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Daniel Halperin, Income Taxation of Mutual Nonprofits, 59 Tax L. Rev. 133 (2006).

Abstract: Section 501 of the IRC exempts at least twenty-eight categories of nonprofit entities from income tax. Most attention is paid to Section 501(c)(3). Many of the organizations exempt from income tax under Section 501(c), however, are what state law refers to as mutual benefit organizations, which exist primarily to serve their members. While many mutuals are exempt from income tax, contributions to mutuals are generally not deductible as charitable contributions, nor are mutuals entitled to other benefits, such as real estate or sales tax exemption or lower postal rates, generally available to organizations exempt under Section 501(c)(3). This suggests that the income tax exemption for mutuals would not be justified on the basis of benefit to the public. In the case of business mutuals, steps should be taken to eliminate or mitigate the deferral advantage. It is concluded that consumer mutuals generally ought to be taxed at least on their investment income and on profits from dealings with nonmembers, as is currently true of social clubs. Otherwise, members of consumer mutuals enjoy opportunities for untaxed consumption.