Lori McMillen Seeks A Rationale for Exempting Non-Charitable Nonprofits

From What is a Nonprofit Organization

Lori McMillen published an interesting article regarding the need for a consistent rationale for exempting non-charitable nonprofits from taxation.  We have almost 30 different types of non-charitable exempt organizations under IRC 501(c) alone, ranging from credit unions and cemeteries, all the way to teachers' funds and cooperative health insurers.  We don't have a consistent rationale for when non-charities should be exempted from paying taxes.  Without a consistent rationale, 50(c) just exempts an ad hoc collection of activities, the sponsors of which were able to get enough votes.  Apparently there is a similarly unexplained proliferation in Canada and McMillen is in search of some guideposts.  Here is the abstract:

Non-charitable non-profit organizations in Canada enjoy tax-exempt status, but the rationale for exemption and the policy goals have been poorly articulated from inception. The empirical data suggest that the major sources of revenue for the subsector are commercial in nature, rather than donative, belying some of the vague assumptions underlying exemption. Given the commercial nature of a large number of these organizations, and the lack of readily available information on exactly what these organizations are doing, more information is needed in order to maintain tax equity between commercial and non-profit organizations. The policy goals for the exemption also need to be articulated. 

And here is part of the engaging Introduction

INTRODUCTION

“Tax exempt status is a privilege that should be closely regulated.” A tax exemption for non-profit organizations, as a tax expenditure, should be considered carefully and re-evaluated regularly—not just for the forgone revenue cost, but because it is important to evaluate the policy goals of the expenditure and to consider the reputational cost if the exemption were perceived as contributing to unfairness in our tax system. The urge to forgo this evaluation on the basis of some perception of the inherent “good” done by those in the non-profit sector might exist but should be resisted. Charities also are part of the sector, and undoubtedly “do good” as well, but in exchange for their tax expenditures, they are subjected to a great deal of oversight and must meet stringent requirements to qualify for and maintain their tax-exempt status. There is no valid reason to gloss over non-charitable non-profits while scrutinizing charities.

Hear, hear.

darryll k. jones