Tax exemption and the myxomycetous sump.

TAX EXEMPTION AND THE MYXOMYCETOUS SUMP

BORIS BITTKER, writing in the Yale Law Journal, described the federal tax code as "a dark, miasmic, myxomycetous sump." With specific reference to tax exemption, Dean Kelley of the National Council of Churches notes that the code "affords lucrative careers to the hardy practitioners of tax law who have become adept at plumbing its murky depths and tracing its meandering bayous that to mere mortals seem so . . . obscure."

Churches, being understandably devoted to the free exercise of religion, are regularly exercised about encroachments on tax exemption. Such encroachments typically begin at the edges with unpopular groups that many are reluctant to defend. Thus the 1983 Supreme Court ruling that denied tax exemptions to Bob Jones University because its religiously motivated ban on interracial dating violated "settled public policy." The idea that tax-exempt organizations must conform to government policy has radical implications, and not just for churches.

In fact, tax exemption is not, as a purely financial question, the life-and-death matter for churches that many suppose it to be. Kelley points out that churches have relatively little "net income" that could be subject to income taxation, and they already--at their own request--pay taxes on unrelated trade and business. True, religion is by far the largest recipient of tax-deductible contributions, but these are usually in small amounts. The loss of deductibility would not hurt churches nearly so much as it would colleges, museums, hospitals, and other charities that depend upon large "pace-setting" gifts. The point is that the churches' leadership on the question of tax-exemption is not so much self-serving as it is a service rendered on behalf of myriad voluntary non-profit groups that need to be protected from the reach of government control. There is no doubt that the power to tax is the power to control. If the Constitution's "first liberty" of the free exercise of religion succumbs to the ambitions of the IRS, there is little hope for other activities less securely protected.

A great deal turns on what we think tax exemption is. There are two competing theories: the "tax expenditure" theory and the "tax base" theory. The first theory holds that a tax exemption is a subsidy granted by the government. It is, in this view, a government expenditure, and the institution benefiting from it should, to that extent, be subject to state control. Underlying that theory is the assumption that the state is entitled to tax absolutely everything. When the state refrains from taxing something, it is granting a special privilege that is tantamount to an expenditure, and the rest of society must "make up for" the taxes not paid by the exempted organization. It does not take much imagination to see the totalist, if not totalitarian, implications of this theory.

The "tax base" theory is dramatically different. It states that non-profit organizations of whatever sort are not taxed because they are not in the tax base to begin with. Boris Bittker again: "The exemption of non-profit organizations from federal income taxation is neither a special privilege nor a hidden subsidy. Rather, it reflects the application of established principles of income taxation to organizations which, unlike the typical business corporation, do not seek profit." Kelley puts it more strongly: Tax exemption "should mean that if a group of people get together to do something of mutual interest from which they derive no personal monetary gain, their joint endeavor (so long as no laws are violated) is simply none of the government's business unless it comes under a few specific exceptions." The details of such rare exceptions need not delay us here. Suffice it that they should constitute a supreme and overriding necessity of state interest for which no less burdensome remedy is available. Certainly the failure to conform to government policy does not justify such an exception. It is precisely the purpose of numerous non-profit voluntary organizations to change government policy. In this country it is not against the law to work to change the law--at least not yet.

AND YET the notion of tax exemption as tax subsidy continues to insinuate itself into theory and practice. In one 1983 tax-exemption case, no less a worthy than Justice Rehnquist wrote a ten-page opinion in which he uses the term "subsidy" or synonyms such as government "grants" or "largesse" 31 times. Justice Powell took a different view, urging that "the provision of tax exemption to non-profit groups is one indispensable means of limiting the influence of governmental orthodoxy on important areas of community life . . . I am unwilling to join any suggestion that the Internal Revenue Service is invested with authority to decide which public policies are sufficiently 'fundamental' to require denials of tax exemptions."

Name a cause and there is a non-profit organization promoting it. At present it does not need a government permit to exist, nor does it need to report to the government on its activities. Unless the alarm is raised, that safeguard of a free society may soon sink into the myxomycetous sump in which tax exemption is confused with tax expenditure and we are moved a little closer to living by the grace of Big Brother.