Nonprofit Organizations
I. OVERVIEW
a. Introduction—RMNCA §13.01; Cal Corp Code §5410
i. NPs play a societal role distinct from that of the government and the private, FP sector but work closely together
ii.
NPs can still make a profit—just no direct personal profit (nondistribution restriction). i.e. Kennedy family runs NP corp in Boston that provides subsidized fuel for low-income families and the Kennedys who run it make over $1M. Just can’t take more than those salary/benefits
Not all NPs are charitable or rely on volunteers—nor do all charities derive the bulk of their support from private philanthropy. NPs may and do often earn a profit.
iii. NPs include:
1. Charitable, religious and education orgs—and labor unions, fraternal lodges, social clubs, college frats, trade assns, and professional sports leagues. Big and small
iv. Defining Characteristic: Nondistribution Constraint
1. NP is an org that is barred from distributing its net earnings to individuals who exercise control over it, such as members, officers, directors, or trustees.
2. “Net Earnings”= pure profits—earnings in excess of expenses
a. NP can pay reasonable compensation
3. Net Earnings must be retained and devoted in their entirety to financing further production of services that the org was formed to provide.
4. Thus, NP corps (most of significance are incorporated) is distinguished from a FP corp primarily by absence of stock/other indicia of w-ship that gives owner a simultaneous share in both profits and control
v. NPs may be formed as charitable trusts w/o incorporation, but uncommon in US. If such is the case, control over org lies w/ trustees, and nondistribution constraint is imposed by law of trusts—which prohibits trustees from taking from the trust anything beyond reasonable compensation for services rendered.
vi. Attributes of the Sector: This sector is uniquely American in its diversity and strength—and in its extraordinary richness and variety (Garner, Indep’t Sector)
1. Pluralism: Most striking feature: relative freedom from constraints and its resulting pluralism
2. Innovation: Every institution is not innovative but the sector provides a hospitable environment for innovation. Nonmajoritarian impulses/values
a. Virtually every significant social idea of the past century in this country has been nurtured in the NP sector
3. Freedom Guardians: NP institutions are in position to serve as the guardians of intellectual and artistic freedom
a. Commercial and political marketplaces are subject to leveling forces that may threaten standards of excellence.
4. Preserve Individual Initiative and Responsibility: NP emphasis on individual initiative is a counterweight to the impersonality of large-scale social organization
5. Community Linking: NPs facilitate linking the individual with the community
vii. There are some flaws though—
1. some NPs have gone into decay or are badly managed. Or fraud, mediocrity, silliness. Human failures affect NP sector too.
2. Conflicts are widespread as not a lot of policing—and AGs do not act sua sponte (need complaints)
a. Interesting area developing: significance re: independence of directors. Count indp’t the univ president whose univ is beneficiary of significant corp gifts? Traditionally indep’t but not sure.
viii. Gaul & Borowski, Free Ride: The Tax-Exempt Economy (1993) (see RN 2)
1. America’s NP economy has become a huge, virtually unregulated industry
a. Almost anything and anybody qualifies for tax-exempt status.
b. Today, approx 1.2M orgs are exempt—not counting churches, which don’t have to apply
2. Exemptions cost more than $36.5B/year in lost tax revenue—equiv of income tax paid by 25M taxpayers
3. NPs do a lot of good in a lot of areas for a lot of people—that’s why they were granted exemption from taxation. But Congress has become more liberal with NP designation and abuses have been grown as the IRS has become swamped
4. 18-month study on 6k exempt orgs—found lots of problems/abuses
5. 3 basic changes have occurred with large NPs:
a. 1) Fees: Instead of depending on charitable contributions, many tax-exempt businesses began charging fees for services
b. 2) Fed: Federal programs (Medicaid, Medicare, Social Security disability) began paying for many services once provided by charities
c. 3) Expanded Definition: Congress, responding to special interests, expanded its definition of NP to include many new categories,
i. incl. frat groups, trade assns, mutual life insurance companies, cemeteries, labor unions retirement funds, credit unions, health insurance firms
6. 25 Categories of NPs today—including the NFL, NHL, NPGA, USTA, etc
a. Exemption covers only the league org, not the teams and players within it.
7. Many NPs are highly profitable—doing better than most FPs
ix. Sources of Funding of the Charitable Sector
1. Public benefit orgs: fees, dues, and charges for services provided.
2. Fees, service charges, and other commercial income: 38.6%
a. Incl. college tuition payments, hospital care charges not covered by gov insurance, income from investments/sales of products.
b. Accounts for over half of all NP service-org revenues
3. Government: 31.7%
a. Gov grants, Ks, and reimbursements.
b. Reflects widespread pattern of partnership between gov and the NP sector in carrying out public purposes, from delivery of health care to the provision of education.
4. Private Giving: 18.9%
a. Mostly by individuals, and mostly to churches (religious orgs = 43.6%)
x. Scope and Structure: The Anatomy of America’s NP Sector (Salamon, America’s NP Sector: A Primer (1999), p13)
1. Religious Congregations
a. Close to 350k—incl churches, mosques, synagogues, worship places, religious orders religious auxiliaries, conventions of churches, etc.
b. Religious congregations exist primarily to serve needs of members rather than public more generally, though they often engage in many service functions
c. The Only orgs automatically entitled to tax exemption under §501(c)(3) of IRC—w/o having to file application for formal recognition from IRS.
i. Also exempt from reporting reqs on other 501(c)(3)
d. reflects strong separation of church and state in American constitution—b/c power to tax is the power to destroy
i. What constitutes religious congregation/church is in dispute—many turn out to be fronts for nonexempt activities so IRS had to get more precise in definition.
e. Now, Churches/religious orgs are expected:
i. to have some recognized creed or form of worship
ii. to be sacerdotal in character
iii. to have regular religious services
iv. to operate for other than private gain
2. Service Providers
a. neither funding intermediaries nor religious
b. 5 Basic Categories:
i. Health Care: 14% of service NPs. hospitals, clinics, nursing/personal care facilities, etc.
1. Account for 62% of NP service org expenditures
ii. Education & Research: 22%. elementary and secondary, higher education, libraries, vocational schools, noncommercial research institutes, etc. 21% of NP Service expenditures
iii. Social and Legal Services: 40%. individual/family social services; job training/vocational rehab services; residential care; day care and legal aid services
iv. Civic and Social: 17%. advocacy orgs; civil rights orgs; neighborhood based orgs
v. Arts and Culture: 8%. bands, orchestras, theatre groups; museums; art galleries, and botanical gardens, zoos.
3. Numbers of Organizations
a. Estimate that about 1.2M registered with IRS as a tax exempt 501(c) org
i. As of 1997, 56% of all IRS recognized orgs were exempt from tax under §501(c)(3) of the IRC
1. organized/operated exclusively for religious, charitable, scientific, literary or educational purposes.
4. Expenditures: A Major Economic Force, RN 5
5. Health Care—largest in NP service sector. Absorbed close to 60% of all NP revenues and 25% of all private charitable contributions.
a. Overview: National Health SpendingBasic Contours
i. 30% of gov social welfare spending goes for health care, and more private spending. 13.6% of GNP in 1996
b. Recent Growth
i. Total health spending grew nearly 5x between 1965 and 1996, twice as fast as the GNP. And health expenditures doubled.
ii. pace of growth slowed in 1990s due largely to the “managed care revolution”—imposing more severe limits on the amounts that health care providers can charge for various services.
c. Sources of Growth
i. Principal source of growth in health spending was in government health spending, growing 8x between 1965 and 1996, compared to 3x increase in private health spending
1. Reflects creation of Medicare/Medicaid programs in 1965
ii. But private sector contributions remain dominant.
d. The Role of Philanthropy
i. Very little of the revenue in this field comes from private philanthropy. Only 2% in 1996.
ii. Such giving is more important in financing certain subfields, such as medical research and construction, but not even the dominant source there.
e. The Role of NP Providers
i. 4 components where NP orgs are most important:
1. Hospital Care; Clinic Care; Nursing Home Care; and Insurance
f. Hospital Care
i. where NPs are most prominent
ii. Sources of Funding
1. Fed Gov (with some
v. Voluntary to some meaningful extent.
2. The International Classification of NP Orgs (ICNPO) identifies 12 broad groups of orgs:
a. Culture and Recreation; Education and Research; Health; Social Services; Environment; Development and Housing; Law, Advocacy, and Politics; Philanthropic Intermediaries and Volunteerism Promotion; International; Religion; Business, professional assns, unions; Et Cetera
b. Historical Overview: Charity, Philanthropy and Nonprofit Orgs
i. Preamble to the Statute of Charitable Uses (1601), (“originating doc for modern charity”)
1. Discusses relief the old, sick and poor; education; road repair; prisons; marrying poor single women. Public benefit key to statute—esp relief of poverty
ii. The Statute of Charitable Uses and the Meaning of Charity:
1. Regarded as the commencement of the modern law of charity, though gifts had been made for “pious causes” for centuries before
2. 2 main objectives:
a. Reform the administration of charity (est commissions to oversee charities—defined jur of commissions and “charity”)
b. Historically most important: the specification of those typical (non-exclusive) purposes which were considered charitable and therefore within the jurisdiction of the commissions.
3. charity is an evolving concept constantly changing to meet the needs of society
iii. Robert Bremner, American Philanthropy (1988)
1. The score of uniqueness is that philanthropy in America took such a firm root and grew so prodigiously that it early assumed a stature and significance
2. age of colonization coincided with one of the great periods of European philanthropy—Almost every effort at colonization had/claimed to have a philanthropic motivation: convert the natives.
3. Winthrop: “A Model of Christian Charity”
a. “Charity” was used as a synonym for love rather than in the modern sense of aid to the poor.
b. “Model” was not a new scheme of benevolence but a code of conduct for Christians who had entered into a covenant w/ God
c. Justified disparities in wealth and condition as divinely ordained—they existed not to separate and alienate men from each other, but to make them have more need of each other, and to bind them closer together.
4. Problem: the common trinity of the world—Profit, Preferment, Pleasure—appeared out of the growth of competition, individualism and self-interest.
a. But the spirit of charity still persisted
5. William Penn: emphasized responsibilities of rank. Doctrine of Stewardship. “The Best Recreation is to do good.”
6. Cotton Mather’s “Bonifacius, Essays to Do Good”: proposed that men and women, acting either as individuals or as members of voluntary associations, should engage in “a perpetual endeavor to do good in the world.” Obligation owed to God rather than as a means of salvation. Doing good was a reward in itself.
a. Real contribution: Recognition of the need for enlisting support of others in benevolent enterprises—tireless promoter of associations.
i. Inspired Ben Franklin, though enemy of the Mathers
b. Ben Franklin: Went beyond Mather in philanthropic activities, establishing the Junto and the library and a volunteer fire company, etc. United public and private support for municipal improvements.
iv. Development of NP Law in the US
1. law itself reflected a pragmatic approach to the solving of social problems through philanthropy.
2. In England, the charitable trust not the corp has been the predominant form of org for charitable activities—
a. In US charitable trusts remained under a cloud—so charitable corp used
3. Charitable Corp favored b/c power of state to dictate terms of corp privilege—gave state greater control b/c the trust’s control is exercised by equity court.
4. Early colonial corps were of 2 kinds:
a. 1) Public Corp-municipal corps—chartered by towns/admin boards
b. 2) Private Corp—included ecclesiastical, educational, charitable, and business corps
i. Mostly those concerned with religious worship.
ii. Then those formed for charitable or education purposes
iii. Business corps few/not important—mainly quasi-philanthropic.
5. Rationale of Passage of early gen incorp acts incl:
a. Advantage to the public if such incorps were increased
b. Convenience to indivs desiring to incorp
c. Relief of legislative workload