Is the Future of Tax Exemption in Jeopardy?

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July 27, 2012; Source: Christian Science Monitor

Howard Gleckman is a resident fellow of the Urban-Brookings Tax Policy Center, a think tank that is generally seen as balanced and not tainted by extreme political ideologies. Therefore, Gleckman’s comments about the recent U.S. House Ways and Means Oversight subcommittee hearing on tax-exempt organizations might raise some red flags about the future of the tax exemption. Gleckman contends that the hearing suggests that some charities are using their tax-exempt status to avoid taxes on business profits or to hide the identities of wealthy donors financing political attack ads. The implication is that such actions may raise congressional concerns about the need to protect the charitable tax deduction. Gleckman writes, “Increasingly, these organizations are straying from the charitable work that drove Congress to grant them tax-exempt status in the first place.”

Gleckman points out one of our favorite examples, the National Football League, as a nonprofit that “arguably exist(s) only as [a] commercial enterprise,” as we have described before in the Cohen Report (here) and the NPQ Newswire (here); his other example of a commercial nonprofit is the U.S. Olympic Committee. While some dubious social welfare organizations have made the 501(c)(4) tax exemption pretty flimsy, contributions to (c)(4)s are not eligible for charitable tax deductions. However, donations to public charities, 501(c)(3)s, are tax deductible and offer legislators a reason for including the charitable deduction in their plans for comprehensive tax reform.

Accounting Today’s coverage of the July 25th subcommittee hearing attributes some of the hard questions about profit-earning public charities and secretive political (c)(4)s to the subcommittee’s Rep. John Lewis (D-Ga.). A lobbyist from SNR Denton, Thomas K. Hyatt, described the problem as one of complexity: “Today it is not uncommon to have multiple business entities operating within an integrated system. They may have a central parent organization charged with strategic oversight of the system; brother-sister companies; subsidiaries; and subsidiaries of subsidiaries. These entities may include nonprofit corporations, taxable for-profit corporations, nonprofit taxable corporations, limited liability companies, limited and general partnerships, and joint ventures.” University of Illinois College of Law professor John Colombo told the subcommittee members that it is time for the Internal Revenue Service to initiate a comprehensive review of the regulations regarding the commercial activity of public charities.

Gleckman concludes, “The more public charities use their tax-exemption to avoid tax on regular business income or mask political operations, the more they will put that special treatment at risk.” We often hear little from the national nonprofit leadership organizations about the increasing commercialization of nonprofit activities. It’s one thing to clarify issues of the Unrelated Business Income Tax (UBIT) or definitions of private benefit within the commercial operations of public charities. It’s another thing entirely to question whether the business operations of large, tax-exempt organizations might be potentially jeopardizing political and public support for the tax-exempt status of charities.—Rick Cohen

  • Ron Wormser

    We in the exempt sector may be on the precipice of a period of unprecedented review and threats to our historical exemption. This comes about from the convergence, the perfect storm, of two factors: an extraordinary growth in the number and purposes of exempts and the financial stresses of taxing authorities.

    The coming together of the former, by stretching the in-play definition of exempt activities bordering on the patently non-exempt and the latter by being desperate for new sources of funds will inevitably lead to hard questions the answers to which may appear to the public as more self- than public-serving.

    We’d best prepare for a long, hard and uphill struggle.