PLR 1220005: State educational instrumentality qualifies for deductible contributions

Plain-English summary

The IRS ruled that an organization created by a state legislature to support public schools serving students with vision and hearing impairments is an instrumentality of the state. The organization was controlled by state officials, subject to state financial oversight, and restricted by statute to public and charitable purposes. The IRS concluded that contributions to the organization are deductible, within the applicable limits, as charitable contributions for the use of a state or political subdivision under IRC § 170(c)(1) and § 170(b)(1)(B). The ruling applied the six-factor framework from Rev. Rul. 57-128.

Ruling snapshot

• Question: Is the state-created organization an instrumentality eligible to receive deductible charitable contributions?
• Outcome: Approved
• Key authorities: IRC §§ 170(b)(1)(B), 170(c)(1), and 6110; Rev. Rul. 57-128

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201220005 Third Party Communication: None
Release Date: 5/18/2012 Date of Communication: Not Applicable
Person To Contact:
Index Number: 501.03-26 --------------------, ID No. -----------------
Telephone Number:
-------------------
------------------------------------------------------ Refer Reply To:
--------------------------------------------------------------- CC:TEGE:EOEG:EO
--------------------------------- PLR-115709-11
--------------------------------------------------------------- Date:
---- February 03, 2012

In Re: ----------------------------------------------------

             TY:     -------

Organization = ------------------------------------------------------------
State = -----------
Statute = --------------------------
X = --
Y = ---
Year 1 = -------

Dear -----------------------

    This is in reply to your letter dated March 31, 2011, requesting a ruling on behalf

of Organization. You requested a ruling that Organization is an instrumentality of State
and is eligible to receive charitable contributions under Section 170(c)(1) of the Internal
Revenue Code.

FACTS AND REPRESENTATIONS

   Organization was established in Year 1 by an act of the State legislature; the act

was codified at Statute. With respect to Organization, the Statute provides as follows.

    Organization was established as a public corporation and an “instrumentality of

the state” of State. The purpose of Organization is to support educational excellence in
State; specifically, to support three public schools serving the needs of vision and
hearing impaired students throughout State (the “Specified Public Schools”). Each of
the Specified Public Schools is operated by the State Department of Education (“the
Department”). The creation of Organization and the execution of its purposes are
declared in the statute to be in all respects for the benefit of the people of State and to
constitute a public and charitable purpose.
PLR-115709-11 2

   Statute directs Organization to solicit and accept contributions of money and in-

kind contributions of services and property. Use of such contributions is statutorily
limited; contributions can be used only for the purpose of supporting educational
excellence in State and for the Specified Public Schools in particular, and to make and
disburse contributions to the Department and others for such purposes.

   Each of the Specified Public Schools is operated by the Department to serve the

needs of vision and hearing impaired students throughout State. In addition, if
Organization is dissolved, then its assets shall devolve in trust to the State Board of
Education or its successor for use only for the benefit of the Department and the
Specified Public Schools. Organization is declared in the statute to perform an essential
governmental function in the exercise of the powers conferred upon it.

   Organization is governed by a board of directors composed of between X and Y

members. Organization’s board members are appointed by the State School
Superintendent, an elected official whose office is established by the State Constitution,
and the State Board of Education, a government department also established by the
State Constitution.

   Organization is attached for administrative purposes to the Department, which is

the administrative arm of the State Board of Education. The Attorney General of State is
designated as the attorney for Organization. State exercises oversight of Organization’s
finances through a state accounting department, which has the right to audit
Organization. Further, no disbursements may be made from Organization other than for
promoting educational excellence in State as provided in the Statute.

LAW

   Revenue Ruling 57-128, 1957-1 C.B. 311, sets forth the factors to be taken into

account in determining whether an entity is an instrumentality of one or more
governmental units: (1) whether the organization is used for a governmental purpose
and performs a governmental function; (2) whether performance of its function is on
behalf of one or more states or political subdivisions; (3) whether there are any private
interests involved, or whether the states or political subdivisions have the power and
interests of an owner; (4) whether control and supervision of the organization is vested
in a public authority or authorities; (5) whether express or implied statutory or other
authority is necessary for the creation and/or use of the organization, and whether this
authority exists; and (6) the degree of financial autonomy of the entity and the source of
its operating expenses. Each of these factors must be evaluated in order to determine if
the Association is an instrumentality of the States.

   Section 170(a)(1) allows, subject to certain limitations, a deduction for charitable

contributions as defined in section 170(c), payment of which is made within the taxable
year. Section 170(c)(1) includes in the definition of “charitable contribution” a
PLR-115709-11 3

contribution or gift made for exclusively public purposes to or for the use of a state, a
possession of the United States, a political subdivision of either a state or possession of
the United States, the United States, or the District of Columbia. Entities eligible to
receive tax deductible contributions include not only governmental units described in
section 170(c)(1), but also wholly owned instrumentalities of states and political
subdivisions. See Rev. Rul. 75-359, 1975-2 C.B. 79; Rev. Rul. 79-323, 1979-2 C.B.
106.

    Under section 170(b)(1)(B), deductions for contributions “for the use of”

governmental units described in section 170(c)(1) may not exceed 30 percent of the
taxpayer's “contribution base.” A contribution to an instrumentality of a governmental
unit described in section 170(c)(1) is a contribution “for the use” of such a governmental
unit, rather than a contribution “to” such a governmental unit. See Rev. Rul. 75-359,
1975-2 C.B. 79.

ANALYSIS

   Organization satisfies the first factor listed in Rev. Rul. 57-128, which requires it

to have a governmental purpose and perform a governmental function. The purpose of
Organization is to support education in State, and specifically to support the Specified
Public Schools.

   Organization satisfies the second factor, as it performs its function on behalf of

the State Department of Education. The Department of Education is the administrative
arm of the State Board of Education. The State Board of Education is a government
department established pursuant to the State Constitution. Organization therefore
performs its function on behalf of State.

   Organization satisfies the third factor, because no private interests are involved.

All contributions to Organization are for the purpose of supporting educational
achievement in State and at each of the Specified Public Schools. Upon dissolution of
Organization, its assets will devolve in trust to the State Board of Education.

   Organization satisfies the fourth factor. Organization is governed by a board of

directors. The composition of the board is determined by the State School
Superintendent (an elected official; the position was created by the State Constitution)
and the State Board of Education. Control and supervision of Organization is therefore
vested in a public authority.

    Organization satisfies the fifth factor, because Organization was created by an

act of the State legislature. Statute mandates that the creation of Organization and
execution of its purposes are to be for the benefit of the people of State. Thus, statutory
authority is necessary for the creation and use of Organization.

   Organization satisfies the sixth factor, which considers the source of operating

PLR-115709-11 4

expenses as well as the degree of financial autonomy. Its source of income is
contributions of money, services and property. While Organization is responsible for
soliciting these contributions, the use of contributions received by Organization is
statutorily limited to specific purposes. Organization itself has no discretion to use the
contributions for purposes outside of those authorized by Statute. State indirectly
controls Organization’s finances because State controls Organization’s Board. All Board
members are appointed by the State School Superintendent or the State Board of
Education. Organization is subject to audit by a state accounting department. Upon
dissolution of Organization, the assets of Organization will devolve in trust to State’s
Board of Education. The devolved funds can be used only for the benefit of the
Department of Education.

   Organization satisfies all factors enumerated in Revenue Ruling 57-128 and is an

instrumentality of State for purposes of Section 170(c)(1). Accordingly, contributions
made to Organization are deductible by a donor to the extent provided in section
170(b)(1)(B) as charitable contributions for the use of a state or political subdivision

   Except as expressly provided herein, no opinion is expressed or implied

concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

  This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representative.

  The rulings contained in this letter are based upon information and

representations submitted by the taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. While this office has not verified any of the
material submitted in support of the request for rulings, it is subject to verification on
examination.

Sincerely,

Casey A. Lothamer
Senior Technician Reviewer, Exempt Organizations (Tax Exempt & Government
Entities)

cc: