REVISITING THE PHI GAMMA DELTA IRS SETTLEMENT – PART I

Barbara S. Bromberg

Introduction

It has now been over two years since the settlement of the Phi Gamma Delta cases with the Internal Revenue Service was made final, and excerpts from the Closing Agreements in these cases were published (“Excerpts”). Accordingly, it seems appropriate at this juncture to revisit some of the important guidelines which have been established through the Excerpts. This article will highlight especially those items in the Excerpts which represented a departure from generally accepted past practices. It will also contain practical suggestions as to how to implement many of these guidelines.

Time Sheets

One item contained in the Excerpts which was something of a surprise to many of those familiar with this area, was the IRS’ indication that in funding of or reimbursement for employee-based educational programs, either from set aside funds or through a fraternity foundation, it would be necessary to have employees keep year-round time records on a contemporaneous basis. This requirement has led to a great deal of discussion and concern among many fraternal organizations.

Many employees who were not accustomed to keeping track of their time in this fashion have shown some resistance to the idea and this has required an extensive educational program with such employees. Having overcome this hurdle, the next problem has been the IRS’ insistence on a 40 hour work week basis for salaried employees. It is well known that most fraternity and fraternal foundation staff work in excess of 40 hours per week, and the challenge has been to devise a timekeeping method which would meet the IRS guideline and at the same time be fairly representative of all of the kinds of work, both educational and noneducational, in which such employees engage.

Various types of time sheets have been devised to meet the IRS guideline. If there is no funding of fraternity educational, time-based programs by a foundation, and the foundation is merely reimbursing the fraternity for its own employees’ time spent on foundation matters, then all that should be needed is a simple time sheet showing an employee’s foundation time and fraternity time separately. If, however, the fraternity’s set aside funds or the foundation are funding employee-based educational programs for the fraternity, then a more elaborate time sheet is needed to capture all of the various educational categories in which the employees work. While the Excerpts do not appear to require the  keeping  of noneducational time  as well as educational  time, I generally  recommend  that  the full 40 hours be recorded, not only for administrative purposes, but because it seems to be easier for employees to record all of their time rather than segmenting only the educational time. A separate and special time sheet and report is generally used for chapter consultants and other fraternity staff and volunteers who visit chapters, engaging in both educational and noneducational work, the latter including assisting with rush and extension matters. These reports and time sheets are usually developed by each organization to meet its own particular needs and are usually more elaborate than the time sheets kept by in-house employees.

Deposit of Investment Income

Another principle contained in the Excerpts which represented a departure from past practice for some fraternal organizations was the indication by the Service that all investment income to be set aside should first be  deposited in a separate set aside bank or investment  account.  While it had been widely known for some time that the IRS wanted fraternal organizations to establish separate set aside accounts in order to have a valid set aside, many fraternal organizations followed the practice of expending set aside monies for qualified purposes during the fiscal year for which monies were set aside. Thus, they did not feel that it was necessary to first deposit the monies into a set aside account. However, the Excerpts indicate that this must be done.

Accordingly, based upon the Excerpts, many fraternal organizations have made arrangements to deposit their investment income in a separate set aside account throughout the year as it is collected, with any additional balance added to the account at the end of the fiscal year after the set aside amount has been finally determined. Then, as qualifying expenditures are incurred and documented, the appropriate documentation is presented to the set aside account, and funds from the set aside account are used to reimburse general funds of the fraternal organization for the qualifying expenditures. Fraternal organizations  that  are not substantially following this general procedure need to discuss the matter with their tax advisors to determine whether they have possible exposure in this area.

Timing of the Funding of Programs

The above discussed rule ties in with a corollary principle contained in the Excerpts. The Excerpts indicated that while it is permissible for a fraternal foundation to fund an educational program pursuant to appropriate grant documentation in advance, provided the fraternity agrees to repay any funds not expended for the qualifying purpose, the Excerpts also provide that with regard to set aside funding, before there is any reimbursement of general funds, the qualifying expenditure must be incurred. It is important to recognize this distinction and incorporate into the fraternal organization’s set aside procedures, as indicated above, the guideline that nothing is expended from the set aside account until qualifying and supporting documentation is available to support the reimbursement.

Educational Allocations

The Excerpts also indicated for the first time that in preparing educational allocations for events which are qualifying in part and non-qualifying in part, such as fraternal conventions, leadership seminars, and other similar conferences and meetings, no meal events may be considered as qualifying in preparing such allocations. There has been some confusion generated by this guideline. As background, it should be noted that the Excerpts appear to approve the practice which has long been engaged in by fraternities and their related foundations of preparing or having counsel prepare, a detailed analysis of such events, and funding the educational content percentage thereof through set aside funds or by a related foundation. It is well known that because of the severe time constraints attending such events, many of the meal functions at such events also have a program component which is usually educational in nature by IRS standards. This may include a leadership speaker or a scholarship awards ceremony.

It  seems very  unfair  and  a distortion  not  to  allow such educational time to be included in the analysis merely because meals are being served, since this is analogous to the treatment of recreational time which is clearly non-qualifying. Nevertheless, the matter can be relatively easily dealt with by dividing the meal function from the qualifying program activity, thereby legitimately increasing the overall educational content of the entire program.

Also, it should be noted that merely because a meal function is not allowed to be included in the qualifying allocation pursuant to the Excerpts, an educational speaker’s appearance at such an event can be funded by set aside funds or through a fraternal foundation, as long as the speaker and topic qualify as educational or leadership subjects under IRS guidelines.

Conclusion

Since it has been some time since the issuance of the Excerpts, we are probably nearing the end of any educational phase whereby the various principles enunciated and underlined in the Excerpts have been disseminated to and discussed by fraternal organizations. It is to be expected that these principles will now be applied in actual IRS examinations of such organizations. Accordingly, it would be prudent for those organizations which have not already undertaken an in-depth review of their activities, set aside funds and financial relationships with related foundations, to confer with their advisors and make certain that they are following the various guidelines announced in the Excerpts, including those described in this article. A future article will focus on other additional guidelines contained in the Excerpts including the much-discussed issue of “control” as it affects board makeup of a fraternity and its related foundation.