What We Talk About When We Talk About Tax Exemption
Philip T. Hackney
Louisiana State University Law Center
September 9, 2013
Virginia Tax Review, Vol. 33, Forthcoming
Under the Internal Revenue Code, certain nonprofit organizations are granted exemption from federal income tax (“tax-exemption”). Most tax-exemption rationales assume tax-exemption is a subsidy for organizations such as charities that provide some underprovided good or service. These theories assume there should be a tax on the income of nonprofit organizations but provide no justification for this assumption. This article contributes to the literature by examining the corporate income tax rationales as a proxy for why we might tax nonprofit organizations. The primary two theories hold that the corporate tax is imposed to: (1) tax shareholders (“shareholder theory”), and (2) regulate corporate manager control over large sources of wealth (“regulatory theory”). The shareholder theory supports the basic tax-exemption organizational structure preventing the distribution of earnings to private shareholders. However, the shareholder theory does not support tax-exemption for mutual benefit organizations such as business leagues because their members are arguably the equivalent of shareholders. The regulatory theory highlights that exempting an organization from income tax removes a regulatory regime. As a result of tax-exemption, organizations become subject to another regulatory regime with some federal oversight of political activity and self-dealing transactions. This article makes some tentative steps towards determining when that substitution of a regulatory regime might be appropriate. The article concludes the regulatory regime imposed on charitable organizations is sufficient to substitute for the regulatory role of the corporate income tax, but concludes that the regulatory regime for mutual benefits is lacking. This article submits it is time to revamp our tax-exempt structure for mutual benefit tax-exempt organizations.
Number of Pages in PDF File: 53
Keywords: nonprofit organizations, charities, tax-exempt, corporate tax
JEL Classification: K34, L3
Date posted: May 20, 2013 ; Last revised: December 4, 2013
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