The Law of Tax-Exempt Organizations, 12th Edition

CHAPTER THREETax Exemption: Source and Recognition

• § 3.1 Source of Tax Exemption
• § 3.2 Recognition of Tax Exemption
  • (a) General Rules
  • (b) Concept of Recognition
• § 3.3 Recognition of Public Charity, Private Foundation Status

As subsequent chapters indicate, there are many categories of tax-exempt organizations. Accordingly, the advantages and disadvantages of tax exemption will differ, depending on the particular category.

§ 3.1 SOURCE OF TAX EXEMPTION

Section 61(a) of the Internal Revenue Code provides that “[e]xcept as otherwise provided in this subtitle [Subtitle A—income taxes], gross income means all income from whatever source derived,” including items such as interest, dividends, compensation for services, and receipts derived from business. The Code provides for a variety of deductions, exclusions, and exemptions in computing taxable income. Many of these are contained in Internal Revenue Code Subtitle A, Subchapter B, entitled “Computation of taxable income.” Of pertinence in the tax-exempt organizations context, however, is the body of exemption provisions contained in Subtitle A, Subchapter F, captioned “Exempt organizations.”

Exemption from federal income taxation is derived from a specific provision to that end in the Internal Revenue Code. A federal tax exemption is a privilege (a matter of legislative grace), not an entitlement,¹ and—being an exception to the norm of taxation—is often strictly construed.² (The same principle applies with respect to tax ...