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Part 4. Examining Process

Chapter 76. Exempt Organizations Examination Guidelines

Section 8. Private and Charter Schools

4.76.8  Private and Charter Schools

4.76.8.1  (07-01-2003)
Private and Charter Schools Introduction

  1. This IRM section contains specific information regarding the examination of private and Charter schools organized and recognized exempt as an organization described in IRC §§ 501(c)(3), 509(a)(1) and 170(b)(1)(A)(ii). It provides examination techniques effective in identifying and developing issues commonly encountered during an examination.

  2. These guidelines provide specific procedures and assistance for the examination of a school and are not all-inclusive.

  3. This IRM does not contain detailed technical information regarding schools and other educational organizations. The examiner should review the technical information contained in IRM Part 7.25.3. (See IRM 4.76.7 for churches or church related schools.)

4.76.8.2  (07-01-2003)
Private Schools Defined

  1. Schools provide the classic form of individual instruction. For IRC § 501(c)(3) purposes, a school includes:

    1. Primary or secondary school

    2. College

    3. Professional or trade school

  2. A school is described in IRC § 170(b)(1)(A)(ii) as an educational organization which 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.

4.76.8.2.1  (07-01-2003)
Church Related Private Schools

  1. IRC § 7611 places restrictions on church tax inquiries and examination procedures conducted by the Internal Revenue Service (IRS) with regard to private schools operated as an activity of a church or convention or association of churches or which claim to be a church. IRC § 7611 procedures do not apply to a separately organized or incorporated church-related school that does not claim to be a church or convention or association of churches. If the school claims to be a church follow the procedures contained in IRM 4.76.7.16.

4.76.8.3  (07-01-2003)
Private Schools Racial Nondiscrimination Policy

  1. A private school must adopt and operate by a racially nondiscriminatory policy as to students, as required for exemption under IRC § 501(c)(3), as set out in Rev. Rul. 71-447, 1971-2 C.B. 230, and in the manner required by Rev. Proc. 75-50, 1975-2 C.B. 587.

    1. In Bob Jones University v. United States, 461 U.S. 574, 591 (1983), the Supreme Court of the United States upheld the Service’s interpretation of IRC § 501(c)(3) as set forth in Rev. Rul. 71-447. The Court also upheld the scope and exercise of the Service’s authority to deny tax exemption to racially discriminatory schools.

  2. In examining a private school to determine if it has affirmatively adopted a policy of racial nondiscrimination as to students and operates in good faith furtherance of the policy, an examiner must use professional judgment concerning the depth and scope needed to make and support the conclusion.

  3. To avoid duplication and reduce taxpayer burdens, examiners should consider facts developed by other government agencies that have made determinations whether a school is discriminatory. For example, most government grants, loans, or contracts require the school to be racially nondiscriminatory within the meaning of Rev. Rul. 71-447. Examiners should not, however, merely rely on another government agency’s conclusion. Rather, he or she should use the facts obtained by the other agency to make an independent determination.

  4. To continue to qualify for recognition of exemption under IRC § 501(c)(3), a private school must establish not only that it adopted a racially nondiscriminatory policy as to students and that it has published its policy in the manner prescribed by Rev. Proc. 75-50, 1975-2 C.B. 586, but that its actual operations are in good faith furtherance of the stated policy. The ultimate test for racially nondiscriminatory operations is equal availability to all racial and ethnic groups. The most conclusive fact would be attendance by a substantial number and variety of minority students. Absent that fact, the determination can only be made by considering the facts and circumstances of the school‘s operations.

  5. If a private school has a history of racial discrimination and few or no minority students, mere adoption and publication of a racially nondiscriminatory policy will not meet the requirements for good faith operation. Rather, such a school must provide clear and convincing evidence that it no longer discriminates on the basis of race, along with persuasive evidence that the absence of minority enrollment is not attributable to a continuation of the school’s past policies.

  6. A rebuttable inference that a private school has a history of racial discrimination is established by any one of the following factors, though the weight given the inference, and the corresponding evidence required to clearly and convincingly rebut it, requires consideration of all the facts and circumstances:

    1. The school has been judged racially discriminatory in judicial or administrative proceedings;

    2. The school was established or expanded at the time of local public school desegregation (either following court order or voluntary plan).

    3. The school previously operated with racially discriminatory policies as to students; or

    4. The school has refused to adopt a racially nondiscriminatory policy as to students.

  7. The determination whether a private school has rebutted the inference that its policies are racially discriminatory is inherently factual. Facts relevant to this determination may include, but are not limited to:

    1. Active and vigorous recruitment of minority students and teachers;

    2. Financial assistance to minority students;

    3. Effective communication, including publication, of a racially nondiscriminatory policy to the minority population;

    4. Actual contact with the minority community; and

    5. Public repudiation of previous actions or statements inconsistent with a racially nondiscriminatory policy by the organization or anyone who would appear to speak or act on its behalf.

  8. Rev. Proc. 75-50 requires schools to keep certain records and establishes guidelines for determining if the requirement of racially nondiscriminatory operations announced in Rev. Rul. 71-447 and confirmed in Rev. Rul. 75-231, 1975-1 C.B. 158 have been met.

    1. The guidelines make it clear that the Service will use thorough field examinations to insure genuine compliance with all aspects of the racially nondiscriminatory requirement.

    2. Examiners should develop enough facts about a school’s operations to determine if it operates in good faith furtherance of a racially nondiscriminatory policy as to students.

4.76.8.4  (07-01-2003)
Private Schools Reference Materials

  1. Reference materials that may be useful in examining a private school include:

    1. Compliance Report of Institutions of Higher Education. This report is required by the Office for Civil Rights of the Department of Education from colleges and universities that receive, are applicants for, or expect to be applicants for federal financial assistance. A copy of this report, which contains racial and ethnic enrollment data, should be available at the college.

    2. Assurance of Compliance with Title VI of the Civil Rights Act of 1964. This is a form educational institutions must file with the Office for Civil Rights of the Department of Education to receive federal assistance. If the organization was required to file, it should have a copy. The examiner should review the form and verify the information on it during the examination. If the school does not have a copy of the form it filed, one can be obtained by writing the Department of Education, Office for Civil Rights, 400 Maryland Avenue, Washington, D.C. 20202.

  2. Rev. Rul. 71-447, 1971-2 C.B. 230 holds that a private school that does not have a racially nondiscriminatory policy as to students does not qualify for exemption. A "racially nondiscriminatory policy as to students " is defined as "a school that admits and grants students of any race to all rights, privileges, access to all programs and activities generally afforded or made available to students at that school" . Also, the school does not discriminate by race in administration of its educational policies, admissions policies, scholarship and loan programs, and athletic and other school-administered programs.

  3. Rev. Rul. 75-231, 1985-1 C.B. 158, holds that organizations, including churches that operate schools with a policy of refusing to accept children from certain racial and ethnic groups will not be recognized as tax-exempt charities under IRC §§ 170 and 501(c)(3).

  4. Rev. Proc. 75-50, 1975-2 C.B. 587, sets forth guidelines and recordkeeping requirements for determining if private schools that are applying for recognition of exemption under IRC § 501(c)(3), or are currently recognized exempt, have a racially nondiscriminatory policy as to students.

  5. Announcement 76-57, 76-16 I.R.B. 24, clarified that the initial annual certification of racially nondiscriminatory operations required by section 4.06 of Rev. Proc. 75-50 must cover the period ending with the school’s first calendar or fiscal year beginning after December 31, 1975.

  6. The restrictions on church tax inquiries and examinations apply to any school operated as an activity of a church or a convention or association of churches. They do not apply to a separately organized or incorporated church-related school that does not claim to be a church or a convention or association of churches. See IRM 4.76.7.16 for requirements for a church related private school.

  7. The Family Educational Rights and Privacy Act of 1974, 20 U.S.C. (1974), which is cited in section 7.02-2 of Rev. Proc. 75-50, restricts an examiner’s access to certain student educational records kept by a school. The Act prohibits a school from releasing personally identifiable information in its educational records to anyone except the affected students or their parents unless the student’s parents give advance written consent, or the release is made to comply with a court order or lawfully issued subpoena, and advance notice of each release is given to the affected student and his or her parents. A school that violates these provisions can become ineligible for certain federal aid. Thus, examiners should take care to observe the Act’s restrictions. The Family Educational Rights and Privacy Act of 1974 does not apply to:

    1. "Directory information" , defined as the student’s name, address, telephone listing, date and place of birth, major field of study, participation in officially recognized activities and sports, weight and height of members of athletic teams, dates of attendance, degrees and awards received, and the most recent previous educational agency or institution attended by the student;

    2. Data assembled by group, or otherwise limited to information that is not personally identifiable. Thus, the Act does not prohibit release of statistics that do not identify individuals, even though the school may collect the information from individual records;

    3. Records otherwise restricted by the Act if all personal identifying information (names, social security number, address, etc.) is deleted;

    4. Any information about persons who have never attended the school. Thus, an examiner can request information about unsuccessful applicants; and

    5. Personal identification information of the kind contained in school records that are obtained independently from sources other than the school.

4.76.8.5  (07-01-2003)
Private Schools Legal Decisions

  1. Following are legal decisions that have considered whether private schools are discriminatory. (See also, Part 7, Rulings and Agreements)

    1. Bob Jones University v. United States, 461 U.S. 574 (1983); in which the Supreme Court upheld the scope and exercise of the Service’s authority to deny tax exempt status to private schools maintaining a racially discriminatory policy. The Court held that the school, which prescribes and enforces racially discriminatory standards by religious doctrine, does not qualify for exemption under IRC § 501(c)(3). The Court held that racially discriminatory private schools violate a fundamental public policy and cannot be viewed as conferring a public benefit within the common law standards of charity and congressional intent underlying IRC § 501(c)(3).

    2. Runyon v. McCrary, 427 U.S. 160 (1970), in which the Supreme Court held that a private, commercial, non-sectarian school violated the 1866 Civil Rights Act by refusing to admit black students.

    3. Prince Edward School Foundation v. United States, 478 F.Supp. 107 (D.D.C. 1979), Aff’d by unpublished order No. 79-1622 (D.C. Cir. June 30, 1980), cert. denied 750 U.S. 944 (1981), which sustained revocation of Prince Edward School Foundation based on its racially discriminatory policy.

    4. Norwood v. Harrison, 382 F.Supp. 921 (N.D. Miss. 1974), which concerned the eligibility of certain private schools in Mississippi to receive state-owned textbooks, discusses various facts and circumstances relevant to determining if a private school is racially discriminatory. Similar criteria was applied in Brumfield v. Dodd, 425 F.Supp. 528 (E.D. La. 1976), which considered the eligibility of certain Louisiana private schools for State aid..

    5. Green v. Connally, 330 F.Supp. 850 (D.D.C. 1971), aff’d per curiam sub nom. Coit v. Green, 404 U.S. 997 (1971), held that neither IRC § 501(c)(3) nor IRC § 170 provide for tax-exempt status or deductible contributions to any organization operating a private school that discriminates in admissions based on race. The court permanently enjoined the Service from recognizing exemption or allowing deductions for contributions to any organization operating a private school in Mississippi that failed to adopt, publish, and operate under a racially nondiscriminatory policy as to students and that failed to supply the Service with certain information to ensure nondiscriminatory operation

  2. . On May 5 and June 2, 1980, the court modified and supplemented the permanent injunction originally issued in 1971 requiring the Service to survey Mississippi private schools, including church-related schools, and apply to them a test that, if failed, results in a rebuttable inference of racial discrimination. The modified order precluded the Service from allowing or continuing exempt status of Mississippi private schools or organizations that operate schools that :

    1. Have been determined in adversary or administrative proceedings to be racially discriminatory; or were established or expanded at or about the time the public school districts where they are located or that they serve were desegregating, and

    2. Cannot demonstrate that they do not racially discriminate in admissions, employment, scholarships, loan programs, athletics, or extra-curricular programs.

  3. The existence of any conditions, previously discussed, raising an inference of present discrimination against African-Americans, can be overcome by evidence that clearly and convincingly reveals objective acts and declarations establishing that such is not proximately caused by the school’s policies and practices. Evidence might include, but is not limited to:

    1. Proof of active and vigorous recruitment programs to secure African-American students and teachers, including students’ grants-in-aid; or proof of continued, meaningful communication between the school and African-American groups and leaders in the community about the school’s nondiscriminatory policies; and

    2. Any other similar evidence showing that the school and all its facilities and programs are in fact open to students and teachers of all races on the same standard of admission or employment.

4.76.8.6  (07-01-2003)
Private Schools Examination Guidelines

  1. These guidelines are to help determine if a private school has adopted and operates by a racially nondiscriminatory policy as to students. The scope of the examination is dependent upon the facts and circumstances and the extent in which the school currently enrolls a meaningful number of minority students.

  2. On any examination of a private school, the examiner must complete Form 5788, Private School Checksheet, to ensure the examiner has made all of the required checks and secured all required information.

  3. Request the following information and documents in the initial contact letter be made available at the initial interview:

    1. Current brochures, catalogues, and any other written advertisements dealing with student admissions, programs, and scholarships.

    2. Blank application forms for employment, student admissions, scholarships, loans, or any other financial aid.

    3. Documentation of how the racially nondiscriminatory policy has been publicized and a copy of the advertisement to ensure size, location, etc.

    4. Statistical data on the racial and ethnic composition of students and staff.

    5. Correspondence files relating to fund solicitations, contributions received, acceptance and rejection of students, and denial or approval of scholarships, loans, or other student aid.

    6. Schedule for tuition and fees.

    7. If the school receives federal funds, obtain a copy of the Assurance of Compliance under Title VI required by the Office for Civil Rights of the Department of Education and any other applications or agreements concerning federal aid from, through, or under the Veterans Administration, Department of Health and Human Services, National Defense Education Act, National Science Foundation, or the Food and Nutrition Service of the Department of Agriculture (for example, Department of Agriculture Form 67, relating to the national school lunch program.)

    8. Copies of reports issued by any other government agency that investigated or audited the school’s compliance with any Federal, State, or local law requiring racially nondiscriminatory operations. If the school claims to have been investigated or audited by another government agency but does not have a copy of the report, ask the school to help obtain a copy of the report and relevant background information.

  4. Review all items above to the extent needed to determine if the school operates on a racially nondiscriminatory basis and that it otherwise qualifies for exemption. Request documentation to support conclusions.

  5. Review enabling documents and bylaws to determine if the school has adopted a racially nondiscriminatory policy as to students. Such action must be affirmatively shown by a statement in the school’s charter, bylaws, or other governing instrument, or by a resolution of its governing body. (Rev. Proc. 75-50, section 4.01.)

  6. Review meeting minutes of the Board of Directors and other committees for any statements or actions that show whether the school complies in good faith with its racially nondiscriminatory policies or activities.

  7. Identify when the school was formed and when any significant changes occurred in the size and racial composition of the student body. Compare these dates to the dates of local public school desegregation, either court-ordered or voluntary. Contact the local school board or state department of education, if necessary, for information on public school desegregation orders or voluntary plans, including the dates of actions and the relevant minority groups in the area.

  8. Determine if the school has made any special efforts to disseminate application forms, brochures, or information about the school’s scholarship programs or other programs, and its racially nondiscriminatory policy.

  9. Review Board minutes from two or three prior years to learn how the school actually carries out its policies and programs.

  10. Determine the effect of any changes in the enabling documents, bylaws, resolutions, admissions policy, tuition rate, recruitment practices, employment policies, property holdings or scholarship, loans or financial aid programs and standards regarding the implementation of the school’s nondiscriminatory policy.

  11. Obtain sources of information that can show if the school operates in good faith compliance with its racially nondiscriminatory policy, or conversely, if despite its stated policy of nondiscrimination, it explicitly or tacitly discourages any minority groups from attending or takes actions to make any minority groups feel unwelcome, including school correspondence files and publicity scrapbooks. For example;

    1. News releases or news articles. in addition to direct references to the school’s racially nondiscriminatory policy and practices;

    2. Articles about the school’s efforts to promote its racially nondiscriminatory policy and to recruit students from racial and ethnic minority groups.

    3. References to athletic, or extra-curricular activities with other discriminatory or nondiscriminatory organizations, or any reference to seminars or speeches at the school by minority group leaders;

    4. Newspapers, yearbooks and other student publications. Determine if the school has made its racially nondiscriminatory policy known to all segments of the community it serves.

  12. If the school uses newspaper notices for this purpose, determine if it published the notices in a newspaper of general circulation that serves all racial segments of the community (see section 4.03 of Rev. Proc. 75-50), and determine whether:

    1. The notice meets the format type and size requirements;

    2. The notice includes the approved statement identified in Rev. Proc. 75-50 or other acceptable statement; and

    3. The publication was made on an annual basis during the registration period or student solicitation period.

  13. If the school publicized its racially nondiscriminatory policy by broadcast media, review copies of tapes, transcripts, or records showing the number, duration, and time periods the policy statement was broadcast to determine if it was effectively communicated to all segments of the general community served by the school.

    1. Determine if the notice was broadcast during the school’s registration period(s), or student solicitation period(s).

    2. Determine if the broadcast announcement used a language reasonably equivalent to the language in the suggested newspaper statement set forth in section 4.03(a) of Rev. Proc. 75-50.

  14. If a school has failed to publish or broadcast its racially nondiscriminatory policy, determine if it meets the exceptions in section 4.032 of Rev. Proc. 75-50.

  15. Determine if the school has communicated its racially nondiscriminatory policy statement directly to leaders of minority groups. This alone is not considered effective publicity, but if the school does it in addition to meeting the newspaper or broadcast publicity requirements of Rev. Proc. 75-50, it would suggest good faith compliance to a nondiscriminatory policy.

  16. Determine if the school has included the required statement of its racially nondiscriminatory policy in all its brochures and catalogues dealing with student admissions, programs, and scholarships. The following statement is acceptable:

    1. "The M School admits students of any race, color, and national or ethnic origin to all the rights, privileges, programs, and activities generally accorded or made available to students at the school. It does not discriminate by race, color, national or ethnic origin in administration of its educational policies, scholarship and loan programs, and athletic and other school-administered programs"

  17. Verify whether the school has made the mandatory reference to its racially nondiscriminatory policy in other written advertising it uses to inform prospective students of its programs.

  18. Determine if the school has publicly disavowed or repudiated any statements purported to have been made on its behalf, after November 6,1975, that contradict its current stated policy of racial nondiscrimination to the extent that the school or its principal officials were aware of such statements. (See section 4.03-2, Rev. Proc. 75-50.)

  19. It may be useful to interview community members, such as leaders of minority groups and members of the public school board, about their perception of the school’s admission policies. Any "investigative disclosure" is authorized by IRC section 6103(k)(6) and Treasury Regulation 301.6103(k)(6)-1. (See Part 11, Communications and Disclosure.)

  20. Verify that the organization has executed all annual certifications required by section 4.06 of Rev. Proc. 75-50 as a part of any required Form 990, or if the organization is not required to file Form 990, by Form 5578, Annual Certification of Racial Nondiscrimination for a Private School Exempt from Federal Income Tax.

  21. Determine if the school has satisfied the recordkeeping requirements of Rev. Proc. 75-50, such as, independent records or copies of reports filed with any Federal, State, or local government agency that:

    1. Show the racial composition of the student body, faculty, and administrative staff for each academic year. (The racial composition may be an estimate based on the best information available without requiring student applicants, students, faculty or administrative staff to submit information that the school otherwise does not require.)

    2. Document that scholarships and financial assistance are awarded on a racially nondiscriminatory basis.

  22. Agencies requiring the above racial composition information may be State Boards of Education, City or County School Districts, Equal Employment Opportunity Commission, Department of Labor Office of Federal Contract Compliance, Office for Civil Rights of the Department of Education, Federal or State Courts, Department of Veterans Affairs, or the Food and Nutrition Service of the Department of Agriculture.

  23. Verify that the school retains copies of all:

    1. Fund solicitations as required by section 7.01 of Rev. Proc. 75-50. Check class photographs on school walls or in student yearbooks for evidence of racial and ethnic composition of students.

    2. Brochures, catalogues and advertisements dealing with student admissions, programs and scholarships as required by section 7.01 of Rev. Proc. 75-50.

  24. Review the school’s racial nondiscriminatory policies and practices in recruiting and admitting students. Determine if the school:

    1. Regularly recruits minority students;

    2. Confines any promotion or recruitment efforts to students of one or more minority group.

      Note:

      If possible, review records of rejected and accepted applicants to compare the racial composition of the rejected applicants to the racial composition of those accepted.

    3. Adjusts its admission standards in an effort to increase minority enrollment. (Schools that favor racial minority groups in admissions, financial aid, or facilities and programs are not discriminating by race if the purpose is to promote the establishment and maintenance of the school’s racially nondiscriminatory policy);

    4. Tuition is beyond the practical reach of all or nearly all of the families in a particular racial or ethnic group;

    5. Board of Directors must review some or all applications for admission and document the reasons review is required;

    6. Parents must appear at the school or elsewhere to apply or register. If so, determine if this is a subtle means to identify and block minority applicants.

  25. Identify any enrollment limits the school has set, and determine how they were set and how they have been enforced. Determine the circumstances of any exceptions the school has made to enrollment limits.

  26. Review the school’s practices for waiting lists. Determine if applicants are accepted out of sequence and if so, why.

  27. Determine whether cash deposits are required at time of registration or application for registration, whether all applicants are required to pay the same amount, and whether deposits are refundable.

  28. Follow up any leads tending to show either presence or absence of discrimination as to students and document any information obtained. Compare the school’s racial mix with other private schools in the same general area and determine the reasons for any notable disparities.

  29. Review the student application form for any evidence of a racially discriminatory admissions policy. Determine whether the application requires a photo or information about race.

  30. Determine if the school has adequately publicized its registration period and whether it allows advance registration or other priority for children of founders, contributors, or the like. If the school allows any advance registration, determine if this significantly reduces the spaces available during the "official" registration period.

  31. Determine if the school asserts religious tenets to reject applicants from certain racial or ethnic groups, or to prohibit or restrict interracial relationships among students

  32. Determine if the school operates any facilities or programs, such as cafeterias, athletic events, community events (i.e. parades and marching band demonstrations), adult evening classes, or any other extracurricular activities in a racially discriminatory manner.

  33. Determine if the school has invited any racial and ethnic groups or leaders to attend or participate in any of the school’s activities and, if not, the reasons.

  34. Determine if the school restricts extracurricular activities, including athletics, to public or private schools that have no students from racial or ethnic minority groups.

  35. If the school allows outside groups, for example, community associations or athletic leagues, to use its facilities during non school hours, determine the criteria for granting permission. Identify the reasons any groups have been refused permission to use school facilities.

  36. Review the school’s faculty and staff hiring policies and practices to determine if they are racially nondiscriminatory.

    1. Determine the racial and ethnic composition of the faculty, staff, and administrators. Review student yearbooks for evidence of racial and ethnic composition of faculty, staff, and administrators.

    2. Review employment applications and related correspondence and determine if rejections are based on racial and ethnic reasons. Determine whether the application form calls for a picture or information as to race.

    3. Determine whether standards for employment are higher for minorities.

    4. Determine if compensation is a factor of race.

    5. Determine if the school actively recruits faculty and staff. If so, determine if it recruits only among one or more specific racial or ethnic groups. If the school concentrates its recruiting at specific colleges or universities, determine if it recruits at any predominately black colleges or universities. If not, determine if there are any predominately black institutions within the same distance from the school as the colleges or universities where it does recruit.

    6. If the school hires through private agencies, determine if the agencies recruit on a racially nondiscriminatory basis.

    7. If the school has no minority employees, determine the reasons why.

  37. Determine if the school awards grants of financial aid on a nondiscriminatory basis, whether it publicizes the availability of aid throughout the general community it serves, and whether any preferential aid it gives to the members of one or more racial groups is of a kind or amount that does not significantly derogate from the school’s racially nondiscriminatory policy. (See section 4.05 of Rev. Proc. 75-50).

    1. Review all applicable requirements for each form of financial aid and obtain sample application forms.

    2. Identify the aggregate number and the amount of all scholarships and loans awarded to each racial or ethnic group for the year(s) under examination.

    3. Determine if the school announces the availability of financial aid on a nondiscriminatory basis in catalogues, brochures, published newspaper notices, broadcast media notices, or other written advertisements. (Student aid in the form of free housing, books, or failure to enforce tuition debts is considered financial aid for this purpose.)

    4. Review the school’s policy on collecting bad debts to determine if a lax policy is used as an indirect financial aid. If so, determine who benefits from the lax policy.

    5. Determine if independent sources provide tuition assistance to students. For example, foundations or funds in the area may provide financial assistance. If so, determine if the assistance furthers or hinders a racially nondiscriminatory policy.

  38. One of the contentions of private schools is that they offer an alternative to parents who think public schools are substandard. Therefore, inquiries should be made into the stated purposes of these private schools. For example, what organizations the school is a member of, and whether the:

    1. School is accredited and, if so, by what organization;

    2. Organization espouses a policy of racial segregation;

    3. Organizations consist of all or nearly all member schools who have a common feature of having no students from racial or ethnic minority groups;

    4. Organization provides prospective employment lists or job referral services for their members and whether the recruitment or referral system is racially nondiscriminatory, and

    5. Organization is associated with, or work with local or state governmental agencies.

  39. If state or local government rent or provide free textbooks, determine if

    1. The school participates in the program. If not, find out why and to what extent textbooks used by the school differs from those available from governmental sources;

    2. The school participates in any other federal, state or local government assistance program available to it and, if not, why not;

    3. Any of the school’s applications for federal, state or local government assistance have been rejected.

    4. State certification is required for state textbook assistance.

  40. Determine if the school has any diversity awareness training or similar programs to prepare current students and staff for minorities in the future. Also, determine if the school has taken any special steps to prevent harassment of minority students who enroll, or attempt to enroll in the school, or if it has made efforts to help minority students adjust to their new environment. If there have been instances of racial harassment at the school, determine what disciplinary or other steps school officials have taken to prevent reoccurrence.

  41. Determine if any contributions (such as land, buildings or other property) were made to the school subject to covenants or other conditions by restricting their use by certain racial or ethnic groups. If so, determine if the conditions prevent the school from operating in furtherance of a racially nondiscriminatory policy. Also determine if based on the facts and circumstances surrounding the contribution warrant a referral to Large & Mid-size Business (LMSB) , to consider if a deduction for the gift should be disallowed.

  42. Inspect all documentation of any gift or bargain sale transactions previously made by any individual or organization of an asset used for racially discriminatory purposes. Determine if the gift or bargain sale was made to foster a racially discriminatory policy.

4.76.8.7  (07-01-2003)
Corrective Action on Private School Cases

  1. A school must comply with the requirements of Rev. Proc. 75-50 in order to demonstrate that it has a racially nondiscriminatory admissions policy. The notice requirements under Rev. Proc. 75-50 will not apply if:

    1. The school is church-related and in the preceding three years at least 75 percent of the students are members of the sponsoring religious denomination;

    2. A substantial portion of the students are from a large geographic area;

    3. The school currently enrolls a meaningful number of minority students or promotional and recruiting activities were reasonably designed to inform minority students in the area of the availability of the school.

  2. The Service’s approach is, and has been, to avoid applying rules mechanically in an area that requires careful judgment of all facts and circumstances. Thus, if the history of a school and the surrounding facts and circumstances indicate the school has a racially nondiscriminatory admissions policy, revocation of such school’s exemption on the basis that a particular requirement of Rev. Proc. 75-50 has not been met may be inappropriate. Rather, the appropriate action may be to give the school an opportunity to take corrective action to conform to the particular requirement of Rev. Proc. 75-50.

    Example:

    If information obtained in a private school examination demonstrated the school, by reason of its racial constituency or other facts, practices a racially nondiscriminatory admissions policy, and the school has satisfied all the requirements of Rev. Proc. 75-50 except that its brochures do not contain a statement concerning its racially nondiscriminatory admission policy, the appropriate action would be to have the school revise the brochures to include the racially nondiscriminatory statement.

  3. For all cases in which a private school has agreed to take corrective action to conform to the private school compliance requirements of Rev. Proc. 75-50, the examiner will prepare a no-change advisory letter, which advises the organization of the nature of the corrective action that it has agreed to take. In such instances, the examiner will prepare Form 5666, EO Information Report, for follow-up action within the year following the year of the examination.

  4. Follow-up action is mandatory on all cases involving corrective action. The follow-up action may be an examination, if warranted, or it may simply involve contacting the private school and soliciting certain information. For example, if the corrective action is similar to that described in above, in which the private school has given assurances that future brochures will contain a statement concerning its racially nondiscriminatory admissions policy, contacting the private school and securing the brochures may be adequate.

  5. Section 4.08 of Rev. Proc. 75-50 provides that failure to comply with the guidelines will ordinarily result in proposed revocation of exemption. Therefore, if a school will not agree to take corrective action necessary to comply with the guidelines, the examiner should consider proposing adverse action. However, if the examiner is in doubt of what the appropriate actions should be, he/she should request technical advice.

  6. Corrective action approach is not intended to be used where revocation action is appropriate. Corrective action is applicable only if all the facts and circumstances indicate the school practices a racially nondiscriminatory policy with respect to students, notwithstanding that a particular requirement of Rev. Proc. 75-50 may not have been met. However, if the facts and circumstances adequately show a school has actually practiced racial discrimination, the examiner should propose revocation of the school’s exempt status, even though the school may agree to change its policy and practice in the future.

    Example:

    If the examiner determines a school has in fact rejected qualified applicants for admission solely on the basis of their racial or ethnic background, he/she should propose revocation of exempt status for those years in which the violations occurred. If the private school’s exemption is revoked, it may of course reapply for recognition of exemption after if has taken the necessary corrective action.

  7. The United States District Court for the District of Columbia has ordered specific guidelines and recordkeeping requirements for Mississippi private schools. Green v. Connally, 330 F. Supp. 1150, aff’d sub non. Coit V. Green, 404 U.S. 997 (1971). The corrective action approach is not appropriate if a Mississippi private school has not complied with the requirements of the Court’s order. If the examiner determines that the school has not satisfied the requirements of the Court’s order, he/she should propose revocation of the school’s exempt status.

4.76.8.8  (07-01-2003)
Charter Schools

  1. Created by state law, charter schools are an example of a public/private partnership designed to enhance educational opportunities for public school students. State charter school laws and policies vary widely. There are differences with respect to the number of schools that may be established and the degree of autonomy they are permitted to exercise. Requirements for charter school applicants and teachers as well as accountability criteria that charter schools must meet also vary from state to state. Charter schools do not charge tuition and are, for the most part, open enrollment, nondiscriminatory, nonsectarian educational institutions. They are funded primarily by per-pupil allocations from the chartering agency (usually the public school district) equal to the per-pupil allocations made to the public schools.

  2. Charter schools are considered public schools. What is different is that charter schools generally are not operated directly by the public school district but under a separate charter, a contract with a state or local agency that provides them with public funds. The charter sets forth essential conditions for which the school will be held accountable but leaves the implementation of these terms to the charter school's board of directors. This frees the charter school from a number of regulations that otherwise apply to public schools and leaves room for innovation and experimentation. There are several different operational models for charter schools. In some states, these schools are under the direct control of the school district. The school district contracts directly for management and educational services. Some states require a separate entity to run the school. For-profit as well as non-profit entities may be eligible to apply for a charter. State law may or may not require that the chartering organization be tax exempt under IRC 501(c)(3).

4.76.8.8.1  (07-01-2003)
Charter Schools Exempt Status

  1. The primary concern regarding charter schools is whether they are operated for exclusively charitable purposes and do not operate for the benefit of private management companies and service providers.

  2. For-profit businesses operating charter schools are not eligible for exemption under IRC 501(c)(3). If the public school district is an integral part of the municipal government, the public school and any charter school it operates will not qualify for exemption under IRC 501(c)(3), as it has no separate existence from the municipal government. Charter schools claiming to be instrumentalities under IRC § 115 should request a private letter ruling from Rulings and Agreements. The income of a municipal government is exempt from federal income tax under the theory of implied intergovernmental immunity. If the school district is separately organized and satisfies the requirements of Rev. Rul. 60-384, 1960-2 C.B. 172, the district may be recognized under IRC 501(c)(3) provided it otherwise meets the requirements for exemption.

  3. Organizations, whether for-profit or non-profit, operating schools under a charter agreement, may have little or no experience in managing or establishing a school and often contract for a myriad of services including, among others, curriculum design, financial management, office management, and special education services. Comprehensive school management companies are a growing presence in the educational sector and offer a complete program of both management and educational services. For a charter school to establish exemption under IRC § 501(c)(3), whether it contracts out some or all of the services required to operate, it must establish that it is organized and operated for exclusively charitable purposes and not for the benefit of private management companies and/or for service providers.

  4. When examining a charter school that has contracted with for-profit entities for management services, the examiner should determine whether the charter school board remains in control and continues to exercise its fiduciary responsibility to the school. The board may not delegate its responsibility and ultimate accountability for the school's operations to a for-profit management company without raising the issue of whether the organization is operating for the private benefit of that company.

4.76.8.8.2  (07-01-2003)
Charter School Examination Guidelines

  1. The following highlights some of the factors the examiner should consider when examining a charter school and discusses the concerns regarding independence of the board of directors and the arms-length negotiation of contracts.

  2. Determine if an Independent Board of Directors governs the charter school. A charter school board of directors composed of parents, teachers and community leaders provides structural independence. A board appointed or dominated by a comprehensive management company raises questions as to whether the school will be operated for the benefit of the management company. The examiner should determine whether a structurally independent board is involved in active oversight of the school's operations or whether the board has delegated its duties and responsibilities to the management company.

  3. To establish active oversight, the examiner should evaluate all the facts and circumstances. A board must show that it is not a front for the benefit of the management company. While it is impossible to specify every duty and responsibility a board should undertake, the following are some indicia of independence:

    1. Regular Meetings - Regular board meetings enable directors to play an active role in the direct activities of the school as well as to exercise continual oversight of the Management Company carrying out its wishes under contract. One or two meetings per year are generally insufficient to establish that the board members are exercising any independent control. Board meeting minutes should reflect the decisions of the board and items considered at each meeting.

    2. Conflict of Interest - The board should have a conflict of interest policy requiring members to disclose all financial interests they have in any service provided to the school. Procedures for determining when a conflict of interest exists, for addressing the conflict and for recording the resolution of the conflict should be included in the school by-laws.

    3. Oversight -The board should oversee the operations of the management company and retain the ultimate responsibility for meeting the terms of its charter. The board, rather than the Management Company, should set and approve broad school policies such as the budget, curriculum, admissions procedures, student conduct, school calendars, and dispute resolution procedures.

    4. Fiscal Responsibility - The board should be responsible for and take appropriate action to ensure the fiscal health of the school.

  4. Review contracts and agreements to determine arm's length negotiation. A charter school must show that contracts, especially comprehensive management contracts, have been negotiated at arm's length and are for the benefit of the school rather than the service provider. Boilerplate contracts may be an indicia that the terms of the contract were not the subject of negotiations between independent parties. Representation of both the school and the management by the same attorney is also an indication of the absence of arm's length negotiations.

  5. Review the terms of the contract. When reviewing a charter school contract for management services, determine whether the terms are consistent with fulfillment of the school's exempt purposes. Some contract terms, may result in a finding that the school is operated for the benefit of the management and preclude exemption. Areas of concern include:

    1. Length of Contract -A contract's length can greatly influences the board's ability to monitor and evaluate the management ’s performance. There is a need to balance the management ’s interest in a long-term contract with the school's need for flexibility in changing companies and meeting its fiduciary responsibility.

    2. Board Policies -The general policies concerning the operation and management of a charter school should not be contracted away. These broad policies help define the school's identity.

    3. Services - Comprehensive school contract packages place much of the control of the day-to-day operations in the hands of the management . Responsibilities of both the company and the school should be stated in the contract.

    4. Personnel - Principals, teachers and staff may be employed directly by the school or may be employees of the management . However, the existence of an anti-compete clause prevents a school from hiring the personnel that it has utilized in operating its school (principals, teachers, etc.) for a specific length of time after termination of the management contract. This practice usually serves the private interests of the management and limits the school's ability to terminate the contract.

    5. Compensation - management fees must be reasonable and commensurate with the services provided. A management fee structure should not be based on total income (i.e., all fees, grants, contributions, and unusual receipts). Compensation should not be above the market rate generally charged for the service provided. This can be established through evidence of comparative shopping for services.

    6. Termination - A service contract should specify the provisions for termination and the procedure for evaluating when the terms of the contract are in default. Termination provisions that unreasonably restrict and limit the options of the school are evidence of private benefit to the service provider.

  6. Consider name identification - In many cases, contractual provisions require a charter school to attach the management 's name to the school (i.e., Company X Charter School or Charter School, a Company X affiliate.) "Name branding" has no clear exempt purpose. It links management companies to exempt schools and allows the company to draw goodwill from the relationship. It allows the management companies to build name recognition without additional expense. It also places a contractual burden on the charter schools, making it more difficult for the school to terminate the relationship with the management . A "name branding" requirement may be an indicator of private benefit depending upon the facts and circumstances.

  7. Analyze ancillary services provided - Comprehensive school management companies may provide other services directly or through affiliates. These services may include cash advances for start up funds, capital loans, facility leasing, technology contracting, furnishings, fixtures, textbooks, and just about anything else a charter school may need. The Service recognizes that such services are essential for start up schools. However, the examiner should scrutinize agreements carefully to determine whether the terms were the result of arm's length negotiation with an independent charter school board or are, in effect, adhesion contracts with a captive school board.

4.76.8.8.3  (07-01-2003)
Charter Schools and Revenue Procedure 75-50

  1. Rev. Proc. 75-50, 1975-2 C.B. 587 sets forth guidelines and recordkeeping requirements for determining whether private schools have a racially nondiscriminatory policy as to students. As public schools, subject to open enrollment, charter schools are not required to meet the specific guidelines set forth in Rev. Proc. 75-50.

4.76.8.8.4  (07-01-2003)
Charter Schools Filing Requirements

  1. Charter schools must file Form 990, Return of Organization Exempt From Income Tax, or Form 990EZ, Short Form Return of Organization Exempt From Income Tax. Their annual gross receipts are generally more than $25,000, and they rarely meet the filing exception contained in Rev. Proc. 95-48, 1995-2 C.B. 418. Ordinarily charter schools are not treated as governmental units or affiliates of governmental units because they are not "operated, supervised, or controlled by" a governmental unit. Most charter schools operate under a contract with the governmental unit and the governmental unit does not elect or appoint the school's board of directors.

4.76.8.9  (07-01-2003)
Colleges and Universities

  1. A university is an institution for higher learning with teaching and research facilities comprising an undergraduate school that awards baccalaureate degrees and one or more graduate schools that award master or doctorate degrees.

  2. A college is an institution of higher learning that grants baccalaureate degrees, though the term is also frequently used by institutions to describe undergraduate divisions or schools of a university that offer courses and grant degrees in a particular field such as liberal arts or law. " College" as used in these guidelines also includes institutions that offer two-year educational programs, such as junior or community colleges.

  3. Colleges and universities are a designated industry under the industry specialization program. When examining colleges and universities, the examiner should contact the Technical Advisor to improve communication and consistency in treatment of issues.

  4. For more information about the exemption of educational organizations, including colleges and universities, see IRM 7.25.3.

Exhibit 4.76.8-1  (07-01-2003)
Form 5788 Private School Racial Nondiscrimination Checksheet

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