A student housing developer will not be able to use tax-exempt bonds to finance a new development after the Internal Revenue Service concluded in a private-letter ruling that it failed to qualify as a 501(c)(3) charitable organization.

"Providing housing for students in the manner you have described, absent special facts and circumstances, is a trade or business that is not a charitable activity," the agency stated in its ruling. "Accordingly, you do not qualify for exemption as [a charitable] organization ... and you must file federal income tax returns."

The ruling, dated Aug. 26 but not released until Friday, did not identify the developer or the higher education institutions involved. But it included a letter from the IRS stating that its proposed determination denying tax-exempt status to the organization is final because it did not appeal it within 30 days.

While private-letter rulings are supposed to be applicable only to the issuers that request them, they are believed to provide insights into the IRS' thinking, particularly on tax matters for which little guidance currently exists.

The IRS determined the developer did not meet the standards for a charitable organization because it did not restrict its services to a charitable class of students, nor did it provide free or below-cost services.

Further, while a housing organization can qualify as tax-exempt if it is formed to provide housing exclusively for students or faculty of a specific university that lacks needed facilities, the developer failed to meet this requirement because it was negotiating developing housing facilities for several universities.

The ruling is the latest in a series of IRS determinations regarding student housing organizations that are pushing to be considered 501(c)(3) organizations, in part so they can issue tax-exempt bonds.

Several years ago, the IRS handed out a number of rulings to similar organizations. In August 2001, the IRS' exempt organizations division published an internal training textbook for agents stating it had received several applications for tax-exempt status from these groups, all of which were seeking to build student housing with tax-exempt bonds. In most cases, the organizations would earn a fee from colleges nationwide for developing and managing the facilities, which, in addition to housing, sometimes included other facilities such as cafeterias.

The textbook stated that unless the organizations met some specific charitable criteria, they should not be granted tax-exempt status, since they would be functioning more like commercial businesses than charitable organizations.

The textbook described a previous revenue ruling, in which the IRS granted tax-exempt status to an organization that provided general student housing, since it was clear that the college and community controlled its activities. In that situation, the organization responded to a community request to provide needed housing that a college could not afford and that is operated substantially below cost, either through reduced student fees or contributions and university subsidies. However, that organization's housing development was not financed with tax-exempt bonds.

In most cases, a student housing organization would fail to meet the standards for tax-exempt status, according to the textbook.

"The essential facts and circumstances ... community control, college involvement, and below-cost operation - are significantly absent in the common fact pattern," the textbook stated.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.