Legal Topics

Is It Against The Law To Pay Me More?

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You may have heard about Dan Palotta’s recent TED Talk about how judging charities on concepts like administrative overhead ratios is hobbling their ability to solve huge problems.

He makes some persuasive points, though some of the concerns I had with his proposals when they appeared on the Harvard Business Review blog three years ago still remain.

Gene Takagi picked up on the talk and addressed legal considerations which would prevent non-profits from operating in the manner Palotta suggests. (Just to be clear, Palotta never suggests charities cleave to non-profit status.)

Takagi notes that charity pay scales are limited by laws governing 501 c 3s and so can’t compete well on salary if supporters show tolerance for doing so to attract the best talent. Expenditures are limited in much the same manner,

“If a for-profit spends 90 cents to make $1, it may be a perfectly acceptable profit margin, but if a charity spends 90 cents to make $1, it would be widely viewed as a terrible waste. As a result, many charities fail to properly report their fundraising expenses, and the IRS has raised the possibility of utilizing the controversial commensurate test, which addresses whether a charity is using its resource in line with its charitable mission…But this can’t be judged strictly on percentages, and charities should be allowed to experiment so if an honest fundraising and mission awareness-raising campaign fails, the charity isn’t slaughtered for it. The problem, however, is not the law, but the misguided public ideology of which Dan spoke.”

Charities are also often limited and discouraged from pursuing new revenue ideas by federal and state laws as well as popular sentiment.

I think the biggest question that this whole discussion raises for me is whether social attitudes are such that a for-profit company raising money for social issues will be tolerated. Given that people will give money to projects via things like Kickstarter without much consideration about whether it is non-profit or not, is the idea that non-profits do things that companies won’t due to lack of profitability and governments can’t/won’t due to lack of political will and expertise, over?

Currently I think there is a capricious element to Kickstarter campaigns that make it an unsuitable model for garnering long term support. However the very existence of such mechanisms may be shifting mindsets to a place where worthiness and overhead ratios are not mutually exclusive.

Info You Can Use: NP Orgs Exist In Shadow Universe (Great Resource Guides Too)

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My Twitter feed delivered me two great resources for arts professionals on the same day this week.

The first came courtesy of Sydney Arts Management Advisory Group. I guess I should have known that when they talked about a guide developed for “WA Artists” they meant Western Australia and not Washington State. In my defense, they link to a lot of prominent U.S. arts sources (like me!).

The guide they shared, Amplifier: The Arts Business Guide for Creative People, from Propel Youth Arts, is really one of the best guides for creatives just starting out that I have come across. If you cut out the resource guide at the end of the booklet, 98% of it is applicable to a creative anywhere.

The guide is really accessible with fun illustrations and interviews that will probably make you want to move to Western Australia. It also walks you through all sorts of planning processes with questions and checklists: project management, business plans, identifying markets, goal setting, evaluation, finances & funding, legal, product, pricing, place and promotion.

It doesn’t just deal with performance, but also tackles film, visual art and publishing, delves into copyright law (which appears almost identical to U.S. law) and licenses.

The guide also spends a few pages on risk assessment and insurance for events which is something I have never really seen in similar guides even though it is very important.

The second resource comes from the Wallace Foundation. This one is more geared toward arts groups rather than individuals starting out and is focused on administrative issues like finances, board oversight and administration.

You may have seen some tweets about it but not followed the link. It is really worth stopping by to take a look.

Some of the guides and case studies are what you might expect “Building Stronger Nonprofits Through Better Financial Management” and How to Talk About Finances So Non-Financial Folks Will Listen.

But there are some with more intriguing titles like: “Efficiency” and “Not-for-Profit” Can Go Hand in Hand,  and The Looking-Glass World of Nonprofit Money: Managing in For-Profits’ Shadow Universe.  

The latter is described as” Especially useful overview for board members with little exposure to the unique nature of finance in a nonprofit context.” I  never really thought of NP orgs as operating in a shadow universe. Sounds so cool! Does that mean Rocco Landesman was the dark emperor or something while he headed the National Endowment for the Arts?

There are also proposals like “The Nonprofit Starvation Cycle” which advocate for changes in the way foundations support non-profits.

The part of this resource I have seldom seen in other places was a whole section of five articles, including a podcast, on figuring out the True Cost of programs. They specifically have a calculator for figuring out the cost of after school programs, but following the steps outlined in some of the other articles can help reveal truths like social media isn’t actually free.

I haven’t read through everything in the guide, but I am definitely going to bookmark it for future reference.

Info You Can Use: Fundraising Must Benefit The Group, Not The Individual

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The approach of the holidays provides me with a little more free time so I have been catching up on my “come back to and read” list. I got to reading a piece by Non-Profit Law blogger, Emily Chan addressing activities athletic booster clubs engage in that may endanger their non-profit status.

Since these clubs are organized under 501 (c) (3) just like arts organizations, I became a little concerned because I see similar things happening with some arts organizations.

The potential conflict Chan addresses is in making the amount of money a person raises directly correlate with the benefit to an individual like crediting against the payment of tuition/dues or travel expenses.

Furthermore, such a credit system still raises private benefit concerns regardless of whether a parent is considered an insider or even involved in the booster club. Lois Lerner, the Director of Exempt Organizations at the Internal Revenue Service, recently affirmed that crediting amounts raised by a participant against that participant’s costs (e.g., dues, travel expenses) is a private benefit violation that may jeopardize the organization’s exempt status.

What immediately came to mind is that a lot of dance schools have their students sell tickets, Entertainment coupon books, etc., keep track of what each person sells and rewards the kids. I don’t think there is any problem with one child only getting to choose glitter stickers because she sold less than the child who was able to claim a stuffed animal.

However, if those sales determined who got to perform or helped one person defray more of the cost of going to see a show in New York than another, there could be a problem. If it defrays the cost of everyone equally, or even a specific class within the group like sending the cast of a show to perform at a festival, then it isn’t problematic.

Really, it is mostly a matter of benefits specific to individuals. This also likely includes fund raising to benefit a specific individual, say the medical expenses of a musician who was in a car crash.

Individuals should not be soliciting contributions from donors with any suggestion or intention that the contribution will be directly used for that individual who solicited the gift. Additionally, the booster club should not accept any contributions that have been earmarked by the donor for a particular individual. Not only would such contributions not be tax-deductible for the donor, the booster club would likely be acting as a conduit in violation of the federal tax laws regulating private inurement and private benefit by allowing such money to pass through the organization to the individual without having exercised any control, oversight, or discretion over those funds

I wonder how this might apply to organizations that try to forge a deeper connection with donors by having them sponsor a student. Keeping in mind that I am not a lawyer, my guess is that if the organization is selecting the student being sponsored, there isn’t a problem. The money went into a general pot with no specific expectation of which student would benefit.

But what happens if the student drops out and the donor has taken a shine to another student and wants the sponsorship applied to her as a replacement? This is a tricky situation if you are hoping for the long term, continued support of the donor.

I also wonder if something changes with the student’s status that requires more funding than for any other student, say their place of residence changes so they must pay higher out of state tuition, can the donor be solicited or even direct additional money to benefit a specific student without endangering the non profit tax status?

Fine Line Of Being For Art And Humanity

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A story on the Slate website revived the question of “what is art?” for me covering a “No Longer Art” exhibition at Columbia University. On display are damaged works which insurance companies no longer consider to be art.

“To give a brief explanation of art that is no longer art: Sometimes the cost of restoring a work of art exceeds the value of the work, in which case the insurer declares a total loss, and the work is declared no longer art—that is, of no market value. The damage can range from obvious to subtle—from a ripped painting or shattered sculpture to a wrinkle in a photographic print, or mold damage which can’t be seen at all. As it wouldn’t do to send the not-artwork to the crematorium—the work might be of scholarly value, or might one day be worth repairing, or might one day be more easily repaired—the work is stored, not dead, but in a state of indefinite coma. The Salvage Art Institute, Elka’s curatorial brainchild, collects and exhibits not-art.”

This seems to imply the work was art based on the intent of the creator and its state at the time of purchase. Often you will see a piece comprised of broken objects, whether they were intentionally damaged or found in that state. Because the artist assembled the broken items with a conscious intent, the piece is considered whole.

Like the philosophical question about how much of your body can you lose before you are no longer considered human, at what point does a work cease to be art then? If a piece of broken glass attached to canvas falls off while it is being mounted, does it cease to be art if that is one piece of 10,000? What if it is one piece of 10? What if it is a piece of blown glass that becomes detached and shatters on the floor?

What of the performing arts? If a playwright or choreographer was explicit in their directions, does a work cease to be art if the lines or movements are intentionally changed by a performance group? What if the performers try to stay true to the original but make mistakes? Are those flubs equivalent to rips, wrinkles or unseen mold damage?

We often talk about giving credit to artists if their work is sampled, but what about the other side of the situation? How much can be changed before the performing group needs to stop referring to the work as the creation of the playwright, composer or choreographer?

Should Baz Luhrmann have called his Romeo and Juliet by some other name since West Side Story smelled just as sweet? Should Arthur Laurents and Leonard Bernstein called West Side Story, Romeo and Juliet?

And then there is the question about who gets to decide if it is art any more? Should we trust an insurance company’s judgement if an artist says a new dent on a beaten piece of metal is inconsequential and it would have had the same appearance if he had decided to swing the hammer 51 times instead of 50? Do we heed the artist if the roles are reversed and he says the piece is ruined; if he had intended 51 blows, that is how many times he would have struck.

I know this conversation has gone round and round many times without conclusion, but I think this is the very core question which connects art with being human. Any other claim of “What it means to be human” is just marketing B.S. This question asks wherein resides the essence and soul of a piece of art. It is just as difficult to determine where humanity and the soul resides in a person.

The great example from college philosophy courses relates to Star Trek transporters which disassemble and reassemble humans. Once Captain Kirk is broken down to billions of atomic pieces, can the being that is reassembled be the same Captain Kirk? Where is that same point of no return for art where what is taken away removes that quality of being?