Tax-exempt organizations can accumulate capital by operating businesses and receiving tax-free income. As discussed earlier in the course, the tax exemption for these organizations has been justified under the capital formation theory.
Explain, in no more than 2 typed pages, your responses to the following questions: When a tax-exempt organization uses its accumulated capital to form a for-profit subsidiary or joint venture or the organization uses intangible assets developed through its exempt-purpose operations in cause-related marketing or a commercial co-venture, does it receive an unfair advantage over competing businesses? Is the tax exemption really designed to give a tax-exempt organization more assets to pursue an exempt purpose rather than more assets to deploy in connection with for-profit activities? Even if a for-profit subsidiary must pay tax on its income, does it receive a competitive advantage when it receives start-up capital from an organization that was exempt from tax? Should the tax system prohibit or restrict a tax-exempt organization’s ability to engage or invest in these commercial ventures?