The current controversy over the IRS’s politically tainted scrutiny of conservative 501(c)(4) organizations is focusing attention on the Exempt Organizations Division of the federal tax agency. As the Capitol Hill newspaper Roll Call reported, this IRS division has been a longstanding administrative problem. Moreover, it is the office that is responsible for assuring that exempt organizations comply with applicable tax laws. And, it is in charge of overseeing the activities of exempt organizations so that such entities do not engage in unfair competition with private sector, for-profit firms, including small business.
Exempt organizations are not required to pay taxes on revenue that are related to the purpose for which they receive tax exemption. However, such organizations, including MAPPS, are required to pay an unrelated business income tax, or "UBIT” on non-exempt revenue. For example, dues, conference registration fees, sponsorships, publications and other similar normal MAPPS revenues are not taxable because they directly support the association’s exempt purpose. However, revenue from the sale of advertising on our web site is subject to UBIT, inasmuch as that is not related to the mission of MAPPS and is solely for the business benefit of the advertiser. MAPPS can sell advertising, but we must pay tax on that revenue.
A look at the tax law affecting the entire family of 501(c) organizations is in order, to include IRS oversight and enforcement of commercial activities of nonprofit organizations and UBIT, as well as how the IRS is lax in enforcing the law to prevent unfair nonprofit competition with private enterprise.
Recently, the Exempt Organizations Division of the IRS, the very office now the subject of several investigations, conducted a Colleges and Universities Compliance Project, which looked at the UBIT payments (or lack thereof) of colleges and universities. The April 25, 2013 IRS Report, according to a news article, "found increases to unrelated business taxable income for 90 percent of the colleges and universities examined, totaling about $90 million. There were over 180 changes to the amounts of unrelated business taxable income reported by colleges and universities on Form 990-T; and disallowance of more than $170 million in losses and net operating losses that could amount to more than $60 million in assessed taxes."
As Accuracy in Academia has reported, at the same time the IRS Exempt Organizations Division was targeting conservative groups, it was being lax on universities engaging in commercial activities without paying UBIT on revenue from such activities, in unfair competition with private sector, tax-paying companies.
The underlying difficulty of tax fairness among exempt organizations and nonprofits is deeper and more longstanding. Gilbert M. Gaul and Neill A. Borowski of The Philadelphia Inquirer won a Pulitzer Prize for their investigation that identified rampant abuses of America's nonprofit tax laws. Many of the issues raised in this series are still evident today.
A 1980 report by the Small Business Administration also singled out universities as a major source of tax dollar-supported unfair competition with private companies, particularly small firms -- "Unfair Competition by Nonprofit Organizations With Small Business: An Issue for the 1980s” (June, 1984). SBA offered testimony, when requested by the House and Senate Small Business Committees in 1988 and 1996 and conducted some research on non-profit competition in 1999.
Many MAPPS member firms encounter unfair competition from universities. Look, for example, here, here or here, to see just a sampling. We’ve held sessions at MAPPS meetings on university competition.
The 1995 White House Conference on Small Business made this a priority issue when its plank read, "Congress should enact legislation that would prohibit government agencies and tax exempt and anti-trust exempt organizations from engaging in commercial activities in direct competition with small businesses.” That was among the top 15 vote-getters at the 1995 Conference and was number one among all the procurement-related issues in the final balloting.
An entire book has been written on this issue, Unfair Competition: The Profits of Nonprofits, James T. Bennett, Thomas H. DiLorenzo, Hamilton Press, 1989.
The Ways and Means Committee last held extensive hearings on this problem in 1987 and had GAO conduct an investigation. The Small Business Committee has also held hearings, but that was back in 1996.
I testified before the House Ways and Means Committee in February and later participated in a Roundtable hosted by Rep. Reichert and Rep. Lewis, who make up the House Ways and Means Committee Special Panel on Tax-Exempt Organizations.
To help Congress address this issue in more detail, focused on university competition with geospatial firms, please submit your examples of university competition to John "JB" Byrd, MAPPS Government Affairs Manager.