Corporate non-profits cheating the system--how??

April 22, 2012 6:33 PM

There are companies that enjoy tax exemption as a 501c3 and yet actually make quite a substantial profit and operate chiefly according to a business/profit-making model. They don't seem to meet some of the key criteria of a non-profit. How do they do this and are there cases in which non-profits end up being forced to drop their non-profit status? If so, does this usually happen because of challenges from legislators, IRS, community members or who? If it helps, I'm thinking of UPMC (University of Pittsburgh Medical Center) which pulled 750million in profit last year and is involved in a public battle against Highmark BCBS over who enjoys the title of regional insurance monopolist. (Apparently they value profit over their professed healthcare mission.) Thanks for any information!
posted by sb3 to Law & Government (11 answers total)

Being a nonprofit doesn't mean you can't make a profit, it just has to stay within the organization rather than being paid to stockholders. Of course there are additional requirements for 501(c)(3) status.
posted by lakeroon at 6:46 PM on April 22, 2012 [2 favorites]

Bringing in more than you spend !=! profit. It's not "profit" unless you pay it out to an investor, owner, etc.
posted by ThePinkSuperhero at 6:47 PM on April 22, 2012 [3 favorites]

Have a look at the exemption requirements from the IRS.

Basically, 501(c)(3) status has several components. It doesn't mean that the organization is not allowed to net a profit from the sale of a good or service (where "profit" means receipt in excess of the costs of producing / delivering the good or service). It means, broadly speaking, the following three things:

1) The organization must be operating for exempt purposes, as defined by the IRS. (That is, for purposes charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.) 2) Any profits earned from the organization's activities may not to inure to any private individual or investor. 3) The organization may not be an "action organization" which spends a significant part of its resources participating in lobbying or political activities.
posted by gauche at 6:48 PM on April 22, 2012

Non-profits can generate surpluses; that is, revenues in excess of their expenses and disbursements. There is nothing per se illegal about that.
posted by dfriedman at 6:49 PM on April 22, 2012

Best answer: This is slightly different, but Illinois recently had a huge case that went to the state supreme court (Provena v. Department of Revenue) in which non-profit Catholic hospital Provena had its property tax exemption taken away by the state for providing so little charity care that it cost less than 1% of the hospital's revenue. There is still no clear standard in Illinois, but the state supreme court said, "That's simply not enough; you're not a charity; you're a business that gives a little charity on the side. So's Coca-Cola."

In 2002, [Asst Atty General] Siegel said, 302 patients were given free or discounted care out of more than 100,000 admissions at a cost to the hospital of $831,724, or about 0.7 percent of its $113 million in 2002 revenue. Siegel did not specify where the charity care bar should be set. SOURCE

Another source.

Provena claimed to have provided $38 million in "charity" but, if I recall correctly, they included in that number public health billboards (that also advertised Provena) and training of student doctors, and the state requires them to provide charity CARE to get the property tax exemption.

The case has been closely followed in other states and, while the feds don't tax property, there's been a lot of discussion about it w/r/t healthcare 501(c)3s as well, because it is quite clear that there are "charities" that are basically for-profit businesses that provide a little charity on the side ... like any big business with its "foundation."

I expect more of these cases, and I expect they'll be brought to states' attention mainly by cities and other property-taxing bodies (like school districts), which are often funded largely through property taxes. Hospitals take up a lot of land, and in a lot of cities are near city centers where land is valuable. That's a lot of expensive land to NOT have on the tax rolls when they're not providing any benefit beyond what a for-profit business would provide.
posted by Eyebrows McGee at 7:30 PM on April 22, 2012 [4 favorites]

In addition to what's been said, there isn't anything necessarily inconsistent about the fight with BCBS and being a 501c3. If they have a mission to provide X services, see the insurance monopoly as pursuant to that and their charter/bylaws/state law lets them pursue it, then it's okay legally speaking.
posted by michaelh at 8:08 PM on April 22, 2012

Hospitals are particularly prone to follow this pattern: they will earn a surplus, and the surplus is dedicated to expansion of the facility, adding new floors, new services, etc. Often, the expansion brings in more revenue and leads to higher surpluses.
posted by yclipse at 8:19 PM on April 22, 2012 [1 favorite]

I asked a question that touched on a number of related issues a while back.
posted by XMLicious at 9:04 PM on April 22, 2012

you can be a not-for-profit and still pay your management, executives and "consultants" a tonne of cash in salary or service fees.

Kinda like if they were a for-profit and paid a dividend ... but different.
posted by jannw at 6:23 AM on April 23, 2012

Consider one of the oldest non-profits in the US, Harvard University. Last I heard their endowment was $30 billion. And I believe the highest-paid people at Harvard are the people who manage the endowment.

I think another reason hospitals are so prone to this is that non-profit hospitals are in direct competition with for-profits and so take on many of the qualities of their competitors. And they're not just competing on getting patients/procedures, they're also competing at recruiting staff. So if XYZ Corp hospital is paying its doctors and nurses twice what ABC Org is paying its providers, or XYZ Corp has the new fancy surgery robot that all the surgeons want to use and ABC Org doesn't, ABC Org is going to have trouble getting the best people to work there. I'm trying to think of other industries where non-profits and for-profits occupy such a similar niche... maybe theater? lower-prestige institutions of higher ed?

I think also a lot of non-profits worry a lot about growth/stagnation/shrinkage. A non-profit that actually makes no profit and comes out even with no savings at the end of every year is in a pretty dangerous situation, sustainability-wise, and doesn't have a lot of opportunities to expand its services/mission.
posted by mskyle at 7:12 AM on April 23, 2012 [1 favorite]

It's also important for non-profits to have cash reserves in case of an emergency (like, say, a hurricane).
posted by radioamy at 8:00 AM on April 23, 2012