ABUSE OF THE CHARITABLE TAX EXEMPTION THREATENS US ALL

Timothy (Tim) Walsh, a graduate student of nonprofit management here at Seton Hall, has worked with me over the past year as Deputy Director of the Nonprofit Sector Resource Institute. He contributed this article based on a reading in one of his classes.

Barkley Calkins, Director
Nonprofit Sector Resource Institute

An article in the Nonprofit Quarterly last year inspired me to write on the threat posed to our charitable tax exemption by charities that behave uncharitably. The article, entitled Stretching the Idea of Charity, described Dunwoody Village, a continuing care retirement community in Pennsylvania. Local Township and school officials had challenged the Dunwoody claim of being a “purely public charity” since 1) it charged huge entrance fees, in some cases up to $400,000, and 2) it catered to the affluent customer, boasting a masseur, beauty salon and luxurious accommodations.

A judge subsequently upheld the charge by school and government officials that the organization should not receive tax breaks since only ten of its 425 residents receive any financial aid, and their property is valued at $43.2 million. At stake was about $2 million in tax dollars that can now be used for the local municipality and school.

The judge’s ruling was clearly appropriate, since it was evident Dunwoody was abusing the charitable exemption privilege. They were catering to the wealthy and charging exorbitant fees that enabled them to pay higher salaries and invest even more money into the retirement community to attract even more affluent individuals.

The charitable tax-exempt privilege is intended to benefit organizations that serve the general public, particularly the most vulnerable populations.

Other kinds of nonprofits face similar challenges. The Y that uses its facilities to compete with for-profit fitness centers, the nonprofit hospital with special accommodations for the wealthy, etc. While it is appropriate – even necessary – for nonprofits to look for ways to diversify their funding through earned income, they potentially threaten the whole tax exempt privilege when they cross over in to commercial endeavours on a substantial scale.

Unfortunately, the actions of one organization can impact the whole sector. In order to ensure that the actions of your organization do not threaten the favorable tax status of charities, here are a few things to be considered:

1. Is my organization charitable? The definition of charitable can vary state to state, but essentially you need to ask if your organization is assisting a population in need of assistance
2. Are the programs offered by my organization available to everyone that needs the service, regardless of social status?
3. Does my tax-exempt status give my organization an unfair advantage over similar organizations in the for-profit sector?

One of the important ways our nation sustains its long tradition of encouraging and supporting “organized neighborliness” is through tax preferences for charitable activity. It behooves all of us who benefit from those tax preferences to behave in a manner that does not jeopardize them.

Timothy Walsh, Deputy Director
Nonprofit Sector Resource Institute

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About Robert Calkins

In banking (JP Morgan) for 25 years. Long time interest in the nonprofit world. Excited to be with the Nonprofit Sector Resource Institute at Seton Hall University. Active in my church. Love playing the guitar and singing. Love playing bridge and working out each morning (well, most mornings).
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