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- Title
Reforming the Taxation of Exempt Organizations and Their Patrons.
- Authors
Miller, David S.
- Abstract
Originally, only two types of organizations -- charities and fraternal benefit societies -- were exempt from federal income tax. Today, there are more than 29 different types of tax-exempt entities in section 501(c) alone and by some counts more than 70 in all. The tax rules governing tax-exempt organizations have become very complex and the policy basis for many of the rules has not received a comprehensive examination in many years, if ever. This Article proposes a radical reformation of the entire system for taxing exempt organizations and their patrons based on a functional analysis of the activities of the organization. This Article identifies six functional categories and proposes tax treatment appropriate to the activities of the organizations in each category: 1. All noncharitable exempt organizations that compete with taxable commercial businesses, including fraternal benefit societies that provide insurance (current section 501(c)(8)), credit unions (current section 501(c)(4)), business leagues, chambers of commerce, the Professional Golf Association, and the National Football League (current section 501(c)(6)); 2. U.S. governmental organizations (current section 501(c)(1)); 3. Charitable organizations (current section 501(c)(3)); 4. Social welfare organizations (current section 501(c)(4)); 5. Mutual benefit associations (similar to social clubs covered by current section 501(c)(7)); and 6. Retirement, health, and similar plans. All noncharitable exempt organizations that compete with taxable commercial businesses (category 1) would become taxable. Taxation of U.S. governmental organizations (category 2) would not change; therefore current section 501(c)(1) would remain intact. As for category 3 (charitable organizations), the proposal would leave section 501(c)(3) largely intact, except that certain very large public charities with "excessive endowments" could be taxed on their investment income to the extent the income is not used directly for charitable purposes. As for category 4 (social welfare organizations), current section 501(c)(4) would be left intact, except that any tax-exempt organization (including a section 501(c)(4)) that engages in a significant amount of lobbying or campaigning would be taxable on all of its investment income. Finally, category 5 (mutual benefit organizations) would cover virtually all other tax-exempt organizations (except retirement, health, and similar plans). Very generally, organizations in category 5 would not be subject to tax on donations or per capita membership dues, but would be taxable on investment income, fees charged to nonmembers, and fees charged to members disproportionately. Retirement, health, and similar plans are left alone. This Article proposes two significant changes to the treatment of donors. First, section 84 would be expanded to treat any donation of appreciated property to a tax-exempt organization as a sale of that property. Second, any donation to a tax-exempt organization that engages in significant lobbying or campaigning and does not disclose the name of the donor would be treated as a taxable gift by the donor (subject to the annual exclusion and lifetime exemption) for purposes of the federal gift tax. Finally, this Article proposes two measures of relief for tax-exempt organizations. First, the unrelated debt-financed income rules would be repealed. Second, limited amounts of political statements by the management of section 501(c)(3) organizations (like election-time sermons) would not jeopardize the tax-exempt status of the organization.
- Subjects
UNITED States; TAXATION; INCOME tax; TAX exemption laws; BOARDS of trade; NATIONAL Football League; TAXATION of charities; LAW
- Publication
Tax Lawyer, 2014, Vol 67, Issue 3, p451
- ISSN
0040-005X
- Publication type
Article