Rev. Rul. 82-30

ISSUE

Does the nonprofit community action organization (the organization) described below come within the scope of the federal excise tax exemptions for states and local governments?

FACTS

The organization was incorporated under state law as a nonprofit corporation. The objective of the organization is to eliminate poverty (or causes of poverty) by developing employment opportunities; by improving individual motivation, performance, and productivity; and by bettering the conditions under which people live, learn, and work. Other voluntary or governmental organizations in the community that operate or sponsor programs geared to the elimination of poverty, and that otherwise meet any affiliation requirements established by the organization under consideration here, are eligible to affiliate with this organization in an advisory or consultative capacity.

Grants made available by the federal government provide a portion of the organization's financial needs, with the balance being provided by contributions from the local community. The organization's programs must be approved by the Community Services Administration, which was established under the Headstart, Economic Opportunity, and Community Partnership Act of 1974 to administer federal funding of such programs. The organization's board of directors is responsible for, and determines by majority vote, its fiscal and administrative policies. The board consists of 24 members. Eight members are elected from and by the local community groups that the organization's program is intended to serve. Eight members are public officials designated by the participating jurisdictions or are individuals from independent public agencies. The last eight members are selected by the board from educational, social, religious, or business groups within the communities. In carrying out its program proposals submitted to and approved by the Community Services Administration, the organization subcontracts with public and private institutions to perform services that correspond to the program proposals.

LAW AND ANALYSIS

Section 4041(g)(2) of the Internal Revenue Code exempts from the taxes on diesel and special fuels imposed by section 4041 sales for the exclusive use of any state, political subdivision or the District of Columbia. Comparable exemptions from the manufacturers excise taxes, the tax on communications, and the highway use tax are provided by sections 4221(a)(4), 4253(i) and 4483(a), respectively.

In determining whether a sale to, or use by, an organization is for the exclusive use of a state or local government, it must be established that 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; 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. The term traditional governmental function does not include activities of an organization merely because they are of the type that could appropriately be carried on by a state or local government if it chose 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.

The organization in question is not controlled directly or indirectly by a state or local government authority since its fiscal and administrative policies are formulated and controlled by a board of directors that is independent of such authority. The board members that are public officials or individuals from independent public agencies do not have authority that indicates control by a state or local political subdivision.

In addition, the programs of the organization directed at the elimination of poverty are quite unlike the usual programs by which state or local governments have assisted the indigent in meeting their basic needs. State and local governments traditionally have provided only money and in kind benefits, rather than programs directed to improving economic abilities and motivation.

HOLDING

When taxable articles are sold to the organization or when taxable communication services and facilities are furnished to the organization, the excise tax exemptions provided by sections 4041(g)(2), 4221(a)(4), and 4253(i) of the Code do not apply since such transactions are not for the exclusive use of a state or local government. Further, the exemption from the highway use tax provided by section 4483(a) does not apply to the operation of vehicles by the organization.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 68-274, 1968-1 C.B. 449, holds that a substantially similar nonprofit community organization is entitled to tax exemption under sections 4055, 4221(a)(4), and 4292 on the basis that the activities of the organization are functions traditionally associated with state or local governments.

However, under the rationale of this present revenue ruling, the organization described in Rev. Rul. 68-274 is not entitled to the tax exemptions presently provided in sections 4041(g)(2), 4221(a)(4), 4253(i) and 4483(a).

Rev. Rul. 68-274 is revoked.

NONRETROACTIVE APPLICATION

Under the authority contained in section 7805(b) of the Code, the conclusion in this revenue ruling will not be applied before July 1, 1982.