Is Tax Exemption Obsolete?

By Nicole Millman-Falk, CAE

Jerry Jacobs, Esq. (center) spoke about what might happen to tax-exempt nonprofits if they lost their federal income tax exemption status. Also pictured are Stephen C. Crane, PhD (left), NYSAE chairman of the board and executive director of the American Thoracic Society, and Joel A. Dolci, CAE, NYSAE president.

As Congress begins to debate broad-based tax reform, with everything on the table, is federal income tax-exempt status for nonprofit membership and philanthropic organizations at risk? Maybe, but not yet, concludes Jerry Jacobs, a partner at the law firm of Pillsbury Winthrop Shaw Pittman LLP, who tackled that topic at NYSAE’s September Welcome Back Luncheon.

Jacobs noted that both the chair of the Senate Finance Committee and the House Ways and Means Committee are serious about tax reform. “Tax-exempt nonprofits are easy marks to target since we are not paying taxes at all,” he said. This is not the first time that Congress has targeted tax-exempt organizations. In 1988, Jacobs reminded the group, the IRS wanted to tax the investment income of c6 organizations. ASAE was instrumental in getting that legislation killed.

More recently, however, the Senate Finance Committee announced that it would be looking at charitable deductions, commercial activity, political activities, and general oversight of tax-exempt organizations. “There are those who want to repeal charitable deduction altogether,” said Jacobs, “believing that people should give out of the goodness of their hearts and not because tax exemption.”

Some in Congress are questioning that tax-exempt organizations may be in the same business as for-profit organizations. ASAE recently delivered letters to leaders of both tax-writing committees in Congress, encouraging lawmakers to bear in mind how much the various tax reform proposals might impact the nation’s association community. Of particular concern are possible changes that would expand the definition of “unrelated business income” in the tax code.

Notes the September 17 ASAE letter to leaders of the Senate Finance Committee and the House Ways and Means Committee: “Depending on various changes that may be considered, associations could be forced to make stark changes related to their activities and income sources, and may have difficulty continuing the work they do in communities across the country. Most associations depend on income from passive royalties to advance their tax-exempt purpose, and changes in this area could have broad and negative ramifications for the entire association community.”

“While American culture,” said Jacobs “is based on a barn-raising mentality, that is, we get together as a community to solve problems, it is hard to imagine that any organization could attract membership/sponsorships if not tax-exempt.”

Because the goals of the Senate Finance Committee are to remain revenue neutral, and the House Ways and Means is looking to lower rates, it may be difficult for Congress to agree on which direction tax reform should take. “Add to that other distractions, such as Syria, the debit limit debate, the affordable care act, and reelections, and it is unlikely we will see reforms in the near future.

NYSAE’s Public Affairs Committee, as well as ASAE, will continue to monitor impending tax reforms affecting the association and nonprofit communities.

Jacobs leads Pillsbury Winthrop’s Nonprofit Organizations practice, which provides legal counseling and advocacy for more than 200 national trade associations, professional societies, cause organizations, credentialing agencies, and charities. He is also leader of the firm’s 60-lawyer Public Practices and Public Policy Sections. His experience is international in scope; and he has advised the governments of the EU and the Peoples’ Republic of China on nongovernmental organization issues. In addition, he serves as general counsel to ASAE. Jacobs has published numerous books, as well as written or edited a dozen books on nonprofit organization law, including the standard text Association Law Handbook, now in its 5th edition. He was honored by the American Bar Association as the Outstanding Non Profit Attorney.

Nicole Millman-Falk, CAE, is president of Millman-Falk Communications, LLC, and managing editor for NYSAE’s InView. She is also chair of the Awards Committee. She can be reached at 201-652-1687;; or