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Subcommittee Examines Taxable Activities Of Non-Profit Organizations

May 10, 1988

WASHINGTON (AP) _ A government spokesman for small business says the nation’s taxpaying companies are being undercut by competition from non-profit tax-exempt organizations.

″The distinction between the two sectors has become blurred - in some instances beyond recognition,″ Frank S. Swain, chief counsel for advocacy at the Small Business Administration, told the House Ways and Means oversight subcommittee Monday. The law exempts from taxation numerous activities that were never contemplated by Congress, he added.

Representatives of charities and other non-profit organizations acknowledged the need for tougher requirements for such tax-exempt groups to justify their exemptions. But they generally opposed several options being weighed by the subcommittee that could result in taxation of a greater part of the income earned by colleges, hospitals and similar organizations.

Those proposals ″would result in changes going far beyond correcting perceived abuses and anomalies to radically altering the way the tax system affects the viability of charities in this country,″ said Brian O’Connell, president of Independent Sector, which represents 650 philanthrophic and charitable groups.

Don Chapoton, assistant secretary of the treasury for tax policy, told the subcommittee ″it would be premature to make far-reaching changes to the law at this time.″ If numerous suggestions raised by the subcommittee are ever written into a bill, he said, it will be important to determine whether any benefits of such legislation outweigh increased burdens that would fall on tax-exempt organizations and the Internal Revenue Service.

Several members of Congress favor strengthening the special tax on non- profit organizations’ income that is not related to the purpose for which their tax exemption was granted. If the levy, the ″unrelated-business -income tax,″ were changed, it might force universities, for example, to pay tax on income earned from their cafeterias, or tax hospitals on profits from their pharmacies.

The tax was enacted in 1950 to protect taxable enterprises that find themselves competing with exempt organizations. The tax produced $119 million last year - almost double the 1986 figure - from 30,500 organizations. There is some evidence, officials said, that this increase was attributable to subcommittee hearings last year, which were widely followed by non-profit groups.

The increased collections, said Rep. J.J. Pickle, D-Texas, the committee chairman, were ″a result of either better compliance by tax-exempt organizations or a dramatic growth in income-producing activities subject to the tax or both.″

The Treasury Department estimates that if all the toughest proposals being considered were enacted, the maximum yield would be no more than $5 billion a year.

Chapoton noted, however, that the tax does more than produce revenue and protect taxable competitors. The tax ″also serves the important goals of enhancing the efficiency of the governmental subsidy inherent in tax exemption and of helping to ensure the accountability of tax-exempt organizations,″ he said.

Although Chapoton endorsed some of the several suggestions the subcommittee drafted last year for tightening the tax, he rejected two major changes.

Present law exempts from tax a non-profit organization’s income generated by a business that is ″substantially related″ to the organization’s exempt purpose. The proposal would exempt income only if ″directly related.″ That would generate considerable uncertainty without improving the standard, Chapoton said.

He also said the administration opposes a suggestion that Congress declare what specific income-producing activities standing alone by themselves should be tax-exempt. Under that test, Chapoton said, operations of dormitories, dining halls and hospital pharmacies likely would be taxable.

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