Rev. Rul. 81-79

1981-1 C.B. 605, 1981-10 I.R.B. 39.

                       Internal Revenue Service
                                 Revenue Ruling

                            EDUCATIONAL INSTITUTIONS

                            Published: March 9, 1981

United States-United Kingdom Income Tax Convention

(Also Part I, Sections 151, 170; 1.151-3, 1.170A-9.)

  Educational institutions. The amendment made to section 151(e)(4)(A) of the Code by the Tax Reform Act of 1976 does not affect the definition of "educational institution," "educational establishments," or "other educational institutions" as used in the income tax conventions with the United Kingdom, Japan, Germany, and Switzerland.  Rev. Rul. 58-433 distinguished and Rev. Ruls. 70-196 and 72-106 amplified.

ISSUE

  Whether in the light of the amendment of section 151(e)(4)(A) of the Internal Revenue Code by the Tax Reform Act of 1976, Pub.L. 94-455, 1976-3 C.B. (Vol. 1) 1, amounts paid by an educational segment or division of an organization employer to a nonresident alien teacher are payments by an "educational institution" that are exempt under Article 20 of the United States-United Kingdom Income Tax Convention (Convention), 1980-1 C.B. 394, 402.

LAW AND ANALYSIS

  Article 20 of the Convention provides that a professor or teacher who visits one of the Contracting States for a period not exceeding two years for the purpose of teaching or engaging in research at a university, college, or other recognized educational institution in that Contracting State and who was immediately before that visit a resident of the other Contracting State shall be exempted from tax by the first-mentioned Contracting State on any remuneration for such teaching or research for a period not exceeding two years from the date of the first visit to that State for such purpose.  (Emphasis added.)

  The term "educational institution" is not defined in this Convention and it was not defined in the previous Convention with the United Kingdom, T.D. 5569, 1947-2 C.B. 100 (1947 Convention), which it replaced.  However, Article 3(2) of the Convention provides that in the application of the Convention by one of the Contracting States any term not otherwise defined shall have the meaning that such term has under the tax laws of that Contracting State, unless the context requires otherwise.  The Convention does not provide any basis to change the meaning of the term "educational institution" as used in Article XVIII of the 1947 Convention.  Therefore, Internal Revenue Service rulings and determinations applicable to such term under the 1947 Convention apply to the Convention, unless the Tax Reform Act of 1976 amendment referred to in the issue and discussed later in this revenue ruling require a different meaning for such term.

  Rev. Rul. 72-106, 1972-1 C.B. 277, concludes that the United States will interpret the term "educational institution" for purposes of the 1947 Convention in accordance with section 151(e)(4) of the Code.  Prior to the amendment of section 151(e)(4) in 1976 (as discussed below) it provided a complete definition of the term "educational institution."

  Rev. Rul. 72-106 deals with a medical research organization that operates with three major segments, a professional education department, a research department, and a clinical services department.  On its facts Rev. Rul. 72-106 holds that the organization's educational department is an "educational institution" within the meaning of Article XVIII of the 1947 Convention.  See also Rev. Rul. 68-604, 1968-2 C.B. 63, and Rev. Rul. 74-484, 1974-2 C.B. 342.

  Thus, prior to the amendment of section 151(e)(4) of the Code, a division or a segment of an organization could qualify thereunder as an educational institution even if the organization itself did not so qualify.

  Section 1901(a)(23) of the Tax Reform Act of 1976, Pub.L. 94-455, 1976-3  (Vol. 1) C.B. 1, 243, amended that portion of section 151(e)(4) of the Code dealing with the definition of an "educational institution" by eliminating the complete definition and supplying one by a reference to "an educational organization described in section 170(b)(1)(A)(ii)."  The language in section 170(b)(1)(A)(ii) is substantially the same as that formerly in section 151(e)(4), except that it refers to an educational organization rather than to an educational institution.

  The relevant question is whether the amendment of section 151(e)(4) of the Code by the Tax Reform Act of 1976 changed the rules applicable to the exemption of earnings from teaching under Article XVIII of the 1947 Convention, and therefore under Article 20 of the Convention.

  The 1976 amendment to section 151(e)(4) of the Code was part of the so- called "deadwood" provisions, which are normally presumed to be nonsubstantive in effect unless (1) the specific legislative history of the provision indicates otherwise;  (2) the specific deadwood provision, by its language, requires otherwise;  or (3) the purpose of the provision dictates that the provision be construed to effect a substantive change.  None of these criteria applies to the amendment of section 151(e)(4) by section

1901(a)(23) of the Tax Reform Act of 1976.  Thus, the 1976 amendment to section 151(e)(4) is not considered a substantive amendment.  See S.Rep.No.94-938, 94th Cong., 2d Sess. 1 at 491 (1976), 1976-3 C.B. (Vol. 3), 49, 529.

HOLDING

  The 1976 amendment did not affect the definition of the term "educational institution" developed under section 151(e)(4)(A) of the Code.  Thus, a division or segment of an organization can be an educational institution for purposes of Article 20 of the Convention.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 58-433, 1958-2 C.B. 102 is concerned with whether contributions made by an individual to an organization will qualify for the charitable deduction allowed to individuals under section 170.  It concludes that an organization must be primarily and not just secondarily engaged in educational activities in order to constitute an "educational organization" within the meaning of section 170(b)(1)(A)(ii) of the Code.  Rev. Rul. 58-433 does not involve an interpretation of the term "educational organization" under section 151(e)(4), and therefore this revenue ruling is distinguishable from and has no effect on Rev. Rul. 58-433.

  Rev. Rul. 72-106, discussed above, and Rev. Rul. 70-196, 1970-1 C.B. 359, provide that the terms "educational institution," "educational establishments," and "other educational institutions" contained in the Japan, Germany, and Switzerland Income Tax Conventions will be determined by reference to section 151(e)(4) of the Code.  The rationale and holding in this revenue ruling apply similarly to those terms in the Japan, Germany, and Switzerland conventions.

  Rev. Rul. 58-433 is distinguished.

  Rev. Rul. 70-196 and Rev. Rul. 72-106 are amplified.

Rev. Rul. 81-79, 1981-1 C.B. 605, 1981-10 I.R.B. 39.