Profits, Bonneville, and the Church

Once upon a time,[fn1] a couple wealthy alumni left all of the shares of the Mueller Pasta Co. to NYU’s law school. The donation kinda freaked people out: a pasta company owned by a tax-exempt organization presented a possibly existential threat. Because the company didn’t have to pay taxes on its profits, it could charge less per box, undercutting other pasta companies and driving them out of business. (How? Well, in 1947, the top marginal corporate income tax rate was 53%. Imagine a pasta company charged 20 cents for a box of pasta and made 10 cents of profit per box. After taxes, they would have about 5 cents left. If Mueller didn’t have to pay taxes, it could charge 15 cents, a 25% discount. As long as it had similar quality, you’d probably buy the Mueller pasta!) Alternatively, it could charge the same amount, make twice the profit, and use that profit to buy competition and otherwise act as a monopolist.

Neither was, in many people’s mind, a good result. So Congress enacted the unrelated business income tax. What is the unrelated business income tax? We don’t need to go into a lot of detail, but in broad strokes: to the extent a tax-exempt organization earns income not related to its exempt purpose, it pays taxes on that income at ordinary corporate rates. The unrelated business income tax is meant to take away any unfair advantage that tax-exempt organizations would otherwise have competing with for-profit entities.

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