Internal Revenue Service
Revenue Ruling
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smRev. Rul. 56-88
1956-1 C.B. 464
IRS Headnote
A nonprofit library corporation was organized under a state statute for the purpose of maintaining a free public library, collections in natural history and works of art, and the promotion of intellectual culture generally. Legal title to the buildings, grounds and books is vested in a Board of Trustees, which holds and administers a trust fund created by a will. About two-thirds of the library's finances are derived from the city in which it is located and one-third from endowment funds. Employees of the library are eligible to participate in the city's retirement system. Held , the library corporation is not a wholly-owned instrumentality within the meaning of section 3121(b)(7) of the Federal Insurance Contributions Act. Held further , a waiver certificate filed pursuant to section 3121(k) of the Act is not terminated as a result of the library's employees becoming eligible to participate in the city's retirement system.
Full Text
Rev. Rul. 56-88
The Internal Revenue Service has been requested to determine whether a library corporation is a wholly-owned instrumentality of a state or its political subdivision within the meaning of section 3121(b)(7) of the Federal Insurance Contributions Act (chapter 21, subtitle C, Internal Revenue Code of 1954); also, whether a waiver certificate filed under section 3121(k) of the Act is rendered ineffective because the employees of the library have become eligible to participate in the city's retirement system.
The library was organized as a nonprofit membership corporation under the statutes of a state for the maintenance of a free public library, collections in natural history and works of art, and the promotion of intellectual culture generally. At the outset, it was completely financed by private endowments to a self-perpetuating board of trustees, which still exists. The board holds legal title to the building and grounds, holds and administers the principal of the trust, and pays over the income therefrom to be used by the library corporation under the control and direction of its board of directors. Several years ago the city began making contributions to the library from the general property taxes and at the present time the library is financed two-thirds by the city and one-third by private endowment funds. The tangible personal property, including books, furnishings, and library equipment, is owned outright by the library. The board of directors of the library corporation has charge of all its affairs, elects a librarian, and chooses the librarian's assistants.
Under the state statutes applicable to all public charitable trusts, the library is required to make annual reports of the receipt and use of funds to the state's attorney general. The board of trustees is required to account annually to the county probate court, to the library corporation, and to the state attorney general. The corporation's charter contemplates perpetual existence. Thus, it is possible that in the event its life should terminate, the cy pres doctrine would be applied and a court of equity would appoint a successor trustee to continue the charitable purpose. The library employees have been declared eligible to participate in the city retirement system under a statutory provision which extends such benefits to employees of any free public library to the support of which a city or town contributes not less than half the cost.
Section 3121(b) of the Act contains the following exception from the term `employment,' as that term is defined in the Act:
(7) Service * * * performed in the employ of a State, or any political subdivision thereof, or any instrumentality of any one or more of the foregoing which is wholly owned by one or more States or political subdivisions; * * *'
It is held in the instant case that the library is not a wholly-owned instrumentality of the state within the meaning of section 3121(b)(7) of the Act. It was created with private endowments and private funds still constitute a considerable portion of its income. The private corporation maintains full ownership of the building, grounds and books, and its board of directors, rather than the city, has full control of its affairs.
Section 3121(k) of the Act allows a waiver certificate to be filed by an organization exempt from Federal income taxes as an organization of the type described in section 501(c)(3) of the Code where certain conditions are complied with. Section 408.216(b)(3) and (4) of Regulations 128, applicable to the Internal Revenue Code of 1954 by virtue of Treasury Decision 6091, C.B. 1954-2, 47, provides the conditions to be complied with for the termination of the waiver.
The library has been held exempt from the payment of the Federal income taxes as an organization of the type described in section 501(c)(3) of the Internal Revenue Code of 1954. It has filed a waiver certificate under section 3121(k) of the Act and pays taxes under the provisions of the Act with respect to wages paid to its employees. The city objects to the payment of the taxes for the reason that the employees of the library participate in the city retirement system.
The waiver certificate filed by the library under the provisions of section 3121(k) of the Act is not rendered ineffective as a result of the employees' participation in the city's retirement system. Such waiver certificate can be terminated only as provided in section 408.216(b)(3) and (4) of Regulations 128.