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The Unrelated Business Income Tax and Cost Shifting by Certain Exempt Membership Organizations. (Doctoral Research in Taxation).

MARY ANN HOFMANN, The Unrelated Business Income Tax and Cost Shifting by Certain Exempt Membership Organizations, Ph.D., Arizona State University, 2002; Associate Professor of Accounting, Andrews University.

This study examines tax-motivated earnings management in the nonprofit sector. It extends recent research on the cost-shifting behavior of nonprofit charitable organizations by examining a group of noncharitable exempt membership organizations (EMOs) such as trade associations and labor unions. Due to differences in the specific financial information that is publicly disclosed to constituents and the means by which it is disclosed, the motivations and opportunities for earnings management on the tax return differ between EMOs and public charities. To explore these issues, survey data is collected regarding the financial and tax reporting practices of EMOs. Augmenting the survey data with publicly available tax return data, the relationship between total expenses and various sources of revenue is estimated by a pooled cross-sectional regression model. Using the regression coefficients, allocations of total expenses to unrelated business (taxable) revenues are predicted for each firm and are compared to report ed expenses to compute estimated cost shifting. EMOs exhibit positive, statistically significant amounts of cost shifting, unlike the public charities in recent studies. Furthermore, EMOs with advertising revenue exhibit more cost shifting than EMOs with other types of unrelated business income, despite (or perhaps because of) the fact that the Treasury Department has issued detailed regulations outlining an appropriate allocation of costs to advertising income. The cost shifting estimated in this study does not necessarily represent noncompliance on the part of the EMOs. Furthermore, sensitivity tests, especially the use of a fixed-effects panel regression, suggest that the basic expense/revenue relationship may not be valid for predicting cost allocations.

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Author:Hofmann, Mary Ann
Publication:Journal of the American Taxation Association
Article Type:Brief Article
Geographic Code:1USA
Date:Mar 22, 2003
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