A majority staff director for the Senate Finance Committee said in an April discussion on philanthropy in the 21st century that perhaps it might be time to consider the tax liability for an entity that is neither wholly charitable nor wholly for-profit.  In fact, the director said that the Senate Finance Committee wrestled with the problem of a quasi-charitable entity in enacting the health care legislation, and said that the tax treatment of not-for-profit organizations might be revisited further in the tax reform context.

Traditionally, the Code has used a strictly charitable or for-profit dichotomy for businesses – they necessarily had to go in one of these two “buckets.”  Now, given what is happening in society, many argue that the Code must evolve to address businesses that have both quasi-charitable and for-profit goals and receive tax treatment that accurately reflects that status.  In fact, some corporations that are for-profit, particularly in the technology field, often make charity a main priority.  And even within the charitable context, charities themselves are beginning to receive different treatment.  The new requirements for not-for-profit hospitals brought on by the Patient Protection and Affordable Care Act is a clear example of this distinctive charitable treatment.

This evolution has made it almost necessary to create and adhere to a pluralistic model where some charities receive more favorable treatment than other charities.  The problem with this approach is that you are effectively elevating one cause for favorable policy, regulation, or tax treatment over another.  And latent in this treatment is the question of who exactly should decide what constitutes a service worthy of special initiatives and why a particular cause should receive favorable treatment in the first place.  Moreover, choosing the formula to decide what constitutes the favorable kind of treatment can also be complicated.

A lingering question within this discussion is how this new tax treatment would affect the L3C, often referred to as the for profit entity with a not-for-profit soul.  The L3C would seemingly fit the quasi-charitable and for-profit goals qualifying for a different tax treatment so it will be interesting to see how this entity would be treated under any new tax treatment rules for charities, including the development of a pluralistic model.  We will just have to wait and see.