Monday, March 20, 2023
We Need A Restatement of the Law of Charitable Tax Exemption
The Service issued a private letter ruling last week denying tax exempt status to a commercial credit counseling wolf running around in educational sheep's clothing. PLR 202311006 is 17 pages of IRAC-ness, wholly lacking in any sort of literary appeal or policy reasoning. Just square peg in square hole. An educational organization transferred credit "educational packages" to clients, and clients simultaneously made "donations" contingent on the size of the educational package. Even with dry generic terms -- transfer, simultaneous, and donation -- you get the picture. Substance, not form. There, problem solved in three words! Its a PLR, so I understand why it has to dot every I and cross every T. All it needed to say though was "you are selling, you are pursuing a private benefit, and you look just like a regular store to us. Now get the hell outta here!" It needed all 17 pages to go through 501(q). Proof that no statute should extend beyond the letter "d" in subsections anyway.
Section 501 is quickly becoming as unhelpfully detailed as the partnership tax regulations. That's because its a mish mash of standards and rules on so many different subjects. A single statute is almost a whole subchapter all by itself. Its an old debate, I know, whether tax jurisprudence would be better served by standards rather than rules. But Section 501 has regurgitations on disparate, unrelated, unassociated, variant, different, and not-same topics: insurance in 501(m), credit counseling in 501(q), terrorism in 501(r), child care in 501(k), community benefit in 501(r), and anti-discrimination in 501(i). IRC 501(q)'s purpose could have been accomplished with a few regulatory examples, cross-referencing the few regs on commerciality and private benefit. And those examples would have edified us all on the general topics of private inurement, private benefit, commerciality, and unrelated activities. Every IRAC regarding 501(c)(3) revolves around those four topics. Plus politics I guess, but I am not convinced politics ought to be a substantive concern of tax exemption.
I just think laws develop better when Congress enacts standards, Treasury adopts rules, and courts analyze those rules to ensure they are applied consistently with the standards. Wash, rinse, repeat. That way, all three branches talk to each other often, in reasoned conversation and the law is better for it. That is how it works at American Law Institute -- representatives from all three branches -- judges, legislators, and folks in or who interact with executive branch folks (including professors) -- reason and talk and then publish restatements and model codes comprising standards more than rules. Its obvious Congress and Treasury talk a lot, because 501(q) basically adopts Treasury's credit counseling audit manual in statutory form. Which really proves the point, if we understand that statutes are intended to apply broadly, not to just one problem. The most obvious affect of all that detail is that courts rarely accept tax cases they can avoid, and when they do, they just follow the lines. The outcome for a "code" is perpetual, motivating and resulting in increasing amounts of tall weeds in the statutes and even the regulations because verbiage is used to discourage judicial reasoning. Wash, rinse, repeat.
We need a whole new Restatement of the Law of Charitable Tax Exemption.