The Charitable Tax Exemption

The Charitable Tax Exemption

The Charitable Tax Exemption

The Charitable Tax Exemption

Synopsis

"The tradition of tax-exempt status for nonprofit "charitable" organizations is well established, and few would argue with the principle. But the tax-exempt sector of the economy is vast and rapidly growing, resulting in the loss of billions of dollars of tax revenue. At the same time, we have no consensus on what purpose the charitable tax exemption serves, let alone agreement on what constitutes a charity. In this important addition to the theory of tax law, Colombo and Hall develop an original "donative" theory that links the charitable tax exemption to the ability of an organization to derive donative support from the community. Their theory not only makes intuitive sense but also receives support from economic, political, and moral theory. Its implications would rationalize the charitable tax exemption, comport with legal precedent, and simplify the administration of the law. The Charitable Tax Exemption is a major contribution to the theory of tax law and should be essential reading for a wide range of lawyers dealing with taxes. It will also be enlightening for anyone involved in the operation of a nonprofit organization." Title Summary field provided by Blackwell North America, Inc. All Rights Reserved

Excerpt

For over 400 years, western societies have exempted nonprofit entities from taxation because of their "charitable" status. In the United States, this exempt sector of the economy is vast and growing rapidly. Over one-tenth of all private organizations "in the United States (and up to one-third in some locations) pay no federal or state income, property and sales taxes, resulting in federal, state and local governments foregoing tens of billions of dollars of revenue each year. Despite the size and significance of the charitable tax exemption, modern scholars, legislators and regulators have no comprehensive and convincing explanation of what purpose the exemption serves or even of what constitutes a "charity." Accordingly, this book attempts to answer the twin questions, "why are charities tax-exempt?" and "what is a charity for this purpose?"

We explore these interrelated questions through a systematic legal, economic and public policy critique of the existing theories for exempting charitable organizations from taxation. In the first chapter, we sketch the history and scope of the charitable exemption and the tax-exempt sector of the economy, and we specify the four criteria that we employ in our analysis of the exemption. In the next chapter, after outlining the legal framework for exemption, we examine the fundamental theoretical dispute over whether exemption is in effect an indirect government subsidy to the exempt entity. In the following chapters we turn to a detailed critique of the traditional explanations of the charitable exemption: (1) that certain categories of activity are per se exempt based on the law of charitable trusts; (2) that the exemption serves as a quid pro quo for providing free services to the poor or relieving other government burdens; and (3) that the exemption is in exchange for the benefits that nonprofit institutions provide to the community at large. Chapter 6 then addresses two additional theories for the exemption advanced by academics: Professor Hansmann's capital subsidy theory, which demonstrates why it is defensible to use the exemption to help certain nonprofit firms to overcome their comparative disadvantage in accessing capital markets; and Professor Atkinson's . . .

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