The controversy over IRS review procedures for exemption applications has raised questions about the origins of the "social welfare" exemption. Many observers have traced it to the original 1913 income tax law, and specifically to the entreaties of the U.S. Chamber of Commerce. But the legislative history is sparse, leaving many unanswered questions about what Congress had in mind.
When searching for the historical origins of our modern exemption provisions, you can find yourself running backwards fast. Some analysts start the story with the British Statute of Charitable Uses of 1601.1 But most accounts focus on more proximate origins: federal tax legislation enacted between 1894 and 1913.2
The Wilson-Gorham Tariff Act of 1894 -- famous for its income tax provisions later found unconstitutional by the Supreme Court -- provided an exemption for "corporations, companies, or associations organized and conducted solely for charitable, religious, or educational purposes, including fraternal beneficiary associations."3 Despite its rapid invalidation, the law looms large in the history of exemption provisions. As the IRS has noted, "the exemption language contained in the act would provide the cornerstone for tax legislation involving charitable organizations for the next century."4
Fifteen years later, Congress lifted much of the 1894 language when carving out an exemption from the 1909 corporate income tax. The new tax would not apply to "any corporation or association organized and operated exclusively for religious, charitable, or educational purposes, no part of the net income of which inures to the benefit of any private stockholder or individual," lawmakers wrote. The new restrictions on private inurement would prove durable.5
In general, however, those early exemption provisions were notable for their broadness and lack of specificity. As legal scholars Boris I. Bittker and George K. Rahdert have observed, nonprofit organizations of many different kinds were "lumped together and exempted from tax as though fungible members of an undifferentiated mass."6
When lawmakers began drafting the 1913 income tax, they decided to get more specific about exemptions. Concerned that broad language offered insufficient protection, advocates for various types of nonprofit organizations asked for -- and received -- specific exemptions. Republican Rep. John Rogers, for instance, asked his colleagues to support exemptions for "benevolent" and "scientific" organizations. While existing language might have seemed to cover such entities -- especially because "charitable" and "benevolent" seemed nearly synonymous -- Rogers warned that courts could find daylight between words where none seemed to exist.7
Not everyone agreed with Rogers. To many policy experts of the era, broad language seemed reasonable, perhaps even prudent. The very notion of a corporate income tax implied that nonprofit organizations were exempt. And to the extent that any sort of explicit exemption was necessary, general wording was better than specific enumeration.
Rep. Cordell Hull, chief author of the 1913 act, made this argument on the House floor:
This bill contains the usual language exempting all corporations of the different kinds mentioned and indicated in the exemption clause. Of course, any kind of society or corporation that is not doing business for profit and not acquiring profit would not come within the meaning of the taxing clause. . . . So I see no occasion whatever for undertaking to particularize, because we could find innumerable kinds of these charitable or educational or other organizations called by different names, and there would be no end to it. I think the better way is to follow the exemption clause that has been well defined and understood heretofore without any particular objection.8
Hull was right about the dangers of specificity. As the Joint Committee on Taxation noted nearly a century later:
Congress did not provide exemption for all organizations that are not organized for profit. Rather, the general rule is that an organization is subject to tax absent a specific exemption. Such a rule means that once broad categories of exemption are codified, there will be specific classes of organizations that do not fit within the broad category and that seek and receive exempt status. Social welfare organizations, business leagues, labor, agricultural, and horticultural organizations and other organizations may be examples.
Indeed, the decision to get specific about exemptions led to a proliferation of provisions after 1913.9
But what about the public welfare exemption? Was it really the achievement of the Chamber of Commerce? Perhaps. When lawmakers added the public welfare language, they didn't have much to say about it. "The provision was added as an amendment to the Tariff of 1913 without comment," said one expert.10
The Chamber of Commerce appeared before the Senate Finance Committee during its deliberations over the 1913 law. The group was concerned that existing exemptions would not protect nonprofit business groups. "We are led to believe that the omission of civic and commercial organizations from the list of associations that are not to be subject to the tax was due to inadvertence, not intention," the group said. "This would indeed seem to be an inference to be drawn from a reading of the income-tax section as a whole and the list of organizations having similar purposes which are to be exempt from its provisions."11
But inadvertent or not, the omission posed a danger to "commercial organizations not organized for profit." Existing language might seem to shield those entities from taxation, but a careful reading of law and precedent suggested otherwise, the chamber said. "We desire to urge upon the committee our belief, based upon a consideration of cases, that the civic and commercial organizations could not be held to be 'organized and operated exclusively for religious, charitable, or educational purposes.'"12
In any case, the chamber insisted, nonprofit commercial organizations deserved an exemption of their own. "The commercial organization of the present day is not organized for selfish purposes, and performs broad patriotic and civic functions," the chamber said. "Indeed, it is one of the most potent forces in each community for the improvement of physical and social conditions."13
Chamber leaders clearly understood which way the wind was blowing. Hull's hope for a broadly construed exemption was already failing, as lawmakers began carving out a variety of specific exemptions. The chamber, like every other nonprofit advocate, felt compelled to claim its own spot in the new law.
Lawmakers were apparently persuaded, at least partially, by the chamber's argument. As finally enacted, the law exempted "any corporation or association organized and operated exclusively for religious, charitable, scientific, or educational purposes, no part of the net income of which inures to the benefit of any private stockholder or individual." But it also provided that the new income tax did not apply to "business leagues, nor to chambers of commerce or boards of trade, not organized for profit or no part of the net income of which inures to the benefit of the private stockholder or individual; nor to any civic league or organization not organized for profit, but operated exclusively for the promotion of social welfare."
That exemption language was not exactly what the chamber had asked for (it had hoped for a blanket exemption for nonprofit commercial groups).14 Nor did it convincingly establish that the chamber's request was the proximate cause of the decision to include "social welfare" language in the section.
What seems likely, however, is that the social welfare provision was meant as a check of sorts -- a means of limiting the activities of would-be exempt organizations, whether they were business leagues or something else. Congress was in the business of handing out exemptions in 1913, but the social welfare language seems intended to balance that impulse, if only just a bit.
1 Boris I. Bittker and George K. Rahdert, "The Exemption of Nonprofit Organizations From Federal Income Taxation," 85 Yale L.J. 301 (1976).
3 "The Income Tax of 1894," 9 Q. J. Econ. 229 (1895).
4 Paul Arnsberger et al., "A History of the Tax-Exempt Sector: An SOI Perspective," SOI Bulletin (2007-2008), at 107.
6 50 Cong. Rec. 1306; see also Bittker and Rahdert, supra note 1, at 302.
7 50 Cong. Rec. 1305-1306.
8 Bittker and Rahdert, supra note 1, at 303.
9 JCT, "Historical Development and Present Law of the Federal Tax Exemption for Charities and Other Tax-Exempt Organizations," JCX-29-05 (2005) . "See, for example, domestic fraternal beneficiary societies (sec. 501(c)(10)), teachers' retirement funds (sec. 501(c)(11)), corporations to finance crop operations (sec. 501(c)(16)), religious and apostolic organizations (sec. 501(d)), farmers' cooperatives (sec. 521), shipowners' protection and indemnity associations (sec. 526), and homeowners associations (sec. 528), to name a few."
10 James J. McGovern, "The Exemption Provisions of Subchapter F," Tax Lawyer 29, No. 3 (1975-1976): 530.
11 States United, Tariff Schedules: Briefs and Statements Filed With the Committee on Finance, United States Senate; Sixty-Third Congress, First Session on H.R. 3321 2001 (1913).
12 Id. at 2001-2002.
13 Id. at 2002.
14 Bruce R. Hopkins, The Tax Law of Associations 29 (2011).
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