Commercial Activity and Charitable Tax-Exemption

Abstract

This article looks at the relationships between three separate legal doctrines that deal with commercial activity by tax-exempt charities: the "commerciality doctrine" (which governs when commercial activity endangers tax exemption); the unrelated business income tax (which taxes some commercial activity); and the Moline Properties corporate-separate-identity rule (which governs how commercial activity by a subsidiary in a complex structure affects a parent or sibling corporation). After reviewing the current state of legal doctrine in these three areas and concluding that current doctrine is inadequate and contradictory, the article turns to reconstructing the applicable rules in light of the public policy concerns raised with respect to commercial activity by charities. The article identifies six potential policy concerns: (1) unfair competition between exempt and for-profit organizations; (2) protection of the corporate tax base; (3) managerial diversion from charitable mission; (4) economic efficiency; (5) measuring the worth and need for tax subsidies by exempt organizations; and (6) protecting charitable assets from liabilities generated by for-profit business activities. The article then contrasts how two different general approaches to dealing with commercial activity by charities affect these six policy concerns. The two general approaches are permitting such activity to continue tax-free in order to provide additional tax subsidies to exempt organizations versus restricting such activity by expanding the UBIT into a general commercial-activity tax. The article concludes that the best solution to the policy concerns raised by commercial activity is to radically restructure the underlying tests for tax exemption; in absence of such radical restructuring, the article suggests that the next best approach is to restrict commercial activity by expansion of the UBIT, and provides specific doctrinal suggestions for implementing such a "commerciality tax". The article also suggests that under either suggested solution, both the commerciality doctrine and corporate-seprate-identity rule as applied to exempt status should be repealed.