A Planned Parenthood Center that (1) maintained a clinic to which local doctors provided services for medical examinations and consultations, (2) provided informational classes and distributed literature on planned parenthood practices, and (3) cooperated with drug companies engaged in medical research as to the effectiveness of various birth control pills, was not a nonprofit hospital under IRC 4253(h), as it was not engaged in providing hospital care or operating a hospital for the sick. See Rev. Rul. 67–465, 1967–2 C.B. 381.

  6. A nonprofit health agency that conducted programs of research, public information and education, and professional education and training with respect to a specific disease was not a nonprofit hospital under IRC 4253(h), because (1) it was not a hospital, and because (2) its principal purpose was not providing medical or hospital care to patients. See Rev. Rul. 75–295, 1975–2 C.B. 437.

  7. A hospital organization described in IRC 170(b)(1)(A)(iii) that contributes its assets to a joint venture will continue to qualify under IRC 170(b)(1)(A)(iii) as long as the organization’s principal activity remains the provision of hospital care, regarding the activities of the joint venture proportionately as the activities of the partners. See Rev. Rul. 98–15, 1998–12 I.R.B. 6.

7.26.2.4.1.5  (03-30-1999)
Dual Classification

  1. Even if a hospital is described in IRC 170(b)(1)(A)(iii), it may seek to qualify and be recognized as a publicly supported organization under IRC 170(b)(1)(A)(vi). See Rev. Rul. 76–416, 1976–2 C.B. 57.

7.26.2.4.2  (03-30-1999)
IRC 170(b)(1)(A)(iii) Medical Research Organizations

  1. An organization qualifies as an IRC 170(b)(1)(A)(iii) medical research organization under Reg. 1.170A–9(c)(2)(ii) if:

    1. its principal purpose or function is to engage primarily in the conduct of medical research, and

    2. it is primarily engaged directly in the continuous active conduct of medical research in conjunction with a hospital.

7.26.2.4.2.1  (03-30-1999)
Definition of Medical Research

  1. Medical research is the conduct of investigations, experiments, and studies to discover, develop, or verify knowledge relating to the causes, diagnosis, treatment, prevention, or control of physical or mental diseases and impairments of mankind. See Reg. 1.170A–9(c)(2)(iii).

  2. Medical research encompasses the associated disciplines spanning the biological , social and behavioral sciences. See Reg. 1.170A–9(c)(2)(iii), which contains a list of disciplines included in medical research.

7.26.2.4.2.2  (03-30-1999)
Principal Purpose or Functions

  1. The "principal purpose or functions test" for IRC 170(b)(1)(A)(iii) medical research organizations is both an organizational and operational test.

  2. An organization must be organized for the principal purpose of engaging primarily in the conduct of medical research. See Reg. 1.170A–9(c)(2)(iv).

    1. An organization will normally be considered to be so organized if it is expressly organized for the purpose of conducting medical research and is actually engaged primarily in the conduct of medical research.

  3. However, an organization that otherwise meets the requirements of a medical research organization will not fail to qualify solely because its governing instrument does not specifically state that its principal purpose is to conduct medical research. See Reg. 1.170A–9(c)(2)(iv).

7.26.2.4.2.3  (03-30-1999)
Directly Engaged

  1. Engaging directly in the continuous active conduct of medical research does not include the disbursing of funds to other organizations for the conduct of research by them or the extending of grants or scholarships to others. See Reg. 1.170A–9(c)(2)(v)(c).

  2. Therefore, if an organization’s primary purpose is to disburse funds to other organizations for the conduct of research by them or to extend grants or scholarships to others, it is not primarily engaged directly in the continuous active conduct of medical research. See Reg. 1.170A–9(c)(2)(v)(c).

  3. Similarly, an inactive medical research organization does not qualify. See Reg. 1.170A–9(c)(2)(i).

7.26.2.4.2.4  (03-30-1999)
Primarily Engaged Directly in the Continuous Active Conduct of Medical Research

  1. The regulations set forth several alternative tests for determining whether an organization is primarily engaged directly in the continuous active conduct of medical research: two bright-line safe-harbor tests (a "devotion of assets" test and an "expenditure of endowment" test), and a facts-and-circumstances test.

7.26.2.4.2.4.1  (03-30-1999)
Primarily Engaged Directly in the Continuous Active Conduct of Medical Research—in General

  1. In order for an organization to be primarily engaged directly in the continuous active conduct of medical research under Reg. 1.170A–9(c)(2)(v)(a), the organization must either

    1. devote a substantial part of its assets to such purposes, or

    2. expend a significant percentage of its endowment for such purposes, or

    3. both.

  2. Whether an organization devotes a substantial part of its assets to, or makes significant expenditures for, such continuous active conduct depends upon the facts and circumstances existing in each case. See Reg. 1.170A–9(c)(2)(v)(a).

  3. An organization will be treated as devoting a substantial part of its assets to the continuous active conduct of medical research if it devotes more than half of its assets to such conduct. See Reg. 1. 170A–9(c)(2)(v)(b).

  4. An organization will be treated as expending a significant percentage of its endowment for the continuous active conduct of medical research if it expends funds equaling 3.5% or more of the fair market value of its endowment. See Regs. 1.170A–9(c)(2)(v)(b); 1.170A–9(c)(2)(x), Example (1).

  5. If an organization fails to satisfy a safe-harbor test, in evaluating the facts and circumstances, the factor given most weight is the margin by which the organization failed to meet such tests (in this regard, see Example (3) of Reg. 1.170A–9(c)(2)(x)).

  6. Some other circumstances cited under Reg. 1.170A–9(c)(2)(v)(a) as favoring the organization are as follows:

    1. The organization fails to satisfy the tests because it failed to properly value its assets or endowment, and upon discovery of the improper valuation it devotes additional assets to, or makes additional expenditures for, such purposes, so that it satisfies such tests on an aggregate basis for the prior year in addition to such tests for the current year.

    2. The organization acquires new assets or has a significant increase in the value of its securities after it had developed a budget in a prior year based on the assets then owned and their prior values. See Reg. 1.170A–9(c)(2)(x), Example (2).

    3. The organization fails to make expenditures in any given year because of the interrelated aspects of its budget and long-term planning requirements (for example, where an organization prematurely terminates an unsuccessful program and because of long-term planning requirements it will not be able to establish a fully operational replacement program immediately).

    4. The organization has an objective to spend less than a significant percentage in a particular year but make up the difference in the subsequent few years, or to budget a greater percentage in an earlier year and a lower percentage in a later year.

7.26.2.4.2.4.2  (03-30-1999)
Primarily Engaged Directly in the Continuous Active Conduct of Medical Research—Special Rules

  1. The following rules apply in determining whether a substantial part of an organization’s assets are devoted to, or its endowment is expended for, the continuous active conduct of medical research.

  2. Under Reg. 1.170A–9(c)(2)(vi)(a), an organization may satisfy either test for a computation period consisting of either:

    1. the immediately preceding taxable year, or

    2. the immediately preceding four taxable years.

  3. In applying the tests for a four-year computation period, the relevant expenditures, endowment values, or asset values are aggregated or summed, even though the value of the same asset may be counted four times. See Reg. 1.170A–9(c)(2)(vi)(a).

  4. Any property substantially all the use of which is "substantially related" (under IRC 514(b)(1)(A)) to the exercise or performance of the organization’s medical research activities will not be treated as part of its endowment. See Reg. 1.170A–9(c)(2)(vi)(b).

  5. The following valuation rules under Reg. 1.170A–9(c)(2)(vi)(c) apply:

    1. The valuation of assets must be made with commonly accepted methods of valuation (such as a method in accordance with the regulations under IRC 2031).

    2. Assets may be valued as of any day in the organization’s taxable year to which the valuation applies, provided the organization follows a consistent practice of valuing the asset as of such date in all taxable years.

    3. An asset held by the organization for part of a taxable year shall be taken into account by multiplying the fair market value of the asset by the following fraction:
      # days asset held in tax year
      # days in tax year

7.26.2.4.2.5  (03-30-1999)
Hospital

  1. Reg. 1.170A–9(c)(2)(ii) provides that the "hospital" with which the organization must be engaged in medical research, in addition to qualifying as a hospital under Reg. 1.170A–9(c)(1), must be one or more of the following:

    1. described in IRC 501(c)(3) (see also Rev. Rul. 66–245, 1965–2 C.B. 71)

    2. a federal hospital

    3. an instrumentality of a government unit referred to in IRC 170(c)(1)

7.26.2.4.2.6  (03-30-1999)
Medical Research in Conjunction With a Hospital

  1. To be considered primarily engaged directly in the continuous active conduct of medical research in conjunction with a hospital, there must be a joint effort on the part of the research organization and the hospital pursuant to an understanding that the two organizations will maintain continuing close cooperation in the active conduct of medical research. See Reg. 1.170A–9(c)(2)(vii).

  2. The organization need not be formally affiliated with a hospital. See Reg. 1.170A–9(c)(2)(vii).

  3. For example, the necessary joint effort normally will be found to exist under Reg. 1.170A–9(c)(2)(vii) if all of the following circumstances exist:

    1. the activities of the medical research organization are carried on in space located within or adjacent to a hospital,

    2. the organization is permitted to use the facilities (including equipment, case studies, etc.) of the hospital on a continuing basis, and

    3. there is substantial evidence of close cooperation between staff members of the research organization and staff members of the hospital.

7.26.2.4.2.7  (03-30-1999)
Organizational Period for New Organizations

  1. A newly created organization is considered primarily engaged directly in the continuous active conduct of medical research in conjunction with a hospital if it establishes to the satisfaction of the Service that it reasonably can be expected to be so engaged by the end of its organizational period. See Reg. 1.170A–9(c)(2)(ix).

  2. The information to be submitted shall include detailed plans showing the proposed initial medical research program, architectural drawings for the erection of buildings and facilities to be used for the medical research, plans to assemble a professional staff, and detailed projections showing the timetable for the expected accomplishment of the foregoing. See Reg. 1.170A–9(c)(2)(ix).

  3. The "organizational" period is the period appropriate to implement the proposed plans, giving effect to the proposed amounts involved and the magnitude and complexity of the projected medical research program, but not exceeding three years from organization. See Reg. 1.170A–9(c)(2)(ix).

7.26.2.4.2.8  (03-30-1999)
Commitment to Spend Contributions

  1. In order for a contributor to have the maximum deduction allowance provided for in IRC 170(b)(1)(A), during the calendar year in which the contribution is made, a medical research organization must be committed to spend the contribution for research before January 1 of the fifth calendar year that begins after the date the contribution is made. See IRC 170(b)(1)(A)(iii); Fox v. Commissioner, T.C.M. 1968–205.

  2. This five-year spending requirement is ignored for purposes of determining whether the organization is a public charity under IRC 509(a)(1). See Reg. 1.509(a)–2(b).

  3. An organization need not receive any deductible contributions to qualify as a medical research organization, and the organization need not be committed to spend within the five-year period amounts to which the limitation of IRC 170(b)(1)(A) does not apply. See Reg. 1.170A–9(c)(2)(i).

  4. The following rules under Reg. 1.170A–9(c)(2)(viii) apply to the organization’s commitment:

    1. The organization’s commitment to spend the contribution within the prescribed time for the prescribed purposes must be legally enforceable.

    2. A promise in writing to the donor in consideration of making a contribution that a contribution will be spent within the prescribed time will constitute a commitment.

    3. A medical research organization will be presumed to have made the required commitment with respect to any contribution if its governing instrument or bylaws require that every contribution be spent for medical research before January 1 of the fifth year that begins after the date the contribution is made.

  5. The expenditure of contributions received for plant, facilities, or equipment used solely for medical research purposes shall ordinarily be considered an expenditure for medical research. See Reg. 1.170A–9(c)(2)(viii).

  6. An in-kind contribution shall be considered spent for medical research if the proceeds of its disposition are spent by the organization within the five-year period for medical research; or, if property is used on a continuing basis directly in connection with medical research, it shall be considered spent for medical research in the year in which it is first so used. See Reg. 1.170A–9(c)(2)(viii).

7.26.2.5  (03-30-1999)
IRC 170(b)(1)(A)(iv) Exclusion—Organizations for the Benefit of Certain State and Municipal Colleges and Universities

  1. Organizations described in IRC 170(b)(1)(A)(iv) are excluded from private foundation status under IRC 509(a)(1).

  2. An organization is described in IRC 170(b)(1)(A)(iv) if:

    1. it normally receives a substantial part of its support (excluding exempt-function income) from the United States or any State or political subdivision thereof or from direct or indirect contributions from the general public,

    2. it is organized and operated exclusively to receive, hold, invest, and administer property and to make expenditures to or for the benefit of an IRC 170(b)(1)(A)(ii) college or university, and

    3. the benefited college or university is an agency or instrumentality of a State or political subdivision thereof, or is owned or operated by a State or political subdivision thereof or by an agency or instrumentality of one or more States or political subdivisions.

7.26.2.5.1  (03-30-1999)
Legislative History

  1. Congress granted IRC 170(b)(1)(A) status to such organizations in order to place State colleges and universities on an even footing with private ones for purposes of the deductibility of contributions. See S. Rep. No. 585, 87th Cong., 1st Sess. 4 (1961); S. Rep. No. 2109, 87th Cong. 2d Sess. 6 (1962).

  2. The law of some States limits the ability of State-owned colleges and universities (unlike private ones) to directly accept gifts for particular purposes, which instead must go into the general State treasury.

  3. University endowment foundations were created to receive gifts on behalf of a State university and use them for normally accepted functions of the university.

7.26.2.5.2  (03-30-1999)
Publicly Supported

  1. The public-support requirement of IRC 170(b)(1)(A)(iv) is similar, but not identical, to that of IRC 170(b)(1)(A)(vi).

  2. The regulations under IRC 170(b)(1)(A)(iv), which was enacted in 1962, have always defined substantial public support in less detail than the regulations under IRC 170(b)(1)(A)(vi), which was enacted in 1964, and the regulations have never cross-referenced one another.

  3. Reg. 1.170A–9(b)(2)(ii), which deals with the substantial public support requirement for 170(b)(1)(A)(iv) organizations, provides little elaboration of the Code provisions except for the following principles:

    1. An example of an indirect contribution from the public is the receipt by the organization of its share of the proceeds of an annual collection campaign of a community chest, community fund, or united fund.

    2. In determining the amount of support received by such organization with respect to a contribution of property which is subject to reduction under IRC 170(e), the fair market value of the property shall be taken into account.

  4. A distinction between public support for IRC 170(b)(1)(A)(iv) purposes and 170(b)(1)(A)(vi) purposes is that the class of government entities referred to in IRC 170(b)(1)(A)(iv) as providing public support is smaller. See Rev. Rul. 82–132, 1982–2 C.B. 107.

  5. An organization that satisfies the substantial public support requirements of IRC 170(b)(1)(A)(vi), by support from the United States or a State or political subdivision thereof or contributions from the general public, is deemed to satisfy the substantial public support requirements of IRC 170(b)(1)(A)(iv). See Rev. Rul. 82–132, 1982–2 C.B. 107.

    1. However, an organization that fails to meet the substantial public support requirements of IRC 170(b)(1)(A)(vi) may still meet the requirements under IRC 170(b)(1)(A)(iv) and Reg. 1.170A–9(b)(2)(ii). See Rev. Rul. 82–132.

  6. The requirement of Reg. 1.170A–9(e)(5)(i) that an organization must have been in existence for a taxable year consisting of at least eight months to obtain a ruling (other than an advance ruling) that it is a public charity under IRC 509(a)(1) and 170(b)(1)(A)(vi) does not apply to 170(b)(1)(A)(iv) organizations. See Rev. Rul. 77–407, 1977–2 C.B. 77.

    1. Thus, a newly created organization, however short its existence, may be issued an IRC 170(b)(1)(A)(iv) ruling if it demonstrates that it will "normally" receive a substantial part of its support from contributions from governmental units or the general public. See Rev. Rul. 77–407.

7.26.2.5.3  (03-30-1999)
Expenditures for the Benefit of a College or University

  1. Under Reg. 1.170A–9(b)(2)(i), "expenditures to or for the benefit of a college or university" include expenditures made for any one or more of the normal functions of colleges and universities, such as:

    1. the acquisition and maintenance of real property comprising part of the campus area

    2. the erection of, or participation in the erection of, college or university buildings

    3. the acquisition and maintenance of equipment and furnishings used for, or in conjunction with, normal functions of colleges and universities

    4. expenditures for scholarships, libraries, and student loans

7.26.2.5.4  (03-30-1999)
Benefited College or University Requirements

  1. The college or university (including a land grant college or university) to be benefited must be both:

    1. an IRC 170(b)(1)(A)(ii) organization (treating a school that is an integral part of a State or political subdivision as separately organized for this purpose) , and

    2. an agency or instrumentality of a State or political subdivision thereof, or owned or operated by a State or political subdivision thereof or by an agency or instrumentality of one or more States or political subdivisions.

7.26.2.6  (03-30-1999)
IRC 170(b)(1)(A)(v) Exclusion—Governmental Units

  1. The following governmental units are excluded from private foundation status under IRC 509(a)(1) and 170(b)(1)(A)(v) (which cross-references IRC 170(c)(1)):

    • a State

    • possession of the United States

    • political subdivision of (a.) or (b.)

    • the United States

    • the District of Columbia

  2. Indian tribal governments are treated as States for purposes of IRC 509(a)(1) and 170(b)(1)(A)(v). See IRC 7871(a)(1)(A) and 7871(a)(7)(B).

    1. For a fuller discussion of Indian tribal governments, see "Instrumentalities" in IRM 7.25.3.

  3. "Possessions of the United States" are not defined in the regulations under IRC 170.

    1. Territories and commonwealths generally regarded under the Code as U.S. possessions include American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands. See IRC 931–936 (dealing with U.S. possessions); IRC 7654(b)(2); IRC 7701(d); and Rev. Rul. 94–56, 1994–2 C.B. 37.

    2. The Interior Department’s Office of Insular Affairs deals generally with U.S. territories and insular possessions under Title 48 of the U.S. Code and may be consulted in determining the possessions of the United States.

  4. "The United States" has been construed as follows:

    1. Gifts to a research foundation created by executive agreement between the U.S. and a foreign country, equally financed, owned, and governed by the U.S. and the foreign country, were held not gifts to "the United States" or other IRC 170(c)(1) organization in Rev. Rul. 76–195, 1976–1 C.B. 61.

    2. Gifts to a Presidential Inaugural Committee appointed by the President-elect to sponsor inaugural festivities were held not gifts to "the United States" in Rev. Rul. 77–283, 1977–2 C.B. 72.

    3. Gifts to the federal social security trust fund were held gifts to "the United States" in Rev. Rul. 82–169, 1982–2 C.B. 72.

7.26.2.6.1  (03-30-1999)
Political Subdivision—General Principles

  1. A government entity is not a political subdivision unless it possesses a sovereign power.

  2. Although the regulations under IRC 170 do not define a "political subdivision" of a State, the term is defined under IRC 103 as any division of any State or local governmental unit which is a municipal corporation or which has been delegated the right to exercise part of the sovereign power of the unit. See Reg. 1.103–1(b).

    1. A political subdivision may or may not include special assessment districts, such as road, water, sewer, gas, light, reclamation, drainage, irrigation, levee, school, harbor, port improvement, and similar districts and divisions of a State or local government unit. See Reg. 1.103–1(b).

    2. The Service used the definition of a "political subdivision" under Reg. 1.103–1(b) for purposes of IRC 170(c)(1) in Rev. Rul. 75–359.

  3. In Texas Learning Technology Group v. Commissioner, 96 T.C. 686 (1991), the court reasoned as follows in holding that an IRC 501(c)(3) organization was not a governmental unit under IRC 170(b)(1)(A)(v):

    1. a State statute’s characterization of an organization as a political subdivision is not controlling for federal tax purposes

    2. an organization must possess a sovereign power (traditionally regarded as the power to tax, to condemn property, or to police or regulate) to qualify under IRC 170(b)(1)(A)(v)

    3. governmental functions that are exercisable by others without the sovereign’s authorization, such as education of youth, do not constitute sovereign powers

    4. government "agencies" or "instrumentalities" are not synonymous with "political subdivisions," as IRC 170(b)(1)(A)(iv) refers to "an agency or instrumentality of one or more States or political subdivisions"

    5. an organization cannot claim IRC 170(b)(1)(A)(v) status as an "integral part" of a political subdivision if it claims to be separately organized for purposes of IRC 501(c)(3) status (Rev. Rul. 60–384 requires that government entities be separately organized and not be an integral part of the government to qualify under IRC 501(c)(3))

7.26.2.6.2  (03-30-1999)
Political Subdivision—Specific Cases

  1. A sewer and water authority authorized by town ordinance to construct and operate the town’s sewer and water system, and authorized to charge the costs of sewer construction against the properties benefited, was held a political subdivision under IRC 170(c)(1). See Rev. Rul. 58–473, 1958–2 C.B. 100.

  2. A voluntary association of counties, organized to perform research in the field of local government, train local officials with respect to their public duties, provide information to permit more efficient operation of county government, and represent the counties at the State legislature, whose members consisted of county officials and others, was held not a political subdivision under IRC 170(c)(1) since it was not delegated any sovereign powers of its member counties or the State, although it constituted a wholly-owned instrumentality. See Rev. Rul. 75–359, 1975–2 C.B. 79.

  3. A State Bar, created by statute, that worked with the State Supreme Court in implementing statutory rules on the practice of law in the State and that promoted the professional interests of its members was held not a political subdivision under IRC 170(c)(1) because it had no meaningful sovereign powers. See Rev. Rul. 77–232, 1977–2 C.B. 71.

  4. An industrial commission, established by a State legislature to study problems of industrial life and promote economic growth in a particular area consisting of several municipalities, and governed by the State and member municipalities, was held not an IRC 170(c)(1) organization, although gifts to it were "for the use of" 170(c)(1) organizations. See Rev. Rul. 79–323, 1979–2 C.B. 106.

  5. In Texas Learning Technology Group v. Commissioner, 96 T.C. 686 (1991), the court held that an unincorporated cooperative organization that was created by State statute, had members consisting of local public school districts, had a purpose to develop and administer programs to improve student learning in the public schools, and was recognized as exempt under IRC 501(c)(3) was not a governmental unit under IRC 170(b)(1)(A)(v).

  6. Special rules apply in determining whether an organization is a political subdivision of an Indian tribal government. See IRC 7871(d) and (e).

7.26.2.6.3  (03-30-1999)
Other Considerations

  1. A governmental unit referred to in IRC 170(c)(1) cannot qualify for exemption under IRC 501(c)(3) if it possesses powers inconsistent with IRC 501(c)(3) status, such as a substantial power to tax or to police or regulate. See Rev. Rul. 60–384, 1960–2 C.B. 172.

    Note:

    For a fuller discussion, see "Instrumentalities" in IRM 7.25.3.

  2. Nevertheless, all IRC 170(c)(1) organizations qualify as 509(a)(1) publicly supported organizations, for purposes such as being permissible beneficiaries of 509(a)(3) organizations, or grantees over which private foundations need not exercise expenditure responsibility.

  3. Although a foreign government is not an IRC 170(c)(1) governmental unit, support from a foreign government is treated as support from an IRC 170(c)(1) governmental unit in determining whether an organization of the same foreign country is a public charity under IRC 509(a)(1) and 170(b)(1)(A)(vi). See Rev. Rul. 75–435, 1975–2 C.B. 215.

7.26.2.7  (03-30-1999)
IRC 509(a)(4) Exclusion—Testing for Public Safety

  1. Organizations organized and operated exclusively for testing for public safety are excluded from private foundation status under IRC 509(a)(4).

  2. Testing for public safety is an exempt purpose expressly described in IRC 501(c)(3).

7.26.2.7.1  (03-30-1999)
Status as Public Charity

  1. 509(a)(4) organizations, although not private foundations, have a less favorable status than organizations described in sections 509(a)(1), (2), or (3) in several respects (and in some respects even less favorable than private foundations).

  2. Contributions to 509(a)(4) organizations are not deductible for purposes of federal income, estate, or gift tax. Compare IRC 501(c)(3) to IRC 170(c)(2)(B), 2055(a)(2), 2106(a)(2)(A)(ii), and 2522(a)(2).

  3. Since testing for public safety is not a purpose described in IRC 170(c)(2)(B), a private foundation’s distribution to a 509(a)(4) organization for such purpose is not a qualifying distribution but is a taxable expenditure. See IRC 4942(g) and 4945(d)(5); Reg. 53.4945–6(c).

  4. A private foundation must exercise expenditure responsibility over a grant to a 509(a)(4) organization regardless of the purpose of the grant. See IRC 4945(d)(4).

  5. A private foundation cannot terminate its private foundation status by transferring its assets to, or operating as, a 509(a)(4) organization. See IRC 507(b)(1).

  6. A 509(a)(4) organization is not excluded from the definition of "substantial contributor" under IRC 507(d)(2) or "disqualified person" under IRC 4946 in certain situations where other public charities and private foundations are excluded. See Regs. 1.507–6(a)(2) and 53.4946–1(a)(7) and (8).


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