Posts Tagged ‘IRS’
October 27, 2011
Kudos to the Nonprofiteer’s nonprofit consulting colleagues Campbell and Co. for sponsoring a study by the Indiana University Center on Philanthropy to determine the impact on giving of increased marginal tax rates and a cap the charitable-giving deduction. While some of us have been arguing that both of these moves toward social justice should be supported by the nonprofit community, and others have been arguing that the world will come to an end if every penny of tax savings isn’t afforded to the generous rich, these institutions decided to look for the facts.
The facts–as elegantly stated in a Congressional Research Service study that came to the same conclusion–are these:
The estimated effects of the cap and other elements of the budget package depend on whether the proposals are compared with the current tax rates of 33% and 35% or the rates scheduled for 2011, 36% and 39.6%. Compared with current rules, estimated effects are between one-half a percent and 1% decline in charitable giving . . . . When compared with tax rate provisions in 2011, charitable deductions are estimated to fall by about 1.5% if only the cap is considered, but if income effects from the entire budget package are included contributions actually rise 2.5%. The relatively modest effects of the proposal arise because (1) the effect of caps on the subsidy value is limited, (2) only a fraction (about 16%) of charitable giving is affected, and (3) because evidence suggests that behavioral responses to changes in subsidies are relatively small.
(Emphasis the Nonprofiteer’s.) To paraphrase: the tax subsidy isn’t much reduced; that small reduction doesn’t affect 84% of charitable giving; and, in fact, charitable giving isn’t all that tied to tax benefit.
So whether we take the IUPUI findings that charitable giving is likely to decline modestly if these tax reforms are enacted, or the CRS findings that it might actually go up, we should realize that everyone who’s hyperventilating about the impact of these changes on their poor struggling private school, museum or hospital should just take a deep breath. Given that the reforms will support many of the social programs, environmental protections, educational institutions and health care options the nonprofits themselves seek to provide, it’s about time for the community to stop whining and agree to pony up.
Tags:501c3, charitable tax deduction, charity, donors, Fundraising, IRS, nonprofit, nonprofits, not for profit, philanthropy
Posted in Advocacy, Arts Organizations, Coverage of nonprofits, Current Affairs, Disease charities, Education, Environmental, Finances, Fundraising, Health care, Higher education, Nonprofit management, Nonprofits--General, Philanthropy and Taxation, Private Philanthropy, Social Service Agencies | Leave a Comment »
July 13, 2011
About a month ago the Nonprofiteer received a note from a public relations officer at the Jewish Federations of North America describing the Federations’ opposition to placing caps on tax deductions. Being well aware that the debt ceiling negotiations are completely out of her control (and probably out of anyone’s control at this point), this letter failed to move the Nonprofiteer to leap to her telephone and urge her Congressbeing to beat back this latest assault on the nonprofit sector.
But it wasn’t mere laziness that kept her from the front lines in this particular battle; it was actual disagreement, based on the letter’s own summary of the horrifying proposal:
Specifically, the Administration has proposed limiting tax benefits for charitable contributions for those earning over $250,000 (married) or $200,000 (single). The tax benefit of all itemized deductions, including charitable contributions, would be capped at 28 percent and the Jewish Federations want the charitable portion to be exempted.
Thus, an extremely modest proposal for assuring that the wealthiest citizens pay some additional portion of our shared tax burden is considered a threat to the health and well-being of the hundreds of thousands of people served by the Jewish Federations. This, despite the fact that deductibility’s impact on giving is far from clear.
Listen up, gang. You want to see a threat to health and well-being? How about cuts in Medicaid, in Medicare, in the Affordable Care Act, in Social Security, in food stamps, in child care, in education? The fundamental problem of the American economy is that we don’t pay enough in taxes to support the services we very reasonably demand. We don’t pay nearly as much in taxes as our quite conservative neighbors to the north, or our counterparts in Europe or Japan. So we don’t have the health care, the educational system or the family support services we need.
Even complete abolition of the charitable deduction wouldn’t make much of a dent in the shortfall we’ve created out of pure political cowardice and foolishness. The deficit is not the result of social spending but of three simultaneous wars piled on multiple tax cuts. So the hideous notion of a cap on deductions fails on the Willie Sutton basis: you don’t rob nonprofits because that’s not where the money is.
But. If there were what Everett Dirksen called “real money” hidden in the charitable deduction for wealthy families, it absolutely should be subject to revision, for the same reason every other deduction and credit and tax dodge should: because those dodges enable the wealthy to pay less than their share, and because this society needs more money than poor people’s taxes provide to continue those services necessary for us to remain a member in good standing of the developed world.
The Jewish Federations’ objection to this proposal—while completely understandable from their perspective—suggests that even the nonprofit sector has become infected with the shortsighted quarter-to-quarter thinking which addles Wall Street. Rather than consider the long-term good of the society they serve, the Federations are concerned about balancing next year’s budget. And while the Nonprofiteer doesn’t blame them for that—that’s their job—you’ll pardon her if she sides with (and cites) a different giant of the American Jewish community, Samuel Goldwyn*:
“Include me out.”
———————–
*Per Wikipedia: “In 1916, Goldfish partnered with Broadway producers Edgar and Archibald Selwyn, using a combination of both names to call their movie-making enterprise the Goldwyn Pictures Corporation. Seeing an opportunity, Samuel Gelbfisz then had his name legally changed to Samuel Goldwyn, which he used for the rest of his life. “
Could this possibly be because the alternative combination of their names is Selfish?
Tags:501c3, Advocacy, charitable deduction, charity, deductibility, donors, Fundraising, IRS, nonprofit, nonprofits, not for profit, philanthropy, social services, taxation
Posted in Advocacy, Coverage of nonprofits, Current Affairs, Finances, Fundraising, Nonprofit management, Nonprofits--General, Philanthropy and Taxation, Private Philanthropy, Social Service Agencies | 5 Comments »
May 19, 2011
As governments at all levels scramble for resources, the idea of eliminating the charitable deduction from the income tax code has begun to attract support. Many people who work in nonprofits say this would damage the sector, because people would be less inclined to give and those who did give would give less. Let’s assume this is true (though Americans’ passion for voluntary organizations long predates the tax code; Tocqueville, anyone?). Is the health of “the sector” really the relevant concern?
It may be that people will give less to their churches or alma maters or prestige arts organizations if deprived of a tax benefit for doing so. But that money will be in the public treasury, where it will go for health care and education and environmental protection (and even a pittance for the arts). So wouldn’t the goals of nonprofit hospitals and nonprofit schools and environmental nonprofits and arts nonprofits actually be advanced if the government had more to spend on these essential services?
In other words, as with health care, the question isn’t whether people pay; it’s how. You either pay for health care by giving money to an insurance company, or by paying taxes and letting the government insure you. (The latter model, in use in this country only for the aged, produces the greatest efficiencies and greatest satisfaction among patients, families and caregivers; but of course extending it to the rest of the population would set us on the road to serfdom. Hayek himself endorsed public provision of health care, so what are we arguing about, again?)
Likewise, you pay either way for education and schools and environmental protection and so on; it’s just a matter of which pot you’re anteing up in: the private nonprofit or the public.
So there’s a real discussion to be had about whether the charitable deduction is a good idea for the entire sector, or whether in fact social service and social justice nonprofits–-the ones that struggle the most for philanthropic support–-would be better off without deductions but with a bigger public fisc.
(Yes, the money might go for defense, or subsidies for oil companies, or some other boondoggle. It’s our responsibility as citizens to prevent this; tax deductions were not designed to protect us from self-government.)
This is another version of the argument the Nonprofiteer has made elsewhere about the generosity of billionaires versus the reinstatement of a significant inheritance tax. (We Democrats should make a point of calling it “the inheritance tax,” because that’s the whole point: at the moment, people who work for their money pay income taxes on it while people who inherit their money don’t. Or we could call it “the windfall profits tax,” which is what it is: a tax on the windfall profits of people whose only contribution to society is having picked the right parents. And the Nonprofiteer speaks as a windfall recipient.)
When the government collects inheritance taxes it can spend the money on things we as a democratic society think important: health and education and social services and, yes, roads and weapons systems and a bunch of other things about which the Nonprofiteer’s opinions are in the minority. If the government doesn’t collect, billionaires’ offspring can spend the money on the things they as potentates think are important, which might be eradicating malaria and endowing charter schools but which might, yes, be paying scholars to produce support for the elimination of public education or the abolition of all regulation, or even paying legislators directly for said elimination and abolition.
The tax code is designed to provide the government with resources to do its job. Its job, among other things, is to provide essential services to citizens who cannot provide those services for themselves; and the more money it collects, the more services it can provide. What’s important is that those services get provided, not that they get provided by the sector that happens to employ the Nonprofiteer.
So the question here is not, “Is it good for the sector?” but “Is it good for social welfare and social justice?” The answer is not clear-–crunching the numbers would be a huge job for which the Nonprofiteer is totally unqualified-–but let’s make sure we’re asking the right question.
Tags:501c3, donors, IRS, nonprofit, nonprofits, not for profit, philanthropy, politics, Poverty, social services
Posted in Health care, Insurance, Nonprofit management, Nonprofits--General, Philanthropy and Taxation, Private Philanthropy, Public private partnerships, Social Service Agencies | 9 Comments »
March 17, 2011
Here’s something strange: a concept thrown around routinely and casually in conversations among nonprofits and philanthropies is simultaneously the subject of fierce debate and sometime disapproval by the Internal Revenue Service, a committee of the American Bar Association, and other experts. What is going on?
The notion of Low Profit Limited Liability Corporations (L3Cs, for short) is that they’re a vehicle for doing well by doing good and therefore an improvement over the typical nonprofit structure. L3Cs are permitted to earn profits but proponents claim that their praiseworthy intentions—to end hunger or provide clean water or whatever—make those who lend to them eligible for the special tax benefits attached to program-related investments. In other words, this is a legal structure presented as a technique for gaining access to capital (always a struggle for nonprofits) by providing a tax benefit to lenders.
Of course, foundations already get a tax benefit for program-related investments in regular nonprofits, so what, exactly, is the appeal? In theory, foundations might be more interested in program-related investments that generate a reliable flow of capital (in the form of profit) than in program-related investments that generate nothing but additional nonprofit programs and services. Likewise in theory, regular venture capitalists outside of foundations will be more interested in making investments in profit-making entities than in pure nonprofits. This—the notion goes—will increase the amount of capital available to support general good-guy behavior.
However, a number of scholars and lawyers (Daniel Kleinberger of William Mitchell College of Law prominent among them) see the L3C as, at best, redundant and, at worst, an invitation to fraud. They point out that regular limited liability corporations can be organized for any purpose, including public-spirited and low-profit ones. They point out that the IRS has not yet issued (and does not seemed inclined to create) a rule awarding automatic program-related investment status to any investment in an L3C. So anyone who invests in an L3C on the basis that it provides a higher return than a regular nonprofit with the same tax benefits will find out to his/her sorrow that this is not the case.
What strikes the Nonprofiteer as peculiar, though, is that in the many discussions she’s heard and read about L3Cs, only one mention (specifically, Professor Kleinberger’s Nonprofit Quarterly article) has ever surfaced of this opposition from the bar and Federal regulators. Not until her tax lawyer Stuart Levine asked about the [successful] efforts in Illinois to create L3Cs did she realize there was anything controversial about the phenomenon. After bringing her up to speed Levine wisely said,
L3C’s don’t work unless there is a change in federal tax law. In other words, L3C’s are a little like Oreo-Tycin-Myacin—the wonder drug for which there is no known disease.
L3C’s raise difficult issues of fiduciary duty and the inherent conflict between “charitable” purposes and “business” purposes. At the least, these conflicts cannot be dealt with via a quick-fix state statute.
Doubtless the Nonprofiteer spaces out on frequent occasions and misses aspects of what’s said or done in the sector. But she suspects there’s also a disconnect between what nonprofit executives and L3C promoters expect and describe and what lawyers and regulators understand.
So if you’re considering investment in an L3C, be the aware buyer of whom you’ve heard.
Tags:501c3, charity, Executive Director, foundations, Fundraising, IRS, L3C, low profit limited liability corporation, nonprofit, nonprofits, not for profit, philanthrocapitalism, philanthropy, program related investments, Relations with funders, social capital, social entrepreneurship
Posted in Coverage of nonprofits, Current Affairs, Earned income, Executive Directors, Finances, Foundation Hall of Shame/Stupid Foundation Tricks, Fundraising, Investment, Nonprofit management, Nonprofits--General, Philanthropy and Taxation, Private Philanthropy, Relations with funders, Social enterprise | 8 Comments »
January 19, 2011
Take a look at this piece from the Chronicle of Higher Education documenting the important role of legacy preferences—admissions boosts to the children of alumni—in college acceptance rates. It raises the question, as our colleague Rick Cohen puts it at the Nonprofit Quarterly, “why tax preferred institutions of higher education in many cases get to use their tax-exempt status to serve children of immense wealth and privilege.”
This is the real issue embedded in another question frequently asked: “Why do well-endowed universities get tax breaks?” The answer to that can easily be “because education is a public good,” but if that good is available disproportionately to a tiny subset of the public then the entire edifice of tax protection for elite institutions starts to crumble.
Legacy preferences are regularly justified on the grounds that they’re necessary to assure alumni loyalty and therefore alumni financial support. As the Chronicle article documents, the evidence for this is ambiguous at best. But even if it were true, it’s not clear why the convenience of fundraising officers should trump society’s legitimate questions about how it’s allocating scarce benefits among competing groups of beneficiaries. And as long as universities receive tax breaks, it is the broader society that’s doing the allocating and has the right to ask the question.
And here’s another question we have a right to ask: why is affirmative action a problem when it benefits poor people and minorities but not when it benefits wealthy white people? “Legacy preferences” is, after all, a euphemism for making sure that thems that has, gits—and gits more.
Most colleges and universities these days would regard it as an ethical violation to accept tobacco money, or porn money. Why should their ethical standards tolerate accepting privilege money—which means, essentially, accepting a bribe? It makes little sense for the source of money to be evaluated for purity while its purpose goes unquestioned.
As an ex-admissions officer, the Nonprofiteer is more familiar with legacy preferences than she ever wanted to be, and she can assure her readers that merely being the child of an alumnus is not a bona fide occupational qualification. Plenty of successful alumni have no-’count kids—hence the old saw about “shirtsleeves to shirtsleeves in three generations.” Nor does it matter that the practice is long-established. Ivy League colleges had a long-established practice of coordinating their scholarship packages (to keep students from choosing among them on the basis of cost), until someone read and implemented the antitrust laws. The sky didn’t fall as a result of that change, and it won’t as a result of this one.
Of all the ways in which universities violate the spirit if not the letter of the laws granting them tax advantages (from running semi-professional sports teams to serving as research arms of the military), legacy preferences are perhaps the most damaging. Every legacy preference helps perpetuate a system of inequality. Every legacy preference deprives someone better-qualified of an opportunity s/he’s earned. What’s more, the howls of protest that go up when that accusation is leveled at some other system of preference are nowhere to be heard.
If institutions of higher learning want to maintain their tax-favored status, they should abolish legacy preferences. If they don’t—if they go on practicing white people’s affirmative action—they deserve to be knocked off the comfortable perch on which they now sit.
Tags:501c3, charity, donors, Fundraising, IRS, nonprofit, nonprofits, not for profit, philanthropy, Poverty, Relations with funders
Posted in Coverage of nonprofits, Current Affairs, Education, Fundraising, Higher education, Mission, Nonprofit management, Nonprofits--General, Philanthropy and Taxation, Poverty, Private Philanthropy, Racism | 7 Comments »
January 6, 2011
Dear Nonprofiteer,
I have been a long time reader, and appreciate your blog tremendously!
I have a question, and if you choose to publish it, I would prefer to remain anonymous.
My organization is the fundraising agent for a couple of state funded organizations (the state only funds salaries & utilities—and the foundation I work for was founded a long time ago to raise funds for educational programs, content, etc.). Recently, as a means to save ourselves ample amounts of time, energy, and overhead in administration, we began contracting with another local NPO that is first and foremost a performing arts space, but also the most comprehensive ticketing agent in our town. This has become vastly beneficial because our own staff is so limited that we just don’t have the time and support staff to administer ticketing for ALL of the events for ALL of the organizations we support. This saves us a great amount of time prior to these events, but we still have to process funds transferred to us from the ticketing agent post-event, and then send letters for any tax deductible value to the patrons.
So, here’s the question that has arisen in our office—can we just put something on the ticket itself that states the tax deductible value of the ticket to save ourselves from having to also send letters? Or, is it just best practice to send those letters post event to the event patrons?
Signed, Overwhelmed and Understaffed
Dear Overwhelmed:
Without being sure of the details, the Nonprofiteer recalls that actually tearing tickets is considered best practice in the management of for-profit events as a protection against employee theft of proceeds: the stubs are compared to the sales numbers and everything has to balance out at the event’s conclusion. So it seems like a mistake to put the tax receipt or other acknowledgment on the ticket itself, when you’re going to want to physically retrieve at least part of it.
Of course, it’s possible to print a detachable ticket stub and leave that in the hands of the donor, and that stub could contain the necessary language for tax purposes. (“Ticket price: X. Tax-deductible value: X minus value of event’s benefit to patron. Helping [nonprofit's] clients: Priceless.”) And if you’re using electronic tickets, which can be scanned and then returned in full to the patron, that same language can appear anywhere on the ticket’s face.
But the Nonprofiteer is a little puzzled about your role in the process. Given that you’ve transferred ticket-processing to another nonprofit, why not transfer the entire fiscal agency to that nonprofit? Does being the fiscal agent confer some other benefit on your foundation? If not, it may be that a relationship that once made sense no longer does, now that the agencies you’re shepherding have become so active in their event-based fundraising.
Even if your foundation needs to remain fiscal agent for the purposes of state contracts, it should be possible to transfer fiscal agency for events to the ticketing nonprofit. In that case, the task of sending tax-receipt acknowledgment to the patrons would fall to it.
In either case, of course, the task of actually thanking the patrons falls to the nonprofit whose event it is. If the Nonprofiteer understands the situation correctly, donors have no particular interest in you: by their attendance at events, they intend to benefit the nonprofits for which you’re the agent. Therefore, they don’t want to hear acknowledgment from you—they want to hear it from the benefited agency. That’s what’s priceless!
Tags:501c3, charity, donors, fiscal agency, fiscal agent, Fundraising, IRS, nonprofit, nonprofits, not for profit, social services
Posted in Benefit events, Finances, Fundraising, Government grants, Management Advice Day tip, Nonprofit management, Nonprofits--General, Public private partnerships, Social Service Agencies | 3 Comments »
December 20, 2010
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.
Tags:501c3, Board of Directors, charity, church, governance, IRS, nonprofit, nonprofits, not for profit, personnel, phony nonprofit, religion, scam
Posted in Boards of Directors, Charitable Choice/Church-State Separation, Charity scandals, Earned income, Finances, Fundraising, Mission, Nonprofit management, Nonprofits--General, Religion, Volunteers/Volunteerism | Leave a Comment »
August 31, 2010
Jane Mayer’s excellent piece in this past week’s New Yorker about the brothers Koch, oil billionaires who’ve donated hundreds of millions to nonprofits promoting right-wing causes, finally clarified for the Nonprofiteer her unease at Bill Gates’s campaign to persuade billionaires to donate half their estates to charity. It’s not a question of who has or hasn’t taken the pledge, though that’s an entertaining parlor game. Nor is it the fact that the generosity of extremely wealthy people may not be what the rest of us have in mind when we hear the word “charity.” (The Kochs’ “charity,” for instance, is a term of art encompassing donations to all kinds of institutions, predominantly think-tanks churning out rationales for the economic interests of wealthy people and front groups to make it appear that defending those economic interests is the political will of the non-wealthy majority.)
What’s troubling about the billionaires’ pledge remains so even when the receiving causes are unexceptionable. Gates, for instance, has very generously underwritten substantial efforts by the Global Fund to Fight AIDS, Tuberculosis and Malaria. Good for him, and for the world.
But.
Even the best-intentioned best-directed private donations are a way for moneyed people to work their will on the public, while the rest of us have nothing but the vote. And when the level of contributions is discussed in fractions of $1B, it’s no longer charity within a democracy: it’s benevolent dictatorship.
Maybe our country should be giving less to treat AIDS et al and more to eradicate infant and maternal mortality through the UN Population Fund; maybe not. That’s a decision to be made by the people of the United States, through our government. It’s really not a decision for a single person.
Why not? Well, for starters, the “single person” in question is a billionaire, and thus always a man. That means almost by definition that the highest levels of charitable giving will overlook women, though we constitute more than a majority of the population. And if that’s the case—if society’s needs are met by individual whim instead of collective decisions about the greatest good for the greatest number—then what, actually, is left of self-government?
Of course, billionaires have plenty of assistance in the task of allowing economic power to trump political will. The Supreme Court’s decision in Citizens United, holding that corporations are “persons” with First Amendment rights violated by limits on their campaign spending, already put the nation quite a way down that road. But somehow it’s worse when something that sounds so benign—”half my estate to charity, because I’ve been so fortunate”—actually translates as “I set the agenda for the future of this country, because I’ve been so fortunate.”
What we really want from billionaires is for them to pay a lot more in income taxes: say, the 87% of taxable income paid in 1954, or even the 70% paid at the start of the 1980s. And then we as a group can decide where our group’s money goes. All contribute, all decide.
And what we really want from billionaires’ heirs is for them to pay the 77% estate tax rate in effect in 1941, or even the 70% estate tax rate in effect in 1976. (And let’s not hear any nonsense about “death taxes.” The dead aren’t the ones paying.) Why shouldn’t people who get money by inheritance have to pay taxes on it, just like people who get it by working?
Merely to ask that question is to answer it: no democratic society decides that people who don’t work should be privileged over those who do. Societies like that are called “aristocracies,” and all those so-called Constitutional Originalists running around hijacking elections by screaming about excessive taxation should take a moment to remember that our Constitution was designed precisely to interfere with the establishment of a government by inheritance.
The Constitution prohibits not once but twice the granting of any title of nobility; but the Framers didn’t rest there. They fought to cripple and ultimately abolish entail and primogeniture, the primary devices by which English law kept family fortunes together. Why? Because they realized that, if you’re founding a republic, it’s really not a good idea to let money keep piling up generation after generation in the same few pairs of hands.
Self-governing societies can’t operate on noblesse oblige, and societies that do aren’t truly self-governing. As Dr. Franklin said, “A republic—if you can keep it.”
Tags:501c3, Advocacy, charity, corporate giving, donors, foundations, Fundraising, governance, International, IRS, nonprofit, nonprofits, not for profit, philanthrocapitalism, philanthropy, politics, Relations with funders, women, Women's Issues
Posted in Advocacy, Advocacy groups, Campaign finance, corporate giving, Coverage of nonprofits, Current Affairs, Disease charities, Environmental, Finances, Fundraising, International, Mission, Nonprofit management, Nonprofits--General, Philanthropy and Taxation, Private Philanthropy, Public private partnerships, Women's Issues | 10 Comments »
August 30, 2010
Dear Nonprofiteer,
One of our current issues is lack of short-term working capital. As with many organizations, our expenses always precede our revenue by weeks, sometimes months. We were carrying some debt into the recession, which worsened as the economy imploded. We’ve grown fairly organically through the recession and thankfully we have paid the debt down; however, that has left us without much in the way of cash reserves. Which leads us to a short-term crunch on working capital to bridge the gap between the time frames for our expenses and for our revenue.
With the current banking climate credit can be tough to come by so one of our Board members has offered to lend our organization some money to help smooth out our short-term working capital issues. We want to make sure, though, that we are not skirting any legal issues before we proceed. Should an organization accept a short-term loan from a Board member?
Also s/he had a secondary question about interest if we were to accept the loan:
One question I did have is regarding the IRS interpretation of not profiting from board activities. I should be able to do that as a no interest loan; though, would I still be able to do it as a below market rate loan? (Not that there is much of a distinction at the moment with interest rates pretty close to 0.5%) My thinking is that I could lend something around $3-5000 for no more than one year, and I would certainly want fund raising to continue in the meantime, but what would the IRS’s rules direct for this?
What would you advise?
Signed, Board-rich but Cash-poor
Dear Cash-poor:
It would be hard to provide a better summary of the pluses and minuses of borrowing from Board members than the one on Blue Avocado last year; it lays out all possible iterations of such borrowings, along with pros and cons of each type.
As you’ll see, there’s no legal obstacle to your accepting a loan from a Board member (see also this legal guidance, which makes explicit that what’s prohibited is Board members borrowing from nonprofits, not the other way around). But doing so may alter the dynamics of your Board in a way you don’t particularly want. S/he who has the gold makes the rules, of course, and a lender is apt to feel that s/he has a greater stake in the financial success of the organization than other Board members. This may lead to conflicts about whether, e.g., to do something artistically daring or commercially safe, with the creditor putting a heavy thumb on the “safe” side of the scales. The borrowing doesn’t create a conflict of interest, exactly, but it creates the potential for one.
Given the relatively small sum involved, it might actually be better to have a Board member, or members, co-sign a line of credit at a bank or credit union. Many reluctant lenders are willing to lend with personal co-signers, and this keeps the day-to-day financial decisions where they belong—with the staff—while keeping Board members in their proper fiduciary role.
As to the interest-rate issue, Nonprofits for Dummies notes that loans from Board members are only legitimate if they are at or below market rates. The goal is to prevent Board members from looting their agencies by charging exorbitant interest. To be sure that there’s no question about the validity of the interest rate, the full Board should approve the loan by a vote from which the lending Board member recuses him/herself. Under those circumstances, the IRS will not question the transaction—though it must be reported on the agency’s 990 form, and of course any interest income must be reported on the lender’s own tax returns.
Again, your difficulties are not legal, but managerial: if there’s truly no other way, you may borrow from a Board member. But the less you let Board members serve as your creditors, the better governors they will be.
Also—though there’s nothing wrong with borrowing for a defined short-term need like the one you’ve described—if there’s a chronic delay between expenses and revenues, you probably want a longer-term solution (like the credit line) instead of a Board member’s temporary willingness to tide you over.
And please make sure the lending Board member knows that, in the unlikely possibility that you go bankrupt, his/her loan will be the last paid. As an “insider,” his/her loan will be subordinated to everyone else’s, almost as though s/he were a stockholder. In short, make sure everyone on both sides of this transaction understands the risk.
None of these gymnastics would be necessary if there were a Nonprofit Business Administration which would lend to nonprofits the way the Small Business Administration lends to small businesses. But this hobby-horse of the Nonprofiteer’s doesn’t seem to be making any more headway in the Obama Administration than in any previous White House. Maybe there’s a reason—but she can’t imagine what it is.
Tags:501c3, Board of Directors, charity, Conflict of Interest, credit, Executive Director, governance, IRS, nonprofit, nonprofits, not for profit, philanthropy, recession, Relations with funders
Posted in Boards of Directors, Conflict of Interest, Executive Directors, Finances, Management Advice Day tip, Nonprofit management, Nonprofits--General, Private Philanthropy, Relations with funders | 1 Comment »
July 21, 2010
Dear Nonprofiteer:
We are a small non-profit music school. We have been running into a problem with grants strategy–as in, we aren’t getting any.
I am consistently getting feedback:
1. “Lovely program but we are only funding projects that can promise to reach 500-1000.” We are small with 350 students and while I can conceive of a program that would reach a larger audience, I don’t feel I can creditably offer that in a proposal.
OR
2. “Great ideas but we only fund people who we funded before.”
Previous executive directors in more generous times had decided that grant seeking was not worth the effort. I think we need to make a big push but I am starting to wonder if they were right.
We have a subsistence existence with only earned income and I feel we are desperately in need of a more diverse income stream if we are ever going to grow or prosper. Operating at less than break-even is not an option with my board.
What’s the small non-profit to do?
Signed, Stymied at Every Turn
Dear Stymied,
The Nonprofiteer suspects, as you’re starting to, that your predecessors were right when they gave up seeking foundation support. At the best of times, foundations have the attention span of fruit-flies, which means even agencies receiving support spend the whole grant term sweating blood over whether they can get it next time–nonsensical program-officer-speak to the contrary notwithstanding. (What kind of response is, “We only fund those we’ve funded before,” anyway? It’s barely lucid, let alone reasonable–unless it’s just a bald-faced lie.)
And these aren’t the best of times. (Like you hadn’t noticed.) Some foundations are stepping up and spending a larger percentage of their income on grant-making to make up for a loss in their portfolios; others can’t, or won’t. And as aggravating as it is to have a foundation ask you to provide services on a scale beyond your capacity, the Nonprofiteer will defend that point of view: foundations are in the business of trying to have broad impact with narrow means, and your program simply doesn’t meet their needs.
So you have to seek funds from another source. Earned income is all very well, but of course you’re required to raise one-third of your budget in contributions simply to maintain your 501(c)(3) status. How?
Well, as the Reverend Mother did not say, “When a foundation closes a door, somewhere an individual donor opens a window.” Stop pounding your head against the foundations’ doors and get thee to an individual gifts program. This may be your only option; it’s certainly your best one. Seek small gifts through an annual campaign, and big ones through individual appeals made by you and members of your no-deficit Board. (They made the rules, now they have to play the game.)
The annual campaign: Ask your students and their families, as well as any alumni you may have, to help you make up the difference between what it costs to provide this first-rate music education and what you charge in tuition. (If you don’t know that number, figure it out: it’s magic. Not only does it encourage contributions, it makes future tuition increases easier to swallow. Why do you think colleges keep repeating, “Tuition covers only a fraction of the cost of educating a student”? Though at $40,000-plus a year, one might begin to wonder what fraction, exactly.)
Ask at “Back to School” time, and again around Christmas, and again before or during recital/graduation season. Also, ask at performances. Don’t be shy: remember that most people say they give because “Someone asked me.” Your school is just as deserving as any other charity, and with 350 people in the program someone connected to you should be willing to cough up some dough.
Major gifts: Identify anyone who’s already been giving you money and take him/her out to lunch and ask for more. If your Board members aren’t already giving, conspire with your Board president to get them to do so–and once they’ve given, ask each of them for the name of one person who could be asked. Remember the Nonprofiteer’s rule: Board members don’t ask their friends for money–they ask each other’s friends for money!
Individual gifts come in smaller chunks than foundation gifts (though not in your case, actually). Moreover, they’re infinitely renewable and will sustain your school for years to come. Good luck, and let us know how you do.
Tags:arts groups, Board of Directors, charity, charity promotion, donors, foundations, Fundraising, grantmaking, grants, IRS, nonprofit, nonprofits, not for profit, philanthropy, recession, Relations with funders
Posted in Arts Organizations, Boards of Directors, Current Affairs, Earned income, Education, Finances, Foundation Hall of Shame/Stupid Foundation Tricks, Fundraising, Management Advice Day tip, Nonprofit management, Nonprofits--General, Private Philanthropy, Relations with funders | 2 Comments »
