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TABLE 1. HISTORY OF FEDERAL CORPORATION INCOME TAX EXEMPTIONS AND RATES, 1909-PRESENT-Continued
Exemption, brackets, or type of tax
1Less adjustments: 14.025 percent of dividends received and 2.5 percent of dividends paid. 2 Includes surcharge of 10 percent in 1968 and 1969 and 2.5 percent in 1970.
3 Rates are averages of the 1986 and 1988 rates.
Sources: Relevant public laws and summaries prepared by the Joint Committee on Taxation. Reprinted with permission from J. Pechman, "Federal Tax Policy," pp. 321, 322, The Brookings Institute, Washington, D.C. (5th ed. 1987).
TABLE 2. CORPORATE INCOME TAX RECEIPTS, TOTAL AND AS PERCENT OF
1961 ... 1962 ....
TABLE 2. CORPORATE INCOME TAX RECEIPTS, TOTAL AND AS PERCENT OF
1 Beginning in 1987, includes trust fund receipts for the hazardous substance superfund. The trust fund amounts are as follows (in millions): 1987-$196; 1988-$313; 1989-$292; 1990-$461; 1991— $591; 1992 $380.
Source: Office of Management and Budget, Budget Baselines, Historical Data and Alternatives for the Future. January 1993.
Private Inurement Restrictions
An organization cannot qualify for tax exempt status as a charity, labor union, or trade association if any part of its net earnings inures to the benefit of a private individual. This prohibition is intended to ensure that the organization fulfills the rationale for tax exemption by devoting itself exclusively to the public good, and to prevent the organization from conferring financial benefits (other than reasonable compensation) on persons having a personal or private interest in its activities.
Lobbying and Political Campaign Activities
Exempt organizations are also subject to restrictions on lobbying and political campaign activities. Charitable organizations that are
exempt under section 501(c)(3) cannot engage in any political campaign activity and cannot engage in more than an insubstantial amount of lobbying activity. In the case of other types of exempt organizations, the rules are much less restrictive. However, lobbying and political campaign activity generally cannot be the principal activity of the organization.
Prior to 1894, all tax legislation enacted by Congress specified the entities subject to taxation. Thus, tax exemption for various nonprofit organizations existed primarily by statutory omission. With the enactment of a broad-based tax on corporate income, Congress was required to define the appropriate subjects of exemption. Accordingly, the Tariff Act of 1894 provided exemption for nonprofit charitable, religious and educational organization, fraternal beneficiary societies, certain mutual savings banks, and certain mutual insurance companies. Following passage of the Sixteenth Amendment, comparable measures were enacted in the Revenue Act of 1913.
Relief of governmental burdens has long been a principal rationale for the exemption from tax of certain organizations. In its committee report accompanying the Revenue Act of 1938, the Committee on Ways and Means states:
The exemption from taxation of money or property devoted to charitable and other purposes is based upon the theory that the government is compensated for the loss of revenue by its relief from financial burden which would otherwise have to be met by appropriations from public funds, and by the benefits resulting from the promotion of the general welfare.1
A second rationale is that income of organizations formed for the mutual benefit of members (e.g., social clubs, labor unions and trade associations) should be exempt so long as such organizations are primarily financed by such members' after-tax income.2
In 1950, largely in response to concerns about unfair competition between exempt organizations and taxable business, Congress enacted the unrelated business income tax (UBIT). The report of the Committee on Ways and Means observes:
The problem at which the [UBIT] is directed here is primarily that of unfair competition. The tax-free status of * * * [section 501] organizations enables them to use their profits tax-free to expand operations, while their competitors can expand only with the profits remaining after taxes.3
In 1969, Congress revisited the issue and expanded application of the UBÍT.
Also in 1969, Congress enacted special rules and penalty provisions to govern the activities and investments of private foundations.
1H. Rep. No. 1860, 75th Cong., 3d Sess. 19 (1939).
H. Rep. No. 413, 91st Cong., 1st Sess. 48 (1969).
'H. Rep. No. 2319, 81st Congress, 2d Sess. (1950) at 36–37.
RECENT LEGISLATIVE DEVELOPMENTS
Unrelated Business Income Tax
In 1987, the Subcommittee on Oversight of the Committee on Ways and Means held 5 days of hearings to review the Federal tax treatment of commercial and other income-producing activities of tax-exempt organizations. The Subcommittee sought to determine whether the current rules set forth the appropriate standards for determining the taxability of such activities. Following the release of preliminary discussion options for reviewing the UBIT rules, the Subcommittee did not pursue any further legislative activity in the area. However, UBIT receipts have markedly increased in the years following the Subcommittee's work (see table 6).
In 1992, the Committee reported favorably H.R. 5645, a bill to clarify the UBIT treatment of corporate sponsorship payments and affinity card transactions. After H.R. 5645 was passed by the House, the provisions dealing with corporate sponsorship payments were incorporated in slightly modified form into H.R. 11, the Revenue Act of 1992. The Conference Report on H.R. 11 passed the House on October 5, 1992, and passed the Senate on October 8, 1992. H.R. 11 was vetoed by the President on November 5, 1992. Lobbying and Political Campaign Activities
In 1987, the Subcommittee on Oversight held 2 days of hearings to review the Federal tax rules applicable to the lobbying and political activities of exempt organizations. As a result of the hearings, the Subcommittee recommended the following: (1) disclosure by certain tax-exempt organizations of the non-deductibility of contributions; (2) availability of exemption applications and annual information returns for public inspection; (3) disclosure of additional information of section 501(c)(3) organizations; (4) statutory language clarifying that 501(c)(3) organizations are prohibited from engaging in political campaign activities; and, (5) imposition of excise taxes on prohibited political expenditures or disqualifying lobbying expenditures. On July 23, 1987, the Subcommittee recommendations were accepted, with two amendments, by the Committee and enacted as part of the Omnibus Budget Reconciliation Act of 1987.
Additional Disclosure Requirements
In 1992, Congress passed additional disclosure requirements relating to tax-exempt organizations and tax-deductible contributions to such organizations. H.R. 11 contained the following provisions: (1) a substantiation requirement for contributions of $750 or more; (2) information disclosure requirement for charitable organizations that receive quid pro quo contributions; (3) a disclosure requirement for nonprofit organizations that are nonexempt; and, (4) enhanced information reporting and public disclosure by tax-exempt organizations required to file a Form 990, including the provision of copies on request. H.R. 11 was vetoed by the President on November 5, 1992.