Rev. Rul. 60-367

Advice has been requested whether gifts made to a university or college (hereinafter referred to as college) for the purpose of acquiring or constructing a housing facility for a designated fraternity, title to which will be in the college, are deductible for Federal income tax purposes under section 170 of the Internal Revenue Code of 1954 and are also deductible for estate and gift tax purposes under sections 2055 and 2522, respectively, of the Code.

X college has an enrollment of about 600 students. For many years housing for these students has been principally furnished either through college-owned dormitories or by fraternities. The college-owned dormitories accommodate approximately 115 students and the fraternities accommodate approximately 350 students. The remainder of the students either live at home or rent rooms in private homes in the college town.

Over the past several years increasing difficulty has been encountered by the fraternities in properly maintaining their houses and in establishing any program of new construction to replace inadequate and deteriorated facilities. Accordingly, in a number of instances the presently existing fraternity houses are in a physical condition which does not measure up to the standards desirable for the housing of college students. Recognizing the importance of fraternity houses to the overall student housing problem and to student recruitment and enrollment, the college trustees have adopted an official policy of improving and providing proper housing for all fraternity members as a part of the college's activity or function of seeing that all its students are properly housed.

A number of prospective donors have indicated an interest in making gifts to the college for the purpose of improving the housing conditions of the fraternity members. The proposed gifts will be used by the college for the construction of housing for fraternity members or, in the event that the college had acquired ownership of existing fraternity housing, for the reconstruction and remodeling of such houses. None of the funds will be expended on improvements owned by any one other than the college.

It is anticipated that various donors may desire to designate the use of part or all of their gifts for housing to be occupied by members of particular fraternities. It will be the policy of the college to allow such designation and to honor the designation so long as this is consistent with the policy, needs, and activities of the college, but it will accept gifts with such designation only with the understanding that the designation is not to restrict or limit the full ownership rights of the college in the property acquired by use of the gift, or the future uses which the college may determine to make of the property.

It is the expectation and declared policy of the college trustees that all fraternities will ultimately be treated alike by administrative control over the types of gifts accepted. Some fraternities, by reason of donor designation of gifts, may have their housing conditions improved sooner than others, but it is the policy of the college that ultimately all fraternities shall be on a comparable basis. It is the policy of the college that the amounts spent on a fraternity house, the size, the character and architecture of the accommodations will be controlled and determined by the college and will be consistent with the college's policy in respect of nonfraternity housing.

The contemplated housing will be owned by the college and will be rented to fraternity members either as fraternity groups or as individual students, but leases will be for short-term periods. The rentals in either case will be substantially equivalent to the rentals charged for comparable housing facilities in the college dormitories.

Section 170(a)(1) of the Code states that there shall be allowed as a deduction any charitable contribution (as defined in subsection (c)), payment of which is made within the taxable year. Charitable contributions as described in subsection (c) include contributions or gifts to or for the use of a corporation organized and operated exclusively for educational purposes. Sections 2055(a) and 2522 of the Code provide, respectively, deductions for Federal estate tax and gift tax purposes for bequests and gifts to or for the use of corporations organized and operated exclusively for educational purposes.

The X college is a corporation organized and operated exclusively for educational purposes. A gift to the college for the educational purposes of the college would be deductible under section 170(a) of the Code. On the other hand, a gift to a social fraternity for the purposes of the fraternity would not be a gift to a corporation organized and operated exclusively for educational purposes and would not be deductible. See G.C.M. 5952, C.B. VIII-1, 172 (1929), and Rev. Rul. 56-329, C.B. 1956-2, 125.

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.

It is noted that it is the policy of the X college to permit donors to designate the fraternity for the housing of whose members they desire their gifts to be expended and to honor such designation insofar as possible, but that the college accepts such gifts only with the understanding that, although it may be the practice of the college to lease the house to the designated fraternity, the college will not be obligated to such use of the house or to make such lease. It is noted that it is also the policy of the X college that the contemplated housing will be leased under short-term leases at rentals which are closely comparable to the rentals charged for comparable housing facilities in the college dormitories which in some cases may be less than commercial rentals. Such a policy is consistent with the concept that fraternity housing is merely an extension of the dormitory system and is consistent with rights of ownership in the college, just as the rental of dormitory rooms to students at less than commercial rentals is consistent with the college's ownership of the dormitory. However, an obligation or understanding that the property will be leased to a designated fraternity under a long-term lease may be inconsistent with full ownership rights in the college.

It is the policy of the X college that arrangements regarding construction, maintenance, and operation of the fraternity housing will be consistent with the pattern for other student housing, and the college will retain discretion and control with respect to the amount spent on a fraternity house and with respect to the size, character, and architecture of the accommodations.

To summarize:

(1) The X college has officially adopted a clearly defined policy of providing proper housing for all its students. A part of this official policy to which the college has committed itself is the improving and providing of appropriate housing for all fraternity members.

(2) In keeping with this policy, the college will accept gifts designated for improving or building a house for a designated fraternity and will honor such designation so long as this is consistent with the policy, needs, and activities of the college, but the terms of the gift and the acceptance make it clear that the designation does not restrict or limit the full ownership rights of the college in the property acquired by use of the gift or future uses which the college may determine to make of the property.

(3) The college retains and presumably will exercise discretion and control with respect to the amount spent on a fraternity house and with respect to its size, character, and architecture, which will be consistent with the standards and pattern of the college for other student housing and consistent with the expressed housing policy of the college. No part of the gift will be spent on improvements owned by any one other than the college.

(4) The policy of the college is that leases will be for short-term periods and rentals will be closely comparable to the rentals charged for comparable housing facilities in the college dormitories.

In view of the foregoing, it is held that contributions or gifts made to the X college, under the circumstances outlined above, for the purpose of acquiring or constructing fraternity houses which will be owned by the college, constitute allowable deductions by donors in computing their taxable income in the manner and to the extent provided in section 170 of the Code.

It is further held that the amount of all bequests, devises, legacies and transfers to the X college for the purpose and under the circumstances outlined will be deductible, under section 2055(a) of the Code, from the gross estates of decedents in computing the value of the taxable estate for Federal estate tax purposes; and the amount of all gifts to the X college for these purposes and under the outlined circumstances will be deductible, under section 2522 of the Code, from the amount of gross gifts in computing taxable gifts made by donors during a calendar year for Federal gift tax purposes.