JUST WHAT ARE FRATERNAL EDUCATIONAL AND CHARITABLE PURPOSES ANYWAY? (Part Two)

Barbara Schwartz Bromberg

Introduction

This is the second article in a two-part series dealing with the types of programs properly fundable by fraternal foundations and/or a fraternity’s set aside funds. Please refer to the prior article appearing in the March, 1997 issue of Fraternal Law. In the first article we considered some of the most common types of such programs. This article will deal with some of the less common programs and those which are likely to come under intense Internal Revenue Service scrutiny.

Fundable Programs

1. Archives and Similar Expenditures — Most fraternal organizations have accumulated a considerable amount of historic materials relating to the fraternity’s history and notable alumni (ae) and their achievements. These materials may consist of documents, badges, photographs and many other items. Expenditures necessary to properly preserve, organize, and exhibit such materials  include  expenses  of  an archivist, sup­plies, upkeep and maintenance of exhibit space and similar expenses. A common question is whether such expenditures are properly fundable by fraternal foundations or a fraternity’s set aside funds. Until the recent Internal Revenue Service fraternity tax case, it had been assumed by many advisors that such expenses were always appropriate for such funding since they related to historic preservation matters and education in historic subjects. Because of certain statements that were made at the time of that case, some students of the area have expressed doubt as to whether this is still the case. As of this writing, we feel that such expenditures are defendable as long as the display of artifacts does not relate solely to the history of the particular fraternity but rather includes material dealing with the relationship of the fraternity to societal trends at different stages of its history, and the effect of the fraternity experience on these trends. It also is advisable that the exhibit be open to the public even if it is done by appointment or for limited hours. Because this area is not entirely clear, it is recommended that a written opinion from the organization’s advisor  be secured  and  that advisor input be sought as to the proper manner for the establishment of and descriptions involved in the exhibits.
2. Aid to Needy Alumnae (i) — Another program which is very popular for funding by women’s fraternal foundations is aid to needy alumnae. (Men’s fraternal groups may become interested in establishing similar programs in the future.) In establishing and maintaining this type of program, fraternal foundations must recognize that the Internal Revenue Service will have an understandable interest in carefully reviewing such a program on audit to make certain that it benefits only the truly needy. This is especially true since such programs are generally limited to members only. A fairly recent IRS private letter ruling indicates some appropriate standards for such a program. Although it pertains to an employee fund, the ruling contains many indicia as to the Service’s then current position on such funds. It is very important that in maintaining such funds a detailed financial application be used and completed in order to establish the basis of need in an objective, nondiscriminatory manner. There also is a need for follow-up to ensure that the need is actually continuing if the grant is continuing. Obviously, procedures must be established to ensure that no one is in a position to approve a stipend to themselves or a member of their family. It is very important that no earmarked gifts be accepted. These are just a few of the guidelines that need to be followed in managing this type of fund. Any organization considering such a fund or which is unsure whether its current procedures are appropriate, should contact their advisor for assistance as again, this is a sensitive area worthy of substantial attention.
3. Assistance in Local Chapter Housing — Please see Part One for information concerning loans on local chapter housing; this section deals with educational area grants for chapter housing. This is another area where the rules may differ for set aside funds and fraternal foundations, since educational area grants can be made by Code Section 501(c)(3) organizations, but probably not by a fraternity’s set aside funds. Such educational area grants have been ap­ proved in numerous private letter rulings issued by the Service over the last several years, and cover those areas in a chapter house which are used 100% for educational purposes, such as study rooms, libraries, computer rooms and the like. Furniture and fixtures located in these educational areas may also be so funded. No “mixed use” purpose areas may be the subject of such grants. It is very important that such grants be handled strictly according to established procedures and that a written Grant Agreement and legal opinion provide strict guidelines for the use of the grant funds, and the dedication of the funded areas to educational purposes. Some fraternal foundations have obtained IRS private letter rulings which establish an umbrella procedure so that many different local housing projects can be handled under that procedure as long as the particular project meets the established parameters of the procedure. This continues to be a very important area for many fraternal foundations but we cannot overemphasize the importance of careful handling of these projects so that the foundation is assured that its grants are being used solely for educational purposes as previously approved by the IRS.
4. Awards and Other Recognition of Worthy Behavior — Many fraternity set aside funds and fraternal foundations maintain award programs of various types to recognize achievements by their members, particular chapters and others. For example, research grants may be awarded in recognition of past achievements in scientific or medical fields, teaching awards may be given to professors on campuses where a fraternity’s chapters are located and awards may be given to members or chapters to recognize achievements in scholarship, leadership, philanthropy and other educational and charitable endeavors. As long as such awards are made pursuant to an objective and nondiscriminatory procedure, are designed in recognition of appropriate educational and charitable achievements and the amounts of the awards are commensurate with the type of award, such programs should be appropriate for foundation and/or set aside funding.
5. Miscellaneous Educational and Charitable Programs — As stated in our earlier article, there can be no completely exhaustive list of such qualifying programs since each organization has its own character and will therefore have some unique educational programs. Fraternal organizations and their foundations in my experience are constantly developing new and innovative educational and leadership programs to meet the needs of their members and the wider society.

Conclusion

When establishing a new program of this type, it is always wise to seek appropriate professional advice so that your advisor can assist you in developing procedures and guidelines. This should avoid having to dismantle a program after time and money have been devoted to it, or worse yet, having to pay tax in the case of set aside funds, or experiencing a threat to your foundation’s tax exempt status.