One Nation, Tax Exempt

If charities are truly nonprofit, why do they need the protection of the tax code?

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Matt Slocum / AP

This column appears in the commentary section of this week’s magazine. The full issue is open exclusively to TIME subscribers. To become one, click here.

Let’s stipulate that it’s totally uncool for IRS agents to single out Tea Party groups for extra scrutiny. But let’s also stipulate that it’s totally absurd for Tea Party groups, as well as liberal groups and any other blatantly political groups to qualify as tax-exempt “social-welfare organizations.”

What social-welfare organization really means, in the Tea Party context, is “tax-exempt political organization that doesn’t have to reveal its donors.” It’s a dodge. In other contexts—the National Rifle Association or the Sierra Club—social-welfare organization really means “tax-exempt political organization that doesn’t have to limit its lobbying and campaigning like a normal charity.” Another dodge. The obvious solution would be to eliminate the social-welfare organization as a tax entity—the technical term is 501(c)(4)—and stop giving tax breaks to political groups. That would bring some positive change out of the who-knew-what-where-when IRS circus.

Then again, Jeremy Koulish of the nonpartisan Tax Policy Center says eliminating 501(c)(4)s in order to stop subsidizing political activity would be like using a chain saw to kill a bunch of mosquitos. He recently searched social-welfare organizations and found most of them—like the Miss America Organization and the giant Minnesota-based HMO HealthPartners Inc.—didn’t seem political at all. That’s a fair point…except why should an HMO or a pageant be tax exempt? When you think about it, why should any group be tax exempt?

The entire concept of a tax-exempt nonprofit—not only the controversial 501(c)(4) social-welfare shelters but also motherhood-and-apple-pie 501(c)(3) charities and foundations—is odd. An organization that doesn’t make any taxable profit shouldn’t need a special status to avoid paying taxes. My wife owned a retail store that didn’t pay taxes during the Great Recession; it was an unintentional nonprofit, which is why it no longer exists. Charities, foundations and other intentional nonprofits shouldn’t need tax exemptions unless they have profits they need to shelter. Which many of of them do.

In 2012, the U.S. had 1,616,053 tax-exempt organizations, 10 times the number of fast-food restaurants. Harvard University is tax exempt even though it has a $31 billion endowment; it’s basically a huge hedge fund with a lucrative merchandising operation attached to a school. The NFL is also tax exempt, to help its owners keep more of their profits away from Uncle Sam. The Prostate Cancer Fondation doesn’t pay taxes either, although it did pay its CEO $1.2 million. You may or  may not like the Heritage Foundation or Planned Parenthood, the Chamber of Commerce or the AFL-CIO, the Boy Scouts or the NCAA. But the tax dollars you send to Washington help ensure that none of those groups has to send any tax dollars to Washington.

Of course, questioning tax-exempt organizations makes it sound as if you hate soup kitchens and Kevin Durant (the NBA star whose foundation gave $1 million to tornado victims), not just country clubs and Alex Rodriguez (whose sketchy foundation actually lost its exemption). It’s almost as impolitic as questioning the tax deduction for charitable donations. But as long as I’m using my chain saw, the charitable deduction, which costs the Treasury nearly $50 billion a year, is another perk for folks who want hospital wings in their name. You can’t take advantage unless you’re rich enough to itemize. The higher your tax bracket, the more you benefit from the deduction.

The real beneficiaries of all this complexity, aside from 1,616,053 CEOs, are the lobbyists, lawyers, accountants, consultants and other middlemen who help navigate it. A more rational society would simply tax moneymaking individuals and businesses, then use the revenues to finance vital services the private sector won’t provide. If altruistic Americans also wanted to support symphonies and Rotary Cubs and scouting groups with perverse views about homosexuality, fine! They just wouldn’t receive tax advantages for their altruism, and neither would the groups.

But whenever anyone talks about reining in nonprofits, charities go berserk and politicians duck for cover. IRS agents can’t even Google obvious infractions without triggering a national uproar. The only hope for change lies in broad bipartisan tax reform that would eliminate some of the loopholes and complexities that currently festoon the tax code while lowering overall rates.

Unfortunately, the word out of Washington is that tax reform, already maimed by partisan gridlock, has been killed by the IRS furor. So the mosquitoes will continue to swarm.

97 comments
jerrybarney
jerrybarney

Mr Grunwald is apparently unaware that philanthropy in general, and venture philanthropy in particular, uses their revenues to finance vital social services the governments can't provide efficiently ... and the largely measurable impact is extraordinary.


britt
britt

Red Cross, United Fund, United Way and others are "NON-PROFIT", but, why do the Directors, or whatever their title's are, get a huge bonus for their efforts whenever a catastrophic event occurs in their area? Remember the big fire in San Diego, Ca., huge RED CROSS Bonus. Why do big corporations send some of their people to work for United Fund and United Way for a time and return back to their corporations only to be promoted?

Another point - Medicare says costs are being driven up because it cost approximately eighty to one-hundred thousand dollars a year to sustain life for the elderly in a nursing home or assisted living place. Meanwhile, we put "HARD-CORE" criminals who were caught in the act of murder, rape, spousal abuse, child abuse etc. in jail for the rest of their life at a cost per year equal to the elderly who paid their dues in life and gave up all they own to be taken care of the last few years of their life. I believe our government and special interest groups think more of criminals than the honest elderly! What a crime! I guess lawyers can't make any money off the elderly, with appeals and such!

Britt Holland - twobuoys2@verizon.net

Thank You

njbuckeye
njbuckeye

I've read this article through 3 times trying to figure out what I'm missing, but it seems that the author is showing his ignorance by making the number 1 mistake regarding non-profit organizations. Non-profit does not mean that the charity can't (or doesn't) make a profit, it means that any surplus has to go back into the organization to support the mission (instead of being dispersed to stockholders, etc).

Let's say I work for a small arts organization (and I do), and let's say that at the end of the year we have made $5,000. Our Artistic Director can't take that money home, it has to go back into the company to buy costumes or whatever. We can also choose to invest that money such as in an endowment fund, so we can save for a rainy day. Harvard's endowment fund probably funds things like medical research and archaeological excavations that wouldn't otherwise take place. One can surely measure contributions to society in more ways than financially- our tax exempt organization may not pay to have a road repaved, but our arts ed programs help bridge the gap in underserved schools.

The other thing people often miss is that not only do we not pay taxes on earned income, we also are exempt from paying sales tax. Having non-profit status often makes the difference between staying in business and going bankrupt for 90% of the small, community-serving, charitable organizations. Please don't compare us to the NFL, it's insulting.

curt3rd
curt3rd

Let’s stipulate that it’s totally uncool for IRS agents to single out Tea Party groups for extra scrutiny.

I literally could not get passed the first sentence. Lets stipulate that its totally uncool that the IRS is profiling groups and attacking them for their political affiliation.  Lets stipulate that this writer isnt a complete idiot.

EugenePatrickDevany
EugenePatrickDevany

The author is quite brave to expose the charities.

By way of background, the tax code contains tax exemptions (credits, deductions, special rates, deferrals and exemptions) which raise the tax rates by $1.2 trillion and redistribute the wealth (7.5% of GDP) to those taxpayers that qualify. Over time this annual redistribution enables the top 10% of the population to profit while the middle class is harmed and the bottom half of the country is pummeled - losing 70% of their net wealth between 1995 and 2010. In 2000 the nonprofits had twice the net wealth of half the country and by 2010 the nonprofits had eight times the net wealth of half the population (and this does not even include the churches which do not file wealth reports with the IRS).

The charitable deduction actually destroys private sector jobs. It gives $50 billion to wealthy individuals to induce them to take hundreds of billions invested in business and give it to very wealthy public charities. How many jobs are lost each year?

Admittedly, not all nonprofits are the same and only some qualify as public charities enabling the donor to deduct contributions from the donor's tax returns. It is nevertheless a good time for the policymakers to question if charitable deduction has caused more harm than good. Consider that the $50 billion lost each year could be used to create 5,000,000 job at $20,000 each. Is full employment more important than giving tax breaks to the very wealthy who have so much money that they need to give it away? Have the public charities like universities and hospitals used their growth in wealth to help those in need or have they increased the salaries and benefits of their top executives at taxpayer expense?

JohnWerneken
JohnWerneken

Right on! Abolish all the exemptions. Then get the exemotions deductions reduced rates and any other thing whatever, that treats one dime or person or purpose as diffeent, cause they are not different. All activity is done in the persuit of someone's desires. Let their desires pay their own way, or fail, or receive a welfare grant if they'd otherwise be below what a fairly wealthy country could and did agree was the national minimum standard of dignity. After all, most of the special deals exist only to cut more people in on a rat's nest of ever less special provleges. Solve the whole problem: aboilsh all the special deals, particularly including sunsidies for homes, for interest rates, for retirement, and for charity.

TexasTruBlu
TexasTruBlu

If we eliminate taxes for one political group, we must do it for all. This is the same problem that people face when they want religion in public schools. If you allow Christianity, you must also allow every other faith, even Wiccan or Voodoo if you want a strict interpretation of rule of law. By that same method, if we want to tax Tea Party, Patriot oriented groups, The Tides Foundation, Media Matters, ACLU, LULAC, NAACP, New Black Panthers and countless other self proclaimed social welfare groups must also be taxed. If justice is blind as we are told, then the government-which includes the Dept of Justice and the Executive Branch-cannot legally pick winners and losers. Any liberal who thinks this is simply fine is ignoring that by setting precedence that the Oval Office Occupant gets to say who can and cannot be taxed will be screaming years in the future when these events are used to justify future misuse of executive power.

cluebattingcage
cluebattingcage

Why should political groups be taxed at all?  What claim does the government have on the money I choose to use my money to support the causes I wsh to support?  I get taxed when I make the money.  My employer gets taxed on the money he makes on the labor I provide.  Then I pay taxes on my property, and taxes on groceries and home improvement products and clothes and tablecloths, and gasoline and blankets.  And the people who make and sell the stuff I just bought pay taxes on the money they make and everything they buy, too.  And then, say, some like minded people and I want to pool some resources to get a political message out ... and they want to tax that, too.  If I drive a car, they tax the street, if I get too cold they tax the heat, if take a walk they tax my feet.

Things would be far different if there were no payroll tax and each citizen had to write out a check at the end of the year for the taxes they owe.  Priorities would change.   Taxing political groups is absurd.

RRDRRD
RRDRRD

This author is probably the biggest ass I have seen in print in a couple of decades.  The power to tax is the power to destroy - no party in power should have the capability to destroy its opposition through underhanded, cheap, cowardly and pissy actions like that of this administration's.  As for access to donor records, we have seen in the last 30 days what an amoral political leader will do for and with that information. 

All political groups should be kept out from under the thumb of the government and IRS.  And this author needs to find a job he is qualified for - I understand Walmart needs stockers.

dblevene
dblevene

There is some merit to Mr. Grunwald's point - but of course, what he says also applies to labor unions, which are tax exempt under section 501(c)(5) and which have spent billions of dollars on political campaigns in the past few years.  If you want to tax ordinary Americans for engaging in political activity, then you ought to tax labor unions, too.  

MarkWell
MarkWell

It may be that political groups should not have tax-exempt status. That is a matter for Congress to take up. What is true is that both conservative and liberal groups applied for tax-exempt status. And yet, only conservative groups, and not a single liberal group, had unusual, intrusive and IRS admitted improper, requests for information. Only conservative groups saw their processing time zoom from about 5 months, to two years or more, obviously impacting the Presidential election. Mission accomplished, the next task was to suppress this information until after the election. That mission was accomplished, too. Poor customer service? This from an agency whose head visited the White House about 160 times during his tenure, while Bush's IRS Commissioner visited once. Nothing to see here, move along.

EricMKrehemker
EricMKrehemker

Basically being somewhat distrustful of TIME magazine and their political bent this sounds to me like an attempt to throw a bunch of different and individual things into a barrell and say: "see look its all the same".  A classic ploy indeed.  However I do think there is a larger point that I agree with and that is this: why are the taxpayers being asked to pay more in taxes while we have over a million organizations have a tax exempt status?  

Considering all the information coming out these days about some of the misuse of funds by the governement and particularly how they choose to spend our money will we are in a state of "sequestration" I have long ago given up hope of reining in the immense waste that is inherent in a large beurocracy, the history of this in this administration and dating back decades is enough evidence.  The questionis do we as citizens have enough guts to hold the ruling elite responsible for the actions they have taken and the decisions we have made.  So far the answer to that question has been an emphatic "NO" 

yogi
yogi

Yeah, Tax 'em all! Conservative, liberal, and all those in between. Screw the NFL they make enough money suckering cities into paying for their stadiums. And while we're at it, why stop at charities, let's tax the churches too.

madrr
madrr

If you'e including in your group to strip tax free status from - Tides Foundation, Ford Foundation, Robert C Wood Foundation, ACLU, Aspen Inst, ClimateWorks, Environmental Defense, Media Matters, MoveOn, etc, then I'm w/ you

CitizenKane
CitizenKane

And Time shouldn't pretend to be an unbiased news organization.  Ummm didn't Jay Carney work for Time?  All any intelligent person needs to know how useless Time is.  Unless of course you run out of toilet paper late at night.  Next?

ChugiakTea
ChugiakTea

I was wondering how long it would be before some liberal would start justifying the despicable behavior of their messiah by shunning responsibility and deflecting blame.

Andrewp111
Andrewp111

It is not just an absence of "profit" in a 501c(4). Donations to a non-exempt entity would be subject to gift tax, but donations to an exempt entity are not.  That is why tax exemption is necessary for an organization that doesn't make a profit anyway. And 501c(4)'s do not have to disclose their donors. Most labor unions are 501c(4)'s.

tony.kueber
tony.kueber

Read the First Amendment and report back which tax payment is necessary to petition the government for redress of grievances 

roknsteve
roknsteve

Poor little cry-baby conservatives want the IRS to treat them like the Girl Scouts.  And they want free cookies, too. 

peregrine
peregrine

@njbuckeye - This article also proposes charitable spending is already tax-exempt in the current code, and non-profits could simply itemize their taxes instead. Even if this were true, it would be a nightmare for non-profits...it wouldn't reduce complexity at all, for *them*.  Every business decision they make would become a claim they would have to prove, in the event of an audit. 

And the article fails to mention donations to tax-exempt organizations are tax-deductible, creating an incentive for the private sector to fund charitable activities. When the scandalmongers talk about non-profits going "bankrupt" waiting for the IRS to approve their applications, that's what they're referring to. It's perfectly legal to solicit donations *without* tax-exempt status...you just have to pay taxes on them, and your donors can't deduct. This is a pretty hard sell for something like an arts organization, but it's hard to imagine the Tea Party affiliates in question were much impacted...especially since they had an application on file, and could legally market donations as being "tax deductible" pending approval.  And of course, once approved, the donations became retroactively "tax-deductible".  Another reason why political organizations shouldn't be allowed non-profit status, but I digress.

Diecash1
Diecash1

@curt3rd That the groups in question had political affiliations and activities is the problem.  These groups were applying for non-profit status as social welfare groups while actively participating in partisan political activities.  As such, they deserved scrutiny from the IRS and were not qualified to receive special tax treatment. 

I'm amazed how these relevant points are lost among right-wingers who seem to be stuck in a perpetual state of outrage when it comes to all things government (or Obama).


formerlyjames
formerlyjames

@curt3rd 

Nice to see a right wingnut stipulate to anything.  Write your reps in Congress and tell them what that means, if you actually know.

mantisdragon91
mantisdragon91

@curt3rdYes totally uncool that the IRS is profiling groups and attacking them for their political affiliations.


10 examples of Bush and the Republicans using government to target critics: http://m.huffpost.com/us/entry/3288007

The Bush IRS collected political affiliation data on taxpayers - http://www.sitnews.us/0106news/010606/010606_shns_irs_politics.html

The Bush IRS audited Greenpeace and the NAACP - http://www.foreffectivegov.org/node/2281 and http://m.democracynow.org/stories/6652



La_Randy
La_Randy

@cluebattingcage "Things would be far different if there were no payroll tax and each citizen had to write out a check at the end of the year for the taxes they owe.  Priorities would change."

I think they call those 'citizens' Sole Proprietorships. Everytime money changes hands it is usually taxed. Who pays and who does not is the gist of this article.

curt3rd
curt3rd

Walmart is cutting everyones hours due to Obamacare.  He might want to look elsewhere

peregrine
peregrine

@dblevene No one is saying, or has ever said, "politically active" groups can't be non-profits.  Social welfare organizations are almost inherently political.  Chambers of Commerce are political. Anyone with a lobby is political, whether they spend money lobbying Congress or not. 'Politics' are the rules and practices that govern how people interact. Saying you want to work for the "public good" without being political is like saying you want to fly to Las Vegas without using the air.

The restriction, and it's a reasonable restriction, is that non-profits can't use tax-deductible donations to fund political candidates or campaigns.  So Billionaire X can't write the Tea Party a check for one million dollars to fund the next Michelle Bachmann, then write that donation off as a charitable contribution at the end of the year. This is a common-sense safeguard of democracy.  But we shouldn't be surprised it's under attack...by the same billionaire factions that undermined campaign contribution caps and donor reporting requirements a few years back.  In the era of "dark money" and "money is speech", what difference does it make if these donors get to dodge taxes on the back end?

La_Randy
La_Randy

@MarkWell Actually a liberal group was denied, none of the republican groups were and I repeat no pre-clearance was necessary. The groups who  claimed 501c(4) status could have claimed the exemption at the time of filing. 

If they wanted tax free status the least they could have done, to be compliant, would be to hire a competent tax attorney.

curt3rd
curt3rd

States pay for the NFL stadiums because they know in the long run that they will get it all back in job creation, tourism, and taxes.

kkell
kkell

@yogi  Best remember that the liberals all want to scream about separation of church and state---once the churches are NO longer taxes exempt, they will finally be free to say anything from the pulpit that they believe truly needs to be expressed.  Careful what you ask for--there are some of us that think that a tax exempt status for the churches will unleash them to do the job that they need to do in the first place. 

ChugiakTea
ChugiakTea

@Andrewp111 "501c(4)'s do not have to disclose their donors"--unless you apply under the Obama administration (that caveat will be there forever).


CitizenKane
CitizenKane

@roknsteve No, they want to be treated equally and without prejudice base don their beliefs.  Ya know, sorta like black people after we outlawed slavery.  Next?

FastEddieTX
FastEddieTX

@roknsteve  

No, they want to be treated like Media Matters, a completely partisan group with tax-exempt status.  If you cut the tax-exempt status for Organizing for America (formerly Obama for America, a group that has come out and said they are completely non-partisan in one of the most laughable press conferences in history), then cutting the Tea Party groups would be fair.  As long as the Unions and all the groups like La Raza or NAACP were also considered taxable, then there would be no problem.  

KeepingEyesOpen
KeepingEyesOpen

@Diecash1  Actually, these groups were qualified for 501c4 tax treatment.  Apparently you need to learn the IRS regs.  A 501c4 group is allowed to engage in political activity, at least to a limited extent.  These groups may lobby and may participate in political campaigns, but may not make actual contributions to political candidates.  This political activity must not be the primary focus of the organization (less that 50%, according to the IRS).  There are many non-partisan issue-advocacy groups, as well as many liberal-leaning 501c4 groups (MoveOn.org) and conservative-leaning groups (NRA).  According to the tax code and current IRS regs, these groups ARE entitled to tax-exempt status. Note that these groups are NOT allowed the more generous tax-exempt status of 501c3 groups (charities and educational institutions).  Donations to 501c3 groups are tax-deductible, whereas donations to 501c4 groups are not - probably because of the limited political activity allowed for the 501c4 groups.

All of this hair-splitting could be avoided with a revamp of the tax code.  I would favor doing away with all tax deductions in return for much lower tax rates.  I would also favor massive simplification of the  rules for tax-exempt groups and require that donors to political activity be disclosed.  Note that the same rules should apply to the 501c5 Trade Union groups as well.

The real problem here is the complexity of the tax code.  Politicians derive power from this complexity, however, since they depend on political donations to carve out loopholes and exemptions for favored groups.  For this reason it will be a struggle to simplify the tax code.


Diecash1
Diecash1

@curt3rd Care to substantiate that claim?  Walmart has kept thousands of employees below 35 hours per week in order to avoid providing them with additional benefits for years.

dblevene
dblevene

@peregrine @dblevene "The restriction, and it's a reasonable restriction, is that non-profits can't use tax-deductible donations to fund political candidates or campaigns. "  I agree that's a reasonable restriction but I don't see what your problem is.  Contributions to 501(c)(4) groups are NOT tax deductible.  No one was trying to deduct contributions to these various Tea Party groups.  They were not looking for sleazy tax deductions.  That's because, to repeat, contibutions to 501(c)(4) groups are not tax deductible.


The issue is whether the contributions should be deemed taxable income to the political group.  Do you think so?  If I spend $100 on politics, the government doesn't tax that, but if I decide to pool my funds with my friends and form a corporation to handle our funds for us, all of a sudden it's ok for the government to tax all the money we're pooling to spend on politics?  That's the issue, the only issue.





MarkWell
MarkWell

@La_Randy @MarkWell You, much like Bizarro Superman, live in an alternate universe. One liberal group was denied. Where in my post did I say that no liberal groups were denied. Where did I say all conservative groups were denied. I said liberal groups did not get unusual, intrusive and IRS admitted improper requests for information: donor lists, content of prayers, etc. Conservative groups had their average processing time increase dramatically, liberal groups did not. The IRS was engaged in political profiling, in a rather obvious effort to influence Obama's re-election. Mission accomplished. Indictments to follow. 160 visits to the White House, which refuses to release the logs which would show topic and attendees. 160 visits. About once a week, hitting full stride after the November 2010 crushing by the Tea Party. True the Vote still hasn't been approved or denied, three years after their application. 160 visits to the White House. Are  you serious? Because your post is not.

La_Randy
La_Randy

@kkell @yogi "Careful what you ask for--there are some of us that think that a tax exempt status for the churches will unleash them to do the job that they need to do in the first place."

Create a theocracy? Shades of Iran come to mind.

dblevene
dblevene

@peregrine  That's not the point you made above and to which I responded.  You incorrectly claimed that the problem with 501(c)(4)s was that they made it possible to write off as a charitable donation a gift to a political group. That claim was wrong, and instead of conceding that you were wrong, you are now changing the subject.  As a matter of tax policy, what is the difference between me spending $100 on politics, and me forming a group with my friends, each of us contributing $100, in order to engage in politics collectively?  How are they different from a tax perspective?  Why is one activity subject to tax and the other is not?  Where is the potential for tax abuse?  Who is avoiding taxes?  Please enlighten us.  

peregrine
peregrine

@dblevene - Actually no, that's not the issue at all. People can currently pay into PACs, which aren't taxed...but PACs have to report donor information.  The 501(c)4 ploy by these Tea Party groups is solely to avoid PAC regulatory reporting requirements.

MarkWell
MarkWell

@La_Randy @MarkWell You respond to points I don't make. You do not address points I do make. Yet I rail and I am  an incoherent paranoid. Hmmm. Paging Dr. Rohrschach.

MarkWell
MarkWell

@La_Randy @MarkWell  Luckily, I stopped drinking Kool-Aid right around the time Bill Clinton, later disbarred for saying the same thing under oath, waived his finger and said he never had sex with that woman. But you enjoy yours. Remember, it goes well a sh..t sandwich.

MarkWell
MarkWell

@La_Randy @MarkWell Shulman had more visits to the White House than Kathleen Sibelius, Timothy Geithner and Hillary Clinton, combined. Must have been a helluva Easter egg hunt. Shut your eyes and ears, stamp your feet. The fact won't go away. This is  banana republic politics. And what will you say when the shoe is on the other foot, as it will be? What then? Why then it will be corrupt, immoral and illegal. You're an apologist for a corrupt administration. 160 White House visits, for the IRS Commissioner. 45 for the Secretary of State. Release the logs.

curt3rd
curt3rd

Yeah that title isnt bias