Free charter-school meal program advances education

Plain-English summary

A section 501(c)(3) organization operated public charter schools and served as a state-certified School Food Authority. It expanded its meal program to help unrelated tax-exempt charter schools satisfy state and federal requirements for free breakfasts and lunches. Participating schools paid no program fee, students received meals at no cost, and government reimbursements and grants covered the expenses. Any surplus had to remain in the meal program, and state and federal agencies closely supervised compliance, procurement, records, and reserves. The IRS found that the program performed an essential function the participating schools could not readily perform themselves and did not compete with commercial providers. It ruled that the program advanced education and therefore furthered an exempt purpose under section 501(c)(3).

Ruling snapshot

• Question: Does serving as the School Food Authority for unrelated tax-exempt charter schools further a section 501(c)(3) purpose?
• Outcome: Approved
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(d)(2); Rev. Ruls. 67-217, 71-529, 72-369, and 76-336

Full text (IRS public release)

 Internal Revenue Service                               Department of the Treasury
                                                        Washington, DC 20224

 Number: 202326008                                      Third Party Communication: None
 Release Date: 6/30/2023                                Date of Communication: Not Applicable
 Index Number: 501.00-00
                                                        Person To Contact:
 -----------------------                                -------------------------, ID No. -----------------
 ----------------------------------                     Telephone Number:
 ------------------------------------                   --------------------
                                                        Refer Reply To:
                                                        CC:EEE:EOET:EO2
                                                        PLR-119330-22
                                                        Date:
                                                        April 5, 2023



LEGEND

 Organization        = -----------------------
 State               = ---------------
 Year 1              = -------
 Year 2              = -------
 Year 3              = -------
 Year 4              = -------
 Year 5              = -------
 Year 6              = -------
 V                   = -----
 W                   = -----
 X                   = ---
 Y                   = ----------
 Z                   = ------------


Dear -----------------------:

This letter ruling responds to a letter from your authorized representatives dated
September 30, 2022 and supplemental documentation dated January 6, 2023 and
February 14, 2023 requesting a ruling under section 501(c)(3) of the Internal Revenue
Code.1

FACTS

Organization is a State nonprofit public benefit corporation recognized as described in
sections 501(c)(3) and 170(b)(1)(A)(ii). Organization’s purpose since inception has been

1 Unless otherwise noted, all section references are to the Internal Revenue Code of 1986, as amended

(the “Code”).
PLR-119330-22                                2


to “manage, operate, guide, direct and promote [State] public charter schools
established by [Organization] and perform and undertake all activities and functions
related to its charter school program in [State].” Organization operates V charter schools
in State. State charter schools are: 1) part of State’s single statewide public school
system; 2) tuition-free and open to all students; 3) operated under the oversight of State
school districts or county boards of education; and 4) operated in accordance with a
charter petition approved by a school district or county for periods of W years, subject to
renewal.

Organization operates its own student meal program for its V schools, including
preparation and delivery of meals, supervision of students, and related services, all
accomplished by Organization staff. Organization has historically participated in the
following federal programs (the “Federal Meal Programs”):

   •   The School Breakfast Program, which reimburses the costs of providing before-
       school breakfasts;
   •   The National School Lunch Program, which reimburses the costs of providing
       school lunches; and
   •   The Child and Adult Care Food Program, which reimburses the costs of providing
       after-school meals.

State charter schools may participate in the Federal Meal Programs only by becoming
certified as a School Food Authority (“SFA”) or by contracting with another SFA—such
as a chartering school district or another charter school certified as an SFA—for the
provision of meals. An SFA must be a public entity (for example, a school district) or an
organization described in section 501(c)(3). SFAs are licensed through the State
Department of Education, which has been delegated authority to administer the Federal
Meal Programs in State and is overseen by the United States Department of Education
and the United States Department of Agriculture. Organization became a State-certified
SFA in Year 1.

Federal law requires SFAs in State to enter into a Permanent Single Agreement (the
“PSA”) with the State Department of Education outlining the SFA’s obligations and the
conditions under which the SFA may participate in the Federal Meal Programs.
Organization’s PSA with the State Department of Education contains provisions
ensuring that Organization’s participation in the Federal Meal Programs complies with
State and federal laws requiring significant State and federal oversight of Organization’s
SFA operations. This oversight includes regular reporting and audit responsibilities and
a requirement that Organization make all facilities, accounts, and records pertaining to
its SFA operations available to the State Department of Education, the United States
Department of Agriculture, and other officials for inspection, audit, and review. State
also reviews, approves, and audits Organization’s vendor procurement process.
Organization’s vendors are unrelated third parties that, with the exception of vending
PLR-119330-22                               3


arrangements with Organization, have no financial relationships with Organization or
persons affiliated with Organization.

The onerous administrative obligations and financial costs of becoming certified and
operating as an SFA prevent many charter schools from becoming SFAs. State
recognizes the burdens associated with becoming an SFA and, to foster greater
efficiency, encourages charter schools to enter into intergovernmental agreements with
existing SFAs for the provision of meals. Intergovernmental agreements contain
provisions required by State’s Department of Education and, to secure State’s approval
of any intergovernmental agreement, the SFA must verify that the participating school is
a public entity or described in section 501(c)(3). An SFA providing Federal Meal
Programs meals to students at non-SFA charter schools by intergovernmental
agreement must annually apply to State on behalf of the non-SFA charter schools to
participate in the SFA.

Beginning with the Year 2-Year 3 school year, all charter schools in State were required
to provide at least one “nutritionally adequate free or reduced-price meal” per day to
their “needy pupils.” The nutritionally adequate meals to be provided must qualify for
federal reimbursement under the Federal Meal Programs. In Year 3, various unaffiliated
State charter schools asked Organization to serve as their SFA. The schools sought
Organization’s assistance because they could not bear the administrative and financial
burdens associated with becoming an SFA and either the schools’ school districts
refused to serve as SFA or charged prohibitively expensive fees to serve as SFA.
Organization amended and restated its articles of incorporation in Year 3 to include the
following purpose:

      Participate in government-funded programs to provide food service to the
      students attending [Organization schools] and other [State] public charter
      schools, including without limitation the U.S. Department of Agriculture’s
      National School Lunch Program and the Child and Adult Care Food
      Program, and any successor programs.

Organization entered into intergovernmental agreements with these schools to serve as
their SFA commencing with the Year 4-Year 5 school year. All charter schools for which
Organization serves as SFA are described in section 501(c)(3).

In Year 4, State enacted a law establishing a universal state meal mandate
commencing with the Year 5-Year 6 school year. This mandate requires all State public
schools, including charter schools, to provide breakfast and lunch daily for any student
requesting these meals, regardless of need and at no cost to the student. State’s
mandate requires the schools to provide meals that qualify for reimbursement under the
Federal Meal Programs, and State reimburses schools for the cost of the meals
provided to students who do not qualify for free or reduced-price meals under the
PLR-119330-22                                4


Federal Meal Programs. A charter school that does not meet this requirement is in
violation of State law and risks revocation of its charter.

As the SFA assisting other charter schools in providing legally required meals to
students (the “SFA Meal Program”), Organization:

   •   Assigns employees at each participating school with responsibility for certain
       compliance requirements and monthly check-ins with Organization;
   •   Requires school staff at each participating school to annually attend at least two
       trainings provided by Organization;
   •   Performs announced and unannounced inspections to assess school needs and
       compliance with the SFA Meal Program at each school; and
   •   Procures and coordinates vendors, performs auditing tasks, submits
       reimbursement requests to State, and periodically furnishes compliance reports
       to State.

Organization does not charge charter schools any fee to participate in the SFA Meal
Program and all SFA Meal Program meals are free to students at participating charter
schools. SFA Meal Program expenses, including staff and administrative costs (for
example, the cost of audits, applications, and training), are paid through State and
federal reimbursements based on the number of meals served. Additional SFA Meal
Program expenses, such as the cost of providing kitchen equipment to schools, are
funded by grants. Participating schools are responsible for ordering the number of
meals they will serve to students, however, taking into account factors like average daily
attendance, and if a school wastes in excess of W percent of the total meals ordered for
the month, the school is responsible for the price charged by vendors for meals wasted
in excess of the W-percent threshold. Organization pays for wasted meals up to W
percent of the total meals ordered for the month. Organization estimates that for the
Year 5-Year 6 school year, X charter schools will participate in the SFA Meal Program,
providing more than Y students with access to two free, nutritionally adequate meals per
day. Organization expects to serve more than Z meals monthly through the SFA Meal
Program.

Organization represents that reimbursements received for providing meals rarely result
in surplus resources. To the extent there is a surplus from the SFA Meal Program,
Organization complies with its PSA and with federal law, which require that any
revenues received from the SFA Meal Program be used only for the operation of the
SFA Meal Program or to improve its operation. Federal law empowers State to ensure
SFAs stay within prescribed limitations on net cash reserves. To enforce these
limitations, State may require Organization to reduce surplus resources by deploying
such surplus in a meal service activity or by distributing the surplus consistent with
Organization’s SFA status.
PLR-119330-22                                5


RULING REQUESTED

Organization’s SFA Meal Program furthers an exempt purpose described in section
501(c)(3).

LAW

Section 501(c)(3) describes organizations organized and operated exclusively for
charitable, educational, and certain other purposes enumerated therein.

Treas. Reg. § 1.501(c)(3)-1(d)(2) provides that the term “charitable” in section 501(c)(3)
is used in its generally accepted legal sense and includes, among other purposes, the
advancement of education.

Rev. Rul. 67-217, 1967-2 C.B. 181, describes a nonprofit organization formed
to provide housing and food service exclusively for students and faculty of a section
501(c)(3) university that lacked adequate student and faculty housing. The organization
built the housing facility near the university and the facility was managed by a
commercial firm in accordance with the rules and regulations of the university. Housing
was made available to the student body generally at rates comparable to those charged
by the university for similar facilities. Each room was equipped with an outlet for the
university-sponsored educational television series and counseling, tutoring, and special
courses were provided as a supplement to the university’s activities. The organization’s
income was derived from rents and charges for food and its expenditures consisted of
operating expenses and debt retirement. Any surplus from operations was annually
donated to the university and the university had an option to purchase the facility at any
time for an amount equal to the outstanding indebtedness. The ruling concluded that by
providing a housing facility under these circumstances the organization advanced
education within the meaning of section 501(c)(3) and Treas. Reg. § 1.501(c)(3)-1(d)(2).

Rev. Rul. 76-336, 1976-2 C.B. 143, describes a nonprofit organization formed by
community leaders to provide student housing for students of an area college that itself
provided no housing because it was financially unable to do so. The community in which
the college was located did not have suitable housing available at a reasonably
affordable rate to meet the needs of the students. All students were eligible to apply for
the housing with applications accepted on a first come, first served basis and rental fees
approximated costs, including debt retirement. The organization was not controlled by
the student-residents or by the college but did consult with the college to ensure the
needs of the college and its students were served by the operation of the housing
facility. The organization’s income was from rental fees and contributions and its
expenditures were for operating expenses and debt retirement. The ruling concluded
that by providing necessary student housing not otherwise available, the organization
was helping the college fulfill its educational purposes and aiding students in attaining
PLR-119330-22                                 6


an education and that those activities advanced education within the meaning of section
501(c)(3) and Treas. Reg. § 1.501(c)(3)-1(d)(2).

Rev. Rul. 72-369, 1972-2 C.B. 245, describes an organization formed to provide
managerial and consulting services on a cost basis for unrelated section 501(c)(3)
organizations to improve the administration of their charitable programs. The
organization’s receipts were from services rendered and its expenditures were for
operating expenses. The ruling concluded that the organization’s activities did not
further a section 501(c)(3) purpose because providing managerial and consulting
services on a regular basis for a fee is a trade or business ordinarily carried on for profit
and the fact that the services were provided at cost and solely for section 501(c)(3)
organizations was insufficient to characterize the activity as charitable within the
meaning of section 501(c)(3).

Rev. Rul. 71-529, 1971-2 C.B. 234, describes a nonprofit organization that managed
and invested the endowment funds of participating colleges and universities.
Membership in the organization was restricted to colleges and universities described in
section 501(c)(3) and the organization charged nominal fees to the participating
universities that were substantially below the organization’s operating costs. The ruling
concluded that by providing this service the organization was performing an essential
function for its section 501(c)(3) members at a charge that was substantially below cost;
thus, the organization was conducting a charitable activity within the meaning of section
501(c)(3).

In B.S.W. Group, Inc. v. Commissioner of Internal Revenue, 70 T.C. 352 (1978), the
Tax Court held that an organization formed to provide consulting services to tax-exempt
organizations and nonprofit organizations (some of which may not be tax-exempt) was
not operated exclusively for section 501(c)(3) purposes. The fact that the organization’s
activity may have constituted a trade or business was not disqualifying, provided the
activity furthered a section 501(c)(3) purpose; rather, “the critical inquiry is whether [the
organization’s] primary purpose for engaging in its sole activity is an exempt purpose, or
whether its primary purpose is the nonexempt one of operating a commercial business
producing net profits . . . .” The court noted the following factors in concluding the
organization’s sole activity constituted the conduct of a consulting business “of the sort
which is ordinarily carried on by commercial ventures organized for profit”: 1) the
organization failed to demonstrate that its services were not in competition with
commercial businesses, and “[c]ompetition with commercial firms is strong evidence of
the predominance of nonexempt commercial purposes”; 2) the organization’s services
were not inherently charitable, educational, or scientific; 3) the organization received no
voluntary contributions from the public and its only source of income was fees for
services; 4) the organization’s fee policy was generally to recoup its costs and to realize
a profit; and 5) the organization’s clientele was not limited to section 501(c)(3)
organizations.
PLR-119330-22                                7


In Airlie Foundation v. Internal Revenue Service, 283 F. Supp. 2d 58 (D.D.C. 2003), the
District Court for the District of Columbia held that an organization that organized,
hosted, conducted, and sponsored educational conferences at its facilities was not
described in section 501(c)(3). The organization derived substantial income from
weddings and special events and competed with commercial and noncommercial
entities which constituted “strong evidence, pursuant to B.S.W. Group, of a commercial
nature and purpose.” The organization also maintained a commercial website and paid
significant advertising and promotional expenses and, like the organization in B.S.W.
Group, the organization’s clientele was not limited to section 501(c)(3) organizations.
Though the organization fully or partially subsidized some of its conferences, the court
found that there was a “distinctive ‘commercial hue’ to the way [the organization] carries
out its business” and that “the nature of its clients and competition, its advertising
expenditures and the substantial revenues derived from weddings and special events
on the premises, strongly suggest that the [Internal Revenue Service] was correct in
revoking the foundation’s tax-exempt status.”

ANALYSIS

Like the organizations in Rev. Rul. 67-217 and Rev. Rul. 76-336, Organization performs
an essential function for participating section 501(c)(3) charter schools by serving as
their SFA and the SFA Meal Program assists participating schools by assuming a
burden these schools have difficulty meeting or in some cases are unable to meet due
to the onerous administrative obligations and financial costs of becoming certified and
operating as an SFA. For the Year 5-Year 6 school year, Organization estimates that X
charter schools will participate in the SFA Meal Program, resulting in two free,
nutritionally adequate meals being made available each day to Y students, while
simultaneously ensuring these charter schools meet the universal state meal mandate
and thus are able to remain open and continue educating students.

Organization provides meals at no cost to students and section 501(c)(3) charter
schools are charged no fees to participate in the SFA Meal Program, though such
schools are responsible for the cost of meals wasted in excess of W percent of the total
meals ordered for the month. Similar to the organization providing investment
management services in Rev. Rul. 71-529, and unlike the organization providing
managerial and consulting services in Rev. Rul. 72-369, to the extent the SFA Meal
Program results in participating schools bearing any cost at all such cost is substantially
below the cost of operating the SFA Meal Program. Cf. B.S.W. Group, Inc., 70 T.C. at
359 (in which the organization’s fee policy was generally to recoup its costs and to
realize a profit).

Organization’s SFA Meal Program operations are, by definition, not “of the sort which is
ordinarily carried on by commercial ventures organized for profit”—like the activities at
issue in B.S.W. Group, Inc. and Airlie Foundation—because the meals provided through
the SFA Meal Program may only be provided by an SFA and an SFA must be a public
PLR-119330-22                                 8


entity or an organization described in section 501(c)(3). B.S.W. Group, Inc., 70 T.C. at

358. This restriction ensures that Organization cannot compete with for-profit firms and
commercial enterprises in conducting the SFA Meal Program. Moreover, Organization
receives no fees for its work in operating the SFA Meal Program and participating
schools are limited to section 501(c)(3) charter schools that are part of State’s single
statewide public school system. Cf. B.S.W. Group, Inc., 70 T.C. at 358, 360 (in which
the organization charged fees intended to recoup costs and realize a profit and clientele
was not limited to section 501(c)(3) organizations); Airlie Foundation, 283 F. Supp. 2d at
65 (in which the organization’s clientele was not limited to section 501(c)(3)
organizations).

Organization’s SFA Meal Program is an outgrowth of charitable activities Organization
historically conducted for the benefit of students at Organization’s V charter schools.
The SFA Meal Program helps participating section 501(c)(3) charter schools fulfill their
educational purposes and aids students in attaining an education by providing free,
nutritionally adequate meals. Through audits, compliance reporting, and other
mechanisms the SFA Meal Program is subject to close scrutiny by the State and federal
governments. Under these circumstances, and by operating the SFA Meal Program for
a charge that is substantially below cost and in a manner that is not of the sort ordinarily
carried on by commercial ventures organized for profit, Organization’s conduct of the
SFA Meal Program advances education within the meaning of Treas. Reg. §
1.501(c)(3)-1(d)(2).

RULING

Organization’s SFA Meal Program furthers an exempt purpose described in section
501(c)(3).

                                            ****

The ruling contained in this letter is based upon information and representations
submitted by or on behalf of Organization and accompanied by penalties of perjury
statements executed by an individual with authority to bind Organization and upon the
understanding that there will be no material changes in the facts. See Rev. Proc. 2023-1
§ 7.01(16), 2023-1 I.R.B. 1; Rev. Proc. 2022-1 § 7.01(16), 2022-1 I.R.B. 1. This office
has not verified any of the material submitted in support of the request for this ruling,
and such material is subject to verification on examination. The Associate Chief
Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes) will
revoke or modify a letter ruling and apply the revocation retroactively if: 1) there has
been a misstatement or omission of controlling facts; 2) the facts at the time of the
transaction are materially different from the controlling facts on which the letter ruling
was based; or 3) the transaction involves a continuing action or series of actions and
the controlling facts change during the course of the transaction. See Rev. Proc. 2023-1
§ 11.05, 2023-1 I.R.B. 1; Rev. Proc. 2022-1 § 11.05, 2022-1 I.R.B. 1.
PLR-119330-22                                  9



This letter does not address the applicability of any section of the Code or Treasury
regulations other than those sections specifically described. Except as expressly
provided herein, no opinion is expressed or implied concerning the federal tax
consequences of any fact or issue discussed or referenced in this letter.

This letter is directed only to Organization. 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 Organization’s authorized representatives.

If you have any questions about this ruling, please contact the person whose name and
telephone number are shown in the heading of this letter.

                                       Sincerely,



                                       Randall Thomas
                                       Senior Counsel
                                       Exempt Organizations Branch 2
                                       (Employee Benefits, Exempt Organizations, and
                                       Employment Taxes)



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