Tuesday, January 26, 2010

Who is Governing the Nonprofit Sector?

Since the end of the last century the United States has experienced exponential growth and financial wealth within the nonprofit sector, thus leaving a disjointed development of regulation law directed towards nonprofit corporations. [1] There are approximately 1.4 million nonprofit organizations as defined by the Internal Revenue Service (IRS) pursuant to Section 501(c)(3)[2] of the Internal Revenue Code (IRC) within the United States. This sector of our economy “accounts for 5.2 percent of the gross domestic product and 8.3 percent of wages and salaries paid in the United States.”[3] It is estimated that only half of these registered charities filed an IRS Form 990, an annual requirement for those entities that recorded more than $25,000 in gross receipts.[4] The agencies that filed with the IRS reported approximately $1.4 trillion in gross revenue with nearly $3 trillion in assets in 2004.

These corporations that identify as nonprofit, as a majority, are not organizations that are well-defined, established or have strong internal governance policies. They are instead small with minimal to no organizational infrastructure and few business minded staff members, all key elements to enable these entities to function efficiently within a regulated sector.[5] This lack of coherent organization and growth within the nonprofit sector is nothing new, but has been a part of the development and proliferation of charities within this nation’s history. A majority of states early in our nation’s development actively encouraged individuals to incorporate private associations through their state legislatures to permit churches, schools and societies to be incorporated as charitable organizations.[6] This was seen as a way to reduce the state’s burden of providing similar services to those that required public benefits, which laid the framework of what was to become the public benefit corporation.

Public benefit corporations, the category most analogous to 501(c)(3) organizations, whereas their activities may be subject to various state and federal regulations, or lack thereof, has contributed to the sector's phenomenal growth during the past twenty years. When half of these organizations are not required to file a federal tax return, and the general public normally is not allowed standing, they enjoy benefits that any other corporation would not be extended or allowed to embrace. Subsequently with the recent scandals rocking not only the for-profit world, but the nonprofit as well, these exempt organizations may look to adopt some form of regulations, perhaps self-imposed, in a belief that it may eventually be required by different funders and their constituents.[7]

From the establishment and transformation of the nonprofit corporation, this note will evaluate how the regulation of this sector, specifically focusing on the “Public Interest” approach, supported and enhanced the welfare of the citizen and/or consumer.[8] Essentially, the basis behind this one of three perspectives of economic theory is how efficient the nonprofit market could become if there were regulations imposed upon it and at times may possess “higher moral objectives” in respect to those areas of our society that cannot have a monetary valued assigned. [9]

From this perspective it appears that nonprofit corporations do not need additional government regulation, but alternatively should seek to enjoin the sector to adopt enforced self regulation. This type of mandate is where nonprofits subject themselves to some system of order to include goals and adherence, thus attaining a more efficient sector, more so than having a more traditional regulation imposed.[10] The regulation of the charitable sector is necessary to some extent, even if the majority of the general population is not direct beneficiaries of their specific services, since their existence benefits the public as a whole, thus establishing the premise that this same public has a genuine interest to ensure an accountable charitable sector.[11]

The unique nature of the nonprofit sector requires enforced self regulation as a means to hold public benefit corporations accountable, since the current methods of regulations through the Revised Model Nonprofit Corporation Act are woefully inadequate and address concerns that are by and large not relevant to the sector. The current system of the IRS code provides a baseline for membership into the sector, and the attorney general ensures compliance, but that success will ultimately depend on the involvement of the sector’s members and their desire to ensure the public’s trust is retained.

[1] James J. Fishman, The Development of Nonprofit Corporation Law and an Agenda for Reform, 34 Emory L. J. 617, 618 (1985).

[2] 26 U.S.C.A. § 501(c)(3) (2008)

[3] The Nonprofit Sector in Brief: Facts and Figures from the Nonprofit Almanac 2007, National Center for Charitable Statistics at the Urban Institute, pg. 1 (Urban Institute Press Forthcoming).

[4] Id at 2

[5] Julie Goldscheid, Transcript, Supporting Accountability: Assessing the Costs of Regulation, (Copy of transcript on file with the N. Y. C. L. Rev. Summer 321) (2006).

[6] Fishman, supra n. 1, at 631-32.

[7] Goldscheid, supra n. 5, at 321.

[8] Jeffery L. Harrison, Thomas D. Morgan & Paul R. Verkuil; Regulation and Deregulation, Case and Materials, 19 (2d ed. West 1997).

[9] Harrison, supra n. 8 at 32.

[10] Harrison, supra n. 8 at 494.

[11] Susan Gary, Regulating the Management of Charities: Trust Law, Corporate Law and Tax Law, 21 U. Haw. L. Rev. 593, 617 (1999).

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