United States: IRS Announcement On February 9, 2015, Requires Review Of Charter Schools Tax Status

On November 8, 2011, the IRS and Treasury Department published an Advance Notice of Proposed Rulemaking ("2011 Advance Notice") that posed a threat to charter school participation in public pension plan systems. The 2011 Advance Notice stated that the Treasury Department intended to issue regulations on when a retirement plan would constitute a "governmental plan" for qualified retirement plan purposes, and when a governmental affiliated employer, such as a charter school, would be considered an "instrumentality" of state or local government and therefore be eligible to participate in a public pension plan.

On February 9, 2015, in Notice 2015-07, the IRS published requirements for charter schools to qualify as an instrumentality of state or local government under the public pension plan rules of Internal Code Section 414(d). As a result of Notice 2015-07, charter schools should review the state laws under which they are authorized, and their charter contracts, to confirm that they satisfy the requirements to constitute an instrumentality of state or local government. Notice 2015-07 may also have important implications for a range of other issues affecting charter schools.

The Instrumentality Firestorm in 2011. The 2011 Advance Notice immediately generated a firestorm of controversy and concern within the charter school community. The vast majority of charter schools participate in public pension systems established for governmental units in general, or for public schools, and participation in the public pension system is an important component of charter school compensation. A regulation that would limit the ability of charter schools to qualify as instrumentalities would preclude many charter schools from participating in public pension systems. And the public pension systems themselves would face a risk of no longer meeting IRS requirements if they permitted the participation of non-governmental employers. Further, many state laws require that charter school employees participate in the state's public pension plan system.

The 2011 Advance Notice was announced after some public pension plan systems declined to admit charter schools as employer members. Those public pension plan systems were concerned that a charter school would not be considered an "instrumentality" of state or local government and that permitting their participation in the public pension plan could disqualify that plan. The exclusion of charter schools by some public pension plans was not without some basis. In other areas of the tax laws, the IRS has taken the position that charter schools are not instrumentalities of state or local government, and the IRS has not always been consistent in these positions. In some cases the IRS has taken the position that charter schools are not instrumentalities of state or local government and must apply for exempt status as 501(c)(3) organizations. The IRS may apply a different "instrumentality" test for charter school bond financings. The IRS has taken the position that because they do not qualify as instrumentalities, charter schools and their supporting organizations (such as building corporations and management entities) must file annual information returns with the IRS (Form 990).

Notice 2015-07 and the Instrumentality Test. Notice 2015-07 sets forth factors that are to be evaluated in determining whether a charter school is an instrumentality of state or local government for purposes of participation in public pension plans. Because instrumentality status is a question of all of the facts and circumstances, there is no safe harbor which a charter school can satisfy and automatically qualify as an instrumentality. Charter schools should be able to satisfy a number of the listed factors easily. However, there are some listed factors which charter schools should evaluate closely to assure they qualify. Those factors include:

  1. If a charter school is permitted to or elects to withdraw from a public pension plan, the charter school's employees' benefits under the public pension plan must continue to be protected and funded under that public pension plan to the same extent that the employees of any other governmental unit are protected, if that governmental unit were to withdraw from the pension plan.
  2. The charter school must be subject to significant regulatory control and oversight by a governmental entity, such as a state department of education or the chartering school district.
  3. The school's chartering authority must be able to hold the charter school accountable for its results.
  4. All financial interests of ownership in the charter school are held by a state governmental unit, such as the authorizing school district. Upon dissolution or final liquidation of the charter school, the charter school's governing documents require the charter school's net assets to be distributed to another public school or to a state governmental entity, such as its chartering authority.

What Charter Schools Should Do. Notice 2015-07 provides that if a charter school does not now satisfy these requirements, it may continue to remain in a public pension plan until the final regulations are issued, which will likely take close to a year or more. Also, such charter schools may continue to remain in public pension plans after the final regulations are issued if they satisfy the requirements of Notice 2015-07 by the time final regulations are issued.

Charter schools should review all of the factors listed in Notice 2015-07 with their counsel to confirm that they would be regarded as eligible to participate in their state's public pension system. In reviewing these factors, charter schools should take into account not only their applicable state law, but their governing instruments and the terms and conditions of agreements with their charter authorizer. In some circumstances, modifications to a charter school's governing instruments or charter agreements might be appropriate to assure the charter school remains eligible for participation in a public sector pension plan.

Other Implications of Notice 2015-07. Notice 2015-07 was carefully drafted to limit its scope to the eligibility of charter schools to participate in governmental pension plans as instrumentalities of state or local government. While the IRS is clearly reserving the right to require that a charter school satisfy different requirements to qualify as an instrumentality for different tax purposes, charter schools should carefully consider how Notice 2015-07 might otherwise affect their tax status in other respects and use this review to re-examine their current tax reporting positions. Charter schools who have not previously obtained 501(c)(3) status may wish to now consider applying, or should confirm that their income is exempt from taxation under Code Section 115. Charter schools who are not filing Form 990 should evaluate whether they are exempt from filing requirements. Charter schools who are considering tax exempt financing should carefully review their own "instrumentality" status and the instrumentality status of any related borrowers (such as building corporations) with counsel.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.