Jack Siegel & Gene Takagi take a look at a controversial recent private letter ruling in which the IRS revoked a charity's tax exempt status. Note the PLRs, while instructive, are not binding precedent:

The IRS determined that the organization failed on all three parts. The IRS concluded that the grants did not qualify as being in furtherance of one or more exempt activities because the distributions were given to “other unrelated organizations to use in conducting their own program of exempt activities.” [This conclusion makes little sense to me. Grantmaking does not qualify as being in furtherance of an exempt purpose? - Ed.] Administrative costs played a large factor in the second and third parts of the test because the grantmaking activities only attributed for 13% of total expenditures over a four-year look-back period while salaries counted for 37% and general overhead at 50%.

Branded wine at an open bar for the Full Circle Fund, a venture philanthropy fund in San Francisco:

Members conduct their work through Circles, focusing their hands-on grantmaking on four key issue areas . . .

Each Circle develops a Theory of Change, a specific, strategic approach for how the Circle plans to engage their issue. To construct this Theory, the Circle thoroughly analyzes their issue and chooses the most effective approach that draws upon members’ skills and interests. This Theory then guides the Circle’s grantmaking decisions.

Interesting--and potentially troubling--tax law news from India:

To curb the misuse of tax exemption given to charitable organisations, the government will now closely scrutinise accounts of large entities, which include NGOs and trade bodies, after it was found that some of them were allegedly indulging in commercial activities.

The basis for this action is a recent amendment to India's tax legislation, explained in a December 19th tax circular that I've uploaded here. This amendment refines the legal definition of "charitable purpose" to exclude "any activity in the nature of trade, commerce or business" or "any activity of rendering any service in relation to any trade, commerce or business" provided for a fee or other consideration, if that activity is associated with "the advancement of any other object of public utility" besides education, medical relief or relief of the poor.

The exceptions are crucial: charities dedicated to one of these three purposes can still use business to advance their cause without losing their tax exemption. Relatedness is key--as the circular explains, permitted charitable business must be handled in separate books of account and "be incidental to the attainment of the objectives of the entity."

Other organizations are arguably at risk. One direct target of the amendment: trade associations that are using the broad standard of public utility to gain recognition as charities, which had enabled them to market goods and services to non-members without paying tax on the profits. However, trade groups are not the only organization affected by this refinement of the law--any charity that does not fall within the ambit of the three excepted purposes listed above needs to pay attention to this change.


Pictured above: Reality Tours, a Mumbai social enterprise that promotes relief of the poor by conducting slum tours and donating 80% of the profits to local charities dedicated to the relief of the poor.

Earlier today, I received a helpful note from Jimmy Wales confirming that his term on the board of the Wikimedia Foundation did not lapse. Contrary to the Valleywag post, the Wikimedia Foundation had not only re-appointed him to the board before December 31st but had reported his re-appointment to members of the Foundation's email list.

As I tried to indicate in my post yesterday, my aim was not to take sides in the controversy but to highlight the rhetoric associating nonprofits with incompetence, backbiting and arcane bureaucracy. The popular perception that nonprofits grow less responsive to their mission as they scale up is an environmental factor that can harm even the most efficient organization--for example, it's one reason why legislators & AGs time and again seek to improve their electability by calling for charity "reform."

With regard to the Wikimedia Foundation more specifically, it is dealing with dilemmas faced by any number of nonprofit organizations. Relying on donations is for many people an essential quality of 501(c)(3) status, yet asking for donations is nonetheless often criticized as an unseemly preoccupation with money and marketing. Nonetheless, when a nonprofit tries to reduce fundraising requests through corporate sponsorships and ads, the criticism can actually grow more intense as some purists accuse the organization of selling out. For more on these tensions and ways to resolve them, check out my article on law and nonprofit design.

The Wikimedia Foundation also highlights other important issues faced by nonprofits. One obvious issue is that of executive pay. Contrary to the critics I don't find the salaries of the Foundation's top staff to be excessive--there are any number of nonprofit (and for-profit) executives who get paid more for doing less in organizations of similar size & scope, and under current law comparability is a key metric. That said, as any number of nonprofits have experienced, the use of donations to pay substantial salaries can, however counter-productively, provoke a backlash.

Another issue faced by the Foundation: whether the millions potentially raised by online advertising are worth the risk of adverse action by the IRS. It's something the Mozilla Foundation is dealing with now, although for somewhat different reasons. For the Wikimedia Foundation, placing ads on Wikipedia pages could arguably give rise to a substantial amount of unrelated business income, which in turn could jeopardize its tax exemption. There are subtleties and strategies in this regard that I'll discuss here soon enough--for now, suffice it to say that the Foundation's current practice of relying on donations could be the wiser course of action for reasons that go beyond maintaining a noncommercial culture.

If Marx had written about the withering away of the bookstore, he might still be regarded as a sage.

Cody's is dead. The Harvard used book scene is a pale shadow of its former self. And now Hollywood's Book Soup is up for sale.

Book Soup, for those who have never been, is a gem--a truly essential shop for anyone with a serious interest in the dramatic arts & design, not a mention a hub for local arts scene. It was a steady haunt when I lived out there and remains a mandatory drop-by whenever I'm back in the area.

Which got me thinking. Book Soup still makes a profit, and it's an integral part of both the artistic community and the region's various arts-related industries. Perhaps one way to maintain its integrity is for a charity to buy it, such as the California Community Foundation or even the Academy Foundation.

NOTE: Update here.

Wikipedia co-founder Jimmy Wales' term as a director on The Wikimedia Foundation has expired, prompting Valleywag to launch this salvo:

How did Wales come to this embarrassing pass? The former porn merchant and options trader, who has traded sex and money for his help in getting Wikipedia entries edited, has met his Machiavellian match, in the form of Sue Gardner, a Gothy, spider-tattooed Canadian pop-culture expert who now runs the site he helped start as Wikimedia's executive director

Incompetence and infighting are endemic to nonprofits, of course. But Wikipedia's bureaucracy is distinctly, fearsomely awful. The site, which dictates the online reputation of countless living people and companies, itself operates by rules that are completely incomprehensible, determined by a self-appointed group of volunteer editors who can seldom stop arguing over obscurities to explain their ways to outsiders.

No one should be surprised, then, that Wikipedia's overseers are so hobbled that they can't even fill vacancies on the board — a situation Gardner has exploited expertly.

Whatever the particulars of the Wales' situation, the perception of nonprofit governance evident above is well worth noting.

That's the cover story of this week's Christianity Today. The article itself is a trenchant counterblast to the marketing of faith--and an instructive example of the culture clash that can result from remaking a social mission as a product to be sold.

Marketing has problems if it makes the consumer pant for the dead opposite of what you are trying to sell. . . .

The difficulty with the pro-marketing arguments, however, is the failure to recognize that marketing is not a values-neutral language. Marketing unavoidably changes the message--as all media do. Why? Because marketing is the particular vernacular of a consumerist society in which everything has a price tag. To market something is therefore to effectively make it into a branded product to be consumed.

Still using the break to gain some perspective. In the meantime, here are a few news items that stick out:

• This article has been making the rounds in design circles, and it really is a must-read for do-gooders of all stripes. I've been writing about the link between design and social benefit for a while, and it's a theme whose importance will only grow.
  
• Bruce Nussbaum on the shift from innovation to transformation. I have much more to say on that--in fact, I've already said a fair bit about it, if you read my articles carefully. What social enterprise folks should note: it's not just the talk about earned income & learning from hedge funds that face obsolescence.
• FilmLA has been in the news due to the decline of filming in Los Angeles. What I hadn't known: that a nonprofit coordinates movie, tv & ad shoots in the area.
  
• When can museums sell their works?
  
• Shaolin monks inspire controversy with their temple management franchise initiative.
  
• BBC announces the next Doctor today!

"Sadly, all the Marxists are in academia rather than broadcast sports. That's the problem with Marxists. They're everywhere you don't want them to be and nowhere you really need them."

--Jonathan Chait on interviews with corporate sponsors during the broadcast of college football bowl games

Above: Stained glass Lenin at the Humboldt University library in Berlin

It's about time.