Should the Nonprofit Organization's Mission Drive the Tax Deductibility of Contributions?

By Elson, Raymond J.; Weld, Leonard | Journal of Legal, Ethical and Regulatory Issues, July 2011 | Go to article overview

Should the Nonprofit Organization's Mission Drive the Tax Deductibility of Contributions?


Elson, Raymond J., Weld, Leonard, Journal of Legal, Ethical and Regulatory Issues


INTRODUCTION

These are not the best of times for nonprofit organizations as they face multiple challenges from federal, state and local governments. First, the tax-exempt status of nonprofit organizations is being challenged by state and local governments as they seek alternative revenue streams to balance gaping budget deficits. Such actions include attempts to repeal property tax exemptions, charging nonprofits payments in lieu of taxes, and instituting user fees for services such as police and fire. The second is even more troubling since it is based on a simple proposal made by a former Labor Secretary that could revolutionize the tax treatment of charitable contributions if adopted by the federal government. The basic premise is that only charitable contributions made to institutions that help the poor would receive a full tax deduction. (Frank, 2007).

This is a more restrictive definition of charity than is currently found in the Internal Revenue Service (IRC) and discussed later in the paper. Gifts to institutions that do not benefit the poor would be deducted at reduced values. By reducing the tax deductibility of charitable contributions, the proposal would result in an increase in the tax revenue collected by the federal government.

With the nation's economy slowly recovering from a recession, the federal government is also exploring revenue sources that could plug its deficit without increasing the tax burden of the citizenry. This deficit was partially created through the passage of a $787 billion stimulus package intended to increase spending during the recent recession.

The Senate Finance Committee (SFC) has taken a leading role in identifying new revenue sources. It contacted the 136 wealthiest colleges and universities to obtain detailed information on how they raise tuition, provide financial aids and manage and spend their endowment. The committee is also interested in the endowment-related bonuses paid to college presidents and endowment managers (Arenson, 2008). In addition, the SFC is looking at nonprofit hospitals and could require them to maintain a minimum level of charitable activity as well as limit charges to the uninsured and indigent patients. Hospitals could be subject to an excise tax for failing to meet these requirements (Baucus, 2009)

A move to reduce the tax deductibility of charitable contributions is already gaining traction. In an attempt to identify new revenue sources, The White House is proposing a reduction in the tax deductibility of charitable contributions made by higher income families by up to 20% (Lacayo, 2009). The National Committee for Responsive Philanthropy is even suggesting that foundations spend half of their grant dollars to help poor neighborhoods and minorities. This suggestion is receiving support from a member of Congress and various charitable leaders (Wilhelm, 2009). Could the proposal to reduce the tax deductibility of charitable contributions made to organizations that do not benefit the poor be far behind?

These events raise some additional questions. For instance, what type of charitable organization helps the poor? Does a religious organization qualify as helping the poor? What about a college or university that provides free tuition to low income students? Does a disaster relief organization such as the American Red Cross benefit the poor? What about a hospital that provides free health care to the under privilege? Should the deductibility of charitable contributions made to these organizations be reduced? We will explore the answers to these questions in the paper by first discussing non-profit organizations in general, the current tax treatment of charitable contributions and the potential impact on individuals and non-profit organizations if restrictions are placed on contributions that do not benefit the poor.

NON PROFIT ORGANIZATIONS

Non-profit organizations (NPOs) generally receive a significant portion of their funding or operating budget from contributions* (*Other primary income sources are endowment income; grants from corporations and government; tuition; fees; and ticket sales. …

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