Wednesday, November 29, 2006


Tax Exemption is in the Eye of the Beholder
by Pam Ashlund

What is the life cycle of a nonprofit organization? What can we expect as we move from visionaries, to implementers, to administrators? Organizational Development professionals have come up with some very valuable takes on the life cycle of nonprofits; and our funding sources have started to rely on that research in their funding selection process.

Seems there are some pretty predictable things that happen as we evolve and therefore we can learn from those we follow. Going through an assessment process can be quite the value-added exercise.

But today I happened upon a different kind of nonprofit life cycle (on the IRS website).

The IRS has a peculiar take on the nonprofit "life cycle"; or maybe not. It is true that life has a beginning, a middle and an end. And that is how the IRS frames it. But their view doesn't just have an ending, it assumes it. Here's how it goes: a nonprofit starts up, then it ages and deals with keeping records over time and keeping up with the current laws (especially those of the IRS); then it goes through what the IRS names "Significant Events". And what is among these significant events? The nonprofit cracks up, does something that blows it, violates a significant law. The IRS calls this "termination of exempt organization". "Boom" that's it.

Now please (especially eager IRS agents) do not take this as an attack on this venerable organization. Just a tiny observation. Perhaps, when looking through the lens of an agency who's job is to collect taxes, this all makes sense.

But let's look at it through another set of eyes. How about these stages of development (often used by foundations to categorize nonprofits):

  • Infancy (start-up or start-over)
  • Juvenile (growth period)
  • Adolescence (growth and decline spurts
  • Maturity (established)

Note that the story isn't: start, comply, don't comply, close.


Other resources on nonprofit stages:

Judy Simon's book:
The Five Life Stages of Nonprofit Organizations: Where You Are, Where You're Going, and What to Expect When You Get There

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1 comment:

janet said...

I don't need to go to the IRS web site to point out that for the IRS there would never be any other life arc. A not for profit organization is by definition an entity that exists by virtue of the grace of the IRS. No matter what else the organization may do, the tax-exempt status we define ourselves by is ONLY a reflection of IRS Code designation, for which we not only must apply but must continue to qualify for. The fact that the tax code section (503c) has some 25 subsections to describe tax-exempt organizations, only one of which may pass along its exemption to its donors is quite telling. The c(3) designation is tied specifically to charitible activities, and many things we have assumed would be designated as c(3) in a prior era would be unlikely to get through the application procvess today.

But to return to the original point, until somewhat recently the IRS really only had death penalty options (that is to say complete status revocation) for dealing with inappropriate not-for-profit organizations. There are actually intermediate sanctions now available to the IRS for what are manifestly egregious acts, but often the organizational cost might as well be revocation as the fines are very stiff. Nonetheless, just as we are NOT precluded from operating with the same mission and activities with other than a (c)3 designation, we would be foolish to think that the organizational development perspective is TECHNICALLY related in any way whatsoever to that tax-exempt status. We might well be far better at doing our job if we kept in mind on a daily basis that before we make decisions we ask whether or not they would pass muster with the present IRS narrow vision. If we find that we are frequently uncertain, then we must ask if we ought to use those non-IRS self-evaluation standards to either honestly give-up our (c)3 pretentions, or seriously rethink what we are doing.