Rev. Rul. 80-139

The purpose of this revenue ruling is to update and restate, under current law, Rev. Rul. 68-178, 1968-1 C.B. 177.

The issue in Rev. Rul. 68-178 is whether amounts contributed by a state teachers' retirement system to purchase annuity contracts for employees of the retirement system are excludable from the gross income of the employees under section 403(b) of the Internal Revenue Code under the circumstances described below.

A state established a teachers' retirement system for the purpose of administering a retirement program established for the benefit of the teachers and administrators of the state public schools. The retirement system is a qualified employees' trust within the meaning of section 401(a) of the Code. It makes all the rules and regulations necessary for the functioning of the teachers' retirement program and invests the funds contributed to the system. The retirement system entered into an arrangement with its employees, intended to meet the requirements of section 403(b), under which the retirement system purchased annuity contracts for those employees.

Section 403(b) of the Code provides that certain amounts contributed by an employer to purchase an annuity contract shall be excluded from the gross income of the employee for the taxable year if the conditions set forth therein are met. Amounts may not be excluded under that section unless the annuity is purchased (1) for an employee by an employer described in section 501(c)(3) which is exempt from tax under section 501(a), or (2) for an employee (other than one described in clause (1)), who performs services for an educational organization described in section 170(b)(1)(A)(ii), by an employer which is a state, a political subdivision of a state, or an agency or instrumentality of any one or more of the foregoing.

An educational organization described in section 170(b)(1)(A)(ii) of the Code is one 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.

A person is considered an employee who performs services for an educational organization if he or she is performing services directly or indirectly for such an organization. The principal, clerical employees, custodial employees, and teachers at a public school are employees performing services directly for such educational organization. An employee who performs services involving the operation or direction of a state's education program, as carried on through educational organizations, is an employee performing services indirectly for such organizations. An employee participating in an "in-home" teaching program is included because such program is merely an extension of the activities carried on by such educational organization. See section 1.403(b)-1(b)(5) of the Income Tax Regulations.

The purpose of the state teachers' retirement system in this case is to administer the retirement program established for the benefit of the teachers and administrators of the state public schools. Since it is a qualified trust under section 401(a) of the Code, the retirement system is neither an organization described in section 501(c)(3) which is exempt from tax under section 501(a), nor is it an educational organization, or a part thereof, described in section 170(b)(1)(A)(ii). Further, since the employees' services are limited to the administration of the retirement program, they do not perform services directly or indirectly for an educational organization.

Accordingly, amounts contributed by the state teachers' retirement system to purchase annuity contracts for employees of the retirement system are not excludable from the employees' gross income under section 403(b) of the Code.

Rev. Rul. 68-178 is superseded because the position stated therein is updated and restated, under current law, in this revenue ruling.