January 20, 2008
Huckabee Straddles Line Between Religion and Politics
On January 19, 2008, the New York Times had an interesting story about Republican Presidential candidate Mike Huckabee's apparent ability to walk the line on religion and politics. Here is an excerpt:
He has indeed made an art of escaping politically delicate questions about theology. He has said he favors the biblical account of creation over Darwinian evolution, but he also said he considered the two approaches largely compatible, with God’s potential role limited to the original jump-start, a view many liberal Christians endorse.
“Did he take the rib out of Adam?” Mr. Huckabee told Charlie Rose in an interview. “I have no reason to believe he didn’t. But I don’t know.”
He said there was “a strong body of science that really can put forth the argument for an evolutionary process,” but also “room for believing” in God as “a prime mover” in the process.
For the full article, see "Between Pulpit and Podium, Huckabee Straddles Fine Line" in the New York Times.
The "Zero-Out" Strategy for Unrelated Business Income
Peter Panepento and Grant Williams have reported in The Chronicle of Philanthropy on a provocative study of the degree to which 501(c)(3) organizations actually pay taxes on income from their unrelated business income. The limitation on unreasonable salaries in IRC 162(a)(1) is not designed to tell business how much to pay in salaries but instead to prevent closely held corporations from "zeroring-out" income at the corporate level by disgusing dividends as salary and thereby avoiding the corporate level tax. Nonprofits, of course, are not ignorant of tax reduction strategies and we may safely assume that they too engage in tax reduction strategies -- its only rational to do so. Panepento and William's report states that while 91 of the largest nonrpofit's reported $413 million in unrelated income, only 49% of those organizations had net taxable income. The story suggests that nonprofits are either intentionally engaging in unrelated loss leaders in support of charitable activities or aggressively allocating non-deductible expenses from related activities to their unrelated activities. The latter strategy effectively zeros-out unrelated business taxable income. See Rensselar Polytechnic Institute v. Commissioner (and cases thereafter) for examples of controversies arising from the strategy. See also Treas. Reg. 1.512(a)-1 (relating to expenses that are directly connected to unrelated activities and therefore deductible). Here is a snippett from the article:
Nonprofit organizations make billions of dollars in income from activities unrelated to their core missions, but roughly half of the groups raising such funds pay little or nothing in federal taxes on the income.
The pattern holds true for the very largest charities, according to a Chronicle review of the organizations’ most recent 990-T tax forms, which were made available to the public for the first time thanks to a change in federal law.
The link contained in the quoted portion above will take you to nice table showing gross and net unrelated business income of 91 large nonprofits, the sources of those revenues and their resulting tax revenues. Here is an interesting comment posted to the article:
This is very interesting. Does it mean that a charity that operates a restaurant at a loss for its patrons’ convenience does not pose competition for nearby commercial restaurants? If it artificially keeps its prices down by willingly taking a loss on an activity it really never expects to be profitable, doesn’t that enable it to compete unfairly? It seems as though the original intent of inhibiting unfair competition has been turned upside down.
Senator Grassley, of course, is quoted in the article as suggesting that nonprofits are not actually conducting loss-leaders, a sentiment that my own cynical mind tends to accept, but are illegitimately allocating nondeductible expenses from related activities to their unrelated activities. As in all of the tax world, the line between legitimate tax planning and illegitimate tax avoidance is fuzzy, at best, so its only rational that nonprofits take the aggressive position. It is nowhere rational to conduct unrelated losing business that divert chartiable resources from charitable activities.