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Wednesday, June 8, 2011

The 501(c)(3) Gatekeeper - Tori

“Do we wish to attach tax exempt status to the distinctive modern American tendency to associate wildly and for diverse and eccentric purposes?” [1]

A caricature of St. Peter has developed in popular culture that depicts the disciple as a modern day doorman or bouncer who decides who gets to walk through the pearly gates of Heaven. In an interesting editorial entitled “Is Charity Status Becoming Irrelevant,” Doug White, academic director for the Heyman Center of Philanthropy at New York University, wonder if the IRS should hire more St. Peters to more carefully scrutinize the qualifications of nonprofit organizations filing for tax-exempt status. White begins his inquiry by reminding readers that Family Stations, the employer of the mathematically challenged doomsday prophet Harold Camping, enjoys the tax benefits of a 501(c)(3) organization and raised more than $18 million in tax deductible donations in 2009. White also laments the recent granting of tax exempt status to Project Veritas, an nonprofit founded by conservative activist James O’Keefe, who, according to White, is more of a dishonest hatchet man than journalist. For White, the nonprofit world is drifting towards relativism, where any organization, no matter how unintelligent or irrelevant their mission, is granted nonprofit status.[2] Citing the work of Stanford University associate professor Rob Reich, White points out that the IRS denies only two percent of all applications each year. In fact, as Reich discovered in his review of applications for 501(c)(3) over a ten year period, the rate of disapproval for 501(c)(3) status has actually increased over the past decade from .74% in 1998 to 2.17% in 2008. In his description of the route to status as a nonprofit organization in the United States, Reich states “Oversight of the creation of nonprofit organizations, and the conferral of tax privileges that accompany nonprofit status, is weak, bordering on non-existent.”[3]

At the conclusion of his argument, White pleads for an infusion of common sense into the process of conferring nonprofit status but fails to provide any concrete recommendations. On the other hand, Reich suggests that Congress should allocate more funding to the IRS to bolster the nonprofit review process and recommends that the IRS should raise the fee for applying for nonprofit status. In addition, Reich states that a public dialogue should be initiated to reevaluate the entire 501(c) code as a method for organizing charity.

While Reich is pragmatic to call for more dialogue on this issue and to explore incremental steps to reforming the process, the creation and enforcement of a stricter litmus test that determines which nonprofits are worthy of tax exempt status raises several important questions. In his work A History of Nonprofit Boards in the United States, Peter Dobkin Hall states that board members use their boundary spanning activities to contribute to the “sum of public values.”[4] Should there be a tribunal that determines which nonprofit causes are legitimate and which are not, especially as moral and political values are historically and culturally contingent and thus evolve over time? Is there a values continuum that draws a distinct and objective line between worthy and unworthy? How can a determination process be created that is equitable and protects America’s pluralism of values? Finally, how does one navigate the politically treacherous waters of investing more resources into the IRS?

[1] Rob Reich, “Anything Goes: Approval of Nonprofit Status by the IRS,” October 2009,

[2] Doug White, “Is Charity Status Become Irrelevant,” The Chronicle of Philanthropy, June 1, 2011.

[3] Rob Reich, “Anything Goes: Approval of Nonprofit Status by the IRS,” October 2009,

[4] Peter Dobkin Hall, “A History of Nonprofit Board in the United States,” Boardsource, 2003, p. 29.

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