Now here’s something that breaks the Nonprofiteer’s heart: the MacArthur Foundation is making grants to a dozen libraries and museums nationwide to establish youth computer learning centers modeled on YOUMedia, the Chicago Public Library’s innovative youth learning project.
Why does such good news evoke such profound sorrow? Because the Nonprofiteer can remember when the notion was that the philanthropic sector would serve as a laboratory, trying out new approaches to solving social problems and then passing along the ones that worked to be funded by the government. What we have here, however, is a model already vetted in the public sector whose future sustenance apparently will have to come from private charity.
This role-reversal is particularly galling here in Chicago, where the reward for the library’s pioneering work has been a substantial chop in the city’s library budget.
It’s hard to read a computer screen, or learn anything, when the world is upside-down.
The Nonprofiteer has never had much time for people who want to change the name of the sector to something non-”non”—something more positive, like “Civil Society Organization,” or less meaningful, like “independent.” But this article about the connection between Herman Cain’s campaign and a Tea Party front group funded by the Koch Brothers has her rethinking her position. Under the headline “Cain to Review Links to a Nonprofit” we learn that
An outside lawyer will review allegations that Herman Cain’s presidential campaign accepted tens of thousands of dollars in goods and services from a tax-exempt organization founded by his chief of staff . . .
The front group, “Americans for Prosperity,” is a Wisconsin nonprofit granted at least preliminary 501c3 recognition by the IRS. And if it were actually nothing more than a group of citizens banded together to advocate for policies they believe will lead to prosperity, there would be nothing wrong with that. But if instead it’s just a mouthpiece for the Koch brothers—an Astroturf, rather than a grassroots, organization—then there is something wrong.
The IRS requires 501c3s to raise a third of their money from the public precisely to prevent the creation of captive organizations of this kind. Use of a tax-exempt entity to promote the interests of a single individual or family is a violation of Federal tax law. Moreover, if the nonprofit paid some of the Cain campaign’s expenses, that’s a violation of Federal election law—perhaps one of the few activities left that is.
The Cain campaign may collapse under the weight of far more interesting allegations (sex beats money every time); but if in fact this nonprofit was nothing more than a campaign slush fund, its existence represents a taint on the “nonprofit” label. What a shame that “handmaiden to profit and to policies assuring that the profitable get more so and the rest of us get squat” is so unwieldy.
Maybe a new name for the sector wouldn’t come amiss; but let’s be realistic. The Iron Law of Euphemisms means that whatever name is adopted instead will soon become an epithet itself. This explains the “progress” in designating African-Americans, from “n****r” to “colored” to “Negro” to “black” to “Black” to “people of color”: as long as people using the term hate the people they’re describing, the term will be infected with their hatred and soon need to be abandoned.
And as long as the wealthiest people using the term “nonprofit” are determined to distort the form to support the worst excesses of the profit-driven world, it hardly matters what the rest of us call it.
Dear Nonprofiteer,
I’m dealing with a non-profit corporation, a church as a matter of fact, that is for all practical purposes a for-profit business masquerading as a non-profit. The board is not independent—it is made up of the leader, her family and various of her hangers-on.
It would be easy to just walk away from this situation—it is so tempting! However, taking the easy way out to let the organization fail on its own isn’t necessarily the way to minimize the harm the organization will likely do along the way while doing this masquerade.
Do you know of any tests that can be applied to non-profits, especially churches, that can expose cases where they are for-profits masquerading as non-profits? If you have any other advice or guidance I would be glad to receive it.
Signed, Clean and Pure
Dear Clean and Pure,
There are all sorts of phony nonprofits. There are “Astroturf” nonprofits, subsidiaries of for-profit corporations purporting to be grassroots efforts to educate the public on issues of financial import to the corporations. There are what I’d call “lunch bucket” nonprofits, which exist to accept Congressional earmarks whose benefits actually flow primarily to for-profits. And then there are flat-out scam nonprofits, which exist to provide tax-shielded income to their founders rather than the public benefit for which the tax shield is a quid pro quo.
The good news is, the IRS discourages out-and-out scams by requiring 501c3 groups to raise one-third of their income from public donations. Though it seems peculiar on the face of it to identify charities by their income rather than their outflow, the theory seems to be that raising money is such hard work, no one would be willing to do it just for the purpose of stealing. It’s easier to sell something, anything, and then steal from the earned revenue. So that’s one of the many reasons that agencies which support themselves entirely by earned revenue are presumptively for-profits (and therefore taxpayers).
State Attorneys General also keep track of the scams, requiring agencies to specify a public or charitable purpose (which is sometimes broader than the IRS’s definition of a nonprofit, sometimes narrower) in order to qualify for tax-favored treatment. (At the state level, this includes exemption from property and sales taxes, among others.)
There are hard and fast IRS rules about when a presumably public charity needs to be re-classified as a private foundation, but that represents a decision about which kind of nonprofit we’re dealing with, not the “phony nonprofit” scenario you’ve described. Further details about those decisions and other IRS rules of thumb are available on the very clear and comprehensive IRS Website (no, really!) on the subject. The decisions and guidelines often refer to something soporific like “reclassification of exempt organizations,” but they are full of traps for the unwary nonprofit as well as disincentives for the dishonest one.
The bad news is, neither Federal nor state regulations are very often enforced against churches. The First Amendment protects free exercise of religion and prohibits the government from becoming “excessively entangled” with religious organizations. “Excessive entanglement,” according to the courts, includes most tax regulation, for if the government has the power to insist on an audit, what faith institution would be safe from government oppression?
This is all very well, except for situations like the one you’ve described. Occasionally someone will petition the state Attorney General or the IRS to reclassify a “church” as a non-church to capture the kind of self-dealing you’re talking about. But that would be very occasionally, which is why Jim and Tammy Faye Bakker and their ilk have managed to get so wealthy under cover of the cloth before crashing and burning for more venial (but juicier) sins.
The only thing you can do to keep yourself clean is to walk away. If you’d like to notify your state’s Attorney General and/or Secretary of State that you believe this agency is not actually a church, you may do so. But bear in mind that the burden of proof will be on you, and the mere fact that the pastor and her brood and buddies govern without membership input and seem to be well-paid will not be enough. Many churches are governed without membership input except in an advisory capacity (consider parishes of the Catholic Church, or affiliated congregations of the Lutheran Church, in which the diocese or the synod rules and the congregation obeys). And many ministries are a family business: think Billy Graham and his son.
So though the Nonprofiteer wrinkles her nose in distaste at the situation you’re describing, she thinks you have no recourse but to walk away. If you’re right, and the agency will crash and burn without your intervention, so much the better. This would demonstrate the wisdom of the Bible saying, “All things come to him who wait.”
Sorry.
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