for which the Nonprofiteer can take no credit. Rather, thanks to her friend, Baltimore tax lawyer Stuart Levine, for laying out so clearly the problem with low-profit limited-liability companies, the latest fad in efforts to do well by doing good. Stuart’s argument appears in response to, among other things, a recent New York Times report that foundations have increased the proportion of their “grants” which are actually program-related investments, that is, grants for which repayment is expected to a greater or lesser degree.
Look, there are numerous “good cases” where one can see that infusion of capital that doesn’t really have to be repaid at market rates makes good sense. (Actually, government loan guarantees of, say, solar power start-ups falls into this category.) The problem with allowing 501(c)(3)’s to make these sorts of investments is that the process is subject to abuse.
Say that I want to create “Stuart Levine’s Good Works Foundation.” The Foundation attracts $10M in tax deductible contributions. The Foundation uses the cash to “invest” in projects operated either by me or my Aunt Minnie. While Minnie and I invest our own funds in these businesses, our capital position is ahead of the Foundation’s and gets a higher return, so that the first profit out goes to pay us and, if the deal craters, the biggest part of the hit will fall on the foundation. (Did I mention the $250K a year consulting fee paid to me by the investment entity?)
I don’t for a minute believe that the Bill and Melinda Gates Foundation is engaged in double-dealing of the sort that I described. I have less faith in the “Stuart Levine’s Good Works Foundation.” Has everyone forgotten the Pallottine Fathers? See here:
Or, as one might say, everything old is new again.
The burden of proof rests on those who believe L3Cs are essential. They must demonstrate that the entities’ potential for abuse is outweighed by their capacity to meet needs that are otherwise unmet. But all that’s unmet so far is that burden of proof.