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Abstract:
The purpose of this article is two-fold. First, it will explain the concepts of federal tax-exemption law as they apply to the NCAA and to the universities operating Division I football and basketball programs. As the article indicates, current law makes it virtually impossible for the IRS to withdraw exemption either from the NCAA or universities operating major athletic programs. It is somewhat more plausible that the IRS could tax revenues from Division I college athletics under the UBIT, although even that course of action would have to scale considerable legal hurdles. Moreover, even if the IRS applied the UBIT to big-time athletic revenues, this course of action likely would end up largely a "paper tiger" because the evidence suggests that virtually none of these programs would have taxable net income in the tax accounting sense after applying appropriate cost accounting. Of course, the law can be changed; Congress could certainly attach particular conditions to tax exemption for the NCAA or universities conducting Division I basketball and football programs if it desired. The second part of this article, therefore, examines the tax policy issues raised by college athletics, particularly whether these programs fit within a theoretical paradigm that demands they be exempt from taxation, or whether instead big-time college athletics should be considered a sui generis exception to general tax policy. The reason this is important is that if major college football and basketball do not fit in any standard theoretical paradigm for exemption, then we should forthrightly recognize that continuing tax-favored treatment for these activities is an "exception" to general tax policy - much like a local community abating property taxes to induce a business to locate there. Such a conclusion, in turn, means that Congress could consider attaching special conditions to continuing tax exemption for the NCAA and universities engaged in big-time athletics without worrying about any damage to established tax policy or principles - in other words, this is the "hook" reformers can use to press their case. While the exact scope of these special conditions should be debated by experts in college athletics, I note in the final section of the article that there are precedents in tax law for (1) attaching conditions on the use of proceeds from an exempt activity (e.g., a requirement that big-time athletic revenues be used to subsidize other charitable outputs, such as increased athletic opportunities in non-revenue sports or for women); (2) expenditure limits such as caps on coaching salaries, and (3) expanded disclosure via a schedule to Form 990, similar to the new Schedule H for hospitals, that would require both the NCAA and universities with athletic programs to provide more information regarding their programs and the academic progress of student-athletes.

Abstract:
This article takes a fresh look at the rationale and doctrinal tests for the charitable contributions deduction under Section 170 of the Internal Revenue Code, specifically in the context of certain kinds of "named" or "commemorative" gifts subject to fee schedules (e.g., University chairs; commemorative bricks). The article concludes that the best explanation for the deduction is an auxiliary funding device for tax-exempt charities, and that as a result, the doctrinal tests for deductibility should be tied closely to and advance the core rationales for tax exemption. Under the "community benefit" theory of exemption, deductions for commermorative-type gifts subject to fee schedules should be allowed, since presumably these gifts advance the mission of the exempt organization and run little or no risk of tax-base impairment or unfair competition, while under economic theories of exemption, these gifts should not be deductible, because the "fee schedule" structure of the gift is designed to overcome free riding, which is the basic economic rationale for government subsidization of exempt organizations.

Abstract:
Why are some activities that have commercial for-profit analogues (e.g., health care, "public interest" law firms, community redevelopment organizations) tax exempt? This article proposes an "access" test for tax exemption that would require nonprofit organizations whose services have commercial analogues to justify exemption on the basis of access to their services: either by providing access to underserved populations or by bringing services to the general population that are undersupplied by the private market. The article begins by exploring a number of Internal Revenue Service rulings and court cases dealing with charitable organizations that provide services that have commercial analogues and concludes that the IRS and courts are actually using access criteria to evaluate tax exemption. The article then relates an access-based test to the major theoretical bases for tax exemption, and then proceeds to propose an access-based doctrinal test for exemption. The article closes by illustrating how an access-based test would apply to current areas of exemption controversy.

Abstract:
Both the courts and the Internal Revenue Service historically have had difficulties with assessing exempt status for nonprofit entities that provide "commercially similar" services. A paradigm example of these commercial similarity cases are nonprofit hospitals. Since 1969, the official IRS position has been that nonprofit hospitals are exempt under a "community benefit" analysis, even if they do not provide substantial free care for the poor. Yet many empirical studies find that the behavior of nonprofit hospitals is similar to for-profits competitors. Similarly, IRS precedents support tax exemption for nonprofit art galleries and community theaters that provide services facially similar to for-profit counterparts; to community development organizations that operate in a manner similar to private real-estate developers or investment bankers, and to "public interest" law firms that litigate class action suits in much the same manner as major law firms.

The central thesis of this article is that the criterion that can and should be used to judge exempt status in these cases of "commercial similarity" is whether the organization provides access to services for previously-underserved populations or provides specific services to the majority population that otherwise are not provided by the private sector. Using "enhancing access" as the main criterion in judging an organization's entitlement to exemption makes considerable sense; after all, a major rationale for granting charitable tax exemption is to recognize the pluralism-enhancing nature of such enterprises. Organizations that provide expanded access to services for those unable to obtain them as a result of economic, geographic or other constraints enhance the pluralism objective; exemption becomes the reward for doing so. The access criterion also fits nicely with the major economic explanations for exemption, which posit that exemption helps overcome an undersupply of services at the intersection of private market failure and government failure. Moreover, making access a central theme of exemption would force organizations to explain their mission in access terms, a process that in and of itself could help focus such organizations on why they differ from for-profit counterparts and what they should do to highlight that difference. The article argues that enhancing access is already a de facto test of exemption (particularly in the nonprofit healthcare field), and ends by discussing how an "enhancing access" test would change current exemption precedents.

Abstract:
This article looks at the relationships between three separate legal doctrines that deal with commercial activity by tax-exempt charities: the "commerciality doctrine" (which governs when commercial activity endangers tax exemption); the unrelated business income tax (which taxes some commercial activity); and the Moline Properties corporate-separate-identity rule (which governs how commercial activity by a subsidiary in a complex structure affects a parent or sibling corporation). After reviewing the current state of legal doctrine in these three areas and concluding that current doctrine is inadequate and contradictory, the article turns to reconstructing the applicable rules in light of the public policy concerns raised with respect to commercial activity by charities. The article identifies six potential policy concerns: (1) unfair competition between exempt and for-profit organizations; (2) protection of the corporate tax base; (3) managerial diversion from charitable mission; (4) economic efficiency; (5) measuring the worth and need for tax subsidies by exempt organizations; and (6) protecting charitable assets from liabilities generated by for-profit business activities. The article then contrasts how two different general approaches to dealing with commercial activity by charities affect these six policy concerns. The two general approaches are permitting such activity to continue tax-free in order to provide additional tax subsidies to exempt organizations versus restricting such activity by expanding the UBIT into a general commercial-activity tax. The article concludes that the best solution to the policy concerns raised by commercial activity is to radically restructure the underlying tests for tax exemption; in absence of such radical restructuring, the article suggests that the next best approach is to restrict commercial activity by expansion of the UBIT, and provides specific doctrinal suggestions for implementing such a "commerciality tax". The article also suggests that under either suggested solution, both the commerciality doctrine and corporate-seprate-identity rule as applied to exempt status should be repealed.

Charity, UBIT, Tax-exempt, Commercial Activity

Abstract:
For at least the past two decades, the Internal Revenue Service has relied heavily on the "private benefit" doctrine to police economic transactions between tax-exempt charities and for-profit entities. The doctrine has been used to regulate the size of the charitable class needed to justify exemption, prohibit joint venture transactions between nonprofits and individuals or for-profit entities, regulate employee recruiting, and possibly serve as a substantive constraint on contracts with third parties. Because of the variety of transactions to which it has been applied, no one really can define the doctrine. In a 1987 General Counsel's Memorandum, the IRS stated that private benefits must be balanced against public benefits that result from specific transactions in assessing tax exemption, but did not give any specific rationale for the doctrine nor provide specific guidance for what benefits present transactional problems.

This article attempts to identify both a specific rationale for the private benefit doctrine and the paradigm transactions to which it should apply. Specifically, the article suggests that the private benefit doctrine should be invoked in cases in which transactions carry substantial risk that the charity is "failing to conserve" charitable assets for the charitable class. The article identifies two paradigm situations in which the risk of such "failure to conserve" may be especially high: (1) a charitable entity transacts with an individual or for-profit entity in order to provide "core services" (services that form the basis for tax exemption) to the beneficiaries of the charity (the "outsourcing" paradigm) or (2) the charity enters into a transaction with a for-profit entity or individual involving these core services that confers a competitive advantage on the for-profit in its own business activities (the "competitive advantage" paradigm). In situation (1), the failure to conserve may be the result of paying a profit margin to the for-profit entity to perform services that the charity might be able to provide as efficiently (or more efficiently) directly; in situation (2), the failure to conserve may be the failure to capture the full value of the competitive benefit conferred by the charity on the for-profit. In either situation, the charity should be required to present a reasonable justification that the transaction in question does not "waste" charitable resources in order to maintain exemption.

Abstract:
A substantial number of commentators and state legislatures have suggested that tax exemption for nonprofit hospitals should be tied exclusively to the amount of charity care the hospital provides. This paper recounts both recent state legislative activity on this front and presents policy reasons both for and against such a move, and suggests that an exclusive charity care standard may not be the best policy approach for tax exemption of nonprofit hospitals.

Nonprofit Hospitals, Tax Exemption, Charity Care

Abstract:
This article proposes an overall framework for analyzing the tax-exemption and unrelated business income tax (UBIT) effects of joint ventures (partnerships) between exempt charities and for-profit entities. The article suggests that joint venture activities should be analyzed simply as if the exempt organization was directly conducting a commercial activity. Given the overall relationship between Code Section 501(c)(3) and the UBIT, the article suggests that joint venture activities should fall within one of four possible categories: (1) the activity itself could be charitable, in which case it would have no effect on the exempt status of the charitable partner nor would be subject to the UBIT; (2) the activity itself is not charitable but is "substantially related" to the exempt partner's charitable purpose, in which case the federal tax consequences would be the same as category (1), although state property tax consequences could vary; (3) the activity could be noncharitable and unrelated to the exempt partner's charitable purpose, but not substantial in relation to other charitable activities, in which case the activity should have no effect on exempt status, but revenue from the activity would be taxed under the UBIT; or (4) the activity could be both unrelated and substantial, in which case exempt status should be denied to the charitable partner under the "primary purpose" test and "commerciality doctrine." Using variations on the facts of Redlands Surgical Services v. Commissioner, the article illustrates the application of the framework and critiques current IRS positions regarding joint venture activities by health care providers.