Tax Policy:

Competition Between Taxable Businesses and Tax-Exempt Organizations

GGD-87-40BR: Published: Feb 27, 1987. Publicly Released: Mar 9, 1987.

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In response to a congressional request, GAO provided information relating to competition between taxable businesses and tax-exempt organizations in providing similar services, including: (1) the evolution and growth of the tax-exempt community; (2) various legislative and administrative efforts that address the competition issue; and (3) concerns of selected taxable businesses and tax-exempt organizations about the issue.

GAO found that: (1) data on the evolution and growth of the tax-exempt community is limited with regard to those income-producing or commercial activities that compete with taxable businesses; (2) while the tax-exempt community is diverse, certain tax-exempt organizations control the majority of the community's total resources; (3) although tax-exempt organizations rely on various revenue sources, such as contributions and dues, they are becoming less reliant on charitable sources of revenue and more reliant on income-producing or commercial activities to fund their operations; (4) although the intent of the unrelated business income tax (UBIT) is to prevent unfair competition between the two communities, the Internal Revenue Service finds it difficult to determine whether an income-producing or commercial activity is not substantially related to an exempt purpose and subject to tax, since there are no concrete rules for determining the relationships between such activities; (5) the taxable business community believes that UBIT does not adequately address the competitive activities of the tax-exempt community because it is too ambiguous and contains too many exceptions, while the tax-exempt community believes that UBIT is the proper framework for determining taxable incomes; (6) the tax-exempt organizations also believe that taxable businesses are expanding their activities into traditionally exempt areas; and (7) both communities recognize the need for better data in this area and are cooperating to better define the issue of competition.

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