IRS Written Determination 201219026 The Charitable House Corporation Remains Elusive

John Christopher, Manley Burke, john.christopher@manleyburke.com

We are often asked why charities cannot (or should not) own chapter houses. The question usually dovetails with an emphasized assertion “other groups are doing it and nothing has happened to them.” The primary benefit, of course, of being a charity is that contributions are deductible by the contributors for Federal income tax purposes. The IRS has recently provided an interesting example of why we counsel charities against owning chapter houses.

On May 11, 2012, the IRS released Written Determination 201219026 revoking the existing tax exempt status of a nonprofit corporation that owned and operated a chapter house. In this case, the “house corporation” had been granted, and for many years had operated under, an IRS determination letter recognizing it as a tax exempt charity. In its application for exemption, the house corporation fully described the housing activities in which it would engage. So, even though the house corporation was doing exactly what it told the IRS it would be doing in its approved application for exemption, the examinations division of IRS nevertheless revoked its charity status.

Since as early as 1964, in Revenue Ruling 64-118, the IRS has taken the position that owning and operating a chapter house is not a charitable activity. As a result, house corporations are normally recognized as being exempt under either Section 501(c)(7) (as a social club) or Section 501(c)(2) (as a title holding corporation). According to the revocation determination, the unit that issued the letter recognizing the house corporation as a charity simply failed to grasp the point that house corporations could not be charities.

For its part, the unit issuing the letter recognizing the house corporation as a charity was provided some compelling facts.  For example, when seeking its charity status the house corporation committed to forbidding the use of the chapter house for social and fraternal purposes. The implication, of course, is that the house would not be a typical fraternity house but would be more akin to an honors dorm.

Additionally, the house corporation (and all other privately owned chapter house corporations) was subject to a “Standard Policy for Non-University owned Fraternity Chapter Houses.” This policy required the non-university owned chapter houses be comparable to university owned student housing in terms of safety, security, maintenance and technology. The university would not permit students to reside in any chapter house that failed the comparability standard.

In its defense, the house corporation argued that since the university effectively had a veto right over whether the chapter house could be used as such, then the house corporation was subordinate to the university and was essentially an instrument of the university in fulfilling the university’s educational mission. In support of its argument, the house corporation pointed to IRS authority for the idea that if a university is unable to provide housing (e.g., financially unable to do so), then a privately established charity can do so in some circumstances. While the house corporation’s argument in this regard is compelling, the IRS was unmoved.

Despite the compelling arguments advanced by the house corporation, the IRS’ decision to revoke is not surprising and but rather is in keeping with its prior positions. What is surprising is that the IRS granted charity status in the first instance. Again, our advice is, and continues to be, that fraternity housing is simply not a charitable activity. As to the often heard assertion that “other groups are doing it and nothing has happened to them,” we believe that is a circumstance of luck and timing. In this case, the IRS even first approved the house corporation activity as charitable. However, that initial approval did not stop the IRS from revoking the exemption when an enforcement agent reviewed the file. Eventually, these things have a way of sorting themselves out.