Rev. Rul. 83-63

1983-1 C.B. 272.

                       Internal Revenue Service
                                 Revenue Ruling

       STATE OR LOCAL GOVERNMENT EXEMPTION;  REGIONAL CENTER PROGRAM FOR
                        DEVELOPMENTALLY DISABLED PERSONS

                           Published: April 11, 1983

SECTION 4041. - -IMPOSITION OF TAX, 26 CFR 48.4041-11: Sales to States or political subdivisions thereof

(Also Sections 4221, 4253, 4483; 48.4221-5, 41.4483-1.)

  State or local government exemption;  regional center program for developmentally disabled persons.  Excise tax exemptions do not apply in the case of a nonprofit corporation that administers, under a state contract, a regional center program for developmentally disabled persons.

ISSUE

  Does a nonprofit corporation that administers a regional center program for developmentally disabled persons qualify for the various federal excise tax exemptions for state and local governments?

FACTS

  State law provides that the state will contract with appropriate agencies to provide fixed points of contact in the community for persons with developmental disabilities.  The law also provides that the agencies will be private community agencies, rather than state agencies, because the services to be provided are of such a special nature that they cannot be satisfactorily provided by the state. One of these community agencies in the state is M.

  M is a nonprofit membership corporation organized by private citizens under state law.  The board of directors is elected by the members.  M's board of directors determines the class of disabled persons who receive priority services, the type of services that receive priority funding, the fee for services, and the overall program goals of M.

  A contract between M and the state requires M to provide (1) preventive and counseling services concerning developmental disabilities;  (2) community education and information programs related to developmental services;  (3) hospital preadmission and discharge services;  (4) advocacy for and protection of the civil, legal, and service rights of persons with developmental disabilities;  and (5) court-ordered examinations of developmentally disabled persons to be used in criminal proceedings.  The contract provides that M will operate a regional center in accordance with policies and procedures set by the state covering all aspects of the center's operation.

  The contract also provides that M will act independently and not as an agent of the state and that the state will have no liability for any claims against M.  However, the state requires M to buy insurance to meet any claims and gives M the funds with which to buy it.  The contract also provides that M will have ultimate responsibility for operating the center;  employees of M, rather than state employees, operate M.  M may terminate the contract at any time upon appropriate notice.

  M is involved in some activities not specifically covered by the contract including referral services, guardianship services, and diagnosis and evaluation.

  M's annual budget is $50,000x;  $5x of this comes from annual membership dues while the rest comes from the state. Any fees charged by M for services it renders are given to the state.  The state owns all property purchased by M.

  Under this statutory and contractual framework, the state is primarily responsible for evaluating M's results but does not control the actual manner in which the services are provided by M.  M has wide discretion and the flexibility needed to achieve the desired objectives for each of its clients.

LAW AND ANALYSIS

  The applicable sections of the Internal Revenue Code that provide federal excise tax exemptions for state or local governments are 4041(g)(2), retailers fuel tax;  4221(a)(4), manufacturers tax; 4253(i), communications facilities and services tax;  and 4483(a), highway use tax.

  For such exemptions to be applicable, the sale must, among other things, be of goods or services exclusively for the use of the state or local government. Whether a sale to, or use by, an organization is for the exclusive use of a state or local government depends on whether the organization is either (a) controlled, directly or indirectly, by an agency of a state or local government, or (b) is performing a traditional governmental function on a nonprofit basis.  See Rev. Rul. 70-214, 1970-1 C.B. 230;  Rev. Rul. 71-485, 1971-2 C.B. 371;  and Rev. Rul. 74-253, 1974-1 C.B. 316.

  Ordinarily an organization will not be considered to be performing a traditional governmental function for purposes of the exemption unless it is performing an essential governmental function that state or local governments generally have performed directly and that would have to be carried on by the state or local government if the organization did not exist.  Activities of an organization are not traditional governmental functions merely because they are of the type that could appropriately be carried on by a state or local government if it chooses to do so, or merely because they supplement existing government activities.  The separate exemptions provided for hospitals (section 4253(h) ) and schools (sections 4041(g)(4), 4221(a)(5), and 4253(j) ) make clear that the state and local government exemptions were not intended to apply to every organization that performs an important social or charitable function that is also sometimes performed by government. See Rev. Rul. 82-30, 1982-1 C.B. 165.

  The fact that a purely private organization is under contract with a state to provide certain services to the state is not sufficient to place the organization under the control of the state for purposes of Rev. Rul. 70-214, even though the organization receives most of its money from the state.  M is a private corporation.  The individuals who operate M on a day-to-day basis are not state employees.  M can terminate its contract with the state at any time with appropriate notice.  Further, state law clearly provides that, because of the special nature of the services to be performed, a private organization rather than the state, can best perform them.

  In addition, the services performed by M are not a traditional governmental function because they are not the type generally performed by a state or local government.

HOLDING

  M does not qualify for the various federal excise tax exemptions for state and local governments.

Rev. Rul. 83-63, 1983-1 C.B. 272.