Chapters & the IRS
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CHAPTERS AND THE IRS
For All Chapters
IMPORTANT INFORMATION-PLEASE READ AND KEEP ON FILE!
The following information is what you need to comply with the IRS regulations. While I believe this
information is correct as of today, the IRS makes frequent changes and you should contact your local IRS office
if a problem arises. The Professional Fraternity Association attempts to keep us abreast of any changes in the
regulations and I will pass them on to you.
Please keep in mind that our 501 (c) (3) classification is a valuable asset. It means that donations to the National
Chapter or the subordinate chapters designated and used for charitable, education or professional purposes are
tax deductible to the donor. We must do everything possible to preserve this status, for once it is lost, it may be
difficult to regain. Other fraternities are spending large sums, without success, to secure this favorable tax
classification.
A.
BASIC CLASSIFICATION
The National Fraternity by letter dated September 22, 1975, was granted, retroactive to August 1, 1972,
exemption from Federal income tax under Section 501 (c) (3) of the Internal Revenue Code.
Our subordinate organizations (chapters) listed in our application dated June 9, 1976 were granted the
same exempt classification and related determinations by a group exemption letter from IRS dated January 18,
1977, with the exemption made also retroactive to August 1, 1972. Our group exemption number is 402
B.
WHAT DOES THIS MEAN TO A CHAPTER?
1. Income Tax Reports - 990 AND 990-T.
Sigma, called for on Form 990 is 402).
(Note: the group exemption number for Alpha Chi
a. ANNUAL GROSS INCOME LESS THAN $25,000.
Neither form 990-T nor form 990 need be filed. If you receive a Form 990 from IRS, simply write
across the front page of the form "Annual Income Less Than $25,000" and mail it to IRS. FAILURE TO
RETURN SUCH A FORM TO IRS MAY CAUSE YOU SOME TROUBLE, EVEN A FINE. You do not
have to file if you do not receive the form in the mail from IRS.
b. ANNUAL GROSS INCOME $25,000 OR MORE
You are not liable for taxes but YOU MUST FILE FORM 990. Failure to do so would make you liable
to a fine and/or a more severe penalty.
c. Form 990-T
You must file a Form 990-T, regardless of amount of income if you have any income from " unrelated
business." It is doubtful that any income of a chapter would be "unrelated business income," but if you have
any doubt about it, write to the Grand Recorder and give him details. "Unrelated business income" would be
income derived from activities which are in no way related to the purposes for which the Fraternity has been
granted exemption.
2. Contributions Deductible to Donor
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All contributions made by members to the chapter or to the National Fraternity, are deductible
to the donor to the extent the member receives no direct benefit from the contribution. This applies to active
members of the chapter and to alumni. It applies to both collegiate and professional chapters.
WARNING: To be deductible, contributions must be given for specific purposes such as
awards programs, scholarships, professional, educational or charitable activities. Money so received may not be
used to reduce the cost of membership, or of room and board if a house chapter, nor can it be used in any way
that would directly benefit a relative of the donor. This warning applies to the donor, not to the chapter.
However, the chapter should be aware of it so that it not place the donor in jeopardy by misuse of his or her
contribution or fees.
3. Bequests, Gifts, Etc.
The chapter can receive bequests, gifts such as property , stock, etc., and the donor, whether a
member of the Fraternity or not, may take a deduction for same, provided a specific use of the bequest is stated
or provided the chapter can demonstrate that the bequest or gift is received and has been used or rigidly set
aside to be used exclusively for one of the exempt purposes which are educational or charitable. Again, it can in
no way inure to the direct benefit of the members of the chapter or any member of the donor's family.
4. House Corporation or Alumni Association
The Bylaws of Alpha Chi Sigma Fraternity require: A Collegiate Chapter shall not incorporate,
nor shall it own any real property for the purpose of providing housing for its members or producing rental
income. Housing Corporations may not be formed on behalf of subordinate chapters without the approval of
the Supreme Council. Such Housing Corporations are separate and distinct from the Alpha Chi Sigma
Fraternity. Members of Alpha Chi Sigma residing in chapter houses should not be voting officers or voting
members of the Board of Directors of the housing corporation.
Any property of a subordinate of a parent organization belongs to the parent (The National
Fraternity) unless a separate corporation is set up to hold title to the property. This is the basic reason for a
HOUSE CORPORATION to be chartered.
The Chapter can rent from the house corporation, or any other landlord, and the Chapter
operates the house.
OR, the house corporation can own and operate the house provided its charter does not
restrict it solely to holding title to property.
5. House Corporations.
Regardless of the type of house corporation set up and chartered, it is mandatory that you
APPLY FOR AND RECEIVE A TAX EXEMPTION LETTER FROM IRS. The Grand Recorder can help
you determine under which Section of the Internal Revenue Code your charter and operation might qualify you
for exemption. He also can give you assistance in preparing and filing the proper application, if you have not
already done so, or in preparing and filing for a reclassification if that seems to be indicated. Generally, there are
only two classifications under which your house corporation could qualify:
a. EXEMPT UNDER SECTION 501 (c) (7).
(1) A House Corporation chartered to both hold title to property and to operate as a fraternity
house can apply for exemption under this section. The wording of the purposes for which chartered will vary
according to state law but the basic purpose in addition to holding title to the property should be to provide
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lodging and meals for college students. It is not a good idea, unless required by state law to do so, to name that
college or to restrict the students to "members of
Chapter of Alpha Chi Sigma." If there is
more than one college in your area you may eventually wish to form a joint chapter. Also, if you do not have
enough members of the chapter to fill the house, you may wish to rent to alumni of other chapters attending
your college as graduate students and you avoid any questions of the right to do so, even though we generally
consider them as active members of your chapter.
(2) CONTRIBUTIONS, BEQUESTS, GIFTS, ETC. BY MEMBERS, ALUMNI OR
FRIENDS TO A 501 (c) (7) ORGANIZATION ARE NOT DEDUCTIBLE TO THE DONOR.
(3) A House Corporation set up in this manner and exemption can establish RESERVE
FUNDS FOR SPECIFIC PURPOSES of maintenance, renovation, new building, etc., and the income from
investment of these funds generally is not taxable. However, there has been considerable controversy about this
on the part of the IRS vs fraternities and in some IRS districts, such income is considered as "unrelated income"
and is taxable. I cannot resolve this problem for you but only suggest you report the income on your Form 990
if your operations are large enough to require filing (annual gross income greater than $25,000). If your tax report
is audited and the auditor claims the income is "unrelated business income," you have the right to appeal that
ruling. If you win, fine. If you lose, you cannot be accused of intent to defraud since you have reported the
income. You can be penalized by fine and interest on the unpaid tax due. Generally, however, because the law
is somewhat vague, you can honestly plead ignorance and be excused from any fine.
(4) Because your chapter is included in our Group Exemption letter as exempt under Section
501 (c) (3) of the code, it can receive contributions from alumni for building purposes but these may not be given
to the 501 (c) (7) exempt House Corporation. They may be lent to that Corporation at no less than 6% interest
and with a definite repayment schedule; in the same manner you may make other income-bearing investments.
b. EXEMPT UNDER SECTION 501 (C) (2), TITLE HOLDING COMPANY
(1) If your House Corporation is chartered only to hold title to property for the chapter, to
collect income there from, meet expenses, and return any excess income to the chapter, then you could apply for
exemption from Federal Income Taxes under Section 501 (c) (2). Generally, the charter does not have to say
more than that the Corporation is formed solely to hold title to the property for the chapter, but it is best to get
this clarified and probably better to have it include the income and expense provisions.
(2) A Title Holding company exempt under Section 501 (c) (2) may rent the property either to
the chapter for which it holds title to the property of to the property or to someone else, BUT IT MAY NOT
OPERATE THE PROPERTY AS A FRATERNITY HOUSE OR ANY OTHER KIND OF BUSINESS.
Any income received by a 501 (c) (2) organization other than rent or special funds from the parent organization
is taxable, and must be reported as unrelated business income on Form 990-T. It can pay expenses of
maintenance, pay off the mortgage and other normal costs assessed upon the lessor (renter) by the lease (rental)
agreement but these generally do not include utilities. However, a lease sometimes may include utilities so long
as they are a part of the total rent and that rent does not vary from month to month during the term of the lease
to reflect variations in utility costs.
(3) A Title Holding Company exempt under Section 501 (c) (2) MAY RECEIVE
CONTRIBUTIONS, BEQUESTS, GIFTS, ETC., BUT THESE ARE NOT DEDUCTIBLE TO THE
DONOR.
(4) CONTRIBUTIONS, BEQUESTS, GIFTS, ETC., given to the 501 (c) (3) exempt
organization for which the 501 (c) (2) holds title to property ARE DEDUCTIBLE TO THE DONOR AND
MAY BE TURNED OVER TO THE 501 (c) (2) for the specific purposes for which contributed or given. In
this case, the member, alumnus, or friend must specify that the contribution, etc., is for the specific purpose of
"paying off mortgage," "building fund to build a new house," "building fund for major renovation," etc., if he or
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she wishes to be safe at an audit on taking the tax deduction. The chapter is not limited on the amount of
money it turns over to its Title Holding Company for the legitimate expenses including paying off the mortgage,
paying property taxes, insurance, etc.
(5) After paying all expenses of mortgage, taxes, insurance, repairs and maintenance,
renovation, etc., the Title Holding Company MUST RETURN TO THE CHAPTER AT THE END OF
EACH FISCAL YEAR THE EXCESS OF INCOME OVER EXPENSE. IRS probably would question any
situation in which expenses exceeded income as being a case of inurement to the chapter members, which is
prohibited and would be cause for cancellation of the tax exempt status of the Title Holding Company.
(6) THE CONTRIBUTIONS, ETC., OF ALUMNI AND FRIENDS MAY NOT BE
USED IN ANY WAY TO REDUCE CHARGES TO INDIVIDUAL MEMBERS OF THE CHAPTER
FOR ROOM, MEALS OR OTHER ELEMENTS OF HOUSE OPERATION.
(7) A TITLE HOLDING COMPANY CANNOT ACCUMULATE FUNDS.
The Title Holding Company cannot set aside part of its income into a reserve fund for future maintenance,
repair or renovation costs. Where a specific time schedule exists for some major renovation, etc., in two or
three years it is possible to get a waiver on remission of excess income to the chapter. But normally, the books
of the Title Holding Company must specifically show such remission of excess income at the end of the fiscal
year.
(8) A JOINT FORM 990 INCOME TAX REPORT MAY BE FILED BY A CHAPTER
EXEMPT UNDER SECTION 501 (c) (3) AND ITS TITLE HOLDING COMPANY EXEMPT UNDER
SECTION 501 (c) (2), but it must be clearly so stated. Unfortunately, I am unable to find specific instructions
on this either in the "Instructions for Form 990," on the Form 990, or elsewhere. I suggest, if applicable in your
case, you consult your local IRS office.
c. SUMMARY, 501 (c) (7) VERSUS 501 (c) (2)
501 (c) (7)
(1) Can hold title to property
(2) Exempt from Federal Income Taxes
(3) Contributions, etc., are deductible
by the donor
(4) Can operate house
(5) Can establish reserve funds
(6) Parent 501 (c) (3) chapters may receive
contributions, etc., which are deductible
to donor and turn these over directly
Title Holding Company
(7)
Remit excess income to chapter
(8)
File joint 990 with chapter
(9)
On dissolution of chapter (charter
withdrawn, chapter to inactive status,
etc.) title to property would go to National
501(c) (2)
Yes
Yes
Yes
Yes
No
Yes
Yes
No
No
No
No
No
No
Yes
Yes
Yes
No
Yes
This summary lists the chief advantages and disadvantages of setting up a House Corporation as one
for which exemption is to be obtained under Section 501 (c) (7) or 501 (c) (2). All are important considerations
but, in my opinion, the major ones are those where the answer is underlined. A (c) (2) cannot establish reserve
funds but a (c) (7) can. However, by proper organization, the chapter can establish the reserve funds and by its
Bylaws put the management of such funds in the hands of a faculty-alumni group to assure its solvency and
protection. Thus, although this is a major difference between the two types of charters and favors the (c) (7), it
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is a situation which can be handled safely with a (c) (2).
The matter of tax deductible contributions is strongly in favor of the (c) (2) and is the major reason for
considering this type of set-up. Although contributions made directly to the (c) (2) are not deductible, those
made to the (c) (3) and then turned over to the (c) (2) are deductible. This definitely is not the case with a (c) (7).
The matter of operation of a house is not too important since the chapter, in either case, may operate it,
even if the house corporation is not so chartered.
Updated by GR Paul R. Jones, from GMA Harold J. Wesselman's, Oct. 22, 1982 revision.
Corrected from August 3, 1994 revision.
From: Paul R. Jones, GR
Date: September 1, 1995
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