Internal Revenue Service
Revenue Ruling
Rev. Rul. 71-529
1971-2 C.B. 234
Sec. 501
Caution: Distinguished by Rev. Rul. 72-369
IRS Headnote
A nonprofit organization that provides assistance in the management of
participating colleges' and universities' endowment or investment funds for
a charge substantially below cost qualifies for exemption under section
501(c)(3) of the Code; Revenue Ruling 69-528 distinguished.
Full Text
Rev. Rul. 71-529
The Internal Revenue Service has been asked whether the nonprofit
organization described below qualifies for exemption from Federal income
tax under section 501(c)(3) of the Internal Revenue Code of 1954.
The organization's governing documents provide that it was formed
exclusively for charitable purposes, specifically, to aid organizations
exempt from Federal income tax under section 501(c)(3) of the Code by
assisting them to manage more effectively their endowment or investment
funds, including the making of arrangements for more effective handling of
their funds, and by obtaining contributions to cover all or part of the
costs of the management of such funds or to provide supplemental income or
capital to be used exclusively for the charitable, educational, or
scientific purposes of such organizations.
The organization receives capital from the participating exempt
organizations, which capital is then placed in one or more common funds in
the custody of various banks. These common funds are controlled and managed
by the organization. The funds are invested upon the advice of independent
investment counsel retained by the organization.
Membership in the organization is restricted to colleges and universities
exempt under section 501(c)(3) of the Code. Its board of directors is
composed of representatives of the member organizations. Each member has
the right to an accounting of its pro rata share of the investment funds
and may withdraw from participation upon thirty days notice. The
organization will not make its services available to anyone other than the
exempt organizations controlling it.
Most of the operating expenses of the organization, including the costs of
the services of the investment counselors and the custodian banks, are paid
for by grants from independent charitable organizations. The member
organizations pay only a nominal fee for the services performed. These fees
represent less than fifteen percent of the total costs of operation.
Section 501(c)(3) of the Code provides for the exemption from Federal
income tax of organizations organized and operated exclusively for
charitable purposes.
By providing the service described above to its members, the organization
is performing an essential function for charitable organizations. By
performing this function for the organizations for a charge that is
substantially below cost, the organization is performing a charitable
activity within the meaning of section 501(c)(3) of the Code.
Accordingly, it is held that the organization qualifies for exemption from
Federal income tax under section 501(c)(3) of the Code.
The facts in this case are distinguishable from those in Revenue Ruling
69-528, C.B. 1969-2, 127. In Revenue Ruling 69-528 the facts indicated that
the organization was primarily engaged in carrying on an investment
management business for charitable organizations on a fee basis free from
control of the participants.
Even though an organization considers itself within the scope of this
Revenue Ruling, it must file an application on Form 1023, Exemption
Application, in order to be recognized by the Service as exempt under
section 501(c)(3) of the Code. The application should be filed with the
District Director of Internal Revenue for the district in which is located
the principal place of business or principal office of the organization.
See section 1.501(a)-1 of the Income Tax Regulations.
