Through its role in administering the laws pertaining to tax-exempt status, the Internal Revenue Service (IRS) is involved in regulating the activities of those organizations that claim such a special position. The interplay between the federal tax system and private colleges will intensify as the demands increase for additional financial support from traditional sources and new sources of revenue are sought. Of tantamount importance is that college administrators be aware of how the current federal tax system applies to specific operations of private colleges. The historical common law roots of the relationship between education and the state are examined, and legal issues, definitions, and court rulings are discussed. The charitable deduction and the responsibility of the private college are discussed in detail. (Author/MSE)