நிறு 4 In many respects, I.R.C. §§ 71, 215, and 1041 already recognize and intentionally implement this bedrock value. The time has come to finally abandon the remaining remnants of our futile attempt to differentiate "alimony" from "child support" from cash "property settlements," distinctions increasingly abandoned under state law in this era in which an equitable and fair apportionment of all undifferentiated income and property rights is the goal. The parties should be permitted to designate whether any cash payment should be includable by the recipient and deductible by the payor, on the one hand, or excludable and nondeductible, on the other, with the default rule (in the case of silence) being that such payments are includable by the recipient and deducible by the payor, unless the payment is to a third party on behalf of a child. Treasury should also make it clear by issuing a new regulation (perhaps pursuant to a new Congressional directive in I.R.S. § 1041, though I don't believe that statutory amendment is absolutely necessary) that the assignment-of-income doctrine, which is fundamentally inconsistent with the premises underlying I.R.C. § 1041, does not trump the nonrecognition rule of I.R.C. § 1041 in the context of divorce. Finally, Treasury ought to issue a new regulation to replace Treasury Regulation § 1.1041-1T(c), Q&A 9, to specify clearly, in the manner described, when property transferred directly from one spouse to a third party outside the marital unit will be considered as having been transferred first to the other spouse before the transfer outside the marital unit, thus shifting the tax consequences to that other spouse. C. Private Benefit, Public Benefit and Exemption Prepared for the Joint Committee on Taxation Simplification Study By Frances R. Hill University of Miami School of Law 1. Introduction: Public Benefit and Private Benefit Exemption is reserved for organizations that operate for the exempt purposes set forth in the Internal Revenue Code (the "Code") and which provide benefits to appropriate recipients defined in relation to an organization's exempt purpose. These exempt purposes define the public benefits of an exempt organization. The public benefit is the benefit arising from the exempt activities. Those who share in an organization's public benefit will be beneficiaries defined by the organization's exempt purpose. Section 501(c)(3) public charities operate for the benefit of a charitable class defined in relation to the various organizations' particular exempt purposes. A section 501(c)(3) organization does not have to serve the interests of the entire public but will be treated as providing a public benefit to every member of the public interested in the organization's particular mission, whether preventing cruelty to animals or presenting opera or fostering interest in stamps or any of the other hundreds, if not thousands, of interests that fall under the exempt purposes enumerated in section 501(c)(3).' Other exempt organizations also provide public benefits, benefit resulting from their various exempt purposes, even though these organizations have a less encompassing scope than do section 501(c)(3) organizations. For example, the members of a labor union and those non-union workers who benefit from a collectively bargained contract will be the appropriate public beneficiaries of the operation of a labor union. Members of a trade association are business entities in a particular line of business and the public benefit is a benefit to that line of business, not benefits to the individuals firms of a type that give them a relative advantage over other firms operating in the same line of business." Social and fraternal organizations operate for the benefit of their members.1 2 1 Section 501(c)(3) lists the following exempt purposes: "religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals." 2 Labor organizations are described in section 501(c)(5). 3 4 Trade associations are described in section 501(c)(6). Social and fraternal organizations are section 501(c)(7) social clubs, section 501(c)(8) fraternal benefit societies, and section 501(c)(10) fraternal societies. 5 A private benefit, in contrast, is a benefit arising from a relationship with the exempt organization not defined by the public or exempt purpose. Private benefits are inconsistent with exempt status. Ordinary employment contracts or ordinary contracts for the provision of goods needed by the exempt organization are not the kinds of relationships that provide private benefits that jeopardize the organization's exempt status since these are cost incurred in connection with conduction the organization's exempt activities. Private benefits are benefits that are not related to the achievement of the organization's exempt purpose. This paper is based on the premise that any coherent rationale for exemption from taxation is necessarily based on the provision of a public benefit. It further argues that much of the incoherence and complexity of the current law of tax exemption arises from the attempt to ground exemption in the absence of private benefit rather than on the provision of a public benefit. The absence of private benefit is not the same as the presence of public benefit. Consider the following hypothetical. A section 501(c)(3) organization is established for the purpose of educating the public on the issue of loss of habitat for endangered species. The organization hires one employee at a modest salary and that employee devotes her time to the study of the loss of habitat for endangered species. She reviews all the relevant literature, travels to areas of receding habitat, and consults all of the leading authorities throughout the world. None of the expenses were unreasonable. Indeed, the board remarked each year on how economically the employee conducted her work. During this time, the employee wrote no papers, issued no reports, spoke at no conferences. The organization made no information available on the loss of habitat for endangered species. After five years, the organization terminated its operations and distributed its remaining assets to another section 501(c)(3) organization. There was no private benefit in the sense of excessive payments to an employee or to some other person. Yet, there was no public benefit, and the organization should not be treated as exempt. Reliance on the absence of a private benefit as the core rationale for exemption has created a conceptual trap for exempt organizations. One side of this trap is the difficulty inherent in grounding exemption primarily on the absence of private benefit. This difficulty becomes acute when an exempt organization engages in exactly the same activities as a taxable entity and both are charging the same fees for their services. There is a process of convergence between exempt and taxable entities. Why is one hospital that provides a peppercorn of charity care 6 5 For example, a section 501(c)(5) labor organization or a section 501(c)(6) trade association that provides football tickets to its members would be providing a private benefit because neither organization is created to provide this kind of benefit. In contrast, a section 501(c)(3) organization that provided children from economically disadvantaged backgrounds tickets to a football game would in most cases be treated as engaging in an exempt activity and not providing a private benefit. At the same time, a section 501(c)(3) organization that provided football tickets to its contributors might be treated as providing a private benefit or as inurement (if the contributor were an “insider") or as an excess benefit transaction (if the contributor had substantial influence over the operation of the organization). 6 Convergence between taxable and exempt entities has become an increasingly prominent theme in three books studying the market activities of exempt organizations by taxable and another hospital that provides a peppercorn of charity care exempt? Why should one university be taxable while another university providing the same types of degrees in the same subjects is exempt? Why should a university be exempt with respect to its tuition for oncampus "bricks and mortar" classes while the same university chooses to be taxable with respect to the revenue from its cyberclasses in the same subjects leading to the same degrees? Is exemption purely voluntary? Is there in practice a check-the-box regime for exemption? The absence of any coherent rationale for exemption in an era of convergence is likely to become a prominent feature of future disputes over tax exemption. The second side of the trap for exempt organizations is that they have become subject to increasingly stringent private benefit requirements. Private benefit, inurement, and excess benefit transactions now all apply in ways that cannot be predicted. Yet, these private benefit doctrines are necessarily limited by the operational needs of the organizations. Excessively stringent private benefit doctrines can impede achievement of an exempt organization's exempt purposes. The protracted conflicts over compensation, including incentive based compensation, illustrate the difficulty. If doctors cannot be compensated at a market rate defined by taxable entities, then exempt hospitals cannot provide the same quality of care. The same considerations apply to at least some segments of universities. If the football coach at a school that treats football as a source of self-definition and a source of revenue cannot receive a compensation package comparable to that offered by the taxable teams in the professional leagues, then the school will not be able to compete for players and assistant coaches. The same considerations apply, although usually with less press interest, in other departments of universities. Efforts to implement restrictions on transactions that may appear to provide a private benefit can seem gratuitous and unrelated to the operational requisites of efficient operation. Private benefit doctrines alone cannot provide a rationale for exemption at the very time that convergence makes such a rationale a more pressing practical necessity. Without a public benefit rationale, exemption will seem simultaneously overinclusive and underinclusive. 7 A public benefit rationale is more complete than a private benefit rationale, even if one could be developed, because exempt organizations engage in activities that may not result in private benefit but which, at the same time, are not related to providing a public benefit. The result is that both the technical requirements for exemption and the conceptual rationales for exemption ignore much of the activity of contemporary exempt organizations. A public benefit rationale would address both the distribution of resources to persons other than the intended beneficiaries of the organization's exempt activities and the diversion of resources from exempt activities to nonexempt activities within the organization. While private benefit doctrines direct attention to distribution of organizational resources outside the organization, they do not address Professor Burton Weisbrod and his colleagues. See BURTON A. WEISBROD, THE VOLUNTARY 7 University compensation structures generally reflect a hierarchy based on the presence of a market alternative to teaching, so that medical school faculty make more than law school faculty who make more than most professors in the humanities or social sciences, there being a very limited private market in anthropologists or philosophers. the diversion of resources within the organization to activities that are not related to the organization's public benefit purpose. Academic theories have focused on the external distribution issues addressed by private benefit doctrines. There has been no academic attention to internal diversion and its implications for exemption. This paper and the companion paper on the unrelated business income tax begin to address the contours of such a nondiversion constraint. This paper does not resolve the conceptual and practical issues arising from the failure to define the rationale for exemption in terms of public benefit. It focuses on the elements of complexity arising from the three private benefit doctrines. The paper identifies four elements of complexity characterize private benefit concepts under current law: (1) the concurrent existence of three concepts of private benefit-private benefit, inurement, and excess benefit transactions-each of which presents unresolved issues and definitional complexities; (2) different meanings of private benefit and inurement as these apply to different types of exempt organizations; (3) the absence of guidance relating to the scope of private benefit, inurement or excess benefit that jeopardizes exempt status; and (4) overlapping application of two or three of the elements of private benefit to particular types of exempt organizations. This paper discusses the three types of private benefit doctrines as they apply to various types of exempt organizations and the intersections among the three doctrines." It then offers proposals for addressing the ambiguities of each of the three doctrines and the intersections among them and considers alternative approaches that might follow from basing exemption on an affirmative public benefit requirement. 2. Two Contemporary Cases: A Template and a Conceptual Collapse The tensions and paradoxes discussed above are the central feature of a case that has become a template for much of the contemporary thinking on private benefit, the doctrines through which it is currently expressed, and its relationship to exempt status. The United Cancer Council ("UCC") case seemed poised to become the STET of our era until it was settled, due largely to the exhaustion of the parties. Despite the settlement, the case reverberates through 10 8 The concept of a nondistribution constraint was developed in a series of articles by Henry Hansmann, who found this concept only an attenuated rationale for exemption from taxation. See, Henry B. Hansmann, The Role of Nonprofit Enterprise, 89 YALE L. J.(1980); The Rationale for Exempting Nonprofit Organizations from the Corporate Income Tax, 91 YALE L. J. (1981); The Evolving Law of Nonprofit Organizations: Do Current Trends Make Good Policy? 39 CASE WN. RES. L. REV. 807 (1988-89). 9 This paper does not attempt to present a complete consideration of all aspects of these three doctrines. For a more complete analysis, see FRANCES R. HILL AND DOUGLAS M. MANCION, TAXATION OF EXEMPT ORGANIZATIONS (Warren, Gorham & Lamont, forthcoming 2001). 10 United Cancer Council v. Commissioner, 109 T.C. 326 (1997), rev'd and remanded, 165 F. 3d 1173 (7th Cir. 1999). The closing agreement between the Service and the UCC, which was dated April 7, 2000, is available at 2000 TNT 75-12. |