Tangled Up in Tax: The Nonprofit Sector and the Federal Tax System

Nonprofit Sector: A Research Handbook (3rd edition, Patricia Bromley & Walter Powell eds., Stanford University Press, 2019 Forthcoming)

University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 871

U of Chicago, Public Law Working Paper No. 699

51 Pages Posted: 30 Jan 2019 Last revised: 29 Sep 2019

Date Written: January 19, 2019

Abstract

If the relationship between the federal tax system and the nonprofit sector is to be summed up in a single word, “entanglement” rather than “exemption” would be the appropriate term. Nonprofit organizations in the United States are caught in a complex web of nonprofit-specific tax provisions, and even seemingly unrelated tax statutes often tie back to the nonprofit sector in winding ways. This chapter seeks to understand how the federal tax laws lead to and limit the nonprofit sector’s entanglement with the public and for-profit sectors. It distinguishes among three types of entanglement — administrative entanglement, political entanglement, and market entanglement — and goes on to explain how society’s decisions to support the nonprofit sector through tax exemptions and tax deductions both respond to and result in entanglement of all three types. It then evaluates the specific strategies of entanglement management that the federal tax system employs. The chapter concludes with thoughts on the future of entanglement in light of the December 2017 tax law, which creates new sources of friction between the federal tax system and nonprofit organizations while at the same time withdrawing some of the tax system’s support for the nonprofit sector.

Keywords: tax-exempt organizations, 501(c)(3), charitable contribution deduction, federal tax law, nonprofit sector, entanglement

JEL Classification: K34, L3, L30, L31, L38

Suggested Citation

Hemel, Daniel Jacob, Tangled Up in Tax: The Nonprofit Sector and the Federal Tax System (January 19, 2019). Nonprofit Sector: A Research Handbook (3rd edition, Patricia Bromley & Walter Powell eds., Stanford University Press, 2019 Forthcoming) ; University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 871; U of Chicago, Public Law Working Paper No. 699. Available at SSRN: https://ssrn.com/abstract=3319042

Daniel Jacob Hemel (Contact Author)

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

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