IMPORTANT PROPOSED LEGISLATION FOR FRATERNITY HOUSING – AN UPDATE AND EVALUATION

Barbara Schwartz Bromberg

Introduction:

Readers who have followed this column over the years and who have a strong interest in Greek housing are aware that for many years the Internal Revenue Service has approved the finding by Code Section 501(c)(3) charitable organizations of educational areas and facilities in Greek housing, as long as certain strict guidelines are followed.  Since July 2001, the funded facilities also needed to be similar in nature to those provided by the particular university on whose campus the fraternity house is built.  While these rules can be quite workable and have supported many millions of dollars of fraternity house construction and reconstruction over the years, the Greek community has consistently searched for a better alternative.

There is now such an alternative on the horizon in the form of a rather simple provision in  HR7, also known as the Care Act.  This article will explain what the Care Act will and will not do, discuss its prospects for passage at the present time and set forth some guidelines for utilizing the provisions of the Act when and if passage is obtained.

Statutory Provision:

The section of the Care Act that would effect this change simply states that a Code Section 501(c)(3) organization shall not fail to be treated as such solely because such organization makes “collegiate housing and infrastructure grants” to an organization described in Code Section 501(c)(7) (which would include fraternal organizations), so long as at the time of the grant substantially all of the active members of the recipient organization are full-time students at the college or university with which such recipient organization is associated.  Please note that this provision does not state that such grants will constitute a charitable activity, merely that a charitable organization can engage in making such grants without losing its tax exempt status solely for doing so.

The statutory definition of housing and infrastructure grants is that these are grants to provide, improve, operate or maintain collegiate housing and such housing may involve more than an incidental social, recreational or private purpose, so as long as such grants are for purposes that would be permissible for a dormitory of the college or university.  There is only one exception to this rule stated in the proposed legislation and that is that a grant to provide physical fitness equipment would not be treated as a housing and infrastructure grant for these purposes.

Because those drafting the statutory language, including the author of this column, were concerned that most Greek housing is not owned by the chapter itself but rather by a house corporation or similar entity, the definition of such grants would also include one made to an organization exempt under Code Section 501(c)(2) or (c)(7) which holds title to property exclusively for the benefit of such a student organization.  The effective date of the statute, as currently drafted, is grants made after December 31, 2003.

Legislative Progress:

Those of us observing the progress of this statutory language were indeed pleased to note its rapid progress through the House where it was overwhelmingly approved as part of the Care Act legislation.  It was scheduled to go to a Conference Committee in late 2003, but the Conference Committee process was blocked by various political considerations and in spite of last ditch attempts to resurrect the legislation before Congress recessed, this did not happen.  Accordingly, it appears as of this writing that further legislative progress will hopefully take place early in 2004.  While the above discussed language is not contained in the Senate version of the legislation, there is much optimism that it will be retained in the final legislation that hopefully will make it to the President’s desk before activities surrounding the upcoming election make any further legislative progress impossible.

What The Act Will And Will Not Do:

For the moment, let us assume what we all hope – i.e., that the legislation will be passed in its present form early in 2004.  I have heard it expressed that it would then be possible for Code Section 501(c)(7) house corporations to offer charitable deductions for fraternal housing projects.  Nothing could be further from the truth.  The simple fact is that what the proposed legislation does in terms of the process is to remove the restrictions for charitable funding to educational areas.  In other words, one hundred percent of a Greek housing project (minus the physical fitness equipment aspect) could be funded by an affiliated charitable organization.  Other than that, it is expected that the process should remain exactly the same as currently.

In other words, if a charitable deduction avenue is sought for a Greek housing project, there will still need to be a Code Section 501(c)(3) organization partner.  When a Code Section 501(c)(3) organization partner is involved, there needs to be a paper trail of grant documentation so that it can be established that the housing project fits within the parameters outlined by the statute.  Thus, there will still need to be a grant agreement process.  I think it is important to sound an early note of warning that the passage of this legislation should not be an invitation to handle such housing projects on an informal basis, as regulations will still have to be developed under the statute and normal grant parameters observed.

Conclusion:

The passage of the Care Act with the language discussed above will provide a tremendous boost to the fraternal housing situation financially, placing Greek housing almost in parity with university housing.  It should enable many older houses that would not otherwise be renovated to be so renovated and also allow new construction to be built.  However, it should not be viewed as a panacea that eliminates all need for appropriate compliance with basic Code Section 501(c)(3) – 501(c)(7) principles.  Any organization in doubt about what this legislation may mean to its housing program should consult with its professional advisers.