On Local 501(c)(3) Foundations
A recent article posted on the Forbes Magazine website entitled “College Frats: Should Animal House Be Tax-Exempt?” begins,
“The Animal House image some fraternities have—and some others may want—should tell you that college fraternities—or sororities for that matter—are rarely known for their tax compliance. In fact, you’ve probably never considered taxes and these bastions of educational socializing in the same breath. But even these organizations need to know something about taxes.”
It’s pretty clear that the author of the article doesn't understand the difference between a fraternity active chapter and a house corporation that owns the chapter house. He also confuses "tax exempt" with "publicly supported charity". But the message is still noteworthy.
The article documents the case of a FIJI chapter at Bucknell University in which the IRS revoked its 501(c)(3) status. The IRS determined that the chapter was not fulfilling the charitable and educational mission set forth in its corporate charter. The chapter house provided lodging, dining, library and other educational facilities for students thought sufficient to meet the requirements set forth in the Internal Revenue Code.1
All 501(c) entities are tax exempt in that they are not subject to federal income taxes on the income derived from their primary operations. House corporations can operate in this manner if they apply for the appropriate status and maintain it. In most cases they are recognized as 501(c)(7) social or fraternal organizations. Active chapters enjoy this status under the "umbrella ruling" for Sigma Chi corporation. Contributions to “(c)(7)” organizations are not tax-deductible to donors.
501(c)(3) entities are publicly supported charities and include churches, universities, schools, hospitals and charities such as the Red Cross, the American Cancer Society, etc. The difference is that contributions to these organizations are tax-deductible. Educational Foundations come under this heading.
The FIJI house corporation managed to get status as an educational foundation but had that status revoked. As was clarified by a companion article2
they did not keep up with the educational/scholastic requirements of an educational foundation during the time that the active chapter was in hiatus. That resulted in the revocation.
It is possible that this situation could have been avoided if a scholarship fund had been set up to provide grants and awards. Regardless of the status of the undergrad chapter, the foundation should have continued annual fund raising (a requirement of a publicly supported charity) and found scholarship recipients from
among the larger Bucknell student population even as they continued to operate the house.
Here are a couple of lessons to be learned from this:
1) Any 501(c)(3) organization must strictly adhere to the requirements set forth in their charter. This means no fudging on an educational requirement by suggesting that housing and meal plans meet the educational purpose test or they don't have to observe statutory requirements because their primary constituency (the chapter) is in hiatus.
2) It is better for a separate 501(c)(3) Educational Foundation to be set up with commitment to a full mission of academic support. The chapter house property can be conveyed to it as an asset to be managed by a third party (the house corporation) as part of the foundation’s endowment/investment portfolio. This is the
approach that we have taken successfully in Sigma Chi.
There are many advantages to be gained by having a “local foundation”. It can allow tax-deductible contributions to go towards the improvement, maintenance and operation of a chapter house, provide an additional choice to donors and, in some jurisdictions, exempt the house from local property taxes.
However, it costs thousands of dollars to apply for and receive recognition as a 501(c)(3) local foundation and the regulatory threshold required to maintain it is high. Uncle Sam doesn’t forgo dollars to his Treasury willingly. Don’t learn the hard way as the FIJIs did. When it comes to local foundations, you have got to
follow all the rules all the time.
By Grand Trustee Bruce Morgan Casner
1Read full article here: http://www.forbes.com/sites/robertwood/2012/05/25/college-frats-should-a...
2Read article here: http://www.insidehighered.com/news/2012/05/22/irs-revokes-exemption-hous...