[EL] big IRS story - a note on taxes

[Scarberry, Mark]

Sean's helpful post raises these questions in my mind (questions I may have asked before, and that I may have forgotten the answers to*):

But for (c)(4) status, would contributions to the corporation be income? (They might be analogous to shareholder contributions of capital, such as by purchase of stock newly issued by a corporation, which are not income.)

If so, are the typical expenses incurred by a (c)(4) the kinds of expenses that would be deductible (in determining taxable net income) for  a "for profit" corporation?

On a related point, I think it is an insufficient answer to say that the corporate form provides benefits in exchange for which a showing must be made to the federal government. Limited liability is not conferred by the federal government but by the states. To the extent that the federal government might simply disregard the corporate entity for tax purposes, it does not seem to me that a contributor who does not get a tax deduction for the contribution would have taxable income simply because a disregarded entity spends the money that was contributed.

Mark

Mark S. Scarberry
Professor of Law
Pepperdine Univ. School of Law

* As Churchill is reported to have said, correction of the use of prepositions at the end of sentences is something "up with which I will not put."

From: law-election-bounces at department-lists.uci.edu [mailto:law-election-bounces at department-lists.uci.edu] On Behalf Of Sean Parnell
Sent: Saturday, May 11, 2013 7:56 AM
To: 'Estelle Rogers'; 'John Pomeranz'
Cc: law-election at uci.edu
Subject: Re: [EL] big IRS story - a note on taxes

I've seen a few references here and elsewhere to c4 groups being subsidized by taxpayers or having some sort of privileged tax status, so I thought it might be worth clearing up a point about U.S. tax code. Corporate taxes are based on one fundamental premise - taxes are levied on profits earned by the corporation. Because c4 groups are intentionally nonprofit corporations, and thus have no profits on which taxes might be levied, it's not really accurate to somehow suggest they are ducking taxes or receive some sort of special tax exemption. You could, tomorrow, pass a law that says c4 groups are subject to corporate income taxes in exactly the same way a for-profit corporation is, and it would be meaningless - no profits = no tax liability.

There may be others, but to my knowledge there is only one industry in which firms (incorporated or otherwise) are subject to a federal 'gross receipts tax' wherein a percentage is levied against all revenues regardless of profitability, and that is the medical device industry which (warning - editorial content ahead) failed to 'volunteer' to 'contribute' to the Affordable Care Act by cutting a deal with the Obama administration.

So, the 'privileged' tax status of c4 groups (all nonprofits, for that matter) really isn't all that privileged, other than c3 groups whose donors can subtract donations from their own taxes. Setting aside all the tax loopholes and preferences that Congress has carved out over the years, the reason most corporations (for-profit and non-profit alike) don't pay corporate income taxes is that they don't have profits available to be taxed (there is something called unrelated business income for nonprofits that is taxed, but that's a separate matter).

Best,


Sean Parnell
President
Impact Policy Management, LLC
6411 Caleb Court
Alexandria, VA  22315
571-289-1374 (c)
sean at impactpolicymanagement.com<mailto:sean at impactpolicymanagement.com>

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