ESTATE TAX BLOG

Bloomberg BNA has released a new Tax Management Portfolio, Social Enterprise by Non-Profits and Hybrid Organizations, No. 489-1st. This Portfolio analyzes the unique federal income tax and state law issues affecting the relationships between social entrepreneurship and tax-exempt organizations, whether carried on directly by the tax-exempt organization or encouraged by investments in or grants to socially- or charitably-minded for-profit businesses. The discussion includes an examination of the emergence of hybrid organizations designed to apply commercial strategies to maximize a social or charitable purpose.

Cassady V. "Cass" Brewer, Elizabeth Carrott Minnigh, and Robert A. Wexler are the authors of this Portfolio. Mr. Brewer is an assistant professor at Georgia State University College of Law, where he teaches classes on federal income taxation, nonprofit organizations, and the law of social enterprise. Ms. Minnigh is a Shareholder in the law firm Buchanan Ingersoll & Rooney PC in Washington, D.C, where she serves as co-chair of the firm's Nonprofit Organizations Group. Mr. Wexler is the Principal at the law frim Adler & Colvin in San Francisco, where his practice focuses primarily on the areas of tax and corporate matters for nonprofits and their donors.

The authors begin their analysis with a look at traditional social entrepreneurship by tax-exempt organizations. The discussion considers the overall tests for tax-exemption and then focuses on specific operational activities, including job training, microfinance, low-income housing, technical assistance, the sale of products to the poor, and publishing, to evaluate when those activities can be conducted within a tax-exempt organization. The Portfolio reviews other key issues that affect tax-exempt social enterprises, including the unrelated business income tax rules, the joint venture rules, and the use of for-profit subsidiaries of exempt organizations.

Next, the authors examine the federal income tax and state law issues affecting investments in, or grants to, for-profit entities by tax-exempt organizations. Types of investments discussed include socially responsible investments (SRIs), mission-related investments (MRIs), and program related investments (PRIs). Further, the authors delve into expenditure responsibility grants to for-profit entities.

Finally, the authors look at the emergence of hybrid organizations in the United States, which are single for-profit legal entities that simultaneously serve a traditional business purpose and a social or charitable purpose. Specifically, within the past five years, twenty-five states and the District of Columbia have enacted statutes authorizing distinct types of legal entities that cater to social enterprise. The two primary types of such hybrid organizations are the benefit corporation and the low-profit limited liability company (“L3C”). Both types of such hybrid organizations, as well as certain other variants, are discussed in detail in the final portion of this Portfolio.