Monday, July 22, 2013

Tax Break for the Freemasons But Not College Fraternities

Non-profit organizations are typically organized as section 501(c)(3) organizations, for religious or charitable purposes, or as section 501(c)(4) organizations, for social welfare.  But there are other categories of non-profit organizations.

Internal Revenue Code section 501(c)(10) provides an exemption from taxes for "Domestic fraternal societies, orders, or associations, operating under the lodge system— (A) the net earnings of which are devoted exclusively to religious, charitable, scientific, literary, educational, and fraternal purposes, and (B) which do not provide for the payment of life, sick, accident, or other benefits."

The exemption was created in 1969 to specifically cover the Masons.

In the 1970s, the Zeta Beta Tau national college fraternity, with around 80 chapters nationwide, claimed that they should also qualify for the tax-exemption under section 501(c)(10).  The fraternity already qualified for partial tax-exemption under the different section 501(c)(7), which applied to social clubs, but social clubs are subject to tax on their investment income.  The fraternity had $1,936 of investment income in 1971 that it claimed were tax-free because it was also a "domestic fraternal society" that operated under a lodge system.

Coincidentally, Zeta Beta Tau is the first Jewish fraternity in the United States. 

In the landmark case of Zeta Beta Tau Fraternity, Inc. v. Commissioner, the Tax Court concluded that the Zeta Beta Tau fraternity did not qualify under section 501(c)(10).

The court admitted that "clearly, like the Masons, Zeta Beta operates under the lodge system and its local chapters engage in some activities that concededly further the charitable and educational goals of the fraternity." The fraternity engaged in public service activities such as providing scholarships, leadership workshops, blood drives, "Easter Seal drives," and an annual dance marathon to raise funds for charity, besides the non-charitable activities of "football weekend" and daily meals at the frat house.

But the Tax Court noted that the real purpose of the Zeta Beta fraternity was to provide housing, board, and social activities for its undergraduate members, which was "fundamentally different from fraternal organizations such as the Masons."  Also, the legislative history demonstrated that section 501(c)(10) was supposed to cover the Masons, not college fraternities.

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