The Role of Access in Charitable Tax Exemption
39 Pages Posted: 29 Sep 2003
There are 2 versions of this paper
The Role of Access in Charitable Tax Exemption
The Role of Access in Charitable Tax Exemption
Date Written: September 26, 2003
Abstract
Both the courts and the Internal Revenue Service historically have had difficulties with assessing exempt status for nonprofit entities that provide "commercially similar" services. A paradigm example of these commercial similarity cases are nonprofit hospitals. Since 1969, the official IRS position has been that nonprofit hospitals are exempt under a "community benefit" analysis, even if they do not provide substantial free care for the poor. Yet many empirical studies find that the behavior of nonprofit hospitals is similar to for-profits competitors. Similarly, IRS precedents support tax exemption for nonprofit art galleries and community theaters that provide services facially similar to for-profit counterparts; to community development organizations that operate in a manner similar to private real-estate developers or investment bankers, and to "public interest" law firms that litigate class action suits in much the same manner as major law firms.
The central thesis of this article is that the criterion that can and should be used to judge exempt status in these cases of "commercial similarity" is whether the organization provides access to services for previously-underserved populations or provides specific services to the majority population that otherwise are not provided by the private sector. Using "enhancing access" as the main criterion in judging an organization's entitlement to exemption makes considerable sense; after all, a major rationale for granting charitable tax exemption is to recognize the pluralism-enhancing nature of such enterprises. Organizations that provide expanded access to services for those unable to obtain them as a result of economic, geographic or other constraints enhance the pluralism objective; exemption becomes the reward for doing so. The access criterion also fits nicely with the major economic explanations for exemption, which posit that exemption helps overcome an undersupply of services at the intersection of private market failure and government failure. Moreover, making access a central theme of exemption would force organizations to explain their mission in access terms, a process that in and of itself could help focus such organizations on why they differ from for-profit counterparts and what they should do to highlight that difference. The article argues that enhancing access is already a de facto test of exemption (particularly in the nonprofit healthcare field), and ends by discussing how an "enhancing access" test would change current exemption precedents.
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