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Newsletter > March 2011 > "EDUCATION KEY TO IMPLEMENTING CHIA"
EDUCATION KEY TO IMPLEMENTING CHIA
John Christopher & Sean Callan, Dinsmore & Shohl, LLP
When will the law change so that donations to house corporations are tax-deductible?”
We get this question all the time. The answer is never, or at least no time soon.
The question is grounded in a misunderstanding of the legislation commonly known as the Collegiate Housing and Infrastructure Act, or CHIA.1 In essence, CHIA will facilitate the flow of tax-deductible dollars to recipient house corporations for use in housing projects. So, the misunderstanding underpinning the question is reasonable in that it neatly summarizes the overall effect of CHIA. However, the question itself overlooks a critical component of CHIA in that CHIA requires tax-deductible donations first be made to a charitable fraternal foundation, and only then can funds flow as grants to the house corporations. Overlooking this first critical step could result in serious, adverse tax consequences to the foundation or house corporation involved, but could also have a profoundly negative impact on the industry as a whole. The analysis below describes what CHIA will do, while highlighting the absolute requirement that only a truly charitable foundation can make CHIA grants.
What is CHIA?
The Internal Revenue Code (“IRC”) places significant restrictions on using charitable donations to fund construction or improvement of chapter housing. As currently written and interpreted, the IRC restricts charitable spending to (i) educational areas of chapter houses such as libraries or study rooms and (ii) certain improvements deemed “educational” such as internet wiring. The result is that fraternity and sorority foundations are prohibited from funding any improvements other than strictly educational improvements. Unfortunately, strictly educational improvements often comprise a small fraction of a total project cost.
Oddly, the IRC places no such restrictions on universities and colleges wishing to use charitable funds for chapter housing. As a practical matter, this means that colleges and universities may use tax deductible contributions for improvements to non-educational meeting areas and dining facilities. Because, as explained above, fraternal foundations are prohibited from funding similar, non-educational improvements, fraternal foundations operate at a distinct disadvantage to educational institutions.
CHIA would level the playing field, allowing fraternal foundations to use charitable funds for nearly all components of a housing project, much like host colleges and universities do. In addition, CHIA could result in more dollars being available to remediate the aging collegiate housing stock. In short, CHIA would significantly alter, for the better, the way fraternal foundations do business.
Housing Grants are not Charitable under CHIA
Like many provisions of the IRC, CHIA is written in a way that requires the reader to parse the language precisely to understand what CHIA allows. CHIA does not say, “making grants for chapter housing is a charitable activity.” CHIA does not say, “contributions to house corporations for housing improvements are tax-deductible.” Instead, CHIA describes certain grants that a foundation may make to certain organizations for certain purposes without jeopardizing its exemption. This is an important distinction because a fraternal foundation (like other charities) may only engage in a small amount of non-charitable activities without jeopardizing its exemption. CHIA provides that fraternal foundation housing grants will not be counted as a non-charitable activity, provided the foundation carefully follows the criteria outlined in CHIA.2
Conversely, a foundation must do substantially more than merely make housing grants in order to qualify as a tax-exempt charity. That is, since CHIA does not characterize foundation housing grants as charitable activities in and of themselves, a foundation must engage in substantial other activities that qualify it as a charity irrespective of whether it makes housing grants. To use CHIA properly, a foundation must be charitable in the first instance. Having met that burden, a foundation may make qualifying housing grants without risking the loss of its exemption.
Understanding this concept is vitally important to understanding CHIA. National fraternities and foundations must make sure that (i) local chapters understand that they cannot simply form their own foundations specifically to fund house projects, and (ii) nothing in CHIA authorizes tax-deductible gifts directly to house corporations. Again, simply making housing grants is not a charitable activity. The IRS will look for this precise scenario, and then make the case that CHIA is being abused. While any local foundation or house corporation that runs afoul of CHIA will do so with the best of intentions, intentions do not matter. The IRS will perceive this as an abuse of CHIA, a perception with ramifications for the entire industry.
The authors firmly believe that a proliferation of non-charitable, local foundations making housing grants will result in at least increased scrutiny of the industry, if not a regulatory evisceration of CHIA itself. This prediction is not lawyerly handwringing, but based on the experience of the authors having witnessed the IRS focus on the Greek industry before. Invariably, any IRS crackdown on the Greek industry has arisen from a perceived abuse of the system. CHIA sounds like a simple proposition, so simple that many local foundations will want to “go it alone,” without the help and expense of national foundation involvement. Therein lays the risk. All national fraternities and foundations should do their utmost to discourage formation of local foundations created solely to make housing grants.
As a corollary to discouraging formation of a slew of local foundations, the national foundations should help their affiliated fraternities make local chapters aware that the national foundations are able to provide assistance. Foundations should create and implement an outreach program to (i) discourage creation of local foundations and (ii) encourage chapters to contact the national foundations for help. Education on a local level is imperative to preserving the benefits of CHIA for the long term.
When passed, CHIA will markedly improve the way fraternal foundations provide housing to Greek undergraduates. There can be no doubt that CHIA is a dramatic, industry-changing piece of legislation that will make a real impact on all fraternal foundations. Our fear is that, despite the best of intentions, someone in the industry goes too far, or is too lackadaisical in their approach. As explained above, stretching CHIA beyond its limits or failing to comply with its strictures poses a threat not just to the individual foundations, but also to the industry. Any perceived abuse threatens the advance CHIA represents. Our hope, on the other hand, is that education of our local organizations may highlight potential pitfalls in CHIA, so the entire industry operates within the limits of this exciting proposed legislation.
1 The 111th Congress adjourned without taking action on CHIA. However, we believe that the bill will be introduced in the new Congress relatively soon, and continue to hope that it will become law in the near future.
2 There are a number of other criteria a proper CHIA grant must satisfy. This article is excerpted from a longer analysis of CHIA that examines other CHIA criteria. The authors are happy to forward this more lengthy analysis on request.