Tax law says certain clubs and social groups are exempt from income tax. This can include college sororities. But according to the IRS, this doesn’t apply to sororities created by online schools where the sorority members never meet face-to-face.
A national, for-profit college (the IRS ruling didn’t say which one) started an online sorority. Reading through IRS Letter Ruling 201434022, it appears that this sorority operates similar to other sororities, except almost all activities take place online.
Section 501(c)(7) of the Internal Revenue Code says organizations organized as a club for organized for recreation is exempt from paying income tax. This would seem to apply to a sorority, but the IRS relied on a series of old revenue rulings from the 1950s thru the 1970s, and a court case from 1965, in ruling that an online sorority doesn’t qualify for tax-exempt status.
What is “Social”?
The IRS ruled that because the group didn’t have face-to-face meetings, it didn’t qualify. From the ruling:
Commingling and the promotion of fellowship are not a material part of your operations. Commingling is a necessary and material part in the life of an organization exempt under Sec. 501(c)(7) and is deemed present if such things as meetings, gatherings, and regular facilities are evident…. Face-to-face interaction is important for members of a social club. Organizations that do not afford opportunities for this personal contact among members are not entitled to exemption under Sec. 501(c)(7), even though they may be organized not for profit with no part of their earnings inuring to the benefit of shareholders.
In reading through the rest of the ruling, it appears to me that the IRS may be open to saying an online group could qualify for not-for profit status if there are recreational aspects to the group and/or if the group forms local chapters that engage in periodic group events and activities:
While you engage in some face-to-face interaction at your conferences held once a year, the majority of your activities are performed in an individual capacity and over the Internet rather than face-to-face. Additionally, the topics discussed at your face-to-face meeting and over the Internet pertain more to your organizational aspects rather than the promotion of any recreational or other nonprofitable purposes. Further, you do not expend money on social or recreational purposes.
It looks like the group has the right to appeal this ruling. If I were them, I would immediately update bylaws and create local chapters that have periodic meetings and social outings and see if that would help get the not-for-profit status approved.
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