EXEMPT ORGANIZATION MUST BE PRIMARILY ENGAGED IN SCHOOL ACTIVITIES TO REAP SCHOOL BENEFITS

The Internal Revenue Code provides a number of benefits to schools that qualify as an exempt organization under Code Section170(b)(1)(A)(ii). These include avoiding private foundation status, having contributions qualify for the 50% contribution limits instead of lower limits, avoidance of Form 990 requirements if affiliated with a church, and avoidance of the debt-financed rules as to debt-financed real property.

The Code defines a §170(b)(1)(A)(ii) organization as “an educational organization which 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.” So does this mean that a otherwise qualified exempt organization (e.g., a hospital) can engage in school activities alongside its other exempt functions and qualify for these benefits?

That was the question in PLR 201407024, where an exempt integrated health group that operated hospitals and clinics also operated schools with a regular faculty and curriculum and an enrolled body of students. It sought to qualify under § 170(b)(1)(A)(ii) and § 514(c)(9)(c) to get out from under the debt-financed property rules. Those rules result in a percentage of income and deductions from debt-financed property being treated as taxable unrelated business income.

Perhaps someone had not done their research. While §170(b)(1)(A)(ii) doesn’t address it, Treas. Regs. §1.170A-9(c)(1) requires that to qualify under §170(b)(1)(A)(ii), the PRIMARY function of the organization must be the school activities. Or perhaps the organization thought that the overall “flavor” of educational activities met the “primary” function requirement.

For this organization, only 13% of its expenditures are for formal instruction, with the rest attributable to fundraising, system-wide management activity, development program, medical journal, and “management and general.” Only 20% of the employees are involved with the schooling, and only 6% of the revenues come from schooling activities. Thus, even though the organization engages generally in educational activities, its

“primary function is not the presentation of formal education in the instructive sense, but is, instead, serving as the parent of an integrated enterprise that is educational in the broad sense of ‘advanc[ing] the study and investigation of human ailments and injuries and the cause, prevention, and cure thereof’ (see Articles of Incorporation). The formal educational activities of the Schools are incidental to that primary function.”

Thus, it did not come within the definition of §170(b)(1)(A).

PLR 201407024