For Frat Foundation, Housing Isn't Enough

IRS revokes tax-exempt status of an organization created to help a liberal arts college fraternity renovate its house.

May 22, 2012

The Internal Revenue Service has revoked the tax-exempt status of an organization affiliated with a Bucknell University fraternity, ruling that a foundation designed to support educational and charitable activities at a college fraternity must do more than help the Greek organization maintain and operate its housing facility.

For the better part of a decade, the Graystone University Housing Corp. operated as a nonprofit organization affiliated with the Phi Gamma Delta fraternity chapter at Bucknell. It existed, according to its articles of incorporation, "exclusively for charitable and educational purposes, including the provision of lodging, dining, library, technological and related educational facilities for students."

The organization was established in 2003, at a time when Bucknell's Phi Gamma Delta chapter needed to renovate its house, says Ted Groom, a lawyer for the organization. Supporters of the fraternity knew they'd have an easier time raising money to upgrade the facility if donations were tax exempt, Groom says; the new entity avoided any involvement in social activities, he adds.

The IRS has long determined Greek organizations themselves to not be tax-exempt because the agency considers their primary activities to be social rather than educational or charitable, says Bertrand M. Harding, author of The Tax Law of Colleges and Universities. Foundations can earn an IRS exemption, however, when their support of a fraternity or sorority is deemed to support educational or charitable activities. "As long as a fraternity foundation is using its funds to assist the fraternity and its members in educational pursuits, then it is engaged in an educational activity and can be exempt," says Harding. His book cites such activities as building or improving dedicated library or instructional areas within a fraternity or sorority house, covering annual operating expenses allocated to study-related areas of a house, or installing Internet wiring if the university wires its dorms, as well.

The IRS twice backed such an exemption for Graystone, says Groom, first in 2003 and then several years later.

But the IRS audited the Pennsylvania nonprofit corporation several years ago, and the agency concluded that based on Graystone's actual activities, as opposed to its stated goals, it did not deserve a tax exemption.

"[T]he organization does not qualify for exemption since the primary activity is concerned with the operation and maintenance of a chapter house adjacent to the university," the IRS said in its private letter ruling,  which, as is customary for the agency, did not identify Graystone by name. "Although the purpose in operating the chapter house may arguably benefit the public in the education of [Bucknell] students, the fact remains that the organization is not primarily an educational institution.... [T]he courts have consistently found that providing living and dining are not an exempt purpose. Neither is the operation and maintenance of a chapter house furthering an exempt purpose."

Based on that finding, the IRS said it would revoke the organization's tax exemption; it opted not to do so retroactively, which could have forced Graystone or its contributors to pay taxes on the donations the organization had received.

Groom says via e-mail that Graystone had "intended to provide educational scholarships and educational forums," among other things, suggesting that the organization had educational and charitable purposes in mind. But "the fraternity was placed on suspension for a period of time, which interrupted the expected flow of revenue and intended activity," he says.


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