Canadian Appeals Court Revokes Fraternity Foundation’s Tax Exemption For Private Benefit

I have often wondered about the tax exempt status of college Greek organizations but I never really stopped to figure it out until now.  There is a somewhat dated but still useful EO CPE text on the topic.  It pretty much explains why college Greek letter organizations are not charities under 501(c)(3), but are instead social clubs exempt under 501(c)(7).  The funny thing is that like a lot of exempt, non-(c)(3) organizations, the Greek organizations depend on donations.  And donations are often easier acquired if the donor gets a tax deduction.  Alumni can’t get a charitable contribution deduction for donations to IRC 501(c)(7) organizations. “What to do?” the local chapter might ask.  The answer is to form a captive educational foundation and funnel the foundation’s deductible donations to the college fraternities or sororities via scholarships and other educational grants from that foundation. Alumni donate to the educational foundation and they get a deduction they would not get if they gave the money to the favorite chapter. 

Take the Pi Kappa Alpha Foundation for example.  They are just like all the other Greek foundations, by the way.  The Foundation is a 501(c)(3) organization because of its educational purpose.  It legitimately claims tax exemption even though it serves only PIKEs.  The Service worked this all out with Greek letter organizations years ago.  The PIKE Foundation proclaims it. “Your support enables the Pi Kappa Alpha Foundation to provide direct financial assistance to student brothers and significant financial support for PIKE U, Pi Kappa Alpha’s leadership training program.” So, whatever educational purpose it serves, its exclusive beneficiaries are PIKEs.  Like all Greek foundations, the PIKE Foundation grants scholarships only to Pikes, and may even build or renovate the PIKE House, still with 501(c)(3) status and the deductible donations that status facilitates.  They just have to designate that part of the house a library, a computer room or some kind of educational room (dart boards, pool tables, and beer kegs optional of course).  No kidding.  It all seems so ridiculously easy, this disguised private benefit.  Why should the law even bother with the foundation artifice? 

But folks in Canada are having none of that.  In Sigma Chi Canadian Foundation v. Canada (Revenue), the Federal Court of Appeal told Sigma Chi Canada Foundation that it doesn’t care what the IRS lets them get away with in the lower 48, that sort of private benefit will not be tolerated in Canada.  If the Foundation limits “educational”  grants solely or even just substantially to fraternity members, it is not a charity.  Might be a social club but not a charity.  And with that, the Court upheld the revocation of the Foundation’s tax exempt status:  

First, we see no palpable and overriding error in the finding that Sigma Chi has provided private benefits to its members through its inhouse scholarships. While Sigma Chi submits that these scholarships are open to all male university students eligible to apply for Sigma Chi membership, they are ultimately payable only to recipients who are accepted as members or pledges.

Moreover, despite Sigma Chi’s commitment in the compliance agreement to “devote all of its resources to charitable activities” and to not restrict the beneficiaries of the scholarships and educational assistance program, the record shows that it continued to grant in house scholarships in 2015, 2016, 2020, and 2021. In 2015 and 2016 respectively, 75% and 82% of Sigma Chi’s scholarship funds were restricted to Sigma Chi members and pledges. In 2020 and 2021, Sigma Chi awarded $216,760 in inhouse scholarships. The Minister also points out that, at the time of its registration, Sigma Chi’s stated purpose of assisting students pursuing higher education made no mention of any restriction to members or pledges. But as recently as May 2023, Sigma Chi stated on its website that “[t]he Foundation exists as a vehicle for local Active Chapters, Alumni Chapters and/or House Corporations to raise tax-deductible funds for educational purposes— primarily for the benefit of Active Chapters and Active brothers.”  This is not a charitable purpose under the ITA.

darryll k. jones 

da