## Facts

- Zeta Beta Tau Fraternity, Inc. was a national college fraternity organized as a New York corporation, serving as the central organization for roughly 80 local chapters and related house corporations.
- The IRS had recognized Zeta Beta Tau as exempt under I.R.C. § 501(c)(7) (social club) since 1940.
- For the taxable year ending June 30, 1971, the IRS determined a $1,936 deficiency in unrelated business income tax based on the fraternity’s investment income under § 512(a)(3)(A), which applies to § 501(c)(7) organizations.
- After enactment of § 501(c)(10) (domestic fraternal societies) in 1969, Zeta Beta Tau sought reclassification to § 501(c)(10) to avoid UBIT on investment income.
- The IRS denied reclassification, relying on Treas. Reg. § 1.501(c)(10)-1, which provides that organizations described in § 501(c)(7), including national college fraternities, are not described in § 501(c)(10).
- Zeta Beta Tau petitioned the U.S. Tax Court; the case was submitted fully stipulated under Tax Court Rule 122.

## Issues

1. Whether a national college fraternity recognized as a § 501(c)(7) social club may also qualify as a § 501(c)(10) domestic fraternal society.
2. Whether Treas. Reg. § 1.501(c)(10)-1, excluding § 501(c)(7) organizations (including national college fraternities) from § 501(c)(10), is valid.
3. Whether, as a consequence, the fraternity’s investment income is included in unrelated business taxable income under § 512(a)(3)(A).

## Decision

- The Tax Court held that Zeta Beta Tau did not qualify under § 501(c)(10).
- The Tax Court upheld Treas. Reg. § 1.501(c)(10)-1 as valid.
- Because the fraternity remained a § 501(c)(7) organization, its investment income was subject to UBIT under § 512(a)(3)(A).
- Decision was entered for the Commissioner, sustaining the deficiency.

## Legal Principles

- An organization described in § 501(c)(7) may be excluded from § 501(c)(10) where Treasury has reasonably interpreted the statutory scheme to treat the exemptions as distinct categories.
- Treas. Reg. § 1.501(c)(10)-1 is a valid exercise of Treasury’s rulemaking authority when it reasonably implements congressional intent and is not inconsistent with the statute.
- Congress enacted § 501(c)(10) to exempt certain lodge-system fraternal societies devoting net earnings to specified purposes, not to reclassify college social fraternities historically treated as § 501(c)(7) social clubs.
- For § 501(c)(7) organizations, § 512(a)(3)(A) generally includes investment income in unrelated business taxable income.

## Conclusion

The Tax Court concluded that a national college fraternity classified as a § 501(c)(7) social club could not claim exemption under § 501(c)(10), upheld the regulation expressly excluding such fraternities from § 501(c)(10), and sustained UBIT on the fraternity’s investment income.


Zeta Beta Tau Fraternity, Inc. v. Commissioner, 87 T.C. 421 (1986)