Non-Profit Organizations in the USA

In the social fabric of the United States, non-profit organizations figure prominently. Bruce Hopkins, one of the most respected American experts on non-profit organizations, argues that non-profit organizations have long been an important part of this country. They represent the independent or “voluntary” sector of American society, which also includes the business (commercial) and government sectors. Robert Payton, executive director of the University’s Center for Philanthropy in Indiana echoed him: “In some cases, non-profit organizations replace government agencies, commercial organizations, or do the same job, but much better. Non-profitable people are always ahead of any social movement.”

US Non-Profit System: Overview

The nonprofit system is very complex, even for Americans. These include a wide variety of organizations, some are very similar to our non-profit organizations, others may look rather strange in our mind. The unprofitable organizations are educational institutions and hospitals, professional sports leagues and veteran groups, labor unions and landfill companies, pension and insurance funds, credit unions and lawyers’ organizations, etc. The organizational and legal forms in which a specific organization can act are also varied: a corporation, a trust, an unincorporated association, etc. There are many concepts that are important for the legal status of a particular organization, for example, a non-profit organization and a tax-free organization.

Non-profit organizations have a bright social orientation and, ideally, are called upon to help society in solving a variety of problems, without earning money for personal enrichment. The social usefulness explains the separation of such organizations into a separate group and the corresponding state approach to them. It is clear that the state should be interested in the activities of such organizations, which, on a voluntary basis, help the country in solving both the private problems of its citizens and global public problems. In this regard, the state creates a more favorable mode of activity for them. One of the components of such a regime is the exemption of non-profit organizations from taxation, or preferential taxation. In section 501 (c) of the Internal Revenue Code (Internal Revenue Code – R.P.), Congress identified 25 categories of organizations that are exempt from taxes. Moreover, the status of a non-profit organization does not mean automatic tax exemption. Some non-profit organizations may not be considered tax exempt.

The non-profit status is very attractive for American organizations, and first of all, in connection with preferential taxation. Every year, about 45 thousand new organizations are included in the lists of the Internal Revenue Service and about 1.1 million are waiting in line for confirmation (some experts believe – for obtaining) tax-exempt status. Organizations become exempt from paying federal income tax. At the same time, they can be taxpayers in the states, as well as pay some federal taxes, for example, on income from non-statutory (unrelated) activities.

There is a rather complex mechanism for making a decision on tax exemption. The US Congress determines the categories of organizations that are eligible for this exemption. The IRS, upon application, confirms (authorizes) an exemption that already exists by virtue of an act of Congress. Here you can see the freedom of choice of actions that is very characteristic for many American institutions: an organization does not have to apply for confirmation of its status if it does not need special guarantees or greater confidence in the legality of its activities.

Many non-profit organizations still do really useful work for society: they help the poor, care for the natural environment, conduct medical research and exemption from taxes allows them to keep prices down, heal the poor, and purchase expensive equipment for various research.

But the growing abuses associated with the status of nonprofit and tax-exempt organizations are of growing concern in American society. Government agencies, the media, commercial organizations, congressmen and ordinary Americans are sounding the alarm, expressing the opinion that the institution of non-profit organizations has outlived its usefulness, this is far from what congressmen intended when such organizations were singled out. Last year’s article in an American magazine was accompanied by the question: “You pay Uncle Sam, but why are thousands of American corporations not doing it?” There are indeed grounds for such anxiety.

Many non-profit organizations are in fact the richest corporations in the country. They have billions of dollars in assets. One of the insurance companies with the status of a non-profit corporation has assets estimated at $6.3 billion and net income of $338 million annually. Harvard’s balance sheet could make many American business corporations blush.

Nonprofits own land and real estate, hotels and restaurants, businesses and other non-profit corporations.

However, despite such wealth, they do not always use it for the purposes that they declared, claiming the corresponding status.

Studies carried out by American journalists have shown, for example, that hospitals that have the status of non-profit provide an order of magnitude less charity than those without such status. Moreover, a number of unprofitable hospitals directly refuse to provide assistance to people in need, which is prohibited by healthcare legislation.

A big problem is engaging in activities that are not related to non-profit status, or, as we would say, non-statutory. The overwhelming majority of non-profitable ones have their own enterprises, invest in risky operations, finance various projects and other organizations that sometimes have nothing to do with their status. The same Harvard University participates in large projects related to real estate and the sale of cars, invests in research and development of oil and gas fields. One of the hospitals, which was stripped of the status of a non-profit organization, owned, along with a dozen other businesses, a real estate agency and even a fleet. At the same time, they either do not pay taxes at all on such activities, or pay meager sums, incomparable with the volume of their activities. In 1994, only 44,890 non-profit corporations, less than 5% of all tax-exempt corporations, reported this type of harassment and paid only $373.4 million in taxes.

In fact, non-profit corporations are engaged in commercial activities and in most cases this is not related to their goals and objectives. This fact irritates commercial organizations, which claim that the rules of the game are unfair and that their “non-commercial” competitors are engaged in the same activity and may well operate without tax breaks. In response to such complaints, Congress back in the 1950s imposed a tax on non-statutory income, which was severely criticized and ineffective.

The next question, which causes a not entirely positive reaction in relation to non-profit organizations, is related to various payments to managers, managers, commission agents and others. The amounts are huge. The National Football League paid its commissioner $2.5 million for the year and provided him with a loan of $950,000. Harvard paid one of the top investment managers $2.9 million in salary and other benefits (this amount is 12 annual salaries of the President of Harvard). George Washington University is giving its President $2 million for housing, following a statement he made about the lack of the previous $1 million. Is this not too much for such individuals and why non-profitable people do not spend this money for basic purposes, the Americans ask. Leaders of nonprofits defend payments by claiming that such people are very important to the organization, for example, they deal with investments and manage them skillfully, which affects the state of the entire organization and the benefits that it brings to the entire society. So, the real cost of studying at Harvard ranges from 38,000 to 40,000 dollars per year. Students pay around $28,000 for tuition, housing and board, the difference being borne by the university. We are forced to raise additional funds and invest, and we need highly paid investment professionals, Harvard officials say.

Nevertheless, such facts make both ordinary people and politicians think. Thus, in the US Congress, attacks on non-profit corporations are periodically observed with demands to subject them to more thorough government regulation, to deal with abuses in this area, including dubious loans and huge salaries. But these attacks do not achieve the desired result. One of the reasons – money again – now those that are spent on lobbying. Large non-profit organizations have in their structure special committees of political actions that conduct lobbying campaigns. Similar actions are led by elite organizations in the country, for example, in the field of education, these are Stanford, Harvard, Yale universities, which have their graduates in Congress. There are no restrictions on the funds spent on lobbying. The American Bankers’ Association spent $1.7 million in 1994 for this purpose, and $4.8 million in the previous four years. One of the largest national associations, the National Education Association, spent $8.8 million for the same purpose. Former Congressman J. Pickle said the nonprofits are so powerful and get so much that no one can touch them politically.

But the situation is changing. There are cases in the courts related to the consideration of cases on depriving corporations of the status of non-profitable organizations, the tax authorities are showing interest in a number of them, there are even cases of initiation of criminal cases against the leaders of a number of non-profit organizations. Taunting government regulations, fat executive salaries, cozy business partnerships with commercial organizations – none of this, says California Democrat Pete Stark, Congress was not implying when it instituted exemptions for non-profit corporations in the Tax Code.