College Fraternities and Sororities Lobby for Indirect Tax Benefit

The Washington Post reports that the Fraternal Government Relations Coalition, which represents 100 fraternities and sororities collectively owning $3.2 billion in real estate, “is lobbying Congress this week to urge legislators to pass a bill that would allow charitable donations to fund up to $1 billion in housing construction for Greek-letter houses across the country.”  The story reports that lobbyists justify the tax expenditure on grounds of safety, lowering costs of student housing, spurring small business jobs, and granting “tax parity between the colleges and the Greek houses that serve the same students.” 

I did a little digging, and I am finding some curiosities with the Post’s legal analysis.  The Post reports that the lobbyist group is urging adoption of the Collegiate Housing and Infrastructure Act, and that the “current bill, H.R. 1718, is sponsored by Rep. Pete Sessions (R-Tex.) and has 14 bipartisan sponsors.”  The story further states that the bill would amend the Internal Revenue Code “to allow donations to Greek groups for student housing to be fully tax deductible.”  But according to the text of H.R. 1718, the general rule of the proposed legislation simply states as follows:

For purposes of subsection (c)(3) and sections 170(c)(2)(B), 2055(a)(2), and 2522(a)(2), an organization shall not fail to be treated as organized and operated exclusively for charitable or educational purposes solely because such organization makes collegiate housing and infrastructure grants to an organization described in subsection (c)(7) which applies the grant to its collegiate housing property.

Thus, the bill in question would only indirectly do what the story says, insofar as a section 501(c)(3) entity receiving tax-deductible contributions could use donated funds to finance the construction or refurbishing of fraternity and sorority houses owned by those section 501(c)(7) entities.

The story also mysteriously states as follows:

Under current tax rules, just 30 percent of a single donation to a Greek organization for housing is considered tax deductible. The bill would permit as much as 100 percent of the donation to be deductible, which already is allowed for donors who give directly to universities and colleges.

I have no idea why the Post reports that “30 percent of a single donation to a Greek organization for housing is considered tax deductible” under current law.  Fraternities and sororities are tax-exempt as section 501(c)(7) entities, not section 501(c)(3) entities qualifying for tax-deductible donations under Code section 170(c)(2).

But my main concern is not with the misleading technical analysis of the Post. I am quite skeptical that this proposed tax expenditure is justified.  The IRS long ago issued a revenue ruling that supports the deductibility of charitable contributions to universities that use the donations to build housing owned by the universities and leased to fraternities and sororities.  See Rev. Rul. 60-367, 1960-2 C.B. 73.  Here are the key excerpts from the ruling:

A college might properly adopt as incident to its educational activities a program to assist in the housing of all its students by providing dormitories, by providing an information or rental office to obtain accommodations for its students in private homes, by exercising control over housing for its students, by purchasing or constructing, owning and operating houses for fraternity students, or by a combination of such activities. The furnishing of housing for fraternity members would not cease to be a college activity because the college participated in or undertook plans to have the whole or a part of the cost of a fraternity house defrayed by gifts from alumni of a particular fraternity. In order, however, for the gift to be deductible as a gift to the college, it must in reality be a gift to the college and must not be a gift to the fraternity by using the college as a conduit.

 

The effect of designation by a donor as to the fraternity house for which his gift is to be used must not be such that his gift is for the benefit of the fraternity rather than for the benefit of the college. Therefore, the college must, as the result of the gift, have the attributes of ownership in respect of the donated property, and its rights as an owner must not, as a condition of the gift, be limited by conditions or restrictions which in effect make a private group the beneficiary of the donated property. The making and acceptance of a gift on conditions which confer substantial rights on a private group are inconsistent with a gift wholly to the college. The college should, as an owner, be free to use the property acquired with the gift as its future policy suggests or requires.

I do not believe that the proposed bill is necessary to achieve the benefits claimed by the lobbyists.  Construction and renovation of university-owned housing generates just as much economic boom as that associated with privately owned housing, and it is easier for a university to ensure that frat housing is safe and affordable if the university is in charge of it than if a frat is.  Further, in light of recent nationally publicized events associated with Greek life, I would modestly suggest that policies promoting greater university control of fraternity and sorority housing are not necessarily a bad idea.

So here’s an alternative idea.  Keep current law in place.  Universities can welcome donations of existing Greek houses to the universities, which would then lease the houses back to the section 501(c)(7) entities on terms that ensure fair student housing prices and safe conditions.  And if the fraternities violate anti-hazing or anti-discrimination policies of the universities, they have breached their leases and must find new safe, affordable housing.     

  

JRB