Rev. Rul. 84-7

ISSUE

Does the local humane society described below qualify for the exemptions from federal excise taxes provided for state and local governments?

FACTS

X is a nonprofit corporation organized under a state law that allows citizens in each county to establish humane societies for the prevention of cruelty to animals. This law authorizes X to appoint agents who have law enforcement powers, including the power to investigate and arrest persons suspected of violating the state's anti-cruelty statutes. The appointment of these agents, however, must be approved by the county government, which also pays part of the agents' salaries. The state's anti-cruelty laws can also be enforced by any police or sheriff's officer.

X is also under contract with the county to provide an animal shelter for sick and abandoned animals and to provide quarantine kennels for animals suspected of having rabies. X's animal ambulances patrol the county and pick up strays and rescue animals in distress. When necessary animals are painlessly put to death.

X also sponsors a humane education program and lobbies for additional animal protection legislation. These functions are merely incidental to X's other responsibilities and form only a minor part of X's total activities.

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 of a state, 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.

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 (section 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 the government. Rev. Rul. 82-30, 1982-1 C.B. 165; Rev. Rul. 82-31, 1982-1 C.B. 166. Where the organization performs functions which are not traditional governmental functions, but that are merely incidental to its traditional governmental functions and form only an insubstantial part of its total activities (which otherwise are traditional governmental functions), the organization will be classified overall as one performing traditional governmental functions.

The humane society in the instant case is authorized by state law to appoint agents who have law enforcement powers, including the power to investigate and arrest persons suspected of violating the state's anti-cruelty laws. The society also provides quarantine kennels for animals suspected of having rabies. This facet of the society's program shields the public from the ravages of rabid animals and thus protects the public health. Both these activities come well within the definition of traditional governmental functions.

Moreover, it has long been recognized that the state has preeminent authority over unclaimed animals. The removal of stray domestic animals from the public streets and their ultimate disposal is a necessary governmental function, traditionally performed or arranged for by municipalities in the interest of humane treatment of the animals and of public health and safety.

Thus, the humane society described above is performing a traditional governmental function as that term is defined in Rev. Rul. 82-30.

Rev. Rul. 57-170, 1957-1 C.B. 411, held that certain humane societies organized under state laws like those described above, were exempt from certain excise taxes because they were instrumentalities of a political subdivision of a state. The societies clearly were not municipal corporations and could be considered to be instrumentalities of political subdivisions only if they were formed to achieve a recognized public purpose and had been delegated the right to exercise part of the sovereign power of a state. The society in question is clearly not a municipal corporation and it has not been delegated, in whole or in part, the right to exercise the sovereign power of a state. Sovereign power is recognized as encompassing the powers of eminent domain, taxation and the police power. The society has not been delegated the power to tax or the power of eminent domain. In addition, the society has not been delegated police power. Only the agents of the humane society who are appointed under state statute can prosecute persons committing acts of cruelty to animals. Although these agents are appointed by the humane society, the appointments must be approved by the city or county where the agents reside and such agents are paid by these governmental units. Thus, the agents receive their police power from the city or county rather than from the society. Thus, Rev. Rul. 57-170 was incorrect in concluding that such a society was an instrumentality of a political subdivision of a state.

HOLDING

The local humane society described above qualifies for the exemptions from federal excise taxes provided for state and local governments because it performs a traditional governmental function, and sales to it are thus for the exclusive use of the local government.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 57-170, 1957-1 C.B. 411, holds that a substantially similar organization is entitled to the excise tax exemptions under former sections 4055, 4224, and 4292 of the Code. Under this revenue ruling the organization described in Rev. Rul. 57-170 would also be entitled to the tax exemptions presently provided in sections 4041(g)(2), 4221(a)(4), 4253(i) and 4483(a).

Rev. Rul. 57-170 is modified and superseded.