Money Talk

Episode 33

Federal and Estate Tax Exemptions for Charitable Organizations with guest John D. Colombo

Today’s guest is John D. Colombo. The Albert E. Jenner, Professor of Law, Emeritus at the University of Illinois College of Law. John’s been on the faculty since 1988. Of course, he’s Emeritus now. His specialty was tax law, and with a particular emphasis on the tax exemptions afforded various charitable organizations, specifically hospitals.

Welcome to our listener-supported podcast, Money Talk, uncompromised absolute financial truths behind financial perceptions with host, Ed Sutkowski and Chuck LeFebvre. Let’s listen in.

Chuck LeFebvre: This is Chuck.

Ed Sutkowski: I’m Ed. Today’s guest is John D. Colombo. The Albert E. Jenner, Professor of Law, Emeritus at the University of Illinois College of Law. John’s been on the faculty since 1988. Of course, he’s Emeritus now. His specialty was tax law, and with a particular emphasis on the tax exemptions afforded various charitable organizations, specifically hospitals, and while we’ll not talk about the NCAA and its exemption, which is a fascinating topic in today’s world with the NFL. John’s authored two books, five book chapters, 35 articles, 52 speaking engagements, and about nine opportunities to testify in Congress. His focus today is the federal and state tax exemptions for not-for-profit organizations. John, welcome.

John Colombo: Thank you. Happy to join you.

Ed: Let’s have your pitch on should hospitals have non-for-profit status?

John: Let me rephrase that. The reason I want to rephrase that is because there’s a difference between not-for-profit, nonprofit tax-exempt, and charity. Those words are often used interchangeably by people, but they actually shouldn’t be. The reason is they deal with much different concepts. Nonprofit, for example, is a state law concept. You become a nonprofit by organizing as a state law, a nonprofit corporation, or by setting up a charitable trust, which is a state law creature. Then uncharitable nonprofit organizations under state law, whether they’re nonprofit corporations or whether their charitable trusts, are under the jurisdiction of the attorney general. From a state law perspective, if you’re a nonprofit, the attorney general is the one that makes sure you are doing things in accordance with state nonprofit law. Nonprofit, just being a nonprofit, actually isn’t enough to get you tax exemption. Tax exemption rules are separate from the rules on nonprofit status. That’s true whether you’re talking about the federal level, so federal tax exemption, which essentially means you don’t have to pay the corporate income tax that otherwise would be due under our federal tax law, or if you’re dealing with state tax exemption. At the state level, they’re actually several taxes. There’s the income tax, there’s the property tax, and there are sales taxes. Really, when we talk about state tax exemption, usually the one that is the biggest issue is the state property tax exemption. That’s because at the income tax level, most states just follow what the federal government does. If you’re exempt from federal income tax, you’re probably exempt from state income tax. Sales taxes are a little weird in how they’re administered. In theory, you’re collecting the tax on behalf of the ultimate consumer. Really, when we talk about state taxes, the one that really is the most important is the state property tax. You can be under federal law, it’s a little less so under state law, but under federal law, you can be tax-exempt. You can have a tax exemption from paying the corporate income tax, but not be a charitable organization. For example, chambers of commerce, business leads, fraternities, social clubs, all these things are tax-exempt under a federal law. There’s a whole list in Section 501 that has about 29 subdivisions that will tell you what’s tax-exempt. There’s only one of those that is considered a charitable organization, and that’s 501(c)(3) of the Internal Revenue Code where it defined the charity. The reason that’s important is because it’s only charities under our federal tax laws that can receive tax-deductible contribution. It’s only charities that can issue tax-exempt bond. If you’re an exempt organization but you’re not a charity, so let’s say you’re a business league or a chamber of commerce, for example, you can’t make a contribution to a chamber of commerce and take a federal tax deduction for a charitable contribution because they don’t qualify. It’s important to keep those three concepts separate, the concept of nonprofit versus tax-exempt, which covers a lot of organizations that are not charities. Then charities, which have the most tax benefits under our various tax laws. When it comes to the state property tax exemption, which of course, is the one that’s usually at issue with when we’re talking about nonprofit hospitals, the state rules for property tax exemption are different. They’re not the same rules as they are for the federal income tax exemption. In fact, in Illinois, basically, our property tax exemption is codified in the Illinois constitution. The legislature has a role in implementing the property tax exemption. They can pass laws relating to implementation. The standards for tax exemption are constitutional standards. Those standards are applied by the Illinois Supreme Court. The Illinois Supreme Court has made very clear that the Illinois legislature can’t decide what is a charity on their own. Only the Supreme Court can decide what a charity is because it is a constitutional law matter in the State of Illinois.

Ed: John, this sounds like a tax lawyer’s dream.

Ed: Is that fair? My barber told me he formed the Illinois not-for-profit corporation.  So what I said, because you’re still paying income tax on that, those activities to the extent, there’s a net profit. In other words, the deceit, if you will, it sounds like a deceit, is you have an Illinois not-for-profit corporation. That doesn’t mean very much, is that fair?

John: That is absolutely correct. That doesn’t mean very much standing alone. I can’t imagine someone forming a non-profit without the intention of seeking tax exemption. It would be a little weird to go out and say, “I’m going to form a non-profit, but I don’t want to be tax-exempt.” It is true that just being a non-profit, basically, isn’t anything. That and what? $2 these days will get you a cup of coffee.

Ed: Chuck, you have some observations about that not-for-profit status as it relates to trust companies.

Chuck: Right, yes. It’s an interesting little quirk in the regulations in the statutes that deal with the regulation of trust companies, in that an organization is exempt from regulation as a trust company if it’s a not-for-profit corporation that is engaged in the furtherance of its not-for-profit organizational purpose. The plain reading of that statute suggests that you could, in fact, form a not-for-profit company to provide trust services and be exempt from regulation.

Ed: Go ahead.

John: Maybe exempt from regulation, but I’m pretty sure you wouldn’t be exempt from state property tax or federal income tax.

Chuck: Yes, I agree with you completely there. There would be no tax exemption with that, but the regulations might cost more than the tax-

Chuck: -in that circumstance.

Ed: John, let’s get to your favorite topic, as I understand it. Talk about the healthcare industry. Currently, it’s about $3.5 trillion. About one third of the healthcare costs in 2017 are associated with hospitals rather than drugmakers, and more specifically, get to the question of executive compensation. Why should someone with a tax-exempt not-for-profit organization get about $6 million in W2 compensation, John, how does that square with your theories?

John: Let me back up a little bit. I have long taken the position, actually, throughout my entire 30 plus year career as a law professor, that nonprofit hospitals, most of our nonprofit hospitals, not all of them. There are a few, I think, that may legitimately be charitable organizations. Most of our private nonprofit hospitals are not, in fact, charity, and they shouldn’t be treated as charities. They shouldn’t be tax-exempt. They are, in fact, simply businesses. It is true, actually, that some of them, many of them actually, do some charitable stuff on the side. They do provide some charitable care for people who are uninsured, or could be underinsured for. That’s clearly true. Doing charitable stuff on the side doesn’t qualify you as a charity. Microsoft Corporation does charitable stuff on the side, too. In fact, almost all for-profit corporations make charitable contributions and do charitable things, and that doesn’t make them a charity. In the modern healthcare world, hospitals primarily sell healthcare services for a fee. In my view, that’s not charitable. Then the question, the legal question, becomes does the stuff that they do that is charitable? Let’s talk about the charity care that they might do, or certain kinds of discount programs for the underinsured. Does that make them a charity? This is where we get into some questions where legally we have lost our way, or legally, I think, the courts have lost their way, and I am absolutely certain the legislature has lost its way. Under Illinois law, it’s absolutely clear that the test for getting property tax exemption as a charitable organization is that the property must be primarily used for charitable purposes. Let’s focus on that word primary. Primarily. What does that mean? I don’t know necessarily it means more than 51% of something has to be charitable. I think you could argue that the word primary means more than any other thing. If I’m billing four things, and one of them takes 40% of my time, and the other three take 20% of my time each, I think you can make a pretty good argument that the one that takes 40% of my time is primary. I don’t think it matters because it’s quite clear that our nonprofit hospitals, at least most of the private nonprofit hospitals, aren’t doing anything in the charitable world that is primarily charitable. For example, Carle Hospital here in Champaign County, they’ve been litigating a case over tax exemption. That hospital, if you take a look at the American Hospital Directory, the Carle Foundation Hospital, the Carle Foundation Healthcare entity, not just the hospital, but its associated entity, they get close to $4 billion in gross revenue every year, or at least that was their latest. About 3.8 billion, that’s billion, not million. Their latest revenue that I saw shows a net profit of about $215 million. Over $200 million. In the judge’s findings, and the case that was just litigated, the judge was talking about charitable activities that were worth $17 million. The last time I checked, $17 million was less than 10% of the net revenue of Carle Hospital, and less than two-tenth of a percent of their gross revenues. How does one get from that piece to the notion that they are primarily engaged in charitable activity? I can’t grasp that. I don’t know where it is we went down this road of thinking that organizations that primarily, what they primarily do, is they sell healthcare services for a fee. That’s what they primarily do. Now, if you think that selling healthcare services for a fee is a charitable act, okay, then we’re fine. Then they’re a charity. I don’t have to think that–

Ed: John, how can you possibly come to that conclusion? Charity activity– Let me support what you’re saying. The Illinois Health and Facilities and Service Review Board published some statistics that parallel your thoughts. The 11 hospitals that were described here, starting with Northwestern Memorial, where the charitable act- charity care was 1.2% of the net revenue, all the way down. The one that stood out as Stroger Hospital in Chicago, which had 54.4% of its revenue associated with charitable care. In other words, $325 million versus about $600 million in revenue. Northwestern, 1.2. Chicago, 1. Rush, 1.4. Loyola, 0.6, on average 3.4%, and yet this persist. Why? How does this happen that no one attacks this theory, John?

John: It really is historical. You really have to go back to the beginning of the healthcare hospitals in general. Remember– Actually, you won’t remember, but historically– Not even you, Ed, are that old yet. Historically, we didn’t really have healthcare as we know it. If you go back to the 1800s, for example, there were certainly doctors, and they were certainly trying to improve the science behind their care, particularly by the late 1800s. Really, in the 1800s and earlier, if you were rich, you had a private physician, and with any luck, that private physician didn’t kill you. The treatment was cutting people and letting them bleed and use leeches and stuff like that. We didn’t have any of the kinds of aseptic technique or any of the things that we take for granted as being the practice of medicine. What were hospitals back then? In large part, hospitals, first of all, they were almost always related to religious organizations. In the big cities, you had your Lutheran hospital, you had your Methodist hospital, you had your Jewish hospital, you had your Catholic hospital, you had your Baptist hospital, and in the West, you had the Mormon hospitals. They were almost always affiliated with religious organization, and they were largely run by religious volunteer. You can think of nuns running the hospital. They were largely places where the poor went to die. If you were sick, and you were rich, you stayed at home, and you had a doctor come, and you hope they didn’t kill you. If you were poor, and you were sick, and couldn’t work, then the only place you could go was a hospital, and they would take care of you as best as they could. If you got better, you’d go back home and reenter the workforce, but most of the time, you would die in the hospital. You can think of the history of hospitals as really being houses for the poor. That’s what they were mostly. Until the 1900s, until we got to the point where we had enough science where doctors could actually cure people. This happened really in the 1900s, whereas doctors actually had enough information that they could cure people, and doctors needed a building in which they could practice this craft that they had now learned, how to cure people. That became the modern nonprofit hospital. Historically, if we go back to the 1800s, yes, there’s not any question that the hospital of the 1880s, or even the early 1900s. There are some Illinois cases from the early 1900s about hospitals. There’s not any questions. They were charities. They were charities because they were run by religious volunteers and they were largely focused on helping the poor. Now, let’s fast forward to 2020. That’s not the way our medical system works anymore. Everyone knows this. You go to a hospital, you get a bill. You go to a doctor, you get a bill. Doctors have not been tax-exempt, but you get bills. It’s a fee-for-service kind of arrangement. Hospitals no longer have, at least most of them, no longer have as their primary mission helping the poor. Their primary mission is to be the best medical provider they can be, which is great. I think that’s a wonderful mission, and I am tickled to death that in the State of Illinois, we have hospitals like the University of Chicago and Northwestern Medical Center. Even Carle here in Urbana. I can’t be more happy that we have those institutions that strive to be the very best in providing medical care and doing it at a very, very advanced level, but that’s not charitable. That’s like saying to Boeing– Boeing’s mission is to build really great airplanes that don’t fall out of the sky. Okay, that’s a really good thing to do, but it’s not charitable.

Chuck: I’m going to sum up your 30-year career in a sentence, which is due to the discovery of penicillin, a hospital ceased to be charitable.

John: That’s not horribly wrong. It really was- not just the discovery of penicillin, but also the advancement in aseptic technique and surgery and stuff like that. It’s not terribly wrong to say it was really after the 1920s, right after the discovery of penicillin, that hospitals evolved, and the medical healthcare system evolved slowly. I remember when I was in eighth grade, I had an appendectomy at my hometown hospital, city hospital. You remember candy stripers? When was the last time you saw a candy striper in a hospital?

Ed: No. When I was a kid, my sister was one. I remember that. That’s going back maybe 30, 40 years.

John: There you go. Hospitals still do have volunteers. I’m not saying that they don’t have any volunteers, that would be wrong. The ethos, the ethos changed from this organization that was primarily about taking care of the core, to an organization that was primarily about delivering the best quality health service to the entire population for a fee, in most cases.

Ed: You’re lucky these days if you only get one bill. You typically get maybe three bills if you go visit your doctor.

John: Yes, you’ll get multiple bills. It’s not so much about how many bills. Look, if we were writing on a clean slate, if we didn’t have this 200 years or a 100 years worth of history behind it, where hospitals that were tax-exempt originally- and they were, they were charities. There wasn’t any question that the hospital of the 1880s was a charity. If you didn’t have that history, and it was just– All we knew was the hospital system that we have today. One of those hospitals said, “Well, I think we ought to be tax-exempt as a charity.” People would laugh. People would say, “Are you kidding me?” That’s like saying the Ford dealer should be a charity because they provide transportation services to the public.

Ed: John, I’d like to address the opportunity of regulating, or at least coming to a different conclusion by the application of the unrelated business income tax. Could you help us understand what’s going on with that tax?

John: In the context of college athletics or in the context of–?

Ed: In the context of medical care, the context of all the not-for-profit- the real tax-exempt not-for-profits. In other words–

John: At the medical care level, we don’t apply the unrelated business income tax to revenues from providing healthcare services because the IRS position is essentially that that is the charitable activity. There’s a very famous revenue ruling, 69-545, in which the internal revenue service said that providing health services to the general community, even if they are being provided for a fee. Even if you’re charging, providing health services for the general community is charitable. That means that the unrelated business income tax doesn’t apply to those kinds of things. Now, if Northwestern Memorial Hospital decided to open a nice Ferrari dealership next door and run the Ferrari dealership, yes, that would be subject to the unrelated business income tax. In the healthcare world, providing healthcare services is not an unrelated business. It is, in fact, a related business, or it’s actually, in fact, the core element, the core activity of charity.

Ed: If I could to reconfigure it, I’d love to be a CEO of a major hospital, a not-for-profit organization, get about $6 million in W2 compensation. I guess when you measure that reward of versus Aaron Rogers subject to $21 million, it’s a free market. I’m not sure that I understand how can this happen when you have this. With his exemption from tax, yet you have a CEO who is making $6 million a year. It’s upside down, but maybe I’m a little too naïve.

John: The truth is on that one, Ed, we disagree. I actually am not offended by CEO salaries, per se. The CEOs of big healthcare organization have just as complicated, if not more complicated a job, as the CEO of Microsoft, or Boeing, or General Motors, or GE. Actually, most of them probably do a better job than some of these CEOs in the private sector. Their compensation level per se doesn’t bother me. The only reason it bothers you is because they happen to be CEOs of entities that are tax-exempt. Let’s solve this the right way. The right way to solve it is to recognize that hospitals are not tax-exempt. Then we solve the problem, right?

Ed: I want to differ with you a little bit about what bothers Ed. There seems to be in the corporate setting, at least their directors, hopefully, they own some shares of the corporation, are in a position of regulating, or at least negotiating the compensation of the CEO. The directors in theory have skin in the game. They represent the shareholders. In the hospital setting, these are figurehead members of the board that want that designation simply to have it in their obituary, or am I overstating that, John?

John: No, I think you are overstating that. Particularly these days, there has been enough litigation, and again, here’s where we get into issues that overlap between tax exemption and nonprofit status. The fiduciary duties of nonprofit board members are just as significant and just as wide as the fiduciary duties of for-profit board members. Now, it’s true that in for-profit boards, their primary duty is to the shareholders. In the nonprofit sector, the board’s primary duty is to the charitable class, whatever charitable class is being served by that charity. There’s certainly been litigation in which state attorney general, because remember, it’s the attorney general that is the person who is in charge of making sure that a nonprofit organization is operated well. State attorney generals haven’t been shy, at least over the past couple of decades, about suing board members of nonprofit organizations for dereliction of duty as board members. This has become a very, very big issue among lawyers and nonprofit lawyers who represent nonprofits, and nonprofits themselves. It is no longer the case, I believe, that board members, that nonprofit organizations can just sit back and say, “Gee, that was a great lunch. Now it’s time to go home.” That’s going to get you into trouble really, really quickly. I think it is true. It is true that the question of oversight, how does the world of oversight when it comes to boards and the management of nonprofit organizations, how does that world differ from the world of for-profit organization, where you not only have the shareholders, but you have the market in general as a force to contend with? As a nonprofit organization, you don’t generally have to worry about your stock price, and you don’t have to worry about mad shareholders, but you might have to worry about a mad attorney general, and you might have to worry about angry charitable beneficiaries who are suing you because you didn’t provide the services that you were supposed to provide. I don’t think it’s accurate to say that nonprofit board members are somehow not being held to as high a standard of performance as for-profit board members. Some don’t, but of course, some for-profit board members don’t either. That’s how you get for-profit who have CEOs that are earning $200 million a year salaries, while the company is going bankrupt.

Ed: I couldn’t agree with you more, John. It seems to me that if- let’s assume, theoretically, I have an investment in a New York stock exchange company. I’m a director, I’ve got $2 million dollars involved. Do you think I’m going to pay more attention to executive compensation and what’s going on in that company, than I would be so inclined if I run with no equity investment in a hospital not-for-profit?

John: Maybe.

Ed: 2 million bucks, maybe I would say, “Wait a second here.”

Chuck: Got to look at your balance sheet for a sec.

Ed: What are you doing here? Why are you getting negative–?

John: The sense of, maybe, probably most of the time, yes. Let me tell you, Ed. I’ve met a lot of true believers who are members of boards of nonprofit. Think about the true believers in politics for a second.

Ed: Wait a minute, is there such a thing?

John: Think about and ask yourself, are they any less dedicated to seeing certain things happen than the person with a $2 million investment in the market? I actually happen to be a big believer in market discipline. I have very strong beliefs in market discipline. I also think that we have to have a certain amount of government regulation of the market. Market discipline is really a core aspect of how we do things, and how our economy has excelled over two centuries. I’m a big believer in market discipline. I also happen to believe that there are nonprofit board members who take their jobs just as seriously and with just as much thought about what they’re doing as for-profit board members. Ultimately, both of them can get sued, and they do get sued. That’s part of understanding your duties as a nonprofit board member. I’ve been asked to serve on many nonprofit boards. A lot of times I’ve said, “No.” The reason for that is because I don’t want to invest the time and effort that I would need to invest to do my job well and make sure that I’m not the subject of a lawsuit down the road.

Chuck: I have a couple of questions. The first is, let’s say your campaign succeeds and the IRS withdraws revenue ruling 69-545. The provisioning of healthcare for a fee is no longer considered charitable work. In that world- so I’m playing a little bit of devil’s advocate here. The $17 million of charitable care that you’ve mentioned before that Carle was providing in the Champaign Urbana community. How does that care get provisioned? Is there maybe a smaller purely charity that’s doing that then, or does it get absorbed by the for-profit healthcare industry, or do people get- do they just not receive care?

John: I have a lot of different answers to that question. The first answer is, you treat the hospital as a taxpaying entity. You take that money, you being the government, take that money, and that money then serves the tax money that you collect can then be used to pay for services for people who can’t pay for them. That’s a glib answer because the tax money probably won’t ultimately cover it. Of course, you’re dealing with government. Every time they’re going to get their hands on $2 million, or $4 million, which is I think what the tax bill we’re talking about the Carle’s case. The notion that they are always going to do the right thing with that money is a little farfetched. Maybe I’m not giving our politicians enough credit. I don’t necessarily see always fiscally responsible decisions being made by government. The real answer to your question is a more difficult one. The real answer is, we have a problem in the United States with how we deliver health services, particularly to the poor, and particularly to the uninsured. Uninsured, you can have a really good job with really good insurance, and then you get laid off and unemployed, and now you have no insurance. This is a systemic problem of our healthcare system. To me, how you deal with that issue, that’s a health policy issue, it’s not a tax issue, trying to use tax exemption to fix what is ultimately a health policy issue is nuts. It’s crazy. It’s like this. This is a hypothetical that I use all the time. We have in this country, believe it or not, we have people who are too poor to buy food. What do we do? We have a government program, the Supplemental Nutritional Assistance Program, SNAP, which some people refer to as food stamps. I actually happen to think that’s a little pejorative, but that’s the way we deal with that issue.

Now, let’s assume that we dealt with that issue like we do with healthcare. Instead of having SNAP, what we would do is we would go to the local Kroger Store and say, “Hey, if you’ll give away some food to poor people, we’ll give you tax exemption.” Then they say, “How much food?” “Well, we’re not really sure.”

John: You give away some, and you should be serious about the food that you’re giving away. Then if you do that, we’ll give you tax exemption. That’s how we’ll solve the problem of people who can’t afford to buy food. Would you consider that to be a sensible system?

Chuck: I see your point. Let me ask my second question because you’ve led into it, which is that one of the proposals that we keep hearing bandied about to address this larger problem that you mentioned is to simply have the government provide health insurance to everybody.

Ed: Or healthcare for everybody.

Chuck: I’m trying to envision in that world where the tax exemption for these hospitals fits in. On the one hand, the government is paying all the bills, and then you’re going to tax that money back, or how does that work?

John: I think the structure of the system would be different in those circumstances. It’s not necessarily just that the government would pay and then you tax people on their income. We do that now. You may not be there yet, but there is this healthcare system called Medicare. Guess who runs Medicare?

Chuck: I’ve heard of it.

John: I actually will turn 65 in April. I’m really interested in Medicare. The Medicare system is essentially a single payer healthcare system. It’s run by the Federal Government, but it’s a payer system. It’s not the federal government providing your care. Medicare doesn’t employ doctors, it simply reimburses doctors. A doctor performs a service for a Medicare patient, they get reimbursed by the Medicare system, and at the end of the year, they pay tax on their income. This is a system we have already. I’m always amused when I see bumper stickers on cars that say, “Keep those dirty government hands off of my Medicare.”

Chuck: I think I’ve seen a poster with that. It does seem to me like it’s a slightly different question when you have the government paying for part of the bill, versus when you create a universe where the government is paying all of the bill to all of the medical providers across the country. You’re just recycling that money back into the same government’s hands, aren’t you? Or am I thinking of this too simplistically?

John: No, it’s like I said, how would this system change financially? You can think about a lot of different things. You can think about a system where– Even in countries that we call single payer countries, so Canada, Britain, the western democracies that have single payer systems, they also have private systems that function alongside that. You can imagine a system where you have the organizations that get government payments, that’s not considered income. That’s not a big deal. I happen to be on a state pension, the state doesn’t consider it taxable income. I think, by the way, that’s a little silly, but I’m not looking to gift horse in the mouth. All a pension is, is deferred compensation. Ed knows this. A pension is deferred compensation. If they paid it to me when I was working, I’d had paid tax on it. I don’t understand why I don’t have to pay tax on it when I’m not working, but I’m perfectly happy to go along with that system.

Ed: John, let me give you an example of a friend of mine with a $20 million in an IRA is taking those distributions, and guess what? There’s no 4.95% on that under current law, and there may not be any tax on that if this fair tax gets adopted. I’m not sure just how to view that because that same individual could have invested and gone to zero. There is this risk and reward concept, but that’s a whole different topic.

John: Yes, it is a different topic, but all I’m pointing out is, is that it is not inconceivable that you could have a system in which government payments are not considered income. At the end of the year, you calculate your income, and if you did private pay stuff, then yes, you pay tax on the revenues minus expenses from your private pay, but you don’t pay tax on it for the revenues minus expenses for the government pay. I suspect, actually, that what this system does eventually is- it really depends at the entity level. If you’re talking about an entity, you probably end up with a system where the government is going to squeeze out virtually most, if not all, of the actual profit involved. What you’re really talking about is, what do we do with doctors and drug companies and stuff like that? Doctors pay tax. I don’t see an inconsistency with saying they get their government payments because they treat people, and at the end of the day, they pay tax on that money. Particularly if you’re dealing with tax systems of different jurisdictions. The fact that they’re getting a federal payment may not be of much interest to the state government, which still has to function based upon taxes. At the end of the day, all I’m saying is there are plenty of ways. Look, pull out your internal revenue code, and read through it, and you can see that we’ve got a pretty good history of dealing with issues. We don’t always get them right, but there’s a lot of stuff in there where we have dealt with things just like this in the Internal Revenue Code, which is probably the reason that it’s 18,000 pages long.

Ed: Yes, and about five pounds.

Chuck: I’m a little curious, given how much thought you’ve put into this particular topic. Does this make you completely opposed to the concept of making charitable contributions to healthcare systems? We see a lot of clients that build that into their state plans, and that’s part of their charitable giving. Do you see that through a different lens than this public policy lens that we’ve been talking about?

John: Yes, in two ways, actually. Neither of which are probably going to make people very happy. Again, the first way is you solve that problem by telling hospitals they’re not tax exempt, then there’s no more charitable contribution, and that’s the end of that. Does that create a problem in terms of how hospitals fund their physical plant, because now somebody is not going to donate $100 million for the new cancer wing, or something like that? Yes, but it’s not any different from every for-profit business that has to figure out how to make capital investments and whether to make those from selling equity in the market or going out and borrowing money or whatever. I’m not terribly concerned about that.

Chuck: I might have misstated my question a little bit. I’m curious, like, let’s say, Ed turns to you and says, “Well, John, last year, I made a $20,000 contribution to St. Jude’s.” Would your reaction to that be, “Oh, Ed, you wasted that contribution”? Or do you think that those charitable contributions are actually promoting good charitable work in today’s world?

John: I think most contributions to the healthcare system are major contributions that buy a capital improvement with the donor’s name on it. I don’t think there are going to be many $20,000 contributions to St. Jude. There may be some, but the major part of contributions that go into healthcare systems are not the $20,000 contribution. There’s a $20 million contribution that builds the Ed Sutkowski Cancer Care Wing. Okay?

Chuck: Okay.

John: Now, we could talk about whether I think those kinds of payments ought to be tax deductible. That’s a different issue. It’s like I said, I’m not going to make many friends today, because I actually don’t think they should be. I think people who make those kinds of contributions are buying a monument for themselves. If they went out and bought a billboard and put it up and had everybody drive by on Interstate 57, or the tri state tollway, you know what? They wouldn’t get a charitable contribution for it. Don’t think I’m one of these people who think there are charitable contributions out there, and people make charitable contributions, and there are a lot of major gifts that are about as charitable as Donald Trump building another Trump Tower.

Ed: John, one of the issues that I see it is that what is occurring, the naming rights for the building is nothing, and nothing more, nothing less than an attempt by the donor to live forever. They’re preying on that opportunity. We have a finite, useful lifetime in this world in the physical sense, and all of a sudden, you get your name in a building, or a scholarship, with the idea of it staying around forever. You have an increased life expectancy. How do you feel about that?

John: Yes, this is exactly why I said, I would not make these kinds of gifts, tax deductible. I don’t think they should be characterized as charitable gifts. Now, in truth, in the tax world, we have doctrines that allow us to split payments. For example, if you go to a charitable fundraiser, and the charitable fundraiser cost you $2,000 for a plate for one person’s dinner. The tax rule about that is you can’t deduct the value of the dinner, but you can deduct all the value above the value of the dinner. I can imagine applying a rule like this to these kinds of payments, that to the extent you are buying a monument to yourself, that’s not tax deductible. To the extent that whatever you gave exceeds maybe some economic value of the living forever piece of this, that would be tax deductible. Of course, it is in our tax system. The burden is on the taxpayer to establish that. If you can establish that you have an excess gift, great. We’ll give you the excess amount as a tax deduction.

Ed: John, we don’t have the time or maybe energy to describe the application of these concepts to your article, the NCAA tax exemption in college athletics. We could spend a couple days on that, and maybe we should think about another session on that very topic. This is an area that’s not only intriguing, but it’s certainly educational, very much so.

John: Yes, the college athletics is a real problem. Again, do I think that major college football, for example, the FBS teams, the Power Five conferences and that, do I think that they are running a charitable program when Alabama is playing LSU, or Michigan is playing Ohio State? Absolutely not. College athletics has more- or at least big time college athletics. I’m not talking about the AAU programs or when you’re going to the Rec Center to play pick-up basketball, but the big time college athletic programs have more into big time businesses. In fact, they mostly become training grounds for the pros. Should they be considered charitable activity? No, I don’t think so. Now, having said that, I would tell you that this is another one where I talked about, you can’t solve– In the healthcare world, we should be trying to solve a health policy issue with tax law. In the educational world, I don’t think we should be trying to solve, and in fact, I think we can’t solve what I view as an educational policy issue with tax law. The reason for that primarily is because, yes, the Internal Revenue Service, I think, could declare Michigan Football Program to be an unrelated business tomorrow, and nothing would change. There would be absolutely zero difference in how that program operated the next day. If you really are concerned about college athletics, and you’re concerned about the commercialization of college athletics, and you’re concerned about coaches salaries, there you go, Ed. I’m much more concerned about coaches salaries than I am about CEO salaries of non-profit hospital. If you’re really concerned about that stuff, you can’t fix it with the tax system. There is a way to fix it, but you can’t fix it by declaring Michigan Football Team to be an unrelated business.

Ed: I know. I agree, John. The only observation I like to share with you is the problem with these big time college athletics speaking only of football for a moment, is that what it does to the participants. When the day is done, if you’ve devoted four or five years to a major college program, you know what you have left when the day is done. Hopefully, you’re physically able to communicate long term, I’m not speaking immediate.

John: Yes.

Ed: So it’s who is really being injured here. The entertainers are being abused, and yet nothing seems to be doing–

John: There’s no question that this is true. I think there are ways in which one could, if one was wanting to do so, one could regulate that kind of thing. There may be a role for the tax system in helping with that regulation, but you can’t solve that problem by making Duke’s Basketball Program an unrelated business, that’s not going to solve anything. If you’re really worried about these issues, there are ways to solve them that no one is going to like, and that it will be dead three centuries before Congress ever think about doing it.

Ed: No, I understand. John, this has been gratifying and educational. Chuck, do you have any observations? I think I understand where John’s coming from. How do you really feel, Chuck?

Chuck: Yes, I know. You’ve been pretty subtle in terms of expressing your views here, but I think that’s–

Ed: That’s good.

Chuck: Right. I think we’ve been able to pick up on it.

Ed: John, thank you for your time and energy. Then till we reconvene sometime in the future, there are some areas here that I’d like to pursue in more detail. Again, thank you for your effort, and have a good day.

Chuck: Thank you.

John: Thank you so much. Happy to talk to you guys. Bye-bye.

Ed: Bye, bye.

Chuck: Bye.

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