Rev. Rul. 64-117

Advice has been requested whether an organization which is organized and operated for the purposes and in the manner described herein may qualify for exemption from Federal income tax under section 501(c)(3) of the Internal Revenue Code of 1954.

According to its charter, the organization was incorporated as a non-stock corporation for educational purposes.

The membership of the organization consists of undergraduates and graduates of a college. Its activities consist mainly of membership meetings. Graduate members meet only at annual and special meetings which deal with the business aspects of the organization. The undergraduate members hold regular meetings during the academic year. Only members may attend the meetings except in the case where guest faculty speakers are invited as hereinafter described. All of the meetings are held in a house rented by the organization for such purposes.

At some meetings, designated members lead discussions or deliver speeches which are followed by discussions. The topics are selected by the designated member speaker and are generally introspective, that is, based on some subject involving the speaker's own ideas, opinions, knowledge, or experiences. Other meetings are devoted to discussions led by a guest faculty member of the college, following a half-hour speech by such faculty member. Topics selected by these speakers are usually of interest primarily to the membership.

With respect to the meeting house, no one is allowed to reside therein or remain overnight. Beside being used as a meeting place, it is also used by the members for study. Food and other refreshments are served at the meetings.

The organization's income is derived from contributions by members and membership dues. All but a nominal amount of the contributions are received from the undergraduate members who are regarded as the organization's regular members. Substantially all of the organization's income is expended in the maintenance and operation of the meeting house. Expenses in connection therewith are for rent, heating, electricity, gas, food and beverages, janitor services, furniture, and miscellaneous items.

The organization's members are selected by the following process. Members of the undergraduate group (all seniors) nominate students for participation as members the following year. The only requirement for eligibility for membership is that the nominee must be a junior at the time of nomination. The nominees are interviewed by a group of three or four members and the interviewing group votes on the nominee. The main emphasis during the interview is on intellectual maturity and the ability and desire of the prospective member to gain from and contribute to the discussions. The organization tries to obtain members with a diversity of interests. No other specific qualifications are required. If a majority of the interviewing group approves the prospective member's admission to the organization, he is so informed after the interview.

Section 501(c) of the Code describes certain organizations which are exempt from income tax under section 501(a) of the Code and reads, in part, as follows:

(3) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, * * * or educational purposes, * * * no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation, * * *.

Section 1.501(c)(3)-1 of the Income Tax Regulations provides, in part, that in order to be exempt as an organization described in section 501(c)(3) of the Code, an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt.

Section 1.501(c)(3)-1(d)(1)(ii) of the regulations provides, that:

An organization is not organized or operated exclusively for one or more of the purposes specified in subdivision (i) of this subparagraph (Religious, Charitable, etc.), unless it serves a public rather than a private interest. Thus, to meet the requirement of this subdivision, it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests.

Section 1.501(c)(3)-1(d)(3) of the regulations provides, in part, that the term "educational," as used in section 501(c)(3) of the Code, relates to (a) the instruction or training of the individual for the purpose of improving or developing his capabilities; or (b) the instruction of the public on subjects useful to the individual and beneficial to the community.

The organization serves a private rather than a public interest inasmuch as its program is limited to members only and the membership is limited in class and numbers. Secondly, there is no provision, as such, for application for membership.

Prospective members are selected on the basis of their intellectual and social compatibility with other members rather than on such qualities as scholarship, student leadership, etc. Moreover, the exchanges of opinions and ideas herein considered do not qualify either as "instruction" or as "training," as those terms are used in the regulations, as the educational activities appear incidental to the social activities.

In view of the foregoing, it is concluded that the organization is not operated exclusively for educational purposes. Accordingly, it does not qualify as an organization exempt from Federal income tax within the meaning of section 501(c)(3) of the Code.

Contributions to such an organization are not deductible by the donors under section 170 of the Code.