In its ongoing work toward comprehensive tax reform, the Senate Finance Committee last week released an options paper outlining possible changes to the tax code dealing with tax-exempt organizations.

The paper [PDF] is one of a series prepared for Finance Committee members to discuss and consider. Developed by committee staff, the document makes clear that the options presented are not necessarily endorsed by either Finance Committee Chairman Max Baucus (D-MT) or ranking member Orrin Hatch (R-UT).

The paper identifies several potential goals for the Finance Committee in reviewing provisions in the tax code that apply to tax-exempt organizations, including:

• maximizing the efficiency and effectiveness of any incentives for charitable giving
• more tightly aligning tax-exempt status with providing sufficient charitable benefits
• closely examining the relationship between political activity and tax-exempt status
• reconsidering the extent to which tax-exempt groups should be allowed to engage in commercial activities
• improving the accountability and oversight of the tax-exempt sector

Many of the options outlined in the document would have severe repercussions for both charitable organizations and trade and professional associations. For example, options include taxing all commercial activities of tax-exempt organizations or revising the requirements for tax-exempt status to disallow it for “certain organizations engaged in business activity.”

Associations and other tax-exempt organizations that engage in political activity would also be severely affected. Options include limiting the amount of political activity that 501(c)(4), 501(c)(5), and 501(c)(6) organizations may engage in and changing the categories of tax-exempt organizations that are permitted to engage in political activity. One of the options would be to create a new category for tax-exempt organizations engaged primarily in political activity; another would be to eliminate 501(c)(4) organizations but allow them to reapply for tax exemption under a different category.

Neither the Senate Finance Committee nor the House Ways and Means Committee has introduced a comprehensive tax reform package yet. Both Baucus and Ways and Means Committee Chairman Dave Camp (R-MI) have said they hope to pass tax reform through their committees this year.

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