(b) Organizations to Which Section Applies. -- This section shall apply to any organization described in section 501(c)(3) or (17) or section 401(a) except --

(1) a religious organization (other than a trust);

(2) an educational organization 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;

(3) an organization which normally receives a substantial part of its support (exclusive of income received in the exercise or performance by such organization of its charitable, educational, or1971 U.S. Tax Ct. LEXIS 83">*93 other purpose or function constituting the basis for its exemption under section 501(a)) from the United States or any State or political subdivision thereof or from direct or indirect contributions from the general public;

Obviously section 503(b)(1) is inapplicable to the case at bar; just as obviously, however, section 503(b)(2) and (b)(3) does apply. There can be no question that Iowa State is an educational organization. It maintains a faculty approaching 2,000 in number, carries a regular curriculum in some six colleges or departments, and services in the neighborhood of 20,000 students. A serious argument to the contrary1971 U.S. Tax Ct. LEXIS 83">*94 cannot be made. Moreover, we think Iowa State falls within section 503(b)(3) since a substantial portion of its support is received from the State of Iowa. To meet the requirement of section 2039 an organization need only fall within one of three subparts under section 503(b). Iowa State satisfies two.

Respondent argues that section 503(b)(1), (2), and (3) must be read in conjunction with the introductory language of section 503(b) which, he says, imposes a preliminary requirement that the organization be "described in section 501(c)(3)" and that Iowa State is not so described. First, we think section 2039(c)(3) points no further than to the three subparts of section 503(b) mentioned therein. We think this conclusion is unavoidable when section 503 is viewed as a whole. The overall import of section 503 is the denial of tax-exempt 56 T.C. 944">*948 status to organizations engaged in prohibited transactions. Certain types of organizations, however, are permitted to retain their exempt status even though engaging in prohibited activities. Coincidentally, the same types of organizations excepted from denial of tax-exempt status were intended by Congress to be within the scope of section1971 U.S. Tax Ct. LEXIS 83">*95 2039. This latter section simply lifts the three parts of the section out of their unrelated context and adopts them as qualifying standards.

Secondly, even if we felt compelled to incorporate the introductory language of 503(b) we believe Iowa State would still qualify. Section 503(b) says "This section shall apply to any organization described in section 501(c)(3)." Section 501(c)(3) in turn provides:

SEC. 501. EXEMPTION FROM TAX ON CORPORATIONS, CERTAIN TRUSTS, ETC.

(c) List of Exempt Organizations. -- The following organizations are referred to in subsection (a):

* * * *

(3) Corporations and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation, and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign1971 U.S. Tax Ct. LEXIS 83">*96 on behalf of any candidate for public office.

Without deciding at this point whether Iowa State is exempt from taxation under section 501, it is clear to this Court that the organization is one of those described by section 501(c)(3). It was organized and operated exclusively for educational purposes, no part of the net earnings inures to the benefit of any private individual, no substantial part of the activities amounts to the carrying on of propaganda or otherwise attempting to influence legislation, and it does not participate or intervene in any political campaign on behalf of any candidate for public office. There could not be a more fitting description of Iowa State than that provided by section 501(c)(3).

The first requirement of section 2039 having been met, we now turn to the second and more difficult question. Can Iowa State be said to be "exempt from tax under section 501(a)"?

We begin by pointing out that from Iowa State's standpoint it is generally irrelevant whether its exemption from taxation is a result of section 501(a) or the broader exemption to which it is entitled as a wholly owned entity of the State of Iowa. As a practical matter a university's exemption1971 U.S. Tax Ct. LEXIS 83">*97 from taxation is generally no more than an amnesty from filing returns since generally the costs of operation exceed its income. There are occasions, however, such as the one before 56 T.C. 944">*949 us, where the nature of a university's exemption becomes the focal point in determining a question of tax law.

In a two-pronged attack respondent argues that Congress did not intend State-owned universities to fall within the scope of section 501(a) and that Iowa State is integrally related with the State of Iowa and therefore precluded from inclusion with section 501(a). For the reasons set out hereinafter we think both arguments are without merit.

To accept respondent's first argument would require attributing to Congress an intent to treat State universities differently than private universities. Absent any logical reason for making such a distinction, we do not believe that such was the intent of Congress in enacting section 501(a). We are aware, of course, that Congress may have not specifically contemplated that section 501(a) exempt State schools from taxation. Such an omission, however, undoubtedly resulted from a belief that, in view of the overriding exemption, such a provision1971 U.S. Tax Ct. LEXIS 83">*98 would be superfluous. That being the case, it would be anomalous for us to conclude that such institutions are to be treated less favorably than those contemplated by the provisions in question.

This same rationale neutralizes any effect that might be afforded respondent's argument that Congress, having dealt specifically with public schools in sections 511(a)(2)(B) and 513(a)(2), would likewise have expressly included them under section 501(a) had they so intended. The sections pointed out by respondent relate to the taxation of unrelated business income. Recognizing that public schools are generally exempt from taxes due to their State-owned status rather than section 501(a), to omit them from the sections requiring taxation of unrelated-business income would leave the door open for a claim of complete tax immunity. By expressly pointing out the taxability of unrelated-business income of tax-exempt public schools as well as organizations necessarily exempt under section 501(a), Congress in no way intimated an intent that public educational institutions be treated differently than private ones. In fact the goal of the cited legislation is to the contrary.

Respondent's own revenue1971 U.S. Tax Ct. LEXIS 83">*99 rulings can be read as supporting petitioners herein. In Rev. Rul. 55-319, 1955-1 C.B. 119, respondent stated the following:

An inquiry has been received whether (1) a wholly-owned State instrumentality may also qualify for exemption from Federal income tax under section 501(c)(3) of the Internal Revenue Code of 1954 * * *

It is held that where an organization desires to have the benefit of a particular tax feature extended to its employees, such as the exception provided by section 403 of the Code, which depends on exemption under section 501(a) of an employer described in section 501(c)(3), and the particular organization meets the statutory requirements for exemption under section 501(c)(3) of the Code, it may be granted exemption thereunder, regardless of the fact that it also qualifies as a wholly-owned State instrumentality and, as such, would not be subject to Federal income tax.

56 T.C. 944">*950 This ruling was amplified by Rev. Rul. 60-384, 1960-2 C.B. 172, 173, wherein respondent said:

Revenue Ruling 55-319 holds, in part, that where an organization desires to have the benefit of a particular tax1971 U.S. Tax Ct. LEXIS 83">*100 feature extended to its employees, such as the exemption provided by section 403 of the Code, which depends on exemption under section 501(a) of an employer described in section 501(c)(3), and the particular organization meets the statutory requirements for exemption under section 501(c)(3) of the Code, it may be granted exemption thereunder, regardless of the fact that it also qualifies as a wholly-owned state instrumentality and, as such, would not be subject to Federal income tax.

Thus, such an organization may be exempt under section 501(c)(3) of the Code if it is organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or for the prevention of cruelty to children or animals.

A state or municipality itself, however, would not qualify as an organization described in section 501(c)(3) since its purposes are clearly not exclusively those described in section 501(c)(3) of the Code. See for example, Estate of John C. F. Slayton v. Commissioner, 3 B.T.A. 1343">3 B.T.A. 1343. It follows, therefore, that where the particular branch or department under whose jurisdiction the activity in 1971 U.S. Tax Ct. LEXIS 83">*101 question is being conducted is an integral part of a state or municipal government the provisions of section 501(c)(3) would not be applicable. For example, where a public school, college, university or hospital is an integral part of a local government, it could not meet the requirements for exemption under section 501(c)(3) of the Code.

On the other hand a wholly-owned state or municipal instrumentality which is a counterpart of an organization described in section 501(c)(3) of the Code such as a separately organized school, college, university, or hospital may qualify for exemption under section 501(c)(3) of the Cole. If the organization conducting the activity, although a separate entity, is clothed with powers other than those described in section 501(c)(3) it would not be a clear counterpart of a section 501(c)(3) organization. For example, where a wholly-owned state or municipal instrumentality exercises enforcement or regulatory powers in the public interest such as health, welfare, or safety, it would not be a clear counterpart of an organization described in section 501(c)(3) of the Code even though separately organized since it has purposes or powers which are beyond 1971 U.S. Tax Ct. LEXIS 83">*102 those described in section 501(c)(3).

We find it no easy task to draw the distinction so easily made by respondent between a public school, college, university, or hospital that is an integrally related part of a local government and one that is separately organized. We think it a needless exercise in semantics to draw such nebulous lines. The real question is, and must be, whether the organization, even though State owned, fits within the scope of section 501(c)(3). Once this question is answered in the affirmative the organization should be dealt with on an equal plane with organizations who must employ section 501(a) to receive tax-exempt status.

Even were we to proceed along the path forged by respondent we would reach the same conclusion. By his own Rev. Rul. 60-384 set out supra, respondent concedes that a separately organized, wholly State-owned university that is a counterpart of an organization described in 56 T.C. 944">*951 section 501(c)(3) may qualify for exemption under that section. We think Iowa State typifies the instance in which such a principle should be applied. Iowa State is certainly a counterpart to every private1971 U.S. Tax Ct. LEXIS 83">*103 university qualifying under section 501(c)(3). We also think it is separately organized. It is governed by a board of regents and operated by a university president and his staff. While university officials must look to the State legislature for funds and at times to public officials for guidance, such sojourns into the public realm do not strip it of its independent separate character. ³

1971 U.S. Tax Ct. LEXIS 83">*104 Based on the foregoing we conclude that Iowa State is an employer within the scope of section 2039(c)(3) and that the portion of the value of the annuities in question attributable to contributions made by Iowa State is entitled to be excluded from decedent's gross estate.

Decision will be entered under Rule 50.