Nonprofit Board Crisis

Nonprofits & UBIT

At the same time that states and municipalities are eagerly assessing opportunities for applying new "taxes" on nonprofits, nonprofits are eagerly looking for revenue-generating activities (which is a good thing because we really need more American-made). 

One of the risks a nonprofit board should consider while assessing whether a prospective revenue-generating activity is a good idea is the potential risk that the activity may be subject to the unrelated business income tax (UBIT).  Generally I advise most nonprofits in their business planning that the risk of a UBIT is relatively low AND, even if the venture is assessed as UBIT-elligible, to consider whether making let's say, seventy cents isn't just as good as making $1.00.

That said, I found an article in the January/February 2011 Taxation of Exempts titled "The IRS Rules on the 'Regularly Carried On'" requirement most fascinating. The article provided a few cases examples including the NCAA which challenged an IRS' UBIT ruling concerning the advertising revenue-generating Final-Four program which the courts found UBIT-worthy because the program was "not regularly carried on".  Yes it might take all year to sell enough advertising to fill the program but the court decided that preparation versus distribution did not count as a year-round activity.

Equally fascinating in this article was the provision of a bit of history of UBIT.  I believe that history always provides a helpful understanding of where we come from and provides insights about how to make change.  Anyway, the article notes that the purpose of UBIT lays in the desire to place exempt organizations doing business on the same tax basis as the comparable nonexempt business endeavors with which they compete:

UBIT was legislatively initiated pre-1950 when "an exempt organization could engage in any commercial business venture, secure in the knowledge that the profits generated would not be taxed as long as the destination of the funds was the exempt organization; the source of those funds did not affect their status. 

But, as more exempts undertook commercial enterprises there were rumblings in Congress to do away with the perceived advantage enjoyed by these organizations.  In 1947, as a revenue-generating venture, the New York University School of Law aquired the C.F. Mueller company which made macaroni.  A big law suit ensued and in 1950 President Truman stated that "an exemption intended to protect educational activities has been misused in a few instances to gain competitive advantage over private enterprise through the conduct of business..entirely unrelated to the educational activities." 

Congress subsequently created a tax on net business income of exempt organizations primarily "to restrain the unfair competition fostered by the tax laws" but only on that income substantially unrelated to the organization's exempt purposes.

For nonprofits considering revenue generating activities I found the history of UBIT of great interest.  I will continue to maintain that few nonprofits will find themselves with an opportunity that is so substantially unrelated but even if they did, maybe the income after-tax will still make the venture worth the effort.

Nonprofit Status and NFL

I just learned that the NFL is a nonprofit?

Huh?

Nonprofit Under Investigation

Who do we most trust: the government or a nonprofit?

For many reasons, I myself would tend to trust a nonprofit before I trust a government.  At the same time, I am often provided reasons to accept that when a government entity steps in to assess a nonprofit, I might want to trust that government.  As convoluted as that statement may seem, a good example may be my tendency to trust State Attorneys Generals who for some reason I like to believe are above politics and put the best interest of the public first.  I also approve of some US Congresspeople who have proven histories of challenging nonprofits that just don't seem nonprofit enough (like some hospitals or colleges).

So where am I going with this track you are likely asking if you are still with me?  Well, the Bangladesh government has set-out to investigate the doings of the Grameen Bank.  Grameen has served as the pioneer and model for helping really low-wealth people acrue assets.

According to the Wall Street Journal, the Bangladesh government is conducting a probe of Grameen and the microfinance industry.  The same is happening in Pakistan.  One issue, the amount of interest being charged to borrowers (a suprising to me rate of up to 27%) although I admittedly may not understand the interest rates there.

Anyway, should I and other consumers believe that Grameen has gone awry because the government says something's not right?  Grameen has a long history of proving who its loyalties are to -- the people.  But, could Grameen indeed have gone awry and wouldn't I welcome the government looking out for the people and helping make corrections?

I'm not so sure.

Nonprofit Revenue Generating Venture Relies on Quality, not the Cause

The New York Times review (relatively positive) of the food being offered at Hat City Kitchen is a sound reminder that a successful nonprofit social venture must rely on more than just a good cause to be truly successful.

Hat City Kitchen, according to the reviewer:

...opened in the Valley Arts District of Orange a year ago, its name evoking the local factories that once employed thousands and supplied haberdashers the world over. The owner is Housing and Neighborhood Development Services Inc., which has rehabilitated scores of homes in the area and which envisioned the 1890s building that houses the restaurant as a bustling performing-arts space.

As I noted, the review was relatively positive but ended as follows:

For now, Hat City Kitchen is worth eating at if you are there to hear some music, worth supporting if you believe in the group’s mission, worth giving a chance because of its more-than-fair prices. It is not yet worth a trip out of one’s way for the dining experience alone.

Nonprofit Close To Achieving 1st Leg of Mission

Happy Birthday Wikipedia - you are 10 years old! 

Few if any nonprofits can lay claim to the outcomes that Wikipedia (owned by parent nonprofit Wikimedia Foundation) has achieved in just 10 years: "tapping into the collective wisdom of humanity, by allowing anyone to contribute and edit articles, to produce the most complete, impartial and accurate information source around."  And for not so much money either. 

There have been bumps as outlined in the San Francisco Chronicle  but I'm thinking lots of nonprofit boards and staff could gain some insights from how the founders got Wikipedia going and kept it growing.   But these facts will not be as informed by crowd sourcing as some good and deep conversations with Wikipedia's founders.  And, it is these types of conversations every nonprofit board should have early on to document their organization's history ensuring its ability and that of future boards to fulfill their duty of obedience to the mission.

Nonprofit Corporate Capitalist not a Nonprofit

The first paragraph in the San Francisco Chronicle says it all:

Defying California's new insurance commissioner, Blue Shield of California has refused to delay controversial health insurance rate increases for 60 days...with customers who are seeing successive increases over the last five months of up to 59 percent.....note too that.....Blue Shield is seeking to boost rates for the third time since October, and some of its 194,000 individual policyholders were notified recently that they will get all three rate increases at once.

Now, to be begrudgingly fair, Blue Shield did "pledge to issue refunds to customers if errors are found in its paperwork."  But really, remind me: what is it that justifies this corporation a nonprofit status?

Nonprofit Ok After Making Millions As For-Profit

In another example of where the have-it-now turns an about-face to do good, the founder of Monster.com is starting a nonprofit that will lower the over-all costs of finding a job for those without.  Is it about time?  Absolutely!  Does it matter that one of the biggies who made money out of the process not being so affordable wants to do it without profits? Not really and anyway, the founder of this nonprofit already has his profits.

American capitalism at its best -- we turn to a nonprofit when its convenient and there is no more incentive for the for-profits.  That of course is the three-legged stool we work with.  For more about the new nonprofit, see the Christian Science Monitor.

Nonprofit Arm of For-Profit Still Attempting Social Enterprise

Panera Bread resturaunt is opening its 3rd Panera Cares resturaunt.  The Panera Cares stores are the same as the regular Panera's with one exception: customers decide how much they want to pay.  Panera the for-profit hopes that customers will cumulatively pay more than the menu items are valued and that the surplus created from such overpayments will go to charities.

The first resturaunt was opened in the St. Louis area.  The 3rd is going into the Portland, OR area.  Oening 2 or 3 more stores is not what I believe is indicative of success although it might be.  I can't seem to locate any real information on how this model is really working.  And, I have no real evidence that the model should work -- quite the contrary in my opinion. 

What it does do though is give lots of positive impressions by the public of Panera.  The consumer can believe that Panera is a very generous operation.  And maybe it is.  But it certainly would help to hear some results like how many people pay more, equal value or less; how much money has been raised for charity. 

One other aspect also bothers me about this model.  There appears to be an assumption on Panera's part that consumers like the idea of contributing to charity without knowing exactly what specific charity will benefit.  There is no promise by Panera that surplus monies will go to one charity or another.  In our newly developing "results-focused" world, the specific charity does matter.  Just raising money and promising to donate is no longer adequate.

Anyway, this whole scheme doesn't excite me.

Nonprofit Message Matters

The Civil War Preservation Trust has a new name, logo and tag line. The Civil War Trust is about saving America's Civil War battlefields, one of those "lest we forget" efforts I personally believe is critical to sustaining a healthy society. 

The Trust, according to the Washington Post, has a lot of work to do, particularly as America is approaching the sesquicentennial of the Civil War.  In order to do this work the Trust acknowledged that citizens, particularly prospective supporters, must easily recognize who the Trust is and what it does. 

The recent changes will help achieve this goal and should serve as a reminder to all nonprofits, particularly those facing the likes of fund-raising challenges and possible taxation, that having a recognizable and valued identity goes a long way toward addressing these challenges.

Kudos to the Trust Board and staff for recognizing how to survive in important but difficult times.

Nonprofit To Save Everyone's Digital Information

The San Francisco Chronicle posted an article about a new nonprofit whose mission will be to "permanently" save everyone who subscribes digital information.

Chronicle of Life claims to overcome this problem by working as a nonprofit. While companies can change their business models at will if they're not making money, Chronicle of Life by law must commit all the money it raises to its promised mission, Pommerenke says.

Yet even a nonprofit must raise enough money to keep operating. Chronicle of Life charges one dollar per megabyte of data stored, about the size of an average digital photo. That's a huge markup over the cost of today's hard drives or flash drives.

Chronicle of Life's pricing serves as a reminder that Pommerenke intends the service as storage for a selection of a person's most important files, not an all-purpose backup. Three-quarters of all payments received go into an endowment that sticks to conservative investments to make the service self-sustaining.

The fledgling service needs 1,250 users on top of the money already raised to make Chronicle of Life financially viable, Pommerenke says. Most of the money spent to run the service pays for the labor needed to monitor and manage the data.

Ok, so the business idea makes sense (assuming this is indeed a goal of everyone) but I'm seriously not getting how Chronicle of Life should be a nonprofit.  Why is there no incentive for a for-profit to do this?  When anyone figures this out, let me know.