History of Federal Law Regarding NPOs

      As I was doing my research for my weekly blog post, I found a reference to the history of federal law regarding  nonprofits as written by Kansas City, Missouri attorney  Bruce Hopkins. I found his testimony in front of the House of Representatives' Ways and Means Committee intriguing. He wrote the original report in 2005, but the history and evolution of nonprofit law in the United States remains accurate. (His book about nonprofits, which is updated yearly, is available on Amazon.com.) Hopkins' work is cited on many of the websites I have found that address issues facing nonprofits and the regulation of that sector. I have summarized his history here.

    According to Hopkins, tax exemptions for nonprofits were originated with the Revenue Act of 1913, although an earlier law, the Tariff Act of 1894, provided  charitable, educational and religious organizations tax exemptions prior to its passage. Major changes were made in 1917, 1950, and 1969. The changes in 1969 gave directions for charitable giving and provided statutory structure for nonprofit tax law with practically every Congress since has added to. Hopkins contends that current law remains "unbalanced and uneven."

     The IRS and Treasury Department have issued decisions and promulgated rules about nonprofits and their tax-exempt status, including revenue acts passed in the 1930's that made it clear that nonprofits should not influence Congressional legislation as a "substantial part" (48 Stat. 700) of their mission. I wonder what would they think of ACORN and the political action committees we have today?

     In 1950, Congress passed legislation requiring tax exempt organizations to pay taxes on the portion of their business that did not directly relate to the mission of the nonprofit. This evolution in nonprofit law has accelerated in recent years. Later legislation, including the Internal Revenue Code of 1954, Revenue Code of 1987 and Omnibus Budget reconciliation Act of 1993,  taxed NPOs for lobbying and contributing to political campaigns as well as disallowing deductions for expenditures related to such activities. As I disclosed last week, NPOs must file tax returns and make the last three years' worth of returns available to the public.

    Recent changes includes the suspension of a charities tax exempt status for engaging in terrorist activities (Military Family Tax Relief of 2003), and regulation of computer and technology contributions for educational purposes (The Working Families Tax Relief Act of 2004). The American Jobs Creation Act of 2004 gave rules for patents and other intellectual property. IRS  rules addressing how to help disaster victims through organizational donations and through employer-sponsored  donations were passed in response to 9-11 and Katrina.

      As society has changed in its perception of what defines a charity, which activities NPOs should engage in, and how those charities operate, the law regarding the taxation of nonprofits has changed. Early definitions were narrow, with the focus on organizations that addressed educational, charitable, or religious issues. Today organizations are created to serve a wider variety of purposes:  accomplish scientific research; provide disaster relief; increase access to, and subsidize, the creation of art and music; provide poor families technology access;  and establish after school sports programs to keep children out of trouble. Congress and governmental agencies will need to continue to define what activities benefit the general public enough to subsidize with tax exemptions, decide how to track and regulate these organizations, and provide the public with information about these entities.