- The Most Frequently Asked Questions Concerning New IRS Guidelines on Fraternity Foundation Funding of Educational Areas In Fraternity Chapter Houses
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Newsletter > September 2002 > "The Most Frequently Asked Questions Concerning New IRS Guidelines on Fraternity Foundation Funding of Educational Areas In Fraternity Chapter Houses"
The Most Frequently Asked Questions Concerning New IRS Guidelines on Fraternity Foundation Funding of Educational Areas In Fraternity Chapter Houses
Barbara S. Bromberg, Dinsmore & Shohl
This article is a follow up to my article in the November 2001 issue of Fraternal Law which described the new IRS guidelines issued in July, 2001, concerning the subject of fraternity foundation funding of educational areas in fraternity chapter houses. Since we have been working with these guidelines for approximately a year now, a pattern has emerged of frequently asked questions in connection with the new guidelines. This article will share these questions and will provide my views as to the appropriate answers.
Questions and Answers:
1: What does it mean that a fraternity foundation is permitted to fund educational facilities similar to what the university provides? Does this mean all universities or the particular university where the project is located and how does one document that the university is providing comparable facilities?
Answer: Definitely, the guidestar for this part of the inquiry is the particular university where the project is located and whether it provides comparable educational facilities in its dormitories or other student housing. This is the unique case where the appropriate tax standard relied upon by the IRS could be different from campus to campus, although to date it appears that most universities and colleges today are providing similar facilities and the rule does not appear to be a practical problem so far. I recommend that the particular university’s provision of these facilities be documented by a letter from an appropriate university official to this effect.
2: Since these new IRS guidelines have been recently issued, do you recommend that fraternity foundations planning to fund these types of projects seek an IRS private letter ruling or handle the project on a less formal “opinion of counsel” basis?
Answer: The answer to this question really depends on the mind set of the foundation and its degree of conservatism. Since these guidelines are recently issued, it is not likely that they will change soon unless the Service discerns abuses in the area. However, we all know that similar guidelines have changed several times in the past, so for those organizations that are conservative and want absolute assurance, an IRS private letter ruling is the best way to proceed. However, most fraternity foundations seem to be happy to go forward with an opinion of counsel, especially those who have received IRS private letter rulings under the former guidelines. In summary, this is a question that needs to be discussed and resolved between the fraternity foundation and its advisers.
3: Since the new guidelines seem straightforward and fairly precise, is a grant agreement still necessary when a fraternity foundation is funding a housing project?
Answer: The answer to this question is a definite yes in my view. Whenever a Code Section 501(c)(3) charitable organization is making an educational or leadership grant to a non-Code Section 510(c)(3) organization, even if it is tax exempt under another Section, such as a house corporation or local chapter, an appropriate grant agreement is definitely required. This is especially true in a situation like this where the projects are usually sizable and the buildings hopefully will endure for several decades. The grant agreement should be tailored to a housing project and not the type that is used for a non-housing educational grant.
4: I understand that under the new guidelines, grants can be made for fire alarms, smoke detectors and internal sprinkler systems in a fraternity house – is this correct?
Answer: It is correct that grants can be made for this type of safety equipment; however, the grant is limited to educational areas in the chapter house and those areas that are directly servicing or adjacent to educational areas, so that this type of funding is not available on an “entire house” basis.
5: What about fraternity foundation funding of computer network equipment and wiring for the entire house – is this like the safety equipment referenced above or can this be provided throughout the entire house?
Answer: As with all fraternity foundation funding of these projects, the first inquiry is whether the university provides such ubiquitous computer access in its residences. If it does, then the fraternity foundation may indeed fund such equipment and wiring for the entire house. In other words, such funding is not limited to designated educational areas in the way that funding for fire safety equipment is.
6: I have heard that there are some new guidelines on fraternity foundation funding of educational furniture – what are these?
Answer: This is indeed an area where there has been a relaxation of the previous rules. As before, if the university provides these items in its residences, then computers, study desks and chairs, as well as, other types of furniture that are in the designated educational areas may be funded by the fraternity foundation, as long as these items are not personally owned by members. There is a new guideline that as long as these items are not owned by the members, a computer, desk and chair may also be provided in sleeping areas, whether or not these areas are separately designated educational areas.
7: I know that the prior rules required educational areas funded by a fraternity foundation to be 100% educational in use – has there been any relaxation of this standard?
Answer: Here again, there is some good news as to the IRS’ view on this question and it has, in my view, taken a more practical approach to this question. In the past, no mixed-use areas such as dining areas and sleeping quarters could be considered educational, but now, a minor social or recreational use such as a reception occasionally held in a library will not be considered to change an educational facility into one of mixed use. This is indeed helpful but caution and good judgment should be exercised in this regard.
8: Has there been any change under the new guidelines as to grants by fraternity foundations being made for annual operating expenses in a chapter house?
Answer: No, grants can still be made for annual operating expenses (insurance, utilities and similar items) relating to dedicated educational areas. In this connection, as well as with the overall funding of educational areas in fraternity houses, any reasonable allocation may be used for determining educational space in the fraternity house.
This article has necessarily covered only the most commonly asked questions relating to fraternity housing projects funded by fraternity foundations. In my experience, each project is unique and in connection with such a project, numerous questions will arise, with some of them likely to be novel. The best way to proceed in securing accurate answers to these questions is for a foundation involved in such a project to work closely with its fundraising advisers, counsel and architects as a team so as to ensure the success of the project as well as the protection of the foundation’s tax exempt status under code Section 501(C)(3).
[WATCH FOR NEWS ON STUDENT RECORDS:
This spring two important decisions were announced by courts dealing with the privacy of student records. The United States Sixth Circuit Court of Appeals ruled that student disciplinary records are, generally, private records and the release of such records is prohibited under the Family Education Rights and Privacy Act (FERPA). U.S. v. Miami University, 2002 U.S. App. LEXIS 12830 (6th Cir.).
But, a 7-2 decision by the U.S. Supreme Court (Gonzaga University v. Doe, 122 S. Ct. 2268 (2002)), held that a student whose records were improperly released had no right to collect damages from the University whose official released those records.
Watch for an article discussing these cases and their implications for the Greek world in the November issue of Fraternal Law.]
[NPC TURNS 100:
The National Panhellenic Conference (NPC) celebrates its centennial in Chicago on October 11th and 12th. Seven years older than its male counterpart, the National Interfratemity Conference (NIC), NPC is a conference composed of 26 women’s fraternities. Its member groups are autonomous and self-governing. NPC does not control its members, but through a series of Unanimous Agreements, recommends policies of interfraternity interest to its members. Leadership of NPC rotates among representatives of its member organizations. The current Chairman of NPC is Sally McCall Grant, an Alpha Phi.]