After writing about the Kibbutz movement a few weeks ago, I started to wonder what kind of legal entity enables that kind of organization, and whether such a thing exists in the US. Turns out, it does: the 501(d) non-profit.
I hear about 501(c)(3) non-profits all the time, but I have never heard of a 501(d). So what is it? They are called Religious and Apostolic Associations, and are defined by the IRS as an organization that has a common treasury (and, implicitly, that has a “religious” purpose). Income must be passed on to individuals for tax purposes, so it is kind of like pass-through partnership for tax purposes. The IRS says this about them:
The type of organization exempt under IRC 501(d) is one organized for the purpose of operating a communal religious community where the members live a communal life following the tenets and teachings of the organization. All of the organization’s property is owned in community and, each member, upon leaving, the organization, is entitled to no part of the community assets. The activities often consist of farming and manufacturing. The income of the organization goes into a community treasury and is used to defray operating expenses and the cost of supporting and maintaining the members and their families.
A 501(d) organization isn’t really exempt in the same way a 501(c)(3) is. For example, donations to a 501(d) aren’t deductible. Also, as mentioned above, the members still owe taxes on their pro-rata share of the income. So is there any point to a 501(d), tax-wise?
Perhaps they make it easier to deduct expenses? The support provided to members is not taxed (only the income is). Also, a 501(d) organization must file a form 1065, which includes a deduction for “rent” but the instructions for the form say “Do not deduct rent for a dwelling unit occupied by any partner for personal use.” So, I guess you can’t use it to pay for housing, etc with pre-tax income.
In an article entitled Taxing Utopia, one professor argues that the main tax implication is that 501(d) status allows an organization to avoid paying the payroll component of employment taxes. But any partnership can do that.
Ultimately, a 501(d) is more like a partnership than it is like a charity. The main difference being that members don’t actually hold an ownership interest in the entity. So, for example, if they leave they aren’t entitled to an ownership share and if they die, a share of the entity won’t go into the estate.
So I guess you could donate to a 501(d) to avoid estate taxes in the same sense you can use a 501(c)(3) to avoid estate taxes. That is, you can avoid estate taxes by giving all your money away to an entity in which you don’t have any ownership.
My interest in the 501(d) stems precisely from this idea that members can have mutual control over the entity without having individual, transferable ownership. Thus, there can be an incentive to cooperate (or disincentive to leave, because you are leaving behind the value you get from membership) while maintaining equality within the group.
Traditionally, the 501(d) has been thought of as an entity geared toward people living together in a communal fashion. I do think there is value in a Kibbutz style neighborhood, but I equally interested in the idea of people working together. Modern technology makes it easier to work together while living remotely, but it also makes it easier to live together and work remotely.
One question that is probably unanswerable at this point is the extent to which the IRS wants 501(d) organizations to require communal living/working or whether it is acceptable for such an organization to incentivize these things.
For example, an entity may not require members to live in a communal setting, but if they do, they might get subsidized housing. Similarly, an entity may not require members to work together, but if they don’t they may have to pay some kind of penalty (i.e., like a tithing). I have more to say about this, but will leave it to a subsequent post.
Another question is whether an organization whose bylaws provide for a common treasury (i.e., without common ownership) would be treated as such (e.g., in an estate determination) even if the IRS didn’t recognize it as a 501(d). In other words, could a partnership mimic that aspect of a 501(d) without permission from the IRS. It seems like the answer should be yes. After all, such an entity would have to exist prior to application for 501(d) status. If it couldn’t, there might be a chicken and egg problem that would effectively make the existence of a 501(d) impossible.
