A student housing organization does not qualify for tax-exempt status and cannot finance projects with tax-exempt bonds because it fails to meet several charitable criteria, the Internal Revenue Service concluded in a private-letter ruling released last week.

"You have failed to establish that your operations will further a charitable purpose and that you will not be operat[ing] for a substantial non-exempt private purpose," the IRS stated in the ruling. "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 ruling, dated May 21 but not released until a week ago, did not identify the organization or the universities involved. But the IRS found the organization did not restrict its services to a charitable class of students, nor did it provide free or below-cost services.

"Providing services at cost and solely for exempt organization is not sufficient to characterize the activity as charitable," it stated.

The ruling also included a letter from the IRS stating that its proposed determination that the organization was not tax-exempt was final because the organization did not appeal it within 30 days.

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

This ruling is the latest in a series of IRS determinations regarding student housing organizations that want to be considered 501(c)(3) organizations that are qualified to 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 would not be granted tax-exempt status, since they would be functioning more like commercial businesses than charitable organizations.

"Providing housing for students, absent special facts and circumstances, is a trade or business that is not charitable," the IRS stated.

However, a student housing organization could qualify for tax-exempt status if its housing was aimed specifically at a charitable class, such as lower-income students who could not afford university-provided housing.

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 the college could not afford, and 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.

Despite coming years after the bulk of the decision, the May 21 ruling appears to fall in line with the IRS' traditional stance on these organizations.

"I haven't seen one of these for a long time," said Carol Duane Olson, an attorney with Peck, Shaffer & Williams LLP in Cincinnati, who noted that the textbook provided strong guidelines for similarly situated organizations.

"They kind of gave you a road map of how to do it ... I saw this exact situation 10 years ago, and then service was not willing to give a positive ruling," she said.

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