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Is it odd that there are tax-exempt charities at all?

July 9, 2013

A columnist writing for a Time publication, Swampland, questions why there should be any non-profits at all. In his column, Mike Grunwald states,  ” The entire concept of a tax-exempt nonprofit—not only the controversial 501(c)(4) social-welfare shelters but also motherhood-and-apple-pie 501(c)(3) charities and foundations—is odd. An organization that doesn’t make any taxable profit shouldn’t need a special status to avoid paying taxes. My wife owned a retail store that didn’t pay taxes during the Great Recession; it was an unintentional nonprofit, which is why it no longer exists. Charities, foundations and other intentional nonprofits shouldn’t need tax exemptions unless they have profits they need to shelter. Which many of of (sic) them do.” http://swampland.time.com/2013/05/30/one-nation-tax-exempt/#comments

Obviously, Mr Grunwald didn’t do any due diligence before dashing off this opinion, revealing a certain ignorance of the difference between a nonprofit’s excess revenues, and where they go, vs. the profits earned by for-profit businesses that are redistributed to owners and/or investors to do with as they please.

Even a cursory reading of the ubiquitous Internal Revenue Service publication #557 would have made it clear that 501(c)(3) nonprofits cannot simply take any excess revenues and divvy them up to the board members to spend as they choose on personal expenditures. The funds have to be reinvested for the “public good”. I am not well-versed in the other “C” designations, but in the interests of full disclosure, I have worked for and with the 501(c)(3) nonprofit sector for over a decade.

This attitude about nonprofits not paying their fair share is echoed in the comments (97 of them when I read the article July 9, 2013). I ran into the same attitude when I was the business manager for a nonprofit. For-profits that offered a similar service to ours constantly bemoaned the fact that they had to pay taxes and the nonprofit didn’t, and claimed an unfair business advantage was afforded to the nonprofit. I saw a certain bias in that direction in the quote above.

The 501(c)(3) nonprofit, however, gave away those services to anyone that couldn’t afford them. The for-profits gave away…nothing. Nonprofits organized under the c3 designation are not “owned” by a private entity or group of people. If they go out of business any proceeds from the sale of assets does not go to owners or stockholders. The proceeds have to be made available to the community or the target beneficiary group, usually through another nonprofit. Any excess revenue must be used “for the public good”.

Mr. Grunwald also seems to have a problem with the compensation charities give to key executives. Nonprofits have to make their tax returns public. For-profit companies that are privately owned do not. A simple search of the Prostate Cancer Foundation’s 2011 return shows that in 2011 they contributed $33,841,169 toward research, clinical trials and other activities designed to cure or treat prostate cancer. Their total income before adjustments was $41,831,745. That would make the CEO’s compensation Mr. Grunwald was so worried about, 2.8% of the total revenues, if it was in fact the $1.2 million he cited (in 2011, it was not $1.2 million, but $845,074). Dare I say that CEO’s of for-profit entities often are extremely well compensated also? Being the CEO of ANY business that handles that much cash flow is going to be a well-paid position. The duties, responsibilities and legal obligations of a CEO are no different, whether the organization is a for-profit or a nonprofit. Nonprofits spend money on fundraising, otherwise known as revenue generation. For-profits spend money on marketing, also for the purpose of generating revenue. Different names for attaining the same objective, which is to stay in business and grow. The only difference is who benefits from that growth when all is said and done.

There is no doubt that some nonprofits do not perform their missions well. Whether political activities should be subsidized through a tax-exempt mechanism is always going to be a subject for debate. I would submit that competing political viewpoints have to have some way to present their viewpoints and that they serve a vital purpose in a supposedly free and democratic society, but since I am not an expert on those organizations I leave that debate  to others.

On the subject of nonprofit tax exemptions as a concept, as long as we have the tax code we have now, and as long as the American people have segments of their society that need assistance, I hope we have 501(c)(3) charities. Ask yourself this question. If the government got 39.5 percent of the excess revenues charities report, how much of that money would go back to the needy, and how much of it would be frittered away on “team-building exercises” or used to purchase other even less savory treats for the politicians working so hard to find some place to spend it? I find that picture odd.

©Rebecca L. Baisch, 7/9/2013

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