CRS Publishes History of the Charitable Deduction

• Published date: 01 April 2020
• Date: 01 April 2020
• DOI: http://doi.org/10.1002/npc.30714

Bruce R. Hopkins’ NONPROFIT COUNSEL

6 April 2020 THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

COMMERCIALITY DOCTRINE

CORNER

• An ostensible nonprofit automobile repair and ser-

vice shop filed an application for recognition of

exemption as a charitable entity. It made the rep-

resentation that this type of business will set it “apart

from any other mechanic shop” (surely true) and that

the shop will “offer services to parts of our society

that were previously unable to get the extra support

they needed.” Not surprisingly, the IRS declined to

recognize the exemption, concluding that this entity

will be operating for a substantial nonexempt com-

mercial purpose (Priv. Ltr. Rul. 202004011).

• Another nonprofit organization received the same

treatment; this entity was formed to operate a facil-

ity (formerly a church) to be leased to the public as

event space. The IRS observed that “[p]urchasing,

renovating, and leasing a facility are not inherently

exempt activities,” and ruled the entity is operating

in a commercial manner (Priv. Ltr. Rul. 202004012).

This ruling also included a finding of private inure-

ment, in that the organization paid interest on a

loan provided by two board members that was dou-

ble the rate it subsequently obtained from a bank.

There is, however, no discussion in the ruling as to

whether that first rate was unreasonable under the

circumstances.

• Still another nonprofit organization was formed

for the purpose of providing access to fine dining

experiences for its membership. Members “meet

regularly to enjoy fellowship, education, exploration

and shared experiences across common interests.”

Here, the commerciality doctrine was, surprisingly,

not invoked; instead, the entity was seen by the

IRS as violating the operational test by operating

for a substantial nonexempt social purpose and

transgressing the private benefit doctrine by serv-

ing its members’ private interests (Priv. Ltr. Rul.

202004015).

• Another nonprofit restaurant has failed to acquire

tax-exempt status. The IRS observed that “[o]

perating an eating establishment on a regular and

continuous basis is an unrelated business” (Priv. Ltr.

Rul. 202005021). The agency noted that this enti-

ty’s prices and hours of operation are the same as

for-profit dining venues. The IRS applied the com-

merciality doctrine, in part because the entity’s only

income is from the restaurant operation and it uses

those receipts to pay for the cost of sales, occu-

pancy expenses, insurance, and salaries. In addition,

the IRS observed that this organization is open to

the public on a regular basis and its customers are

“not limited to a charitable class of individuals.”

[4.9(g)] ◆

CRS PUBLISHES HISTORY OF

THE CHARITABLE DEDUCTION

The Congressional Research Service published a report

titled “The Charitable Deduction for Individuals: A Brief

Legislative History” (R46178). It references the major

legislative changes to this charitable deduction, from

its enactment in 1917 through the changes enacted at

the close of 2017. The report opens with a summary of

the law concerning the charitable deduction available to

individuals who itemize their deductions.

Quoting a law review article, the CRS wrote that the

deduction for charitable giving has changed over the

years from a “short statutory provision into a complex

set of rules.” The report states that “[o]ver the past 100

years, Congress has generally increased the amount that

eligible taxpayers can deduct for their charitable dona-

tion.” Today, it adds, “many policymakers are focused

on the charitable deduction’s impact on giving, and its

efficacy at inducing additional giving.”

The report discusses nine major legislative changes

concerning this charitable deduction, beginning with its

origin in the War Income Tax Revenue Act of 1917, run-

ning through the Tax Reform Act of 1969, and ending

with the Tax Cuts and Jobs Act. ◆

SELF-DEALING SANCTIONS:

PIGOUVIAN TAXES?

I am indebted to law professor Ellen Aprill for introduc-

tion (for me, anyway) to the notion of the Pigouvian tax,

by means of a paper she recently published concerning

the character of the private foundation self-dealing

sanctions. (The paper is to be an article in the Pittsburgh

Tax Review.) Not well-schooled in economic theory, I am

part of the group she describes when writing that “many

have been exposed to the idea of a Pigouvian tax with-

out knowing the term.”

What has come to be known as the Pigouvian tax is

the brainchild of English economist Arthur Cecil Pigou

(1879–1959), a contributor to modern welfare econom-

ics. He introduced the concept of externality and the

belief that externality (social problems) can be corrected

by imposition of a tax. Aprill writes that Pigouvian taxes

“aim to regulate behavior by placing a small tax, usually

in the form of a uniform excise tax, on the activity to be

regulated because of the harm it produces for members

of the public.”

Are the self-dealing taxes Pigouvian taxes? Aprill

says “Yes but.” I, armed with new knowledge, say “Yes

but not technically, with a caveat.” But let’s first define

the tax regime. Of course, two excise taxes are imposed