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Circuit (Court of Appeals), the Court to which an appeal in the
instant case would normally lie, did not decide in Phi Delta
Theta Fraternity the issues under section 512(a)(3) that are
presented here.17 Moreover, the foregoing statement in Phi
Delta Theta Fraternity on which the Trustee relies in the instant
case is dictum. Finally, even if the statement in Phi Delta
Theta Fraternity were not dictum, we do not find that that
17The taxpayer in Phi Delta Theta Fraternity v. Commis-
sioner, 887 F.2d 1302 (6th Cir. 1989), affg. 90 T.C. 1033 (1988),
was a national college fraternity (fraternity) that was exempt
from tax as an organization described in sec. 501(c)(7). The
ultimate issue before the Court of Appeals was whether the
investment income of the fraternity qualified as exempt function
income for purposes of sec. 512(a)(3)(A) and (B). In resolving
that issue, the Court considered two questions: (1) Whether
there was a proper set aside by the fraternity within the meaning
of sec. 512(a)(3)(B); and (2) even if there was no proper set
aside within the meaning of that section, whether the fraternity
spent income on exempt purposes, and, if it did, whether that
income therefore qualified as exempt function income. Although
those questions are not presented here, it is noteworthy that in
resolving those matters the Court of Appeals in Phi Delta Theta
Fraternity quoted portions of sec. 512(a)(3)(B) as applicable to
the sec. 501(c)(7) fraternity involved in that case, as follows:
Such term [exempt function income] also means all
income * * * which is set aside–-
(i) for a purpose specified in section 170(c)(4)
* * * including reasonable costs of administration
directly connected with a purpose described in clause
(i) or (ii). * * *
Phi Delta Theta Fraternity v. Commissioner, supra at 1305. Thus,
the Court of Appeals recognized in Phi Delta Theta Fraternity
that the phrase “including reasonable costs of administration
directly connected with a purpose described in clause (i) or
(ii)” does not stand alone, but pertains to and modifies sec.
512(a)(3)(B)(i) as well as sec. 512(a)(3)(B)(ii).
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