Rev. Rul. 80-88

1980-1 C.B. 234, 1980-13 I.R.B. 9.

                       Internal Revenue Service
                                 Revenue Ruling

                EXEMPTIONS; CHRUCH CONDUCTING SEVERAL ACTIVITIES

                           Published: March 31, 1980

ISSUE

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

(Also Sections 4063, 4221, 6421, 6424, 6427; 48.4221-6.)

  Exemptions; chruch conducting several activities. A discussion is presented of exemptions from excise taxes on fuel, oil, tires, and parts used on buses operated by a tax-exempt church in connection with (1) regularly scheduled Sunday school classes, (2) a regularly staffed kindergarten, (3) a music education program, and (4) recreational programs.

  May taxable fuels and articles be sold exempt from the manufacturers and retailers excise taxes to a church for use in the activities described below?

FACTS

  A church operates the following activities:

    (1)  Regularly scheduled Sunday school classes for all age groups in the congregation.  Classes are taught by a volunteer faculty at the church classroom facility and at various other class locations, including a junvenile detention center and a nursing home.

    (2)  A regularly staffed kindergarten, using the standard curriculum of the local board of education.

    (3)  A music education program conducted by the music ministry and employing three professional instructors in music education, two full-time and one part-time.  The program encompasses age groups from first graders through adults who meet regularly at the church for instruction.  Both vocal and instrumental theory are included in the program and some classes are held at other locations, such as music camps and clinics.  This program is much more extensive than the regular church choir program.  Many persons, however, participate in both activities.

    (4)  Recreational programs that include skating, swimming, a baseball league, and picnics.  The recreational programs are open to all members of the church.

  The church purchases buses that it uses to provide transportation in connection with the various activities described above.  The buses are also used for choir trips and to transport church members to retreats.  In operating the buses, the church purchases fuel, oil, tires, and parts.

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

LAW AND REGULATIONS

  The applicable sections of the Internal Revenue Code and Manufacturers and Retailers Excise Tax Regulations are sections 4041(g)(4), 4063(a)(6), 4221(a)(5), 4221(d)(7), 4221(e)(5), 4221(e)(6), 6421(b)(1)(B), 6424(a)(2), 6427(b)(1)(B), 48.4041-13, and 48.4221-6.

  Under sections 4063(a)(6) and 4221(e)(6) of the Code, as amended by the Energy Tax Act of 1978, Pub. L. No. 95-618 (1978), 1978-3 C.B. Vol. 2, effective December 1, 1978, buses and bus parts or accessories are exempt from the manufacturers excise tax.

  Under sections 4041(g)(4) and 4221(a)(5) of the Code, exemptions from the retailers and manufacturers excise taxes are provided for fuels and articles sold to a nonprofit educational organization for its exclusive use.  Under section 4221(d)(5) and sections 48.4041-13 and 48.422-6 of the regulations, the term 'nonprofit educational organization' includes a school operated as an activity of an organization described in section 501(c)(3) which is exempt from income tax under section 501(a), provided the primary function of such school is the presentation of formal instruction and provided 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.

  Under section 4221(e)(5) of the Code, as amended by the Energy Tax Act, effective December 1, 1978, the manufacturers excise tax on tires does not apply in the case of tires or inner tubes for tires sold for use by the purchaser on or in connection with a qualified bus.  Under section 4221(d)(7) a 'qualified bus' includes a school bus that is defined as any automobile but substantially all the use of which is in transporting students and employees of schools.  In Senate Report No. 95-529, Pub. Law 95-618, 1978-3 (Vol. 2) C.B. 248, the Committee indicates that in reference to a school bus, the term 'substantially all' means at

least 85 percent.  The term 'school' is defined by section 4221(d)(7)(C) as an educational 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 carried on.

  Under sections 6421(b)(1)(B) and 6427(b)(1)(B) of the Code, as amended by the Energy Tax Act, effective December 1, 1978, if gasoline and other fuels are used in an automobile bus while engaged in the transportation of students and employees of schools (as defined in section 4221(d)(7)(C)), the ultimate purchaser of the fuels is entitled to a payment by the Secretary equivalent to the excise tax on such fuels.

  Under section 6424(a)(2) of the Code, as amended by the Energy Tax Act, effective December 1, 1978, if lubricating oil (other than cutting oil and oil that has previously been used) is used in a qualified bus (as defined in section 4221(d)(7)), the ultimate purchaser of the lubricating oil is entitled to a payment by the Secretary equivalent to the manufacturers excise tax on such lubricating oil.

ANALYSIS AND HOLDINGS

  In determining whether certain activities conducted by an income tax-exempt organization qualify as a school for purposes of the excise tax exemptions for nonprofit educational organizations, each activity must qualify on its own, rather than all activities being considered on a cumulative basis.  Thus, each activity must meet the statute and regulation requirements of faculty, curriculum, and student body.  In addition, taxable fuels and articles purchased by the organization must be for the exclusive use of the qualifying school activities.  See, for example, Rev. Rul. 75-314, 1975-2 C.B. 442, and Rev. Rul. 74-234, 1974-1 C.B. 316, which illustrate how the nonprofit educational exemption from certain excise taxes applies where a religious organization conducts an exempt school activity.

  In this case, the Sunday school described in (1), the kindergarten described in (2), and the music education program described in (3) meet the school activity requirements of the statute and regulations in that their primary function is the presentation of formal instruction and that they maintain a regular faculty and curriculum and normally have a regularly enrolled body of students in attendance at the place where their educational activities are regularly carried on.  The recreational programs described in (4), the regular church choir program, and the church retreats do not meet such requirements, and thus do not qualify as school activities.  Moreover, they are not merely incidental to the qualifying school activities since they are available to the entire church congregation.  See Rev. Rul. 68-342, 1968-1 C.B. 484.

  Accordingly, the nonprofit educational exemptions provided by sections 4041(g)(4) and 4221(a)(5) of the Code apply to taxable fuels and articles sole to the organization for exclusive use in activities (1), (2), and (3), but the exemptions do not apply to fuels and articles sold for use in activity (4) or for use in the retreats and choir program.

  Under section 4221(e)(5) of the Code, effective December 1, 1978, however, tires and tubes may be purchased tax free by the organization for use on a bus if substantially all the use of the bus (at least 85 percent) is in providing transportation in connection with activities (1), (2), and (3), thus meeting the definition of a qualfied bus under section 4221(d)(7) even if the bus is used for some nonexempt activities.  Further, if lubricating oil purchased by the organization is used in a qualified bus, under section 6424(a)(2), the organization will be entitled as the ultimate purchaser to a payment equivalent to the manufacturers tax imposed on lubricating oil.

  In addition, where gasoline and other fuels are purchased by the organization tax paid because the organization does not qualify for the nonprofit educational exemption under section 4221(a)(5) of the Code, any portion of such fuels used in an automobile bus while transporting students and employees in connection with school activities (1), (2), or (3) will entitle the organization to a credit or refund under sections 6421(b)(1)(B) and 6427(b)(1)(B), effective December 1, 1978, with respect to the excise tax on such portion of the fuels.

Rev. Rul. 80-88, 1980-1 C.B. 234, 1980-13 I.R.B. 9.