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It's Time to Turn Section 501(c)(3) Inside Out
By Putnam Barber, Feb. 2004
When people who care about nonprofits get together and talk shop, they often spend time lamenting the disadvantages of working in a field defined by negations. And just as often, these conversations come to no very satisfying conclusion.
Nonprofit people are right to chafe at this unfortunate feature of American's everyday speech. Unsophisticated board members worry about whether it is ok for a nonprofit organization to have a surplus of revenues over expenditures. They say they are concerned that such a "profit" might deny the organization nonprofit status. Commentators perpetuate Dickensian stereotypes when they are amazed and alarmed by the scale and complexity of important community institutions. Such writing reinforces the myth that nonprofit organizations should be hardy bands of volunteers ministering to society's ills with one-on-one charity. More attention to being "profitable" is often suggested by pundits and entrepreneurial advocates as a cure for the financial weaknesses of community groups. Too often, the suggestion includes a tiresome implication that nonprofit status carries with it an unexamined resistance to sound management and making tough decisions.
One key source of this familiar pattern of speech is, of course, section 501(c)(3) of the Internal Revenue Code. Instead of a straightforward declaration of the values it exists to further, its language employs an obscure vocabulary while piling one negation on another in a long, convoluted sentence.
Section 501(c)(3) of the Internal Revenue Code exists, we all know, to set the ground rules by which eligible organizations can be recognized as exempt from federal taxes on their corporate income, i.e., their profits. As such, it performs a critical and welcome function. But because of the importance of such recognition for corporate and foundation giving programs, and for personal tax planning by individuals, this section of the IRC has taken on a far wider significance. In a sense, it serves today as the basic charter language for every one of America's charitable nonprofits. Other statutes point to it as well, seeking a touchstone by which to identify organizations entitled to special consideration of one sort or another. This larger role is one that section 501(c)(3) as it stands is ill equipped to support.
It's actually easy to imagine rewriting section 501(c)(3) with the goal of removing some obscure terms and furthering a positive definition of the kind of organization it exists to identify. Consider language that would exempt from federal income tax:
corporations, trusts, and any community chest, fund, or foundation, organized and operated exclusively for public benefit purposes, all of the resources of which are dedicated to furthering such public benefit purposes, no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. For the purposes of this section, public benefit includes, but is not limited to, the activities of religious, charitable, scientific, testing for public safety, literary or educational organizations or those fostering national or international amateur sports competition (but only if no part of their activities involve the provision of athletic facilities or equipment) or the prevention of cruelty to children or animals.
This new language makes only a limited contribution to streamlining the convolutions. But it does do away with the narrow focus on "inurement" (i.e., enrichment of individuals) and substitutes the much more powerful concept of commitment to public benefit -- commitment to be expressed both in the purposes the organization exists to serve and in the way it manages the resources it has available. In the existing text, a central provision of section 501(c)(3) addresses only the question of self-dealing, rather than the broad goals that the general public no doubt expects and that advocates for the value of the work of our sector should adamantly promote. The current text of section 501(c)(3) does not insist that such organizations serve a public benefit, only that they not serve private ones. It emphasizes the periphery, rather than the heart, of what this work should be about.
That concept -- public benefit -- is, admittedly, not an easy one. But we know something about how to draw a bright line around its core. For starters, public benefit activities do good that reaches a large and indeterminate class of people. Public benefit work also often involves situations where it is difficult, if not impossible, to secure full payment from the actual consumer for the goods or services provided. Public benefit work in many cases broadens or extends the reach of services the government also provides, even sometimes lessening the burdens one or another governmental entity has assumed. With clarifying discussion, commentators, consultants, administrators and other leaders will soon build an understanding of the term that can guide organizations' behavior and encourage even greater confidence in their work.
Of course, the troubling word "nonprofit" does not appear in section 501(c)(3) at all. Its legal wellspring is in the corporations statutes of the states, where special provision is made for nonprofit, or not-for-profit, corporations. These are the legal entities that, once formed, may go on to seek IRS recognition under section 501(c)(3) for tax, and fundraising, purposes. In fact, the American Bar Association proposed in 1988 that state nonprofit corporation statutes should be amended to include, as a subcategory within "nonprofit," a category identified as "public benefit" (three options were proposed for organizations to select among; the others were "religious" and "mutual benefit"). Some states, including my home state of Washington, followed this suggestion so that the relevant sections of the Revised Code of Washington refer to both "nonprofit" and "public benefit" corporations. This more affirmative and descriptive label has not, of course, been generally adopted by anyone. That fact is strong testimony to the powerful influence of section 501(c)(3) on the self-definition of America's nonprofits.
Many commentators have observed the debilitating effects of building an enormous resource for our society on a negative definition, and supplementing that negative definition with a litany of the things nonprofits are not, must not do, and cannot attempt. By defining the legal nonprofit status in this way, the statutes encourage the temptation of leaders and managers to ask whether they can get away with something questionable, rather than challenging in the first moment any impulse that might call into question their dedication to the public benefit. The common usage encourages as well the temptation to consider setting up nonprofit organizations by people who are motivated by hostility to taxes rather than any desire to work for the public good.
It's time to turn section 501(c)(3) inside out, to make the heart of nonprofit work the defining characteristic of our field and push into the background all those technical and legalistic "shalt nots." Our field should be defined by the values of the people whose energies and generosity inspire admiration for, and further commitment to, community service. We should push into the background those necessary strictures that constrain the occasional temptation to misbehavior.
By changing the language of section 501(c)(3) in this way, Congress would make an important contribution to the strength of these important institutions and shift public attention to the things that really matter about nonprofit (oops! public benefit) work.
Putnam Barber is President of The Evergreen State Society in Seattle, Washington, and editor of the Internet Nonprofit Center.
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