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Rev. Rul. 75-416 1975-2 C.B. 417

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Revenue Ruling 75-416

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Headnote

Exemption; social services and rehabilitation training program for the blind. A nonprofit organization that provides consultation and social services to blind persons and also conducts a vocational and rehabilitation training program for blind persons does not qualify as a nonprofit education organization exempt from retailers, manufacturers, and communications tax. However, the organization’s training program, which meets the requirements relating to faculty, curriculum, and enrolled student body, qualifies as a school operated as an activity of an exempt organization and is exempt from these taxes.

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ISSUE

Advice has been requested whether the excise tax exemptions for nonprofit educational organizations apply to sales of articles subject to retailers and manufacturers excise taxes and to amounts paid for communication services furnished to the organization described below.

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FACTS

The organization provides consultation and expertise to blind persons in the area of social services. The organization also conducts a vocational and rehabilitation training program under which the blind are prepared for useful employment and develop skills in the use of various aids and devices. Specific skills are taught in classes that meet five times a week and include such subjects as typing, braille, and communication. A staff of four rehabilitation teachers, three vocational counselors, and a social worker implements this program. The organization has been recognized as exempt from Federal income tax under section 501(a) of the Internal Revenue Code of 1954, as an organization described in section 501(c)(3). There are no restrictions against admissions based on race and the organization has a racially nondiscriminatory policy as to students within the meaning of Rev. Rul. 71-447, 1971-2 C.B. 230.

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LAW AND ANALYSIS

Sections 4057(a) and 4221(a)(5) of the Code provide that, under regulations prescribed by the Secretary of the Treasury or his delegate, no retailers excise taxes or manufacturers excise taxes shall be imposed on sales of taxable articles to a nonprofit educational organization for its exclusive use, or in the case of a tax imposed by section 4041, with respect to the use by a nonprofit educational organization of any liquid as a fuel. Section 4294(a) of the Code provides that, under regulations prescribed by the Secretary or his delegate, no tax shall be imposed under section 4251 on any amount paid by a nonprofit educational organization for communication services or facilities furnished to such organization. Under the provisions of sections 4057(b), 4221(d)(5), and 4294(b) of the Code, the term “nonprofit educational organization” means an educational organization described in section 170(b)(1)(A)(ii) that is exempt from income tax under section 501(a). The term also includes a school operated as an activity of an organization described under section 501(c)(3) that is exempt from income tax under section 501(a), if such school normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. Section 170(b)(1)(A)(ii) of the Code describes an “educational organization” as an organization that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. The fact that the nonprofit organization has been granted exemption from Federal income tax as an organization described in section 501(c)(3) of the Code does not, of itself, determine the applicability of the exemptions from the aforementioned excise taxes. In order for such a nonprofit organization to be exempt, it must meet the description of a nonprofit educational organization set forth in section 170(b)(1)(A)(ii) with respect to faculty, student body, and curriculum. In addition under the provisions of section 148.1-4(b) of the Temporary Regulations under the Excise Tax Technical Changes Act of 1958, such nonprofit organization must have as its primary function the presentation of formal instruction. In the instant case, the primary function of the organization is not the presentation of formal education but rather the providing of social services for the blind. Therefore, the organization itself is not a nonprofit educational organization within the meaning of the statute and regulations. However, the above-described training program of the organization meets the requirements relating to faculty, curriculum, and enrolled student body prescribed in the statute and, therefore, is a “school operated as an activity” of an exempt organization so as to be considered a nonprofit educational organization within the meaning of the statute.

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HOLDING

Accordingly, articles that would otherwise be subject to the retailers excise taxes and the manufacturers excise taxes may be sold tax-free to the organization for use exclusively in the operation of its vocational and rehabilitation training program subject to the requirements of section 148.1-4(c) and 148.1-4(d) of the temporary regulations relating to the exemption for nonprofit organizations. Likewise, communication services may be furnished tax free to the school for its exclusive use, subject to the requirements of section 148.1-4(e) of the temporary regulations. See Rev. Rul. 75-314, page 442, this Bulletin, for an example of the application of the communications tax exemption in the case of a school operated as an activity of an exempt organization.