TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, January 10, 2014

Brunson: Taxing Utopia

UtopiaSamuel D. Brunson (Loyola-Chicago), Taxing Utopia:

Communalism has a long history in the United States. Throughout the nineteenth century, the country was seemingly dotted with utopian groups. Most were Christian groups, trying to follow the New Testament model of a body of believers that held all property in common. While these groups generally fell apart quickly, in response to inside or outside pressures, several large groups survived the turn of the century.

In the early twentieth century, though, these religious communal groups had to contend with something new: an income tax. Communalism did not fit into the individualistic economic system envisioned by the drafters of the income tax. So Congress designed a special tax regime, now codified in section 501(d) of the Internal Revenue Code, which exempts religious communal holding companies from tax, while imputing the holding companies’ income to the members of the group. Section 501(d) provides communitarian groups with flexibility to reflect their unusual economics.

There exist, however, a number of problems with the design and implementation of section 501(d). This Article will survey the three principal problems. The first is scope: under current law, only religious communitarian groups can elect to use the § 501(d) regime. Second is uncertainty and vagueness in the statute. Third is IRS overreach in the enforcement, applying doctrines (such as the public policy doctrine) that do not apply to § 501(d). In this Article, I discuss why and how to remedy these problems, while not opening § 501(d) to abusive tax avoidance.

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