Management and marketing pub np organ

And, I bet you thought this part was going to be boring, just because the title is: “The Legal Framework”.

You may yet be correct…

The opening vignette brought back many painful and scary memories. Some of you may have heard about the very public scandal that emerged from an audit of the Lexington Blue Grass Airport in 2009. (https://www.kentucky.com/news/special-reports/article44011710.html) In case you missed the salacious details, such as three executives of the airport board running up a tab of over $5,000 at a strip club in Texas while on a “business” trip. Yup. That, and about $500,000 more in unauthorized charges run up on their corporate credit cards over the years. $500,000 of taxpayer money squandered. Groan.

Now I say that the memories were painful and scary—not because I was associated with any of that. Although, I did have a neighbor who worked at the airport at the time—never accused. And, I was serving on the board of a nonprofit at that time, so the magnitude of the transgressions disturbed me. I wanted to talk about this in Part 1 on Governance, but I didn’t want to scare anyone into dropping the class.

Then state auditor, Crit Luallen, investigated, and then published a document listing 28 recommendations for boards to follow to keep them out of trouble. The state auditor’s office has since added to that list of suggestions (https://auditor.ky.gov/cpatools/Pages/32BoardOversightRecommendations.aspx). I’ll place both in Course Documents for your reading pleasure. The point is… as the vignette suggested, there can be serious consequences for falling afoul of the laws with respect to nonprofit organizations.

Page 35: “…it (Congress) did not enact the requirements or tests that an organization would have to meet to qualify for 501(c)(3) status…”

Question 1: Does that make any sense? Congress is writing the law (very much a legislative function under our separation of powers concept), and yet they “delegate” to the Executive Branch the specifics of what should be accomplished. Does that seem to violate our separation of powers in government? Or, is that a smart way of doing business?

Page 36: “… (2) to engage in political activities in which the organization devotes more than an insubstantial part of its activities to influence legislation “by propaganda or otherwise” …” Now, I have no idea if you all are “good” Church-going folks or not. In fact, that isn’t the point or any of my business. Nevertheless, I’ve attended my fair share of church meetings over the years, and I understand that the preacher frequently admonished me personally and the congregation generally to do things the way he or she believes is the “right” way to behave. More than once the preacher had “instructed” us to see that “this” was “right”, and “the other” was “wrong”. Frequently these “rights” and “wrongs” mapped out directly onto political points of view.

Question 2: How do we reconcile religious, tax exempt organizations and political points of view? Should a church lose their tax exempt status for supporting a particular political point of view (or in some cases I’ve personally witnessed, the preacher even told us what political candidate to vote for or against)?

The chapter three reading I found to be unsettling on several levels. Yes, the style of writing is turgid. (Where else can one read “…to assume arguendo…”? You did note that it was originally published in The Law of Tax-Exempt Organizations, right? Should have been a hint.

Page 43: “For tax purposes, an organization may be deemed a corporation even though it is not formally incorporated.”

Question 3: Given your understanding of “corporation” from your various other business classes, what do you fathom this sentence to mean? What are the potential ramifications?

Page 44: “Assuming the organization is not operated to benefit private interests, its tax exemption will not be endangered because its creator serves as the sole trustee and exercises complete control…” Page 49: “A court concluded, however, that an organization cannot qualify for tax exemption where one individual controls all aspects of the organization’s operations and ‘is not checked’ by any governing body.” Here, I make the warranted assumption that “governing body” is meant to refer to a board of directors, and not a government agency, such as the SEC.

Question 4: Other than the fact that the page 44 statement probably is attributed to an IRS rule or ruling, and the page 49 statement is obviously a judicial ruling; how does one reconcile the apparent dichotomy here?

Page 51: “The IRS does not subscribe to the principles of the public parking corporation case and announced that it does not follow the decision.” Yikes. Add to that the very frightening thought that IRS special agents are essentially accountants who carry guns, and I think we should all be concerned. (Apologies to any accounting majors out there. You know I love all my students equally. I just poke more fun at some.)

Page 53: “The question as to whether, and if so to what extent, a tax-exempt organization (particularly one that is classified as a charitable entity) can earn a profit is at once difficult and easy to answer.” This may actually contribute to the apocryphal tale of the need for a one-armed lawyer. Nevertheless, it gets to the heart of what many people ask with respect to not for profit organizations. Yes, they are allowed to turn a profit. As page 51 warn us, doing things like devoting only 1% of revenue to charitable purposes will draw unwanted attention. This is clearly stated in the second to last paragraph of the reading. Maybe the authors could have saved a bunch of trees and 15 pages by putting that first.

Question 5: Is this reading good and essential guidance for NFP organizations, or a primer on How to Game the System and Traps to Avoid?

Chapter 4 reading (I know this is getting long. Sorry.) has some interesting tidbits to it. Page 61: “…whereas private individuals may target their assistance more easily…” and “…gains to society… from a contagious effect on the behavior of the donors.” But compare that to page 38 and the Bob Jones University blatant discrimination case.

Question 6: Look carefully at table 4.1 on page 60. What does this table suggest to you? What does it do for your understanding and appreciation of Corporate Social Responsibility?

This is getting too long to be manageable. Unfortunate, because I’d love to hear your thoughts on two proposed reforms: 1) go to a Wealth Tax instead of an Income Tax, and 2) do away with For-Profit Healthcare.