Rev. Rul. 80-20

1980-1 C.B. 231, 1980-3 I.R.B. 10.

                       Internal Revenue Service
                                 Revenue Ruling

      EXEMPTION; ADUCATINAL ORGANIZATION; VOCATIONAL REHABILITATION CENTER

                          Published: January 21, 1980

26 CFR 48.4041-13: Tax-free retail sales to certain nonprofit educational organizations.

(Also Section 4221, 4253; 48.4221-6.)

  Exemption; educational organization; vocational rehabilitation center. A nonprofit corporation operates a vocational rehabilitation center for handicapped individuals that provides classroom training, on-the-job training and employment in its sheltered workshops and retail stores, and related services. Neither the corporation nor its workshops, retail stores and related services qualify as nonprofit educational organizations under section 4041(g)(4), 4221(a)(5), and 4253(j) of the Code. However, the classroom training program, including instruction given in the workshops as part of the program, does qualify. Rev. Rul. 64-264 clarified and superseded.

  Advice has been requested whether sales of taxable fuels and articles to, and amounts paid for communication services furnished to, the nonprofit corporation described below come within the federal excise tax exemptions for a nonprofit educational organization under sections 4041(g)(4), 4221(a)(5), and 4253(j) of the Internal Revenue Code.

  The nonprofit corporation is primarily a vocational rehabilitation center that provides employment and on-the-job training in a sheltered workshop and in a retail store renovating and selling household goods and clothing and providing services. The center provides classroom training, personal counseling, vocational evaluation, medical treatment, and unemployment placement services.

  The center conducts a classroom training program that consists of regularly scheduled classes taught by a staff of qualified instructors on a year-round basis.  Instruction is provided to regularly enrolled student/trainees in subjects such as merchandising, welding, shoe repair, carpentry, elementary English, writing, and arithmetic.  Classes for blind student/trainees include instruction in Braille, use of a cane, sewing, shopping and handling money. Classes such as welding and carpentry, although part of the classroom training program, are conducted in a workshop setting rather than in the classroom. Class programs vary from three to nine months depending upon the student's level of competence.

  When the unemployed handicapped individuals complete their classroom training program, they are placed in the sheltered workshops or retail stores where they receive on-the-job instruction and training.  After completing such training, they continue to work in the shops or stores along with other workers while awaiting outside employment for which they have been trained. If they are unable to obtain outside employment, they remain in the workshops or stores as permanent employees.  During the course of their regular employment, persons in the workshops and stores are periodically instructed further by their supervisors in areas relating to their job skills and efficiency.

  The corporation is exempt from federal income tax under section 501(a) of the Code as an organization described in section 501(c)(3).

  Section 4041(g)(4) of the Code provides that under regulations prescribed by the Secretary, no retailers excise tax shall be imposed with respect to the sale of any taxable liquid to a nonprofit educational organization for its exclusive use, or with respect to the use by a nonprofit educational organization of any liquid as a fuel.

  Section 4221(a)(5) of the Code provides that under regulations prescribed by the Secretary no manufacturers excise tax shall be imposed with respect to the sale by the manufacturer of a taxable article to a nonprofit educational organization for its exclusive use.

  Section 4253(j) of the Code provides that, under regulations prescribed by the Secretary no tax shall be imposed under section 4251 on any amount paid by a nonprofit educational organization for communications services or facilities furnished to such organization.

  Under the provisions of sections 4041(g), 4221(d)(5), and 4253(j) 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), and also includes a school operated as an activity of an organization described in 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) 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.  In addition, under the provisions of section 1.170A-9(6)(1) of the Income Tax Regulations, pertaining to section 170(b)(1)(A)(ii), and sections 48.4041-13(b) and 48.4221-6(b) of the Excise Tax Regulations pertaining to Manufacturers and Retailers Excise Taxes, respectively, such nonprofit organization must have as its primary function the

presentation of formal instruction.  Moreover, such nonprofit organizations do not include an organization engaged in both

educational and noneducational activities unless the latter are merely incidental to the educational activities.

  Rev. Rul. 64-264, 1964-2 C.B. 438, describes a training and rehabilitation program for handicapped persons operated by a nonprofit organization.  The program, which is referred to as a 'training school,' consists of courses in driver training, salesmanship, woodworking, small appliance repairing, typewriter repairing, upholstering, use of prosthesis, and speech therapy. Also, elementary subjects, such as reading, writing, and arithmetic, are taught to certain individual participants in the program who have been unable to attend public schools.  Usually, the latter courses are necessary to prepare such individuals for the vocational-type course.

  The training school is operated approximately 250 days each year, and enrollment therein is usually for a period of three years.  A regular staff of instructors is maintained for the training school.  In conjunction with the training school, the organization operates a store and a lodging home for persons receiving training in the store.

  Rev. Rul. 64-264 concludes that the training school meets the prescribed requirement of normally maintaining a regular faculty and curriculum and normally having a regularly enrolled body of pupils or students and, therefore, is a nonprofit educational organization exempt from the manufacturers excise tax under section 4221(a)(5) of the Code.  Consequently, articles sold by the manufacturer to the organization for the exclusive use of the training school are concluded to be exempt.  While not specifically stated in that revenue ruling, articles sold to the organization for the use of the retail store and lodging home are not exempt.

  In this case, as in Rev. Rul. 64-264, the primary function of the organization is not the presentation of formal instruction but, rather, the operation of a vocational rehabilitation center involving employment, educational, and social service activities. The fact that the center provides classroom training services and maintains an on-the-job training program in its workshops and stores is insufficient, in itself, to bring the corporation's primary purpose within the scope of sections 1.170A-9(b)(1), 48.4041-13(b) and 48.4221-6(b) of the regulations.

  In addition, while the on-the-job training program described above is educational in nature, it does not have a regular faculty and curriculum, and an enrolled student body in attendance.  The shop and store activities are not formal instruction.

  Accordingly, neither the corporation nor its workshops and retail stores meet the prescribed requirements to qualify as nonprofit educational organizations as that term is used in sections 4041(g), 4221(a)(5), and 4253(j) of the Code. Nor would the personal counseling, vocational evaluation, medical treatment, and employment placement services meet the prescribed requirements as they are services that relate to the corporation's overall rehabilitation functions.

  However, the classroom training program of the center is an educational activity that meets the requirements of the statute and regulations in that its primary purpose is the presentation of formal instruction, and it has a curriculum and a regularly enrolled student body in attendance at a designated place where instruction is normally provided by a regular faculty at regular sessions. Therefore, the classroom training program is a school operated as an activity of an exempt organization so as to be a nonprofit educational organization within the meaning of the statute. Furthermore, any instruction given in the shops (such as welding, woodworking, or shoe repair) that is part of the classroom training program would be included in the school activity for purposes of the excise tax exemptions.

  Accordingly, the exemptions from the special fuels taxes and the manufacturers excise taxes provided by sections 4041(g)(4) and 4221(a)(5) of the Code, and the exemption from the communications taxes provided by section 4253(j), apply to sales of taxable articles, or communication services furnished to the corporation for the exclusive use of its school.  See Rev. Rul. 75-314, 1975-2 C.B. 442, 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.

  Rev. Rul. 64-264 is clarified and superseded.

Rev. Rul. 80-20, 1980-1 C.B. 231, 1980-3 I.R.B. 10.