ABSTRACT
The most visible source of law for the charitable exemption is § 501(c)(3) of the Internal Revenue Code (I.R.C. or Code), which exempts from income taxes nonprofit corporations, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes. In addition to defining the kinds of activities eligible for charitable exemption, § 501(c)(3) also creates a set of limitations on charitable status. In general, there are two competing sets of explanations for charitable tax exemption: tax-base theories and subsidy theories. According to the first, exemption exists for entities that simply do not have any of what the particular tax system attempts to tax: e.g., no net disposable income or no real property. Historically, tax-base justifications underlay the exemption of charitable entities from taxation. The most thorough exposition of the tax-base theory is contained in Boris Bittker and George Rahdert's landmark 1976 article on the nature of federal income tax exemption.
