Losing Your Status

There have been two chilling stories in the news recently about organizations losing their non-profit status.

The first involves a Tennessee-based "religious charity" that lost its status basically because it spent such a small percentage of its budget on program. (Here's a story from the San Francisco Sentinel about it, another story from the Chronicle of Philanthropy.) It spent preposterously little on program, really, (less than1%!!) so it's hard to get worked up on their behalf. It sounds like a suspicious operation. But still, the principle that the IRS can pull your tax exempt status because of your program/administration/fundraising percentages is getting a lot of attention. The IRS has put non-profits on notice that it is keeping an eye on the efficiency and governance of non-profits. I've linked to recent talks given by Stephen T. Miller, one of the IRS commissioners in charge of nonprofits, about this issue and what he calls the "commensurate test."

The second case may hit closer to home--Monday's New York Times had a front page story about a Minnesota day-care center that had its nonprofit status revoked because, bascially, it didn't give anything away. The battleground for this organization is in the state courts, and the plaintiffs are local governments who want to collect property taxes. the courts could not find a meaningful distinction between the work of the non-profit day care (which didn't offer any discounts to low-income families or other discounted services) and for-profit day cares, which do pay corporate and real-estate taxes (if they own real estate). Every few years one hears similar murmurings about colleges and universities, especially Harvard, where the contrast between it's $35 billion endowment and its $0 property tax bill to the City of Cambridge is frequently invoked. (I believe Harvard does make a contribution to Cambridge in lieu of taxes, but still...).