Rev. Rul. 74-415

Advice has been requested whether, under the circumstances described below, an organization exempt from income tax under section 501(a) of the Internal Revenue Code of 1954 as an organization described in section 501(c)(3) that has filed a waiver certificate, Form SS-15, together with a Form SS-15a, waiving its exemption from taxes under the Federal Insurance Contributions Act (chapter 21, subtitle C of the Code) may terminate its waiver certificate.

M, a private nonprofit school for children with learning disabilities, was granted an exemption from income tax as an organization described in section 501(c)(3) of the Code. As such, the services performed for it are excepted from employment under section 3121(b)(8)(B) of the Federal Insurance Contributions Act and remuneration paid to its employees is not subject to the taxes under the Act unless, pursuant to section 3121(k) of the Act, the organization files a waiver certificate, Form SS-15, waiving its exemption from taxes under the Act, together with a Form SS-15a, containing a list of employees, if any, who concur in the filing of the waiver.

M filed a valid Form SS-15 and a Form SS-15a containing the names of five concurring employees. The certificate has presently been in effect for three years. M now desires to terminate its certificate in order to permit its employees to participate in a tax-sheltered annuity plan available to employees of section 501(c)(3) organizations under section 403(b) of the Code.

M contends that, in order to accommodate children of as many levels of income as possible, it must keep its tuition low but, to serve these children well, it must employ highly-qualified and well paid teachers. M is undertaking a building program with funds donated for that purpose and substantial operating expenses are anticipated as a result of the expansion. M believes it will be unable to continue its employer payments under the Federal Insurance Contributions Act without operating at a budgetary deficit. Further, the employees feel they cannot afford to participate in both a social security program and a section 403(b) plan. Thus, termination of the waiver will both benefit the employer and enable the employees to participate in the tax-sheltered annuity plan.

Section 3121(k)(1)(D) of the Federal Insurance Contributions Act and the regulations thereunder permit an organization to terminate its waiver by giving two years' advance notice in writing to the official with whom the organization is filing returns, but only if, at the time of receipt of such notice, the certificate has been in effect for a period of not less than eight years.

Section 3121(k)(2) of the Act provides, in part, that the Secretary of the Treasury, or his delegate, with the concurrence of the Secretary of Health, Education, and Welfare, may terminate a waiver certificate if an organization has failed to comply substantially or is no longer able to comply with the requirements with respect to the taxes under Chapter 21.

M's waiver certificate cannot be terminated under section 3121(k)(1)(D) of the Act since it has been in existence only three years. Furthermore, the taxpayer is not eligible for termination of its certificate under section 3121(k)(2). This is not only because there has been no absence of compliance in the payment of taxes here, but also because the request of the taxpayer to terminate, instead of being based on the taxpayer's inability to pay the taxes, is based on its anticipated increase in costs and its desire to accommodate its employees by relieving them of liability for employee taxes under the Federal Insurance Contributions Act, thus affording them additional funds to purchase annuities under section 403(b) of the Code.

Accordingly, in the instant case, M is not entitled to terminate its waiver certificate under either section 3121(k)(1)(D) or 3121(k)(2) of the Act.