Note

Knowing an “Educational Institution” When You See One: Applying the Commerciality Approach to Tax Exemptions for Universities Under § 501(C)(3)

Eric Rubin

Throughout American history, colleges and universities have had a constant presence in the nation. Education has consequently played a paramount role in the growth and development of the country, which the government has been determined to foster. Under Internal Revenue Code § 501(c)(3), the government provides tax exemptions for non-profit organizations, including “educational institutions,” such as colleges.

Yet, the size and scope of these institutions has changed dramatically since the earliest colonial schools. With tremendous campuses, massive sporting complexes, and lucrative research contracts, modern universities bear little resemblance to the small private schools they were at their inception and undertake many endeavors outside the realm of pure academia. Thus, it seems that universities in their modern form are no longer purely “educational institutions,” but instead appear to be more akin to businesses.

This Note will argue that tax exemptions for modern universities as educational institutions are no longer appropriate given the extensive capabilities of the entities. The history and purpose of the tax code suggest that the use of the tax exemption was to foster education and its continued use for profit-making endeavors seems to undermine that intention. This Note will also outline numerous methods for defining what constitutes an “educational institution,” arguing that the commerciality approach represents the most effective means to resolve this tension and providing proposals to implement this framework.