Bear Left!

These are Charities? The Seamy Side of Yale's Most Exclusive Clubs
Tim Francis-Wright
6 May 2001

On 22 April, this website broke the news that Skull and Bones, the Yale secret society that claims both George H. W. Bush and George W. Bush as members, might be falsely claiming to be a public charity and not just a social club. Not just Skull and Bones, but at least seven other well-heeled Yale organizations also appear to be falsely claiming charitable status. Eight of the most exclusive organizations all have over $1 million in assets, all pay either no or very little income on their substantial annual earnings, and all claim tax-exempt status as charitable organizations contrary to guidance from the Internal Revenue Service. On most universities, fraternities and sororities engage in essentially the same activities, yet they qualify as social clubs and not as charities. Yale should not be in a class of its own, at least in the eyes of the IRS.

[A preliminary report on Skull and Bones is available from our 22 April 2001 issue. It examined the Skull and Bones tax returns from 1998 and 1999.]

Yale has a number of secret societies that have existed since as long ago as 1832 (Skull and Bones) to a very few years ago. Several of these societies have impressive buildings in and around campus. Unlike fraternity houses, they do not house their members, but they serve as clubhouses for meetings that typically occur once or twice per week. This report examines the finances of seven of Yale's secret societies, plus the Elizabethan Club, which owns a house, right next to the Yale admissions office, that houses both an impressive library of old books and a renowned croquet pitch. Much like the secret societies, however, it is closed to the general public most of the time. Outside scholars may view the books, which are the property of Yale University, but only by going to Yale's Beinecke Rare Book Library and requesting transfer of the volumes in question. Even Yale's librarians must wait for their turn for annual tours of the facility: in 1998, 60 were allowed a brief tour, but more had to wait for another chance.

The first hurdle to examining the finances of these groups is that few of them file tax returns under their common names. Exceptions to this rule were the Elihu Club and the Elizabethan Club. Still others have names that are widely known at Yale, or at least less than secret.

(I must thank Rumpus, Yale's tabloid, for publishing parts of the Berzelius web site, including a reference to the Colony Foundation.)

Some of these groups have returns that are particularly tricky to find, although they have done nothing wrong. Skull and Bones deserves special mention of its elusiveness, because it changed its name from the Russell Trust Association to RTA, Inc. in 1961. Book and Snake filed a fiscal year 1999 tax return with a New York City address, the address of its President, not with a New Haven address from which it and the other societies conduct business. Finally, St. Anthony's filed its fiscal year 1999 tax return with a North Haven, Connecticut address, the location of its accountant, not with a New Haven address.

Contrary to longstanding IRS regulations that clearly deny to college fraternities charitable status under the Internal Revenue Code, all of these organizations file tax returns as charitable organizations. Some file as public charities that are exempt from all federal taxation on their income. Some file as private foundations that are subject to minuscule levels of federal taxation. Yet all appear to fail to meet the tests for charitable organizations provided by the Internal Revenue Service. All have provided dodgy charitable deductions to their donors, and all have benefitted from accumulation of income subject to tax rates of no more than 1%.

*St. Anthony's also reported $35,501 in dues from its members.

These organizations accepted donations of $593,344 (plus dues payments in the case of Saint Anthony Hall of $35,501) and had investment income of $2,470,597. They distributed a grand total of $18,300 in charitable donations, including $2,400 in scholarships to unaffiliated Yale students. By the organizations' reckoning, they were liable for aggregate federal taxes of $11,732. (Each organization pays property taxes to the city of New Haven.)

By stated IRS policy, fraternities cannot claim 501(c)(3) status. Assume for the moment that they could. If eight of a college's fraternities were responsible for almost $600,000 in donations and almost $2,500,000 in investment income and distributed a total of $20,100 to unaffiliated good causes, I would believe that the fraternities did not deserve charitable status. None of these groups do anything for the university at large, for the city at large, or for the world at large beyond the care and feeding of a very few undergraduates who are chosen not for their financial need but for their social compatibility.

Each of these eight societies enjoys assets of over $1,000,000. All told, the value of securities, not including cash accounts, is over $23,500,000. Perhaps the most surprising aspect of these numbers is that Saint Anthony Hall has by far the most assets, with Scroll and Key next and Skull and Bones, the most infamous of these societies, far behind.

Relevant Sections of the Internal Revenue Code

The Internal Revenue Code has several sections that are pertinent to these organizations. Section 501(c)(3) allows a tax exemption for charitable organizations. Section 501(c)(7) provides a more limited tax exemption for social clubs.

Section 501(c)(3)

Section 501(c)(3) organizations are those organized for religious, charitable, scientific, literary, educational purposes. They also include organizations that prevent cruelty to animals or test for public safety. The requirements for obtaining 501(c)(3) status are intentionally high, because only donations to 501(c)(3) organizations are deductions against taxable income. For example, 501(c)(3) organizations face strict limits on their political behavior, no matter how high-minded it might be.

Under Treasury Regulation Section 1.501(c)(3)-1, "an organization must be both organized and operated exclusively for one or more of the purposes specified" in Section 501(c)(3). "If an organization fails to meet either the organizational test of the operational test, it is not exempt."

I lack access to the articles of organization of any of these organizations (although the articles might be available under regulations that allow the public to examine an organization's application for exemption from taxation). The relevant regulation at 1.501(c)(3)-1(b)(1)(iv) specifies that "an organization that is empowered by its articles... 'to engage in the operation of a social club' does not meet the organizational test regardless of the fact that its articles may state that such organization is created for charitable purposes." At 1.501(c)(3)-1(b)(4), the regulation specifies that an exempt organization's assets must be distributed to an exempt institution or government. As we will see, the Elizabethan Club mentions in its tax return that its assets would be distributed to Yale University upon the club's dissolution. it is reasonable to assume that each of the entities in question properly met the organizational test when it first received its tax exemption. The organizational test, however, is necessary but not sufficient for 501(c)(3) status.

The operational test, at 1.501(c)(3)-1(c)(2) prohibits a 501(c)(3) organization from having "more than an insubstantial part of its activities" outside of an exempt purpose. Furthermore, an organization cannot allow its net earnings to "inure in whole or in part to private shareholders or individuals." Section 1.501(a)-1(c) defines "private shareholder or individual" as "persons having a personal and private interest in the activities of the organization." Finally, under 1.501(c)(3)-1(d)(1)(ii), "an organization [must] establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders or the organization, or persons controlled, directly or indirectly, by such private interests."

In Better Business Bureau v. United States (326 U.S. 279), the Supreme Court found that "a single non-educational purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly educational purposes." Even though the Better Business Bureau had as its primary purpose the education of business owners, it had as a substantial part of its operations the improvement of business methods. Courts have used this case as precedent for eliminating any tax exemption if any nonexempt purpose is present.

It is this operational test that should doom the tax exemption of each of these organizations. Of all the funds expended by each organization in fiscal year 1999, all but a small amount was spent on upkeep of the club's building and meetings of the members. Charitable activities that did not directly benefit the club's members ranged from $0 to $10,500. On the other hand, each club spent over $100,000 on activities that only its selected members, and not members of the general public, could enjoy in the least.

Section 509(a)(2) and 509(a)(3)

Public charities get benefits that private foundations do not. Most importantly, they can accumulate unlimited investment income within certain guidelines. A private foundation must pay a small tax, generally 1% or 2% on its investment income, unless it meets strict requirements as an "operating foundation." If it fails to distribute its investment income, it faces higher taxes that start at 15%. It also faces strict rules against transactions that involve foundation managers. The IRS presumes that a 501(c)(3) charity is a private foundation unless it meets one of several tests. It can qualify as an organization under Section 170(b)(1)(A) as:

1. A church
2. An educational institution. According to the relevant regulation, such an institution qualifies if "its primary function is the presentation of formal instruction and it normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance."
3. Hospitals and medical research organizations
4. A governmental unit
5. A publicly supported corporation, trust, community chest, fund, or foundation. Such an entity can qualify by:
   • Having at least one-third of its normal support from the public or from governmental units; or
   • To meet a "facts and circumstances" test under Regulation 1.170A-9(e)(3). Of particular note in this section of the Regulations are three facets of the test. First, a publicly supported organization will have "a governing body which represents the broad interests of the public, rather than the personal or private interests of a limited number of donors." Second, such an organization will have publicly available facilities or services, or have public participation in its programs or policies. Third, publicly supported membership organizations will "appeal to persons having some broad common interest or purpose, such as educational activities in the case of alumni associations."
6. Under section 509(a)(2), an organization that receives at least one-third of its support from gifts, grants, contributions, or membership fees; and not more than one-third of its support from its gross investment income (excluding long-term capital gains)
7. A supporting organization of one of the above organizations, under Section 509(a)(3) of the Code. Regulation 1.509(a)-4(e) is very strict about the operations of a supporting organization. "A supporting organization will be regarded as 'operated exclusively' to support one or more specified publicly supported organizations... only if it engages solely in activities which support or benefit the specified publicly supported organizations." Although the supporting organization's income need not go directly to those organizations, any independent activities must support or benefit those organizations. Examples in the regulations include a university press that supports a university, and an alumni association that has its own educational activities and that encourages alumni to contribute to the university itself.
   
   One of the specific tests that an organization must meet in order to qualify under Section 509(a)(3) is the "integral part test" of Regulation 1.509(a)-4(i). This test is designed to ensure that a supporting organization is significant involved in the organizations that it supports, and the supported organizations depend on it. There are many facets to this test, but the regulation notes the required "attentiveness of a beneficiary organization is motivated by reason of the amounts received from the supporting organization."
   
   Several foundations legitimately meet the requirements of this section because they devote all of their income to particular programs at Yale University. We will see that in the case of the societies claiming 509(a)(3) status, little to no income actually goes to the benefit of the university.
   
   Section 509(a)(3) specifies that a supporting organization must be "organized and at all times thereafter [be] operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations." It also mandates that the supporting organization be "operated, supervised or controlled by or in connection with" one or more eligible organizations. The regulations specify that "the relationship required under any of these terms is comparable to that of a parent and subsidiary, where the subsidiary is under the direction of, and accountable or responsible to, the parent organization."

Section 501(c)(7)

Section 501(c)(7) includes social clubs as exempt organizations, but the tax exemption under this section applies only to income from its members and their guests. In general, investment income of a social club of over $1,000 is subject to tax as unrelated business income under Section 512 of the Code. (Investment income earmarked for charitable or educational purposes is exempt from this tax.) These provisions mean that the tax exemption for social club gains little for its members. They do not get a tax exemption for their dues, but the club pays no income. The members would pay income tax on any investment income, so the club pays income tax proportionately, except for the $1,000 exemption.

Even with the tax on investment income, an exempt social club must have "substantially all" of its income from exempt sources. The safe harbor for this test is that no more than 35% of its gross receipts can come from investment income or other nonmembership sources.

Relevant Rulings

The judicial system and the IRS have several rulings that speak to the question of whether clubs like the ones in question at Yale are properly charitable organizations or social clubs.

General

Regulation 1.501(a)-1(a)(2) specifies that "an organization which has been determined to be exempt under the provisions of the Internal Code of 1939 or prior law is not required to secure a new determination of exemption merely because of the enactment of the Internal Revenue Code of 1954 unless affected by substantive changes in law made by such Code." This means that a challenge to the exempt status of these clubs must come from their operations, not from their organization.

Revenue Ruling 75-196 allowed a law library to qualify for 501(c)(3) status, even though the only users of the library were members of the local bar association, a group ineligible for 501(c)(3) status. The key to the ruling was that "the class benefitted [was] broad enough to warrant a conclusion that the educational facility or activity is serving a board public interest rather than a private interest, and is therefore exclusively educational in nature." All of the societies examined in this article severely restrict their membership to a very small subset of the Yale community. It would be difficult for them to claim an exemption that operation of their private libraries was exempt under this revenue ruling.

Fraternities

A string of IRS rulings have made clear that fraternities at universities, no matter how charitable they may be, are not 501(c)(3) organizations. In 1922, I.T. 1427, and, in 1929, General Counsel Memorandum 5952, specified that fraternities were not charitable organizations under the Internal Revenue Code of the time. Revenue Ruling 69-573 declared that a college fraternity was a 501(c)(7) social club, not a 501(c)(3) organization. It reads, in part, as follows:

The fraternity is an organization of students and alumni, with those currently attending school comprising its active membership. New members are chosen in their freshman or sophomore years by the active members. The basis for selection is largely one of companionability, although some academic qualifications also exist. The fraternity owns a chapter house, which was built with the proceeds from contributions by its members, and which contains living rooms, dining rooms, sleeping rooms, study rooms, and a library. The chapter house also serves as a center for the social activities of its members. The fraternity is not operated as an integral part of the college nor does the college exercise any direct control over its membership.

This description almost exactly describes the situation of these societies at Yale. (The only exceptions are the year in which new members are chosen, and the lack of sleeping rooms in any of the clubs.) The ruling noted that an earlier ruling, 58-589, had described "the characteristics of a social club as personal contacts, fellowship, and a commingling of members." It concluded that while a "college fraternity does in some degree contribute to the cultural and educational growth of its members during their student years, this is not its primary purpose....Such an organization is primarily a social club."

Some activities associated with fraternities are eligible for 501(c)(3) status, but these activities are narrowly defined. Revenue Ruling 56-403 specified that a fraternity could establish a separate 501(c)(3) organization that provided scholarships to the fraternity's members. Revenue Ruling 60-367 allowed charitable contributions to a college that sought to acquire or construct fraternity housing. The college would own the housing and rent it to fraternity members on short-term leases. Because the college would own the property, not the fraternity, donations for the program were charitable in nature. A recent private letter ruling (200003013) allowed a similar program in which a college constructed new fraternity houses, and then leased the houses to fraternities through cancellable five-year leases.

Private Inurement

In American Campaign Academy v. Commissioner (92 TC 1053), the Tax Court found the activities of an organization that trained only Republican campaign professionals were non-exempt. These activities significantly benefitted the private interests of Republican candidates, even though the candidates were not shareholders or insiders.

The primary activities of all of these ostensibly charitable institutions is to benefit the lives of the Yale undergraduates lucky enough to be selected by the previous class. As fraternities, they would all be eligible, at least in theory, for 501(c)(7) status. In practice, most of them would have too much investment income to enjoy any tax exemption. If these groups claim that their missions and organizations are different from that of fraternities, then the cases above allow a different line of attack. Under Better Business Bureau, the provision of a building that functions as a social club would invalidate the tax exemption under Section 501(c)(3). Under American Campaign Academy, the provision of exclusive facilities for a small set of members should be a nonexempt purpose that would also invalidate that tax exemption.

The Public Charities

Several of the clubs claim public charity status. As public charities, they avoid paying even the 1% or 2% tax on investment income that the other entities pay. They also avoid the prohibitions on self-dealing that the private foundations must avoid.

The Elihu Club, Inc.

Elihu is unique among the secret societies by filing a tax return under its own name and with the street address of its house in New Haven. The return claims, on line 11 of Part IV of Schedule A, that it is an organization that normally receives a "substantial part" of its support from a governmental unit or the general public. The association meets the 35% safe harbor for this sort of test, so Elihu is exempt from the rules regarding private foundations.

Elihu lists the conduct of "educational programs for the benefit of undergraduate members" as its exempt purpose achievement on its return. The explicit instructions for Part III of the Form 990 require Elihu to "[s]tate the number of clients served, publications issued, etc. Discuss achievements that are not measurable." As the bottom of Part IV of the return mentions, "Form 990 is available for public inspection and, for some people, serves as the primary or sole source of information about a particular organization. How the public perceives an organization in such cases may be determined by the information presented on its return. Therefore, please make sure the return is complete and accurate and fully describes, in part III, the organization's programs and accomplishments." (Emphasis added.)

The Elihu return cuts some corners by allocating most costs exactly 80% to program services and 20% to management and general. Some categories, like alumni directories, should certainly go in the latter category. Furthermore, it is not clear at all that Elihu engaged in any charitable activities whatsoever. Each of its program service expenditures appears to be compatible with the expenditures of a social club, not a charity. In order to claim status as an exempt educational institution, Elihu would need to have a set faculty and curriculum, neither or which it has. If Elihu did not have 501(c)(3) status, then its contributors could not claim over $102,000 in donations as charitable contributions. It would have to pay income taxes on its investment income.

Elizabethan Club a/k/a Yale University Elizabethan Club, Inc.

The Elizabethan Club return claims, on line 13 of Part IV of Schedule A, that the organization qualifies for public charity status because it is "supports" Yale University, according to the rules under Section 509(a)(3) of the Internal Revenue Code. This box is very important because it allows the club to avoid the private foundation rules. Of all of the clubs examined in this article, this club is the only one which might be able to use this box legitimately. Unlike the other clubs, which have their own investment advisors, Yale University invests the club's endowment for it. Furthermore, the books in the club's library are the property of Yale University. Finally, the tax return states that upon dissolution, the club would give all of its assets to Yale. (It is likely that all of the clubs have similar language to this last clause in their articles of association.) It is possible to argue that Yale benefits from the assets that the club holds, because the club acts as a private library under some control of Yale.

The club's return shows some strange decisions. First, all of the club's expenses are regarded as program expenses, with nary a cent spent on management or general expenditures. Second, income from the club's endowment is listed as program service revenue, the category for receipts like admission fees from an organization's exempt activities. Finally, the return ignores the instructions for Part VIII of the return and fails to demonstrate how the related function income relates to the accomplishment of the club's exempt purposes.

Although the club engaged in a charitable activity, that of maintaining a library, it is not clear that the public benefitted from the library. For a scholar who is not a club member to use any of the books, she would need to go the Beinecke rare Book Library at Yale and have the books moved from the club to the Yale library. It is also clear from the tax return that a substantial part of the club's activities involves socializing: the club spent more money on food and beverages ($23,262) than it did on almost anything else. Regular activities such as tea parties and croquet mean that the club has an additional significant use as a social club in addition to its exempt use as a library. The regulations at 1.501(c)(3)-1(c) make clear that any significant activity that is not an exempt activity will void an organization's exempt status. If the club lacked 501(c)(3) status, then its contributors could not claim over $41,000 in donations as charitable contributions. It would have to pay income taxes on its investment income. Finally, its investment income (except for extraordinary capital gains) could not exceed 35% of the gross receipts of the club. The Elizabethan Club might fail this last test in 1999, depending on how much of its endowment income represents dividends and short-term capital gains.

Examining the depreciation schedules reveals that the Elizabethan Club placed equipment and improvements to buildings into service of $65,441 in calendar year 1999.

Scroll and Key a/k/a Kingsley Trust Association

The Kingsley Trust Association return claims, on line 13 of Part IV of Schedule A, that the organization qualifies for public charity status because it is "supports" Yale University, according to the rules under Section 509(a)(3) of the Internal Revenue Code. This box is very important because it allows Kingsley to avoid the private foundation rules. It is not enough for Scroll and Key to have its members consist only of Yale students and alumni. Kingsley's return essentially states that it was organized by Yale University; and is operated exclusively for the benefit of, performs the functions of, or carries out the purposes of, Yale University.

The only grants that the organization made in fiscal year 1999 went to 29 members of the association, who received grants averaging just over $1,000 apiece. According to the supporting schedule for Line 4 of Part III of the return, the association "awards fellowships to it [sic] members who are enrolled in accredited graduate or professional programs." It is hard to see how Yale benefits from the $6,000,000 of assets that Kingsley holds: the fellowships do not depend on the school that the recipients attend. Yale doesn't get any grants or contributions made by Kingsley, according to the returns. Yale University does not operate, supervise, or control Scroll and Key. Because of this lack of control, supervision, or operation, the Kingsley Trust Association fails to be a public charity.

RTA lists "academic support - provides intellectual and moral improvement to its members and financial assistance to Yale University graduates" as its exempt purpose achievement on its return. Most of its expenses, however, are for the upkeep of a house near campus, for "undergraduate meetings" and for salaries paid to workers at the house. Except for the fellowship grants, each of its program service expenditures appears to be compatible with the expenditures of a social club, not a charity. As we noted earlier, fraternities may set up a separate 501(c)(3) organization that grants scholarships to fraternity members, but the fraternity itself is required to have 501(c)(7) status.

If Scroll and Key did not have 501(c)(3) status, then its contributors could not claim over $102,000 in donations as charitable contributions. It would also have to pay income taxes on its investment income.

Examining the depreciation schedules reveals that the Kingsley Trust Association placed equipment and improvements to buildings into service of $134,722 in fiscal year 1999.

Skull and Bones a/k/a RTA, Inc.

The RTA, Inc. return claims, on line 13 of Part IV of Schedule A, that the organization qualifies for public charity status because it is "supports" Yale University, according to the rules under Section 509(a)(3) of the Internal Revenue Code. This box is very important because it allows RTA to avoid the private foundation rules. It is not enough for Skull and Bones to have its members consist only of Yale students and alumni. RTA's return essentially states that it was organized by Yale University; and is operated exclusively for the benefit of, performs the functions of, or carries out the purposes of, Yale University. It is hard to see how Yale benefits from the $4,000,000 of assets that RTA holds: Yale doesn't get any grants or contributions made by RTA, according to the returns, except possibly for "occupancy." It is more likely that RTA is claiming that it performs the functions of, or carries out the purpose of Yale University. In any case, Yale University does not operate, supervise, or control Skull and Bones. Because of this lack of control, supervision, or operation, RTA, Inc. fails to be a public charity.

RTA lists "educational programs" as its exempt purpose achievement on its return. The explicit instructions for Part III of the Form 990 require RTA to "[s]tate the number of clients served, publications issued, etc. Discuss achievements that are not measurable." As the bottom of Part IV of the return mentions, "Form 990 is available for public inspection and, for some people, serves as the primary or sole source of information about a particular organization. How the public perceives an organization in such cases may be determined by the information presented on its return. Therefore, please make sure the return is complete and accurate and fully describes, in part III, the organization's programs and accomplishments." (Emphasis added.)

It is not clear at all that Skull and Bones engaged in any charitable activities whatsoever. Each of its program service expenditures appears to be compatible with the expenditures of a social club, not a charity. If Skull and Bones did not have 501(c)(3) status, then its contributors could not claim over $116,000 in donations as charitable contributions. It would have to pay income taxes on its investment income. Finally, its investment income (except for extraordinary capital gains) could not exceed 35% of the gross receipts of the club. Skull and Bones would fail this last test in 1999, after eliminating long-term capital gains from the gross receipts equation.

Examining the depreciation schedules reveals that RTA placed equipment and improvements to buildings into service of $162,232 in fiscal year 1999.

Wolf's Head a/k/a Phelps Association

The Phelps Association return claims, on line 11 of Part IV of Schedule A, that it is an organization that normally receives a "substantial part" of its support from a governmental unit or the general public. However, the association falls short of the 35% safe harbor for this sort of test. This box is very important because it allows Phelps to avoid the private foundation rules. It is possible for an organization to fail the 35% test and still meet the requirements in the regulations. However, Treasury Regulation 1.170A-9(e)(3)(vi) requires its facilities or services to be publicly available. The only services that Wolf's Head provided in 1999 to the general public were $2,400 in prizes to Yale University students.

On the part of the Phelps return asking for its program service accomplishments, the return reads "most of the association's expenses are for the maint.[sic] & operation of a building used by the undergrads at Yale for study, library, and educational use. Also grants and scholarships provided." Operation of a building for selected undergraduates to use for study, library, and educational use might well be a charitable purpose, but Wolf's Head also serves as a social club. Under the doctrine of Better Business Bureau vs. United States, this non-exempt purpose would taint the association's tax exemption. If Wolf's Head had a separate foundation that only provided scholarships, then that separate foundation would be in good stead. But its library is restricted to 15 undergraduates out of more than 5000: the class that benefits from the Wolf's Head library is private in nature.

One striking aspect of the Phelps return is that the organization has lent $300,000 to an individual named Steve Sherrill. It is not clear to me why any nonprofit group would be in the business of making large loans to anyone. Such a loan could imperil the organization's exempt status yet another way, by providing benefits to a particular person, Mr. Sherrill, instead of the public at large.

The Phelps return for some reason claims that its administrative expenses belonged under "program services" rather than "management and general." It also includes $17,872 for "supplementation of undergraduate expenses," whatever those may be. On the whole, out of over $300,000 of income, only $2,400 went to scholarships. The remainder was used for undergraduate socializing and the maintenance of the association's house in New Haven. These are valid expenses for a fraternity, but not for a charity. If Wolf's Head did not have 501(c)(3) status, then its contributors could not claim over $120,000 in donations as charitable contributions. It would also have to pay income taxes on its investment income.

The Private Foundations

The societies that claim private foundation status each pay a small tax on their investment income. However, each is still subject to the rules prohibiting private inurement, and each must still have a charitable purpose as its only significant activity. Each of the private foundations-- Berzelius, Book and Snake, and St. Anthony's--includes all of its fraternal activities under "disbursements for charitable purposes" and provides little or no charitable benefits whatsoever.

Berzelius a/k/a Colony Foundation

The Colony Foundation return claims, on Part XVI-B of its 1999 tax return, that it "assisted in various educational activities concerning Yale University." However, the foundation made no grants to any individuals or organizations. In fact, its only activities were the maintenance of a house for its undergraduate members, and for their entertainment. The foundation reported no direct charitable activities on Part IX of its 1999 return.

If Berzelius did not have 501(c)(3) status, then its contributors could not claim over $31,000 in donations as charitable contributions. It would also have to pay income taxes on its investment income, not just the 2% excise tax imposed on private foundations.

The publicly available Colony Foundation tax return for fiscal 1999 is incomplete, because it lacks the supporting schedules outlining both investments and "other expenses" from the first page of the return. The fiscal year 1998 return at www.guidestar.org lacks the same schedules.

The Colony Foundation incurred a tax liability of $661 in fiscal 1999, based on 2% of its net investment income.

Book and Snake a/k/a Stone Trust Corporation

On part IX of its 1999 tax return, the Stone Trust Corporation indicated that its sole direct charitable activity for the year was the provision of "a forum for the exercise of the student's intelligence and the formation of their character in the prescence [sic] of contemporary students and with the advice of faculty members as well as outside speakers having many diverse interests and backgrounds." In essence, the corporation's activities bear a striking resemblance to the activities of a fraternity, an organization ineligible for 501(c)(3) status. The only truly charitable activity for the corporation was a $5,000 contribution to Yale University. While this donation is laudable, it does not turn a fraternity into a charity. If Book and Snake did not have 501(c)(3) status, then its contributors could not claim over $76,000 in donations as charitable contributions. It would also have to pay income taxes on its investment income, not just the 2% excise tax imposed on private foundations.

Examining the depreciation schedules reveals that the Stone Trust Corporation placed equipment and improvements to buildings into service of $54,935 in fiscal year 1999. The Stone Trust Corporation incurred a tax liability of $1,594 in fiscal 1999, based on 2% of its net investment income.

Saint Anthony Hall a/k/a Anthony Trust Association

While much of the public knows about Skull and Bones, and many Yale students know something of the long history of Scroll and Key, few realize that Saint Anthony Hall has the largest endowment of all of Yale's secret societies.

This return is notable for its comprehensiveness, even listing all of the club's fully depreciated equipment and furnishings. The Anthony Trust Association is surely one of the few charitable organizations around that has a "kegerator" listed on its schedule of assets. Another interesting aspect is that the return mentions a $1,630 contribution to "St. Anthony Hall" for fraternal dues. The return lists it as a private foundation. I found neither "Saint Anthony Hall" nor "St. Anthony Hall" listed as an exempt private foundation in IRS Publication 78, so it is not clear who benefitted from this grant.

On part IX of its 1999 tax return, the Anthony Trust Association lists three exempt activities: providing operating funds for a 45 member fraternal educational organization" of $151,423; "grants for study and travel" of $2,400; and a lecture series of $714. In part XVI-B, the return states that "the foundation operates an undergraduate fraternal facility and supports reunion activities among graduated members." The lecture series is probably an exempt activity, and the grants for study and travel might be exempt, but providing funds for a fraternal organization is definitely not an exempt purpose. By the association's admission, its main activity is that of a fraternity, an organization ineligible for 501(c)(3) status. Saint Anthony's did not have 501(c)(3) status, then it would have to pay income taxes on its substantial investment income. Finally, its investment income (except for extraordinary capital gains) could not exceed 35% of the gross receipts of the club. St. Anthony's would fail this last test in 1999, and would face loss of its tax exemption on any of its income

Examining the depreciation schedules reveals that the Anthony Trust Association placed equipment and improvements to buildings into service of $237,842 in fiscal year 1999. Because it included the impending renovation of its building as a charitable use, the Trust incurred no taxes in 1999.

Charitable Status

There is evidence in the tax returns that some of these organizations have engaged in activities that endanger even their status as exempt fraternities. The loan by Wolf's Head to a private individual indicates that it might be running afoul of the private inurement rules. An undisclosed association by Skull and Bones with a private social club would make it liable for severe penalties.

Each of these organizations is essentially a fraternity operating under the guise of a charitable organization. As fraternities, none of them would be able to maintain 501(c)(3) status. The standard of Better Business Bureau vs. United States would preclude them from claiming charitable status as long as the fraternal aspect of their existence continued. While each organization could establish a separate charitable organization, that organization would actually have to perform a charitable function. Merely funding the revelry of a few Yale undergraduates and their friends is not and should not be considered charitable by the federal government.

Disclaimer: I attended Yale from 1984 to 1988. I knew exactly one person whom I knew to be a member of Skull and Bones, and two others who joined other senior societies. I was not tapped by any of the societies at Yale, and I would have rejected any advances. I am neither a tax lawyer, nor a certified public accountant; my experience reading tax returns has been extensive but not based on formal schooling in these matters.

Resources: The tax returns summarized in this article are available from www.guidestar.org, which has hundreds of thousands of tax returns for 501(c)(3) organizations available for download.

The Legal Information Institute has full-text version of the Internal Revenue Code and Treasury Regulations. The FindLaw database has Supreme Court opinions dating back to 1893.