EDUCATIONAL GRANTS FROM FOUNDATION TO FRATERNITY

Barbara Schwartz Bromberg

Introduction:

Many times in the course of my practice,  I am asked by fraternal organization clients, the appropriate parameters for requesting grants from their affiliated Code Section 501(c)(3) foundations.  Similarly, fraternal foundations are concerned with the same issues from the reverse point of view – they want to ensure that awarding their related fraternal organization a particular educational or leadership grant  will not violate current Internal Revenue Service standards for such matters.  In this article, I will explore those items that the Internal Revenue Service has previously indicated are appropriate for funding by a foundation for its related fraternity, of course presuming that appropriate grant documentation is in place.  I will also address those areas that the Service clearly does not approve for such funding.  Obviously, there is a gray area between these two categories, and in those cases, as always, it is best for the fraternity or fraternal foundation to contact its advisor to obtain case by case advice.  I will conclude with some brief comments on the procedural aspects of this type of funding.

Grant Funding Consistent with IRS Standards:

1) The Service has indicated that funding for chapter consultants, graduate consultants and similar leadership trainers can be made available by a foundation to its related fraternity, provided that the percentage of fundability is derived from time sheets kept by these persons on a contemporaneous, 40 hour per work week basis (similar to the requirement for in- office employees discussed in No. 4 below).  When this percentage has been obtained, it may be multiplied times the overall expenses for the activity for the year in question to obtain the fundable amount.

2) The Service has also ruled that a foundation may fund its related fraternity’s sponsored conventions, leadership conferences and similar meetings, provided that the basis for fundability is determined by a careful and reasoned analysis of the official program and other materials with respect to the conference or meeting in question.  At least for large expenditures of this nature, I recommend that the organization obtain a written opinion setting forth the appropriate percentage.  Also, organizations should bear in mind that workshops of this type which are 100% educational by IRS standards, although they do exist, are extremely rare;  thus, if it is determined that a particular meeting does qualify for 100% funding, that decision needs to be carefully reviewed.

3) Also, in this connection, it is important to note that a foundation may fund fraternity educational programs only on a “net” rather than “gross” basis.  For example, if a fraternity sponsors a leadership conference which is 50% educational by IRS standards, the expenses are $100,000 and attendees pay $50,000 in admission fees, the maximum amount that a foundation should fund is $25,000.  Also, there should be no “doubling up” as between the fraternity’s set aside funds and the foundation – in other words, if the fraternity’s set aside funds fully or partially fund an activity, then the Foundation cannot provide the same funding and vice versa.

4) With regard to written materials, videos and similar publications separate and apart from meetings of the type described in No.2 above, the holding in the Phi Delta Theta case requires that such items be 100% educational in content to be funded by a foundation for its related fraternity.  In other words, no allocation of the type described in No. 2 above is allowed for these types of items.  Therefore, scholarship manuals, publications or videos concerning date rape, alcoholism, health and safety issues and similar topics are fundable but new member manuals and the like are generally not so fundable.  Again, at least for large expenditures, the organization should obtain a written opinion based upon a review of the text or viewing of the item in question.

5) A foundation may also make administrative grants to its related fraternity, based upon the Phi Gamma Delta Excerpts, for the educational and charitable percentage of the fraternity’s operations, provided  that such grants are based upon contemporaneously kept, written time sheets of the fraternity’s employees, again on a 40-hour work week basis.  These grants can cover the appropriate percentage of headquarter’s expenses, salaries of employees and the like.

The Service has also indicated that a foundation may fund museum space and archival work of its related fraternity, provided that these items are not confined to the history of the particular fraternity alone but also cover the fraternity’s relationship to educational trends, the place of women in society and similar, broader topics.

The above constitutes a brief description of some of the more commonly approved areas of educational funding of a foundation for its related fraternity and is by no means an exhaustive list.  In addition to these types of grants to the fraternity, the Service also allows a foundation to make charitable contributions to other Code Section 501(c)(3) organizations, to benefit students directly through student loans and scholarships and through awards and other recognition of worthy behavior and, subject to procedural safeguards, to provide grants to needy members.  In addition, a foundation can provide funding for educational housing activities pursuant to a program following the guidelines for same that were issued by the Service in July, 2001.

Funding Not Consistent With IRS Standards:

Organizations also should be aware of those areas that the Service has indicated do not qualify as the subject of educational funding by a foundation to its related fraternity.  These include matters such as ritual, recruitment of new members, social pursuits and extension or colonization efforts;  similarly, those items relating to the day-to-day running of the fraternity and its business are not considered educational under current IRS guidelines.

Procedural Aspects of Educational Grants:

Finally, it is important here to review certain procedural aspects of educational funding.  First, all grants of the type under discussion here, and indeed all grants to non-Code Section 501(c)(3) organizations, must be covered by appropriate grant documentation.  This means that requests for funding should come from the fraternity board, rather than from individual board members or officers, so that the foundation can be assured that if it approves a request, it is an official request from the fraternity.  A grant request should be signed on behalf of the fraternity board and when a  grant is awarded, the request would then be countersigned on behalf of the foundation and the appropriate grant agreement completed and executed.

Second,  in general, and if consistent with donor expectations, a foundation should normally fund the more conservative educational and leadership programs of its related fraternity – i.e., ones of the type discussed in the first part of this article which are clearly fundable – if there is any doubt, then those programs should be funded by a fraternity’s set aside funds.  The reason for this is that if a program is not properly fundable, a foundation could risk its Code Section 501(c)(3) exempt status by doing so, whereas a fraternity’s erroneous set aside funding would result only in taxation.  Finally, I believe that foundations should generally fund a few larger educational programs rather than a number of smaller ones.

Conclusion:

As always, this article must necessarily be somewhat general.  However, my experience shows that the vast majority of fraternities and fraternal foundations have a great desire to familiarize themselves with these Internal Revenue Service guidelines and comply with the Service’s expectations in this regard.  Therefore, it is my hope that this will serve as a good general guideline for all those concerned with these matters.