Should charities still be tax-exempt?
Here鈥檚 a word association game: I say tax-exempt public charity. You say house of worship, soup kitchen, or university. You probably don鈥檛 think about secret back-room political operations or multi-billion dollar businesses. But you should.
Increasingly, these organizations are straying from the charitable work that drove Congress to grant them tax-exempt status in the first place. Instead, they are using the law to avoid tax on or mask the identities of big-bucks campaign donors who finance increasingly nasty, but entirely anonymous, political ads. 聽聽聽聽聽聽聽聽聽
Yesterday, while most tax wonks were focused on the Senate鈥檚 largely symbolic votes on the fate of the 2001-2010 tax cuts, the House Ways & Means Oversight subcommittee was holding an important on the arcana of tax-exempt public charities. And the panel heard, in great, sad detail, how charities are abusing the spirit, if not the letter, of the law.
Let鈥檚 take two examples:
The first is the growing commercial activity of charities. As University of Illinois Law Professor John D. Colombo the subcommittee, such business is booming. 鈥淚t is increasingly common,鈥� Colombo said, 鈥渢o find charities engaged in a variety of economic activities through for-profit subsidiaries, joint-venture partnerships, and contractual arrangements.鈥�
In theory, charities are required to pay tax, called the unrelated business income tax, on this revenue. They can even lose their tax-exemption for such aggressive business activities. 聽But they almost never lose their聽exemption and they rarely pay the tax.
Once, this issue applied to income from college bookstores. Now, it is big business. Colombo described one non-profit Pennsylvania health system that controlled eight tax-exempt entities and three for-profit corporations. Then, there are non-profits such as the National Football League and the U.S. Olympic Committee that arguably exist only as commercial enterprises.
Colombo argued that this trend raises many important concerns, including unfair competition between non-profits and for-profits, the erosion of the corporate tax base, and the loss of focus by charity management. 聽
The second issue, and one that is getting lots of attention in this heated election season, is the aggressive use of the public charity law by political operatives. Through a chain of immensely complex arrangements, these groups have been able to organize themselves in a way that allows their funders to make unlimited, entirely anonymous contributions to political campaigns.
The thread is mind-numbing. But Ohio State University Law Professor Donald B. Tobin . First, keep in mind that the tax laws prohibit public charities from engaging in political advocacy. However, the IRS does allow tax-exempt social welfare organizations鈥攐rganized under a different section of the Tax Code鈥搕o lobby or advocate for issues. Unlike charities, donors can鈥檛 deduct their contributions to these groups. However the organizations themselves do not have to pay tax on their income.
These social welfare groups can even create separate funds to engage in political activities. However, 聽聽they must disclose the names of their contributors鈥攅xactly what the political operatives want to avoid. So, smart lawyers聽figured out a way to keep contributors鈥� names secret by laundering funds directly through the social welfare organizations themselves. This requires them to claim they are engaged in issue advocacy and not politics, and assertion that would surprise anyone who watches the ads they fund.
Tax-exempt organizations won鈥檛 be immune from the debate over tax reform, and their special聽treatment may be jeopardized as Congress looks for ways to broaden the tax base. The more public charities use their tax-exemption to avoid tax on regular business income or mask political operations, the more they will put that special treatment at risk.
