Paul L. Caron

Monday, January 21, 2008

Chronicle: Nonprofits Pay Zero Tax on Billions of Unrelated Business Income

The Chronicle of Philanthropy reviewed the Form 990s for 91 nonprofit organizations -- including Columbia, Emory, Harvard, Indiana, Johns Hopkins, MIT, Minnesota, Penn, Stanford, UC-Berkeley, USC, and Yale -- and found that the organizations reported $412.9 million of income from unrelated business activities, but 46 (51%) reported zero tax liabilities:

The finding does not mean that the nonprofit organizations have run afoul of tax laws. In fact, legal experts say charities are merely following federal tax laws on the books for years that allow them to shield much of their income from tax through exemptions that Congress has built into the tax code and to take myriad expenses as deductions for operating expenses. ... But the finding may verify longstanding concerns of the IRS that current rules on unrelated-business income tax, known as UBIT, may allow “excess flexibility” for charities in some cases when they calculate their “unrelated-business taxable income”. ...

[T]he Chronicle’s finding has some lawmakers worried that existing rules are not working to put charities and companies on a level playing field. There are also questions over whether some charities are being too aggressive in how they account for these activities to avoid taxes. Sen. Charles E. Grassley, of Iowa, the senior Republican on the Senate Finance Committee, said the information “raises a significant number of questions that need to be looked at more closely by charity boards, Congress, and the Treasury Department.”

A Taxing Matter, by Peter Panepento & Grant Williams.  Of the 45 organizations that reported a UBIT liability, five (including Emory and Stanford) accounted for 75% of the taxes paid.

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This article points out the gamesmanship that can be used to reduce taxes. It does not clearly address the potential for fraud and corrupution.

The Hedge Tax that is proposed at puts an end to our convoluted tax code. It answers the complaints about the Fair Tax and Flat Tax (as proposed by Steve Forbes and others).

Posted by: Russell Zagrodzky | Jan 22, 2008 10:20:32 AM

Another interesting, un-investigated channel for non-profit profitmaking is the foundation. Our local hospital and the State university each has a foundation which engages in profitmaking activity, such as real estate development, that has nothing to do with its core mission.

Posted by: Patricia | Jan 22, 2008 8:13:13 AM