Rev. Rul. 74-46

Advice has been requested whether the organization described below is a "nonprofit educational organization" for purposes of the Federal excise tax exemptions provided by sections 4057(a), 4221(a)(5), and 4294(a) of the Internal Revenue Code of 1954.

A nonprofit organization is engaged solely in conducting an activity known as "involvement drama" or "participation theater." The purpose of this type of presentation is to encourage an audience, composed mainly of children, to participate in the dramatic performance and become a part of it by singing, clapping, thumping, noise-making, dancing, or some similar means of spontaneous expression. In conducting this activity, the organization travels constantly from one location to another within a particular geographical area.

The organization performs in public and private schools, in institutions for the handicapped, and in children's wards of hospitals. The principal actors (or leaders) are usually college-age students specializing in involvement drama. No stage is required and the children generally sit on the floor in areas designated by the actors before a performance begins. The audience is limited in size for each performance to allow for maximum participation. Pre-program material is made available before a performance for distribution to educators or others for use in connection with the performance. While the plays are intended and most suited for children in kindergarten through the sixth grade, older children and adults often are observers.

The organization is recognized as exempt from Federal income tax under section 501(a) of the Code as an organization described in section 501(c)(3).

Sections 4057(a) and 4221(a)(5) of the Code provide that, under regulations prescribed by the Secretary of the Treasury or his delegate, no retailers excise taxes or manufacturers excise taxes shall be imposed with respect to the sale of taxable articles to a nonprofit educational organization for its exclusive use, or in the case of a tax imposed by section 4041, with respect to the use by a nonprofit educational organization of any liquid as a fuel.

Section 4294(a) of the Code provides that, under regulations prescribed by the Secretary or his delegate, no tax shall be imposed under section 4251 on any amount paid by a nonprofit educational organization for services or facilities furnished to such organization.

Under the provisions of sections 4057(b), 4221(d)(5), and 4294(b) of the Code, the term "nonprofit educational organization" means an educational organization described in section 170(b)(1)(A)(ii) that is exempt from income tax under section 501(a). Section 170(b)(1)(A)(ii) describes an educational organization as an organization that 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.

The fact that an organization may have been granted exemption from Federal income tax as an organization described in section 501(c)(3) of the Code does not, of itself, determine the applicability of the exemptions from the aforementioned excise taxes. In order for these exemptions to apply, the organization must meet the prescribed requirements of section 170(b)(1)(A)(ii) to come within the meaning of a "nonprofit educational organization."

Although the organization described above is engaged in an activity that in many respects is educational in nature, the organization does not normally maintain a regular faculty nor does it normally have a regularly enrolled body of pupils or students, in the sense that the words normally, regular faculty, and regularly enrolled are used in the statute. Furthermore, the material and subject matter presented at the performances by the organization do not constitute a curriculum within the meaning of the statute.

Accordingly, the organization does not meet the statutory requirements of section 170(b)(1)(A)(ii) of the Code so as to come within the definition of "nonprofit educational organization" contained in sections 4057(b), 4221(d)(5), and 4294(b). Therefore, the exemptions from the retailers excise taxes and the manufacturers excise taxes, provided by section 4057(a) and 4221(a)(5), do not apply to sales of taxable articles to the organization. Likewise, the exemption from the communications taxes, provided by section 4294(a), does not apply to any amount paid by the organization for communication services or facilities furnished to the organization.