Self‐Dealing Sanctions: Pigouvian Taxes?

Date01 April 2020
Published date01 April 2020
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
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
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.
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.”
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.
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

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