Unfair Business Competition and the Tax on Income Destined for Charity: Forty-Six Years Later

Abstract

Two sectors in American society, private enterprise and the federal government, are widely recognized as playing indispensable institutional roles, and both are in obvious need of revenue to accomplish their respective goals. The importance of a third sector-those institutions broadly subsumed under the classification of private, nonprofit charitable organizations-should not be undervalued relative to the other two, nor should its equally pressing need for revenue be underestimated. Beginning early in American history, private institutions have played a major role in attending to social needs. In contrast to other countries where major institutions attending to social needs are financed and operated by the government, many of the universities, schools, scientific research organizations, hospitals, libraries, museums, symphony orchestras, and social welfare agencies in the United States are voluntarily supported and operated by private citizens.
From the very beginning, tax law in the United States has recognized the unique role played by private, nonprofit charitable organizations by affording them exemption from tax. Section 501(c)(3) of the Internal Revenue Code exempts from income tax organizations organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, testing for public safety, or for the prevention of cruelty to children or animals. No part of the net earnings of such organizations may inure to the benefit of any private shareholder or individual.