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http://ssrn.com/abstract=1604722
 
 

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The Attack on Nonprofit Status: A Charitable Assessment


James R. Hines Jr.


University of Michigan; NBER

Jill R. Horwitz


UCLA School of Law; National Bureau of Economic Research (NBER)

Austin Nichols


The Urban Institute

May 11, 2010

Michigan Law Review, Vol. 108, 2010
U of Michigan Law & Econ, Empirical Legal Studies Center Paper No. 10-013
U of Michigan Public Law Working Paper No. 197

Abstract:     
American nonprofit organizations receive favorable tax treatment, including tax exemptions and tax-deductibility of contributions, in return for their devotion to charitable purposes and restrictions not to distribute profits. Recent efforts to extend some or all of these tax benefits to for-profit companies making social investments, including the creation of the new hybrid nonprofit/for-profit company form known as the Low-Profit Limited Liability Company, threaten to undermine the vitality of the nonprofit sector and the integrity of the tax system.

Reform advocates maintain that the ability to compensate executives based on performance and to distribute profits when attractive investment opportunities are scarce makes for-profit entities more efficient than nonprofit counterparts. Offering more favorable tax treatment to for-profits engaging in charity would encourage greater charitable entrepreneurship, the argument goes, and provide worthwhile competition for the nonprofit sector. As matters stand, however, nonprofits can and occasionally do reward executives with performance-based compensation, and their nondistribution rules impose no obligation to make subpar investments. The existing nonprofit sector is extremely competitive, and the charitable activities of for-profits already receive favorable tax treatment. Going further and offering socially active for-profits the tax benefits equivalent to those available currently to nonprofits would create opportunities for tax arbitrage by providing tax deductions to high-bracket donors and taxable income for lightly taxed recipients. The difficulty of policing lines between nonprofit and for-profit activities of the same business entities would entail significant administrative complexity and is unlikely ultimately to succeed. And even should it succeed, the costs of offering new tax benefits to for-profit charities include not only foregone tax revenues, but also spillover effects on the charitable activities of nonprofits.

Number of Pages in PDF File: 43

Keywords: Nonprofit organizations, tax exemptions, tax-deductibility, charitable activities

JEL Classification: H20, I11, L31

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Date posted: May 15, 2010  

Suggested Citation

Hines Jr., James R. and Horwitz, Jill R. and Nichols, Austin, The Attack on Nonprofit Status: A Charitable Assessment (May 11, 2010). Michigan Law Review, Vol. 108, 2010; U of Michigan Law & Econ, Empirical Legal Studies Center Paper No. 10-013; U of Michigan Public Law Working Paper No. 197. Available at SSRN: http://ssrn.com/abstract=1604722

Contact Information

James Rodger Hines
University of Michigan ( email )
625 South State Street
Ann Arbor, MI 48109-1215
United States
NBER
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Jill R. Horwitz (Contact Author)
UCLA School of Law ( email )
Box 951476
Los Angeles, CA 90095-1476
United States
310-206-1577 (Phone)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Austin Nichols
The Urban Institute ( email )
2100 M Street, NW
Washington, DC 20037
United States
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