Tuesday, October 1, 2013

Time to Retire NPO in favor of TSO

The United States forgives taxes on all kinds of so-called “Non-Profit Organizations” (NPO) numbering in the millions. The chief arbiter and conferrer of this status is the Internal Revenue Service (IRS). As we've recently seen, the IRS methods are problematic but generous when it comes to deciding which organizations deserve this status. In fact, the problem with this process is that NPO status determination is based on the organizations qualifying activities instead of its actual need, accomplishments or trustworthiness, for tax abatement.

In a recent case, the U.S. tax court, according to the Wall Street Journal, ruled the IRS could revoke the tax exempt status of a parent run booster club on the basis that their being tax exempt violated the public interest spirit of the laws where such groups must serve a broad public interest and any earnings it accumulated had to be widely dispersed among those benefiting. The problem was some parents couldn't afford the mandatory contribution necessary for the children to belong to the organization, but were allowed to raise funds to offset what they owed to join. The net effect was, according to Wall Street Journal experts, “…some parents were using a tax exempt group to raise money solely to benefit their own children.”

The point is there are way too many ways to create tax exempt organizations in our country. Abuses, some simply incredible, abound.

With so many financial burdens on various levels of government and taxpayers, it seems to me we should thoroughly review a public policy that forces tax payer support without tax payer participation or permission while denying our treasury billions and billions of dollars every year. All the while, carelessly or excessively conferring tax exempt status on organizations that are duplicative, serve very narrow, if any legitimate, public interest, and too often are scams and shams. Lately, CNN has been reporting on so-called charities that distribute less than 10 cents per contributed dollar. Some are hauling away car loads of money in the millions and sometimes hundreds of millions of dollars for private gain.

Public radio and television in this country are an interesting example. They have lost or are about to lose public subsidies. They are working to raise additional money to offset those loses. In their fundraising efforts, sponsors are getting exposure akin to commercial stations. Public television and radio stations dutifully thank their supporters and members. However, they fail to thank the American people who provide tax subsidies that allow those generous members and sponsors to deduct their contributions by the millions, perhaps billions, from their taxes.

Three recommendations: First, change the legal description of exempt organizations from tax exempt “NPO”s which is a very nebulous term, to Tax Subsidized Organizations, TSOs because that’s exactly what they are.

We have allowed an NPO culture to grow in our country where NPO is a term used in an anti-corporate, accusatory way against companies and individuals who are wealthy or make a profit. They pay taxes that support organizations who don’t pay taxes. Tax payers paying for these NPO organizations should get credit or silence for it, and not be demeaned, denigrated or disparaged because they have profits and are able to pay taxes. The term “Non-Profit Organization” should be buried entirely along with its misnomers, prejudices, and the attitudes of the NPO folks who hold their noses and complain about for profit businesses and organizations.

Second, a TSO designation should be more than a change in labeling; it should come with public examination of the organizations real need and true accomplishments to earn tax abatement. Those who are responsible for subsidizing the tax obligations of others deserve to have a say in who gets the designation and to judge the value of what a prospective TSO brings to the community. Ultimately, perhaps, citizens should be able to directly deny tax exempt status for the undeserving.

Third, a mandatory expenditure ratio of 90% should be put in place. Only 10% of TSO revenue can go to organizational operations. 90% or more must go to the cause or organizations they are supporting. Anything beyond 10% should be disallowed and the excess taxed at regular commercial rates that year. In addition, in this circumstance, even once, their TSO status should be suspended, analyzed and reevaluated and possibly permanently suspended. There are just too many who ignore sensible rules and regulations. Let’s make the TSO method really stick.

In addition to these expenditure regulations, all for-profit activities conducted by non-profits, even though taxed, need to be scrutinized for the 10% / 90% rule. For example, in house printing may seem less expensive…but only if this activity and function is within the 10% / 90% ratio. Tax subsidies should be precious, unique, obviously deserved, and non-competitive with those in the profit sector who are paying taxes to subsidize TSO operations. There are far too many so-called NPO’s who are competing directly with tax paying businesses, which has always been completely unfair and unwarranted, but overlooked.

America is an extraordinarily generous commercial democracy, but that generosity has been betrayed by the casual nature of the process we use to grant people tax abatement.

There are organizations exploring alternatives to NPO status and doing advanced thinking. They should be more visible and more important in the discussion of how America uses and allows the use of its extraordinary generosity.

Let the howling begin (or continue). If your NPO can’t make the 10% / 90% ratio, you’re just another business, but one which has an undeserved tax subsidy from Americans. The working generosity of American through these TSOs needs to continue, but only through those organizations that can generate extraordinary help for important or worthy causes at a publicly acceptable cost.


James E. Lukaszewski, ABC, APR, Fellow PRSA is the author of Lukaszewski on Crisis Communication, What Your CEO Needs to Know About Reputation Risk and Crisis Management, available now at Amazon.com.

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Blogger NewViz said...

While I agree with the underlying objective here, and especially the rebranding of NPO to TSO - I fear that the only possible outcome is that the IRS would get bigger and taxpayers would move their subsidies from NPOs to an enlarged government. We do not need more government, we need less.

Instead of worrying about tax exempt or subsidized status why not fix the real problem - the complexity of the tax system. Remove income tax and make all tax a consumption tax. This hits the individual, corporate and 'NPO' consumer the same way. The NPO now only has incentive to reduce cost as that is where they pay tax. The public, as it should now or in either yours or this version of tax change, is responsible for only donating money to organizations which are good stewards. As they are no longer tax subsidized, the fact that they potentially wasted donations is only really a concern of the donors - no longer a tax payer issue.

The whole system loses massive friction in the form of tax advisors, IRS departments and fraudulent tax exemptions.

October 1, 2013 at 1:54 PM  
Blogger Jim Lukaszewski said...

Thank you for your comment. I do believe that our government is big enough. And I am very sympathetic to the need for massive simplification of government processes. I’d like to see some sensible (possible?) approaches like a concerted effort to repeal laws that are outdated.

Somewhere I read that there are a million pages of tax laws (well, lots and lots anyway) . . . most of which are to exempt somebody, some organization or entity or special interest from paying. Clearly this is a far bigger issue than NPO/TSO. But the TSO approach could be a place to start.

October 1, 2013 at 2:22 PM  
Blogger Frances Seymour said...

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November 9, 2013 at 12:36 AM  

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