Article
April 15, 2010

Congress Could Consider Creating New Category of Organization, Expert Says

As Congress eventually moves to consider making broad changes to the nation's tax structure, proposals could emerge that would take into account a "blurring of the lines" in recent years between nonprofit organizations and for-profit companies, according to Russell Sullivan, staff director for the Senate Finance Committee.

"We might see the emergence of some proposals to establish what I'll call, for the lack of a better term, a for-benefit corporation -- something that is in between a private taxable company that's under our rules of C corporations or S corporations and partnerships but also not under our rules having to do with charities," he said.

As an example, Mr. Sullivan pointed to the recent enactment of the new federal health-care law. "As you know, a lot of changes are coming in health care. One of them is we authorized these state-based cooperatives to sell insurance in their states. Not a public option, not pure private sector. So the question is, What is the purpose of that entity and how should it be taxed?"

Mr. Sullivan continued: "Is it really a sort of government-owned entity that is part of the state government? Well, no, not really. Is it really private-sector driven and a corporation? Well, no, not really. It's really kind of in between."

Federal law already has rules regarding agricultural and other cooperatives, he noted, but Congress may want to look at handling "the advent of some of the new kinds of business entities we're seeing evolve."

Mr. Sullivan spoke at a symposium in Washington held by Catholic University's Columbus School of Law. He emphasized he was speaking only for himself and not for his boss, Senate Finance Committee Chairman Max Baucus, the Montana Democrat, or the finance committee.

Mr. Sullivan said that "the history of our tax code is that we basically try to put all entities into one of two buckets. You are either a for-profit entity, in which we try to tax you as a corporation partnership, a proprietorship, or otherwise. Or you are a tax-exempt organization -- you are a charity we are not going to tax at all.

But, he said, "the reality is every business really has multiple purposes," with many focusing on making charitable contributions to support their communities. Meanwhile, many charities "have some business purpose to them" unrelated to their missions on which they pay income tax.

"But I see even more blurring of the lines over the past decade," Mr. Sullivan said. For example, he said, certain green energy companies have a purpose "actually to develop or promote a cleaner environment -- they are just doing it through a corporate structure."

Similarly, "on the opposite end of the spectrum," Mr. Sullivan said, "we see missionaries today who go overseas and they set up a business, they set up a restaurant, they set up a school where they teach English. Are they doing that because they have a business motive? No, they're really not. They are doing it because that is a way for them to gain access to the people that they want to proselytize."

The Columbus School of Law's symposium "Philanthropy in the 21st Century: Should All Charities Be Created Equal?" will be available for viewing online at http://video.law.edu/.