Internal Revenue Service
Revenue Ruling
Rev. Rul. 72-369
1972-2 C.B. 245
Sec. 501
IRS Headnote
An organization formed to provide managerial and consulting services at
cost to unrelated exempt organizations does not qualify for exemption under
section 501(c)(3) of the Code; Revenue Ruling 71-529 distinguished.
Full Text
Rev. Rul. 72-369
Advice has been requested whether an organization that otherwise qualifies
for exemption from Federal income tax under section 501(c)(3) of the
Internal Revenue Code of 1954 is operated for charitable purposes when
engaging in the activities described below.
The organization was formed to provide managerial and consulting services
for nonprofit organizations exempt from Federal income tax under section
501(c)(3) of the Code to improve the administration of their charitable
programs.
The organization enters into agreements with unrelated nonprofit
organizations to furnish managerial and consulting services on a cost
basis. The services consist of writing job descriptions and training
manuals, recruiting personnel, constructing organizational charts, and
advising organizations on specific methods of operation. These activities
are designed for the individual needs of each client organization.
Receipts of the organization are from services rendered. Disbursements are
for operating expenses.
Section 501(c)(3) of the Code provides for the exemption from Federal
income tax of organizations organized and operated exclusively for
charitable or educational purposes.
Section 1.501(c)(3)-1(a) of the Income Tax Regulations provides that in
order to be exempt as an organization described in section 501(c)(3), the
organization must be one that is both organized and operated exclusively
for one or more of the purposes specified in that section. An organization
that fails to meet either the organizational or the operational test is not
exempt.
An organization is not exempt merely because its operations are not
conducted for the purpose of producing a profit. To satisfy the
"operational test" the organization's resources must be devoted to purposes
that qualify as exclusively charitable within the meaning of section
501(c)(3) of the Code and the applicable regulations.
Providing managerial and consulting services on a regular basis for a fee
is trade or business ordinarily carried on for profit. The fact that the
services in this case are provided at cost and solely for exempt
organizations is not sufficient to characterize this activity as charitable
within the meaning of section 501(c)(3) of the Code. Furnishing the
services at cost lacks the donative element necessary to establish this
activity as charitable.
Accordingly, it is held that the organization's activities are not
charitable and therefore the organization does not qualify for exemption
from Federal income tax under section 501(c)(3) of the Code.
This case is distinguishable from the situation where an organization
controlled by a group of exempt organizations and providing investment
management services for a charge substantially less than cost solely to
that group qualifies for exemption from Federal income tax under section
501(c)(3) of the Code. See Rev. Rul. 71-529, C.B. 1971-2, 234.
