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Monday, November 8, 2010

Schwarz Presents Navigating the Charity/Business Border Today at San Diego

Schwarz Stephen Schwarz (UC-Hastings) presents Navigating the Charity/Business Border: Structures, Strategies and Solutions at San Diego today as part of its Tax Speakers Series. Here is the abstract:

In surveying the policies that shape and inform the federal tax treatment of charitable organizations in the United States, Professor John Simon of Yale Law School has identified four functions of the venerable § 501(c)(3): support, equity, regulatory and border patrol. The support function encourages the continuation and expansion of the charitable sector through relief from tax. The goal of the equity function is redistribution of resources and opportunities. The federal tax system exercises its regulatory function by policing, along with the states, the fiduciary behavior of a charity’s directors (or trustees) and officers. And, stated vaguely and loosely for now, the border patrol function constrains § 501(c)(3) charities from engaging in too much “political” and “commercial” activity. See John Simon, Harvey Dale & Laura Chisolm, The Federal Tax Treatment of Nonprofit Organizations, in The Nonprofit Sector: A Research Handbook 267 (Walter W. Powell & Richard Steinberg eds.) (Yale University Press 2d ed. 2006).

The diverse mix of charities seeking shelter under the § 501(c)(3) umbrella, the lack of a consensus on the theoretical rationale for charitable tax benefits, the natural impulses of a tax avoidance culture, and a rich and textured history of doctrinal disarray work collectively to make the study of tax-exempt organizations both frustrating, at least for those who need the comfort of bright-line tests, and fun. Any one of the four functions offers a full-course menu for a lunch talk, if not a gourmet seminar. But I am trying to diet, and so my narrowed topic for discussion is one aspect of the border patrol function – the blurry intersection of charity and business viewed from the perspective of federal tax exemption law. This choice was influenced by the convenience of having presented a paper surveying some of these issues two years ago at an invitational conference (Structures at the Seam: The Architecture of Charities’ Commercial Activities) hosted by NYU Law School’s National Center on Philanthropy and the Law. The paper is still relatively current and will serve as a launch pad for an overview of the structures and strategies employed by the increasing number of charities, large and small, that engage in revenue-generating activities.

The mandate for the NYU paper was to identify and discuss the basic structures and strategies used by charities for their “commercial” activities; address the motivations for and implications of those choices; and investigate the doctrinal trouble spots, folding in some policy observations along the way. The two broad tax issues raised along the charity/business border are: (1) the impact of commercial activities on qualification for tax-exempt status; and (2) if tax exemption is not adversely affected, the extent to which revenue-generating activities are subject to the unrelated business income tax. Resolution of these questions leads to a discussion of structures and strategies, both basic and complex, such as taxable subsidiaries (typically C corporations), joint ventures (LLCs and limited partnerships with both for-profit and nonprofit partners) and less formal contractual arrangements (there are many variations – licensing deals would be one example). My talk will more or less track the paper, condensing (or eliminating) some of the more technical material. As time permits, it also will touch upon new developments, such as the “social enterprise” movement (whatever that means) and the emerging phenomenon of hybrid entities, such as low-profit limited liability companies (L3C’s) and other vehicles (e.g., Google.org) employed by entrepreneurs with a social agenda. The light dessert menu will include some “immigration reform” options to better patrol the business/nonprofit border.

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