Two disregarded LLCs' education-and-workforce activities ruled charitable and educational

Plain-English summary

A 501(c)(3) public charity focused on connecting education to careers owns two single-member LLCs that are disregarded (treated as part of the charity) for tax purposes. It asked the IRS to confirm that each LLC's activities count as "charitable" and "educational" under section 501(c)(3). One LLC runs career-pathway programs: coaching students, providing career experiences, tuition assistance, and free documentaries. The other LLC builds a national database tracking outcomes of non-degree credentials and provides data analysis to educational and government institutions, mostly free and otherwise well below cost, with fees waived for those who cannot pay. Relying on the regulations and a line of revenue rulings (including that services provided to other charities substantially below cost are themselves charitable), the IRS ruled both LLCs' activities are charitable and educational. This matters to charities that carry out programs through disregarded LLCs and want assurance those programs stay within their exempt purpose.

Ruling snapshot

• Question: Do the activities of the charity's two disregarded LLCs qualify as charitable and educational under section 501(c)(3)?
• Outcome: approved
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(d); Rev. Ruls. 68-71, 70-584, 71-529, 75-284, 76-455

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 202451009                                             Third Party Communication: None
Release Date: 12/20/2024                                      Date of Communication: Not Applicable
Index Number: 501.03-08
                                                              Person To Contact:
---------------------------------------------                 ----------------------, ID No. -----------------
-------------------------                                     Telephone Number:
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----------------------------------                            Refer Reply To:
                                                              CC:EEE:EOET:EO1
                                                              PLR-106081-24
                                                              Date:
                                                              September 20, 2024


LEGEND:

Taxpayer          = ---------------------------------------------
LLC A             = ----------------------------------
EO                = -----------------------------------
LLC B             = --------------------

Dear --------------:

This letter responds to a request from Taxpayer’s authorized representative dated
March 22, 2024, requesting a ruling on whether certain activities of disregarded entities
of the Taxpayer are charitable and educational. Taxpayer represents the facts as
follows.

FACTS

Taxpayer is a nonprofit corporation recognized by the Internal Revenue Service (IRS)
as being described under section 501(c)(3) and is classified as a public charity under
sections 509(a)(1) and 170(b)(1)(A)(vi). Taxpayer’s purpose is to develop and support
programs, policies, and organizations that strengthen connections between
postsecondary education and opportunity in the United States. Furthermore, Taxpayer
advances its mission through research, grantmaking, social impact investment, public
policy solutions, and affiliate organizations.

Taxpayer is the sole member of two limited liability companies (LLC A and LLC B),
neither of which have elected to be treated as an association taxable as a corporation,
and Taxpayer represents that both are disregarded entities for federal tax purposes.
LLC A was formed to facilitate the merger of EO into it, with LLC A the surviving state-
law entity. EO was an educational organization that was determined to be described
under section 501(c)(3) and was a public charity under sections 509(a)(1) and
170(b)(1)(A)(vi) prior to the merger. As a result of the reorganization, Taxpayer through
LLC A acquired EO’s assets and activities. EO has, since its inception, engaged in four
projects, which were disclosed to the IRS in its application for exemption as an
organization described under section 501(c)(3). These projects include:

    1. Running a membership organization that is made up of post-secondary
      institutions, employers, workforce and economic development organizations, and
      mission-aligned entities. This program’s focus is on guiding education to career
      pathway strategies to foster success among nontraditional adult learners and
      workers. This program helps adult learners by implementing credits for prior
      learning acquired outside of the traditional classroom and aligning educational
      and credential completion goals with the labor market.
    2. Creating documentaries for K-12 schools, work force organizations, economic
      development organizations, and post-secondary institutions to allow students and
      others to explore various career pathways and connect individuals to educational
      experiences and skill building activities using an interactive interface. The content
      is created by LLC A with the students as its intended audience. The content is
      available to the public free of charge through online publications or public
      television broadcasts of its programming.
    3. Assisting institutions of higher education and various organizations in providing
      career experiences to student-employees with valued businesses, providing
      educational support for students to develop soft skills, and providing tuition
      assistance to student-employees enabling these students to manage debt and
      stay enrolled.
    4. Facilitating a coaching program pairing post-secondary students with workforce
      boards, employers, and other non-profit organizations so that the students can
      build a plan for attaining post-secondary credentials and how to use those
      credentials after graduation. LLC A facilitates the coaching through student
      journey mapping, capability assessments, benchmarking, and training and
      consulting for the coaches.

Taxpayer plans to continue operating these activities in the same manner as they were
conducted prior to the acquisition through LLC A.

Taxpayer created LLC B from its own assets. LLC B plans to conduct several activities
including:

    1. Advancing education through the establishment of a new national database that
      will capture data and provide verified outcomes for a critical mass of non-degree
      credentials ("NDCs") issued in the United States;
    2. Providing insight on NDCs to issuers, policymakers, employers, learners, and the
      general public to make sense of the education and workforce system;
    3. Establishing a program of research resulting in publicly disseminating reports on
      NDCs and their value;
    4. Providing services directly to nonprofits, educational institutions, and employers
      that enable them to better deliver education and providing workforce training
      services;
    5. Identifying and testing solutions for federal and state policies relating to NDCs,
      such as public funding and accountability systems; and
    6. Serving as a trusted organization for convening stakeholders and technical
      experts to define data solutions for improving education and workforce systems.

While LLC B plans to conduct the listed activities, its initial activities will focus on
providing data services to charitable, government, and public education entities
(collectively “Exempt Entities”) all of which will be described in either section 501(c)(3)
or section 170(c)(1). These data services will involve the collection, analysis,
interpretation, and sharing of data on NDCs so that the exempt entities can improve
their educational and workforce programming. An Exempt Entity using LLC B’s services,
generally, will not have the in-house technical or subject-matter expertise to run this
type of analysis itself.

LLC B intends to offer differentiated levels of services to the Exempt Entities. The
primary service offered, which will be provided free of charge, will provide institution-
focused outcomes based upon matched data analysis. For example, this analysis will
provide insights regarding the wage potential of students enrolled in an organization's
NDC programming as well as the outcome disparities between various demographics
enrolled in the same credential. Additionally, LLC B will also offer deeper, more
extensive data analysis to Exempt Entities for a fee, but this fee will be less than 20
percent of the cost of providing those additional services. This fee will also be waived or
reduced depending on the financial resources of the Exempt Entity seeking the deeper
analysis. Taxpayer’s history and annual returns have demonstrated an ability to fund
these services at this level of subsidy.

These data services will also provide LLC B with access to data not typically publicly
available. Unlike bachelor’s degrees, there is currently no infrastructure tracking the
outcomes of individuals that obtain NDCs. In the future, LLC B will use its data from
providing institution-specific analysis to develop insights on the economic mobility,
educational, and career outcomes of those seeking NDCs more globally. LLC B will
create a critical mass of that data to develop aggregated research results that will be
made available to the public free of charge. This same data will also be used to inform
LLC B’s own research and provide evidence-based solutions that are designed to
further the educational landscape with respect to NDC programs and institutions.

RULING REQUESTED

    1. LLC A’s activities constitute charitable and educational activities as these terms
      are defined under section 501(c)(3).

    2. LLC B’s activities constitute charitable and educational activities as these terms
      are defined under section 501(c)(3).

LAW AND ANALYSIS

Section 501(c)(3) describes organizations that are organized and operated exclusively
for religious, charitable, scientific, testing for public safety, literary, or educational
purposes and “no part of the net earnings of which inures to the benefit of any private
shareholder or individual.”

Treas. Reg. section 1.501(c)(3)-1(d)(2) states that the term charitable is used in its
generally accepted legal sense and is, therefore, not to be construed as limited by the
separate enumeration in section 501(c)(3) of other tax-exempt purposes which may fall
within the broad outlines of charity as developed by judicial decisions. Such term
includes, among other things, the advancement of education or science.

Treas. Reg. section 1.501(c)(3)-1(d)(3) defines the term "educational" as the instruction
or training of an individual to improve his or her capabilities, or the instruction of the
public on subjects that are useful to the individual and that benefit the community. An
organization does not have to be a school with a regularly scheduled curriculum to meet
the definition of "education" under section 501(c)(3). Example 2 of section 1.501(c)(3)-
l(d)(3)(ii) explains that an organization whose activities consist of presenting public
discussion groups, forums, panels, lectures, or other similar programs is considered
educational.

Revenue Ruling 68-71, 1968-1 C.B. 249, determined that a "nonprofit organization that
helps people in planning their careers and achieving occupational adjustment by
distributing educational publications at a nominal charge and providing free vocational
counseling services" was educational. The organization achieved its educational
purpose by conducting occupational research and publishing the results.

Revenue Ruling 68-307, 1968-1 C.B. 258, held that educational activities include the
publishing and distributing of educational materials that further the educational program
of another exempt entity, the National Park Service, because the organization was
instructing the public on a subject useful to individuals and beneficial to the community.

Revenue Ruling 70-584, 1970-2 C.B. 114, determined that an organization was
educational when it provided students majoring in such areas as sociology and political
science opportunities for summer positions with local and municipal government
agencies concerned with the improvement of urban life. Through an arrangement made
with the agencies, the students' salaries were paid by the organization rather than by
the agencies for which they worked. The organization's activity was part of an officially
sponsored government program. The ruling provides that the operation of an internship
program advances education since it trains the individual for the purpose of improving
or developing his capabilities in his chosen field of study.

Revenue Ruling 71-529, 1971-2 C.B. 234, provides that by performing an essential
function for exempt organizations for a charge that is substantially below cost, the
organization was performing a charitable activity within the meaning of section
501(c)(3). In this ruling, the organization was charging a fee that represented less than
fifteen percent of the total costs of its operation.

Revenue Ruling 75-284, 1975-2 C.B. 202, determined that providing training on a one-
to-one basis so that students learn the basic skills or requirements of a trade or
profession under the direction of an expert and are given firsthand knowledge of various
occupations prior to their making a career choice is an educational activity. The
students of this organization paid tuition covering the cost of room and board, weekly
seminars, individual counseling, and the on-the-job training. The ruling provides that
the program advanced education by familiarizing students firsthand with various career
fields and by training individuals for the purpose of developing their capabilities.

Revenue Ruling 76-455, 1976-2 C.B. 150, determined that an organization was
engaged in educational activities under section 501(c)(3) when the entity was created to
conduct studies and propose improvements regarding quality, utilization, and
effectiveness of health care and health care agencies, and to educate those involved in
furnishing, administering, and financing health care. In making this ruling, the Service
determined that "[b]y improving and enlarging the body of knowledge concerning current
usage of health facilities and methods of treatment, the organization seeks to create a
more efficient use of the nation's health facilities, and to aid in the planning of better
care for future health needs."

Nonprofits Ins. Alliance of Cal. v. United States, 32 Fed. Cl. 277, 291 (1994) analyzes
the “substantially below cost” standard in the context of section 501(m), reasoning that
the standards are the same. The court quotes GCM 38877 stating that “provision of
goods and services to other organizations described in section 501(c)(3) may be
considered an activity similar to those carried on by a grant-making charity.... [Such]
activity will be considered to be conducted in a charitable manner only if the price
charged is substantially below cost.” The court goes on to indicate that something is
substantially below cost if it clearly manifests donative intent.

LLC A’s activities further education in several recognized ways. LLC A offers programs
like those found in Rev. Rul. 70-584 when it assists institutions in providing career
experiences to student-employees with valued businesses and providing educational
support for students to develop soft skills. LLC A also has activities like those found in
Rev. Rul. 75-284 when it facilitates a coaching program pairing post-secondary students
with workforce boards, employers, and other non-profit organizations so that the
students can build a plan for attaining post-secondary credentials and for how to use
those credentials after graduation. LLC A’s assistance to institutions in providing career
experience, its educational support for soft skills training, and its coaching activities are
offered without charge. Further, LLC A also offers tuition assistance to attend higher
education. Offering services that further a charitable organization’s exempt activity free
of charge and providing tuition assistance to low-income students are recognized
charitable activities. Creating documentaries to allow students and others to explore
various career pathways and connect individuals to educational experiences and skill
building activities is like the activities of the organization in Rev. Rul. 68-71. Finally, LLC
A fosters programs that present public discussion groups, forums, panels, and lectures
as described in Example (2) of Treas. Reg. 1.501(c)(3)-1(d)(3). As such, the activities of
LLC A are charitable and educational as described in section 501(c)(3).

LLC B’s primary activity consists of compiling and analyzing educational and outcome
data on NDC programs offered by educational institutions that are either described in
section 501(c)(3) or section 170(c)(1). This analysis of data is provided to these
institutions to aid in the development and improvement of their NDC programs,
therefore it furthers the essential functions of these institutions. This primary service is
offered to these institutions, the Exempt Entities, without charge, and therefore it is
offered at substantially below LLC’s operational costs like the organization in Rev. Rul.
71-529.

LLC B also anticipates offering deeper, more extensive data analysis to the Exempt
Entities for a nominal fee. Taxpayer anticipates that these fees will be less than 20
percent of LLC B’s operational costs. Additionally, LLC B will waive the fee for additional
data analysis for Exempt Entities that are unable to afford the fee. Nonprofits Ins.
Alliance notes that providing services to an organization described in section 501(c)(3)
may be considered similar to grant making if the service is provided with a clear
donative intent. Additionally, the organization in Rev. Rul. 71-529 was considered to
offer services substantially below cost when its fees were fifteen percent of its costs of
operation. LLC B’s more extensive data analysis services are offered for a fee bearing a
similar discount to that found in Rev. Rul. 71-529, and that fee is waived for
organizations that cannot pay. The low rate of the fee, the waiver of the fee, and the fact
that these services are paired with free data analysis for these organizations indicate
the donative intent of LLC B’s additional services.

LLC B also intends to use the data collected from the services provided to various
Exempt Entities to create infrastructure to track the outcomes of individuals who obtain
NDCs. LLC B will create a critical mass of that data to develop aggregated research
results that will be made available to the public free of charge. This same data will also
be used to inform LLC B’s own research and provide evidence-based solutions that are
designed to further the educational landscape with respect to NDC programs and
institutions. The Service has previously determined that helping people in planning their
careers and achieving occupational adjustment by distributing educational publications
and that publishing and distributing educational materials that further the educational
program of another exempt entity constitute educational activities. Rev. Rul. 68-71 and
Rev. Rul. 68-301, respectively. LLC B’s aggregated research results that are made
available to the public are similar to the activities described in these rulings and are
therefore educational. Additionally, the creation of infrastructure to track the outcomes
of individuals in NDC programs is similar to the studies and proposed improvements for
the healthcare industry found in Rev. Rul. 76-455. As such, LLC B’s future use of the
aggregated data constitutes educational activity as it is described in section 501(c)(3).

Based solely on the facts and representations, we conclude that LLC A’s and LLC B’s
activities are both charitable and educational within the meaning of section 501(c)(3).

The ruling contained in this letter is based on information and representations submitted
on behalf of Taxpayer and accompanied by penalty of perjury statements executed by
an individual with authority to bind Taxpayer and on the understanding that there will be
no material changes in the facts. While this office has not verified the material submitted
in support of the request for this ruling, it is subject to verification on examination. The
Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment
Taxes) will revoke or modify a letter ruling and apply the revocation retroactively if there
has been a misstatement or omission of controlling facts; the facts at the time of the
transaction are materially different from the controlling facts on which the ruling was
based; or, in the case of a transaction involving a continuing action or series of actions,
the controlling facts change during the course of the transaction. See Rev. Proc. 2024-
1, 2023-1 I.R.B. 1, section 11.05.

This letter does not address the applicability of any section of the Internal Revenue
Code or Treasury Regulations to the facts submitted, other than the sections specifically
described. Except as expressly provided herein, no opinion is expressed or implied
concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

The ruling in this letter is directed only to Taxpayer. Section 6110(k)(3) provides that it
may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.


A copy of this letter must be attached to any income tax return to which it is relevant. If
Taxpayer files its returns electronically, you can satisfy this requirement by attaching a
statement to its return providing the date and control number of this letter.

If you have any questions about this letter ruling, please contact the person whose
name and telephone number are shown in the heading of this letter.


                                                  Sincerely,




                                                 Theodore R. Lieber
                                                 Senior Technician Reviewer
                                                 Exempt Organizations Branch 1
                                                 (Employee Benefits, Exempt Organizations, and
                                                 Employment Taxes)

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