LegalEASE: Notes from the Experts - 501(c)(3) Schools

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As discussed in earlier posts, a nonprofit organization that is organized and operated for charitable purposes may be deemed a public charity — and not a private foundation — if it is specifically defined in the Internal Revenue Code as a qualifying charity by the nature of its activities.

The IRS considers educational organizations to be public charities by the nature of their structured educational offerings. Such organizations need not satisfy a public support test: they will qualify by virtue of their defined status.

Internal Revenue Code section 170(b)(1)(A)(ii) defines educational organizations, which are most commonly referred to as "schools." While many charities have educational purposes, or conduct educational activities, not all such organizations fit this definition. The treasury regulations define an educational organization as one whose

primary function is the presentation of formal instruction and [that] 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. The term includes institutions such as primary, secondary, preparatory, or high schools, and colleges and universities. It includes Federal, State, and other public-supported schools which otherwise come within the definition. It does not include organizations engaged in both educational and noneducational activities unless the latter are merely incidental to the educational activities.

— Treasury Regulation § 1.170A-9(c)(1)

School Criteria

A school must meet all three prongs of the above definition: (1) the presentation of formal instruction as its primary function; (2) a regular faculty and curriculum; and (3) a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. The IRS has provided some guidance with respect to each.

1. The Presentation of Formal Instruction as the Primary Function

"[T]he mere fact that an organization has a training program does not, of itself, mean that the program qualifies as a 'school.'" Rev. Rul. 76-237. Formal instruction must be the primary function of the organization. For example, a "recognized university which incidentally operates a museum or sponsors concerts is an educational organization within the meaning of section 170(b)(1)(A)(ii). However, the operation of a school by a museum does not necessarily qualify the museum as [such] an educational organization." Treasury Regulation § 1.170A-9(c)(1).

"Formal instruction" is not limited by subject matter, and it need not conform to a traditional or even uniform curriculum. See Rev. Rul. 79-130 (yoga) and Rev. Rul. 73-434 (survival school). For example, individual courses of study offered to students — without a unified curriculum — may qualify as formal instruction. To qualify, the individual courses must be offered on a regular basis, by a regular faculty, and to a regular body of students. See Rev. Rul. 72-430.

An organization that offers free lectures, workshops, and short courses to the general public, with no regular curriculum, faculty, or student body, is unlikely to qualify as a school. See Rev. Rul. 78-82.

Organizations that do not qualify as schools may still qualify as public charities if they satisfy a public support test.

2. A Regular Faculty and Curriculum

A regular faculty and curriculum requires a consistent offering of courses by a regular faculty, and to a regular body of students. It does not necessarily require that such courses be offered continuously throughout the year.

For example, the IRS ruled an organization to be a school whose only function was conducting an eight-week summer training program with a theological studies curriculum. During those eight weeks each summer, (1) its primary function was the presentation of formal education, (2) it maintained a regular faculty and curriculum, and (3) it had a regularly enrolled body of students that met at the campus facilities of another school. See Rev. Rul. 69-492.

Similarly, an organization that only offers courses once a week may qualify as a school if it still maintains a regular group of instructors, a regular set of courses, and a regularly enrolled body of students. See Rev. Rul. 73-543.

3. A Regularly Enrolled Body of Pupils or Students in Attendance at the Place Where Its Educational Activities Are Regularly Carried On

A regularly enrolled body of pupils or students generally requires some formality in student participation or registration. Programs that offer optional courses for anyone at any time are less likely to qualify as schools. See Rev. Rul. 78-82.

In order to qualify, an organization generally must have a physical place where its educational activities are regularly carried on. This "place" requirement may in certain cases exclude online courses with little student-instructor interaction and may also exclude itinerant locations. However, some online schools may still qualify on the basis of interactive possibilities and other surrounding circumstances.

In one example of the place requirement, the IRS found that an organization whose primary activity consisted of operating a tutoring service for students on a one-to-one basis in their homes, without any formal classroom spaces of its own, did not meet the requirement. See Rev. Rul. 76-384.

In another example, an "organization maintaining a regular staff of paid instructors who conduct field study courses … for a regularly enrolled body of college and secondary school students supplementing their formal classroom studies" did qualify as a school. The IRS explained that the organization met the place requirement "although the place where the organization's educational activities are carried on will generally be in the field rather than in the classroom." See Rev. Rul. 75-215.

Other School Considerations

In the U.S., private schools are subject to additional requirements intended to ensure that they do not exclude students based on race. For example, private schools must have a "racially nondiscriminatory policy as to students" in order to qualify for exemption. Rev. Rul. 71-447. Presumably the IRS does not subject public schools to the same requirements because their admission policies are dictated by state and federal government.

Charter schools in the U.S. also receive unique scrutiny due to their hybrid public-partner nature. They are generally treated by the IRS as public schools though. See Charter Schools, IRS Continuing Professional Education Text.

Pursuant to Revenue Procedure 2017-53, recently issued by the IRS with respect to equivalency determinations (EDs), all foreign schools must provide evidence that they actually operate in a racially nondiscriminatory manner as to students. In the revenue procedure, the IRS suggests various ways an organization might do so. Notably, the IRS suggests that an organization might confirm that it has adopted a policy in its governing instrument, or in a resolution of its governing body, that it does not discriminate against applicants and students on the basis of race, color, or national or ethnic origin.

Many public universities, both in the U.S. and in other countries, qualify as government instrumentalities in addition to, or instead of, as schools. This determination typically depends on the degree of government control over the university and the nature of its founding and governing documents.

Further Details

If you are a grantmaker considering making a grant to a foreign school or other educational organization, we will be happy to provide further details on the implications of seeking an ED for such a grantee.