Abstract
This article questions the validity of Regulations section 1.502-1(b) and its resulting insistence upon virtual mergers. It argues that the regulation is invalid as having no basis in section 502, the statute under which it was codified. This article argues, instead, that the regulation is a logically incorrect amalgamation of two distinct judicial tax doctrines by which tax exemption may be or could have been gained vicariously: (1) the integral part doctrine which allows one organization to achieve tax exemption on the basis of another organization's charitable activities, and (2) the now-discarded destination of income doctrine under which tax exemption could be had on the sole basis that all the earnings of a corporation, however realized, were distributed to an organization directly providing charitable goods and services. An analysis of the two doctrines shows they are oriented toward distinct aspects of the unfair competition problem and do not simply address the same problem in different ways. Although the two doctrines may be legally and theoretically sound as separate doctrines, they are legally and theoretically unsound as a single merged doctrine resulting in the requirement of virtual mergers.
This article also argues that the abdication of judicial power with respect to Regulations section 1.502-1(b), particularly by the United States Tax Court, contributes to unnecessary complexity. The Tax Court has essentially admitted that the regulation has no statutory or even logical support. In the end, though, the Tax Court sustained the regulation based upon a questionable application of principles of judicial deference to administrative rulemaking. Had it overturned the regulation, the Tax Court would have eliminated the needless complexity which presently unnecessarily attaches to exempt organizations' efforts to economize through consolidation. Rather, the Tax Court assumed that the complexity of the issue demanded that it take an unduly deferential approach to the regulation and thereby perpetuated the complexity of virtual mergers.
Finally, this article concludes that even were the regulation a valid interpretation of law, it is nevertheless incorrect as a matter of tax policy because it fosters complexity without a corresponding policy benefit.
Recommended Citation
Jones, Darryll K.
(1998)
"Creating Complex Monsters: Joint Operating Agreements and the Logical Invalidity of Treasury Regulation 1.502-1(b),"
Florida Tax Review: Vol. 3:
No.
1, Article 11.
Available at:
https://scholarship.law.ufl.edu/ftr/vol3/iss1/11