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Part 4. Examining Process

Chapter 76. Exempt Organizations Examination Guidelines

Section 11. Educational Organizations Other Than Schools

4.76.11  Educational Organizations Other Than Schools

4.76.11.1  (04-01-2003)
Overview

  1. Educational purposes under IRC 501(c)(3) are broader than presenting formal classroom instruction. They include:

    1. Ancillary activities, such as, granting scholarships;

    2. Educating the public on particular subjects outside a classroom setting;

    3. Museums, symphony orchestras, art galleries, zoos, and similar organizations.

  2. Examiners of educational organizations should maintain a position of disinterested neutrality with respect to the beliefs advocated by an organization, and must not attempt to judge the merits of an organization's educational or artistic efforts. Rather, the examination should focus on whether the organization's activities to further its purposes are carried on in an educational or charitable manner.

  3. Examiners must remain professional and objective at all times and insure that their personal beliefs or opinions on the educational or artistic merit of an organization's activities do not influence the examination in any manner.

4.76.11.2  (04-01-2003)
Methodology Test to Distinguish Education from Propaganda

  1. In Big Mama Rag, Inc. v. United States, 631 F.2d 1030 (D.C. Cir.1980), the U.S. Court of Appeals (D.C.Circuit) held the IRC 501(c)(3) educational regulations unconstitutional in violation of the First Amendment to the Constitution. In order to more effectively assert the validity of the educational regulations, the Service developed a test with four criteria that reflected its long-standing position that the method used by an organization in advocating its position , rather than the position itself, is the standard for determining whether an organization has educational purposes. Rev. Proc. 86-43, 1986-2 C.B 729, sets out the methodology test for determining if an organization's materials are educational rather than propaganda. Its focus is on the method used by the organization in advocating its position, rather than the position itself. It requires a review of the organization's materials for factors that show whether it fails to provide a:

    1. Factual foundation for the viewpoint it advocates; or

    2. Development from the relevant facts that would materially aid a listener or reader in a learning process.

  2. Review the materials issued by the organization for the following factors, any of which may suggest that the organization may be engaged in propaganda rather than education:

    1. The presentation of viewpoints unsupported by facts is a significant portion of the organization's communications;

    2. The facts that purport to support the viewpoints are distorted;

    3. The organization's presentations make substantial use of inflammatory and disparaging terms and express conclusions more on the basis of strong emotional feelings than of objective evaluations; and

    4. The approach used in the organization's presentations is not aimed at developing an understanding on the part of the intended audience or readership because it does not consider their background or training on the subject matter.

  3. Two court cases, The Nationalist Movement v. Commissioner, 102 T.C. 558 (1994), affirmed per curiam, 37 F.3d 216 (5th Cir. 1994), cert. denied, 513 U.S. 1192 (1995), and National Alliance v. United States, 710 F2d 868 (D.C. Cir. 1983), upheld denial of exemption to organizations on the grounds that they failed to operate exclusively for charitable or educational purposes. They provide excellent examples how to apply the factors to determine if an organization's methodology furthers educational purposes.

  4. An organization may be educational in exceptional circumstances even if one or more of the factors in paragraph (2) is present. Thus, the examiner should review all facts and circumstances that may help clarify the organization's methodology, including internal documents such as:

    1. Minutes of meetings of the Board of Directors, editorial boards, or other committees that affect the organization's program;

    2. Contracts with researchers, authors, or other persons the organization engages to develop materials;

    3. Materials the organization rejected;

    4. Correspondence files; and

    5. Fund-raising materials, if not already reviewed as part of the organization's program output.

  5. Determine if the organization is an " action" organization as defined in Treas. Regs. 1.501(c)(3)-1(c)(3). Even if an organization's materials are educational rather than propaganda, they may still constitute lobbying. Apply both the "ends" test and the "means" test set out in the regulations, which are:

    1. The organization's main or primary objective or objectives may be attained only by passage or defeat of legislation; and

    2. The organization advocates, or campaigns for, attainment of its main or primary objectives as distinguished from engaging in nonpartisan analysis, study, or research and making the results available to the public.

  6. Determine if the organization otherwise satisfies the requirements for exemption under IRC 501(c)(3). If the organization has royalty income, review the cash disbursement and receipt journals to determine if cash has been advanced to authors and income has been received from publishers in the type of arrangement described in Rev. Rul. 66-104, 1966-1 C.B. 135.

4.76.11.3  (04-01-2003)
Educational Scholarships

  1. Organizations that are not private foundations are not subject to the requirements of IRC section 4945(d)(3). See IRM 7.27.19.5.

  2. However, a public charity's scholarship program must serve charitable and educational purposes rather than private interests. Thus, an examination of an organization's scholarship or fellowship program should verify that it does not serve private interests. Accordingly;

    1. Look for "thank you" letters that may indicate a scholarship was awarded on a personal rather than objective basis to a child of a friend, officer, employee, or trustee of an organization;

    2. Check payroll records for names;

    3. Ask other employees if they are aware of how recipients are selected.

  3. Determine who is eligible for the scholarships or fellowships. Verify that restrictions are not used to provide benefits to designated individuals or members of a group too small to be considered a charitable class.

  4. Determine if there is any relationship between contributors to the organization and scholarship recipients. If so, look further to see if the program is an attempt to allow individuals to claim contribution deductions for otherwise nondeductible tuition payments.

  5. Review the organization's methods and criteria for soliciting applicants and awarding scholarship or fellowship grants, as the criteria for selecting recipients must be objective and non-discriminatory.

  6. Review published announcements, brochures, minutes of selection committee, as well as applications. Verify that standards for merit or financial need are legitimate standards. If grants are awarded for reasons other than merit or financial need, determine if the criteria are designed to limit grants to individuals from private groups.


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